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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 000-25771
-------------------------
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3951476
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-------------------------
CPA(R):14 has SHARES OF COMMON STOCK registered pursuant to Section 12(g)
of the Act.
CPA(R):14 HAS NO SECURITIES registered on any exchanges.
CPA(R):14 does not have any Securities registered pursuant to Section 12(b)
of the Act.
CPA(R):14 (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[X] No[ ].
CPA(R):14 has no active market for common stock at May 12, 2003.
CPA(R):14 has 66,366,520 shares of common stock, $.001 par value
outstanding at May 12, 2003.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, March 31, 2003 and December 31, 2002 2
Condensed Consolidated Statements of Income for the three months ended March
31, 2003 and 2002 3
Condensed Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of
Operations 11-16
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. - Controls and Procedures 17
PART II - Other Information
Item 2(d). - Use of Proceeds of Registered Offering 18
Item 4. - Submission of Matters to a Vote of Security Holders 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20-21
* The summarized condensed financial statements contained herein is unaudited;
however, in the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included.
-1-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Land and buildings, net of accumulated depreciation of $44,360 at
March 31, 2003 and $38,683 at December 31, 2002 $ 970,830 $ 971,459
Net investment in direct financing leases 113,370 113,428
Real estate under construction 18,838 14,723
Equity investments 117,042 99,320
Cash and cash equivalents 54,425 74,107
Marketable securities 6,495 6,258
Other assets 42,209 40,602
---------- ----------
Total assets $1,323,209 $1,319,897
========== ==========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 670,920 $ 666,740
Accrued interest 4,352 4,043
Due to affiliates 3,680 3,821
Accounts payable and accrued expenses 8,164 7,898
Prepaid rental income and security deposits 19,940 20,642
Deferred acquisition fees payable to affiliate 22,257 23,170
Dividends payable 12,524 12,488
---------- ----------
Total liabilities 741,837 738,802
---------- ----------
Minority interest 28,925 29,206
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000 shares; issued and
outstanding, 66,992,161 shares at March 31, 2003 and
66,836,152 shares at December 31, 2002 67 67
Additional paid-in capital 599,412 597,852
Dividends in excess of accumulated earnings (49,428) (47,508)
Accumulated other comprehensive income 7,431 6,113
---------- ----------
557,482 556,524
Less, treasury stock at cost, 566,270 shares at March 31, 2003 and
520,911 shares at December 31, 2002 (5,035) (4,635)
---------- ----------
Total shareholders' equity 552,447 551,889
---------- ----------
Total liabilities, minority interest and shareholders'
equity $1,323,209 $1,319,897
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the
audited consolidated financial statements at that date.
-2-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
Revenues:
Rental income $ 26,559 $ 21,369
Interest income from direct financing leases 3,229 2,840
Interest and other income 3,076 723
------------ ------------
32,864 24,932
------------ ------------
Expenses:
Interest 12,787 10,193
Depreciation 5,596 4,569
General and administrative 2,161 1,228
Property expenses 4,592 2,898
------------ ------------
25,136 18,888
------------ ------------
Income from continuing operations before
minority interest, equity investments and
unrealized gain 7,728 6,044
Minority interest in income (472) (259)
Income from equity investments 3,138 1,288
------------ ------------
Income from continuing operations
before unrealized gain 10,394 7,073
Unrealized gain on warrants and foreign currency
contract, net 210 239
------------ ------------
Income from continuing operations 10,604 7,312
Discontinued operations:
Income from operations of discontinued properties - 35
------------ ------------
Net income $ 10,604 $ 7,347
============ ============
Basic and diluted earnings per common share:
Income from continuing operations $ .16 $ .11
Discontinued operations - -
------------ ------------
Net income $ .16 $ .11
============ ============
Weighted average shares outstanding - basic and
diluted 66,351,057 66,028,391
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended
------------------
March 31,
---------
2003 2002
------- -------
Net income $10,604 $ 7,347
------- -------
Other comprehensive income (loss):
Change in foreign currency translation
adjustment 1,055 (401)
Unrealized appreciation of marketable securities 263 -
------- -------
Other comprehensive income (loss) 1,318 (401)
------- -------
Comprehensive income $11,922 $ 6,946
======= =======
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 10,604 $ 7,347
Adjustments to reconcile net income to net cash provided
by continuing operating activities:
Income from discontinued operations - (35)
Depreciation and amortization 5,885 4,736
Straight-line rent adjustments (1,012) (1,054)
Income from equity investments in excess of distributions received (494) (40)
Issuance of shares in satisfaction of current and accrued performance fees 1,461 1,039
Minority interest in income 472 259
Unrealized gain on warrants and foreign currency contract, net (210) (239)
(Decrease) increase in prepaid rents and security deposits (702) 2,717
Change in other operating assets and liabilities, net (470) (626)
--------- ---------
Net cash provided by continuing operations 15,534 14,104
Net cash provided by discontinued operations - 35
--------- ---------
Net cash provided by operating activities 15,534 14,139
--------- ---------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 395 252
Purchases of real estate and equity investments and additional capitalized costs (29,563) (110,808)
Distributions of mortgage financing from equity investee 8,722 -
Payment of deferred acquisition fees (2,373) (1,638)
--------- ---------
Net cash used in investing activities (22,819) (112,194)
--------- ---------
Cash flows from financing activities:
Prepayment of mortgage principal (3,800)
Proceeds from mortgages 3,017 85,273
Mortgage principal payments (2,099) (1,332)
Distributions to minority interest partner (754) (775)
Contributions from minority interest partner - 10,886
Proceeds from issuance of shares, net of costs 100 (1,464)
Deferred financing costs and mortgage deposits, net of deposits refunded 21 (2,603)
Dividends paid (12,488) (11,318)
Purchase of treasury stock (400) -
--------- ---------
Net cash (used in) provided by financing activities (12,603) 74,867
--------- ---------
Effect of exchange rate changes on cash 206 -
--------- ---------
Net decrease in cash and cash equivalents (19,682) (23,188)
Cash and cash equivalents, beginning of period 74,107 147,695
--------- ---------
Cash and cash equivalents, end of period $ 54,425 $ 124,507
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-5-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of
Corporate Property Associates 14 Incorporated (the "Company") have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to
Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim period presented have been included.
The results of operations for the interim period are not necessarily indicative
of results for the full year. These condensed financial statements should be
read in conjunctions with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Transactions with Related Parties:
The Company's asset management and performance fees are payable to the Advisor,
Carey Asset Management Corp., a wholly-owned subsidiary of W. P. Carey & Co.
LLC, each of which is 1/2 of 1% of Average Invested Assets, as defined in the
Company's Advisory Agreement. The Advisor has elected at its option to receive
the performance fee in restricted shares of common stock rather than cash. The
Advisor is also reimbursed for the actual cost of personnel needed to provide
administrative services necessary to the operation of the Company. Asset
management fees were $1,854 and $1,228 for the three-month periods ended March
31, 2003 and 2002, respectively, with performance fees in like amount. For the
three months ended March 31, 2003 and 2002, the Company incurred personnel
reimbursements of $803 and $420, respectively.
Fees are payable to the Advisor for services provided to the Company relating to
the identification, evaluation, negotiation, financing and purchase of
properties. A portion of such fees are deferred and are payable in equal
installments over no less than eight years following the first anniversary of
the date a property is purchased. For transactions that were completed during
the three months ended March 31, 2003, the current and deferred fees were $1,825
and $1,460, respectively.
Note 3. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust mortgage securitization as an available-for-sale marketable
security which is measured at fair value with all gains and losses from changes
in fair value reported as a component of other comprehensive income as part of
shareholders' equity. As of March 31, 2003, the fair value of the Company's
interests was $6,495, reflecting an aggregate unrealized gain of $520 and
cumulative net amortization of $118 ($26 for the three-months ended March 31,
2003). The fair value of the Company's interests in the trust is determined
using a discounted cash flow model with assumptions of market rates and the
credit quality of the underlying lessees.
The key variable in determining fair value of the subordinated interest is
current interest rates. As required by SFAS No. 140, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities," a
sensitivity analysis of the current value of the interest based on adverse
changes in the market interest of 1% and 2% is as follows:
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Interest rate 7.5% 8.5% 9.5%
Fair value of the interests $6,495 $6,173 $5,873
The above sensitivity is hypothetical and changes in fair value, based on a 1%
or 2% variation, should not be extrapolated because the relationship of the
change in assumption to the change in fair value may not always be linear.
-6-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 4. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
lease revenues for the three-month periods ended March 31, 2003 and 2002 are as
follows:
2003 2002
---- ----
Per Statements of Income:
Rental income from operating leases $26,559 $21,369
Interest from direct financing leases 3,229 2,840
Adjustment:
Share of leasing revenue applicable to
minority interest (2,045) (1,266)
Share of leasing revenue from equity
investments 7,047 3,226
------- -------
$34,790 $26,169
======= =======
For the three-month periods ended March 31, 2003 and 2002, the Company earned
its net lease revenues from its investments as follows:
2003 % 2002 %
---- ----
Carrefour France, SA $ 2,603 7% - -
Nortel Networks Limited. 1,500 4 $ 1,500 6%
Petsmart, Inc. (a) 1,453 4 2,076 8
Clear Channel Communications, Inc. (b) 1,415 4 - -
TruServ Corporation (b) 1,264 4 - -
Atrium Companies, Inc. 1,112 3 1,115 4
Starmark Camhood, L.L.C. (b) 1,094 3 - -
Advance PCS, Inc. 1,075 3 1,075 4
Federal Express Corporation (a) 986 3 975 4
Tower Automotive, Inc. 974 3 - -
Galyan's Trading Company 953 3 953 4
Katun Corporation 925 3 - -
Collins & Aikman Corporation 819 2 809 3
Advanced Micro Devices, Inc. (b) 815 2 815 3
Metaldyne Company LLC 791 2 780 3
Applied Materials, Inc. (b) 774 2 775 3
PerkinElmer, Inc. 707 2 578 2
APW North America Inc. 690 2 690 3
Amerix Corporation 614 2 614 2
Celestica Corporation 605 2 605 2
Institutional Jobbers Company 568 2 568 2
Buffets, Inc. 556 2 533 2
Gerber Scientific, Inc. 546 2 529 2
Checkfree Holdings Corporation, Inc. (b) 532 2 527 2
McLane Company, Inc. (a) 526 2 520 2
Other (a) (b) (c) 10,893 30 10,132 39
------- --- ------- ---
$34,790 100% $26,169 100%
======= === ======= ===
(a) Net of minority interest of an affiliate.
(b) Represents the Company's proportionate share of lease revenues from its
equity investments.
(c) Net of unaffiliated third party's minority interest.
-7-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
For the three-month period ended March 31, 2003, lessees were responsible for
the direct payment of approximately $3,132 of real estate taxes on behalf of the
Company.
In connection with a lease that had been terminated in a prior period, the
Company recognized approximately $2,588 in 2003 when it was determined that the
security deposit from the former lessee, Exodus Communications, Inc. has been
forfeited to the Company. Such amount is included in interest and other income
in the accompanying condensed consolidated financial statements.
Note 5. Equity Investments:
The Company owns interests in properties leased to corporations through equity
interests (i) in various partnerships and limited liability companies and (ii)
as tenants-in-common subject to joint control. The ownership interests range
from 33.33% to 50%. All of the underlying investments are owned with affiliates
that have similar investment objectives as the Company. The lessees are Advanced
Micro Devices, Inc., Compucom Systems, Inc., Textron, Inc., CheckFree Holdings,
Inc., Special Devices, Inc., Applied Materials, Inc., TruServ Corporation, Clear
Channel Communications, Inc. and Starkmark Camhood, LLC. On February 7, 2003,
the Company along with two affliliates, through a newly formed limited liability
company, entered into a master net lease with Starmark Camhood, LLC ("Starmark")
(see Note 6).
Summarized financial information of the Company's equity investees is as
follows:
(In thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Assets (primarily real estate) $776,581 $591,167
Liabilities (primarily mortgage notes payable) 474,932 329,330
Partners' and members' equity 301,649 261,837
Three Months Ended March 31,
----------------------------
2003 2002
------- ------
Revenues (primarily rental revenues) $19,470 $8,392
Expenses (primarily interest on mortgages and depreciation) 11,214 4,958
------- ------
Net income $ 8,256 $3,434
======= ======
Note 6. Acquisition of Real Estate:
On February 7, 2003, the Company, and two affiliates, Corporate Property
Associates 12 Incorporated and Corporate Property Associates 15 Incorporated,
through a newly-formed limited liability company with ownership interests of
41%, 15% and 44%, respectively, purchased land and 15 health club facilities for
$178,010 and entered into a master net lease with Starmark. The lease
obligations of Starmark are jointly and unconditionally guaranteed by seven of
its affiliates.
The Starmark lease provides for an initial lease term of 20 years with three
ten-year renewal terms. Annual rent is initially $18,272 with CPI-based
increases scheduled in November 2006, 2010, 2014, 2018 and 2021.
In connection with the purchase, the limited liability company obtained first
mortage limited recourse financing of $88,300 and a mezzanine loan of $20,000.
The first mortgage provides for monthly payments of interest and principal of
$564 at an annual interest rate of 6.6% and based on a 30-year amortization
schedule. The loan matures in March 2013 at which time a balloon payment is
payable. The mezzanine loan provides for monthly payments of interest and
principal of $277 at an annual interest rate of 11.15% and will fully amortize
over its ten-year term.
The limited liability company was granted warrants for Class C Unit interests in
Starmark. If exercised, the Unit interests would represent a 5% interest in
Starmark as of the date of grant. The warrants may be exercised at any time
through February 7, 2023 at an exercise price of $430 per unit. The warrant
agreement does not provide for a cashless exercise of units.
-8-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 7. Accounting Pronouncements:
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The Company adopted this Statement effective January
1, 2003, and the adoption did not have a material effect on the Company's
financial statements. The Company will no longer classify gains and losses for
the extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on the Company's
financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require the
Company to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. The Company does not have any employees nor any stock-based
compensation plans.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when
-9-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without additional financial support. In addition, FIN 46
requires both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. The
Company's maximum loss exposure is the carrying value of its equity investments.
The Company has evaluated the impact of this interpretation on its accounting
for its investments in unconsolidated joint ventures and it does not expect to
consolidate those investments as none of these investments will be classified as
VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively.
-10-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
The following information should be read in conjunction with Corporate Property
Associates 14 Incorporated's ("CPA(R):14") condensed consolidated financial
statements and notes thereto as of March 31, 2003 included in this quarterly
report and CPA(R):14's Annual Report on Form 10-K for the year ended December
31, 2002. This quarterly report contains forward looking statements. Such
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievement of CPA(R):14 to be
materially different from the results of operations or plans expressed or
implied by such forward looking statements. Accordingly, such information should
not be regarded as representations by CPA(R):14 that the results or conditions
described in such statements or the objectives and plans of CPA(R):14 will be
achieved. Item 1 of the Annual Report on Form 10-K for the year ended December
31, 2002 provides a description of CPA(R):14's business objectives, acquisition
and financing strategies and risk factors which could affect future operating
results.
CRITICAL ACCOUNTING POLICIES:
Certain accounting policies are critical to the understanding of CPA(R):14's
financial condition and results of operations. Management believes that an
understanding of financial condition and results of operations requires an
understanding of CPA(R):14's accounting policies.
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, CPA(R):14 must assess its ability to collect rent
and other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because CPA(R):14's real estate operations have a limited
number of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods. CPA(R):14 recognizes a
provision for uncollected rents which typically ranges between 0.25% and 1% of
lease revenues (rental income and interest income from direct financing leases)
and measures its allowance against actual rent arrearages and adjusts the
percentage applied.
Real estate accounted for under the operating method is stated at cost less
accumulated depreciation. Costs directly related to build-to-suit projects,
primarily interest, if applicable, are capitalized. CPA(R):14 considers a
build-to-suit project as in service upon completion of improvements, but no
later than a date that is negotiated and stated in the lease. If portions of a
project are substantially completed and occupied and other portions have not
reached that stage, the substantially completed portions are accounted for
separately. CPA(R):14 allocates costs incurred between the portions under
construction and the portions completed and only capitalizes costs for the
portion under construction.
CPA(R):14 also uses estimates and judgments when evaluating whether long-lived
assets are impaired. When events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, Management performs
projections of undiscounted cash flows, and if such cash flows are insufficient,
the assets are adjusted (i.e., written down) to their estimated fair value. An
analysis of whether a real estate asset has been impaired requires Management to
make its best estimate of market rents and residual values. As CPA(R):14's
investment objective is to hold properties on a long-term basis, holding periods
will range from five to ten years. In its evaluations, CPA(R):14 obtains market
information from outside sources; however, such information requires Management
to determine whether the information received is appropriate to the
circumstances. Depending on the assumptions made and estimates used, the
estimated cash flow projected in the evaluation of long-lived assets can vary
within a range of outcomes. CPA(R):14 considers the likelihood of possible
outcomes in determining the best estimate of future cash flows. Because
CPA(R):14's properties are leased to single tenants, CPA(R):14 is more likely to
incur significant writedowns when circumstances deteriorate because of the
possibility that a property will be vacated in its entirety. This makes the
risks faced by CPA(R):14 different from the risks faced by companies that own
multi-tenant
-11-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
properties. Events or changes in circumstances can result in further writedowns
and impact the gain or loss ultimately realized upon sale of the asset. For its
direct financing leases, CPA(R):14 performs a review of its estimated residual
value of properties at least annually to determine whether there has been an
other than temporary decline in CPA(R):14's current estimate of residual value.
If the review indicates a decline in residual values that is other than
temporary, a loss is recognized and the accounting for the direct financing
lease will be revised using the changed estimate, that is, a portion of the
future cash flow from the lessee will be recognized as a return of principal
rather than as revenue.
When assets are identified by Management as held for sale, CPA(R):14
discontinues depreciating the assets and estimates the sales price, net of
selling costs, of such assets. If, in Management's opinion, the net sales price
of the assets that have been identified for sale is less than the net book value
of the assets, an impairment charge is recognized and a valuation allowance is
established. If circumstances that previously were considered unlikely occur
and, as a result, CPA(R):14 decides not to sell a property previously classified
as held for sale, the property is reclassified as held and used. A property that
is reclassified is measured and recorded individually at the lower of (a) the
carrying value before it was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been
continuously classified as held and used, or (b) the fair value at the time of
the subsequent decision not to sell.
In 2002, CPA(R):14 acquired a subordinated interest in a mortgage trust that
consists of limited recourse loans on 62 properties that are owned by CPA(R):14
or three of its affiliates. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. If there are adverse changes
in either market rates or the credit quality of the lessees, the model and,
therefore, the income recognized from the subordinated interests as well as the
fair value, will be adjusted.
Costs incurred in connection with leases are capitalized and amortized on a
straight-line basis over the terms of the related leases and included in
property expense. Unamortized leasing costs are also charged to property expense
upon early termination of the lease. Costs incurred in connection with obtaining
mortgages and debt financing are capitalized and amortized over the term of the
related debt and included in interest expense. Unamortized financing costs are
written off and included in charges for early extinguishment of debt if a loan
is retired early.
Stated rental revenue and interest income from direct financing leases are
recognized on a straight-line basis and a constant rate of interest,
respectively, over the terms of the respective leases. Unbilled rents receivable
represents the amount by which straight-line rental revenue exceeds rents
currently billed in accordance with the lease agreements. The majority of
CPA(R):14's leases provide for periodic rent increases based on formulas indexed
to increases in the CPI. CPI-based and other contingent-type rents are
recognized currently. CPA(R):14 recognizes rental income from sales overrides
after the level of sales requiring a rental payment to CPA(R):14 is reached.
CPA(R):14 and certain affiliates are investors in certain real estate assets. It
is anticipated that additional properties will be purchased through real estate
ventures. These investments may be held through incorporated or unincorporated
jointly-held entities. Substantially all of these investments represent jointly
purchased properties which were net leased to a single tenant and were
structured to provide diversification and reduce concentration of a risk from a
single lessee for CPA(R):14 and the affiliate. The placement of an investment in
a jointly held entity or tenancy in common requires the approval of CPA(R):14's
Independent Directors. All of the jointly held investments are structured so
that CPA(R):14 and the affiliate contribute equity, receive distributions and
are allocated profit or loss in amounts that are proportional to their ownership
interests. All of the jointly-held investments are subject to contractual
agreements. No fees are payable to affiliates under any of the limited
partnership and joint venture agreements. The presentation of these jointly held
investments and their related results in the accompanying consolidated financial
statements is determined based on factors such as controlling interest,
significant influence and whether each party has the ability to make independent
decisions. Such factors will determine whether such investments are consolidated
in the accounts of CPA(R):14 or accounted for under the equity method. Equity
method investments are reviewed for impairment in the event of a change in
circumstances that is other than temporary. An investment's value is only
impaired if Management's estimate of the net realizable value of the investment
is less
-12-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
than the carrying value of the investment. To the extent an impairment
has occurred, the loss shall be measured as the excess of the carrying amount of
the investment over the fair value of the investment.
CPA(R):14 measures derivative instruments, including derivative instruments
embedded in other contracts, if any, at fair value and records them as an asset
or liability, depending on CPA(R):14's rights or obligations under the
applicable derivative contract. For derivatives designated as fair value hedges,
the changes in the fair value of both the derivative instrument and the hedged
item are recorded in earnings. For derivatives designated as cash flow hedges,
the effective portions of the derivative are reported in other comprehensive
income, a component of shareholders' equity, and are subsequently reclassified
into earnings when the hedged item affects earnings (i.e., the forecasted event
occurs). Changes in fair value of derivative instruments not designated as
hedging and ineffective portions of hedges are recognized in the determination
of earnings.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. Operating segments are
components of an enterprise about which financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management evaluates the
performance of CPA(R):14's portfolio of properties as a whole, rather than by
identifying discrete operating segments. This evaluation includes assessing
CPA(R):14's ability to meet distribution objectives, increase the dividend and
increase value by evaluating potential investments in single tenant net lease
real estate and by seeking favorable limited recourse mortgage financing
opportunities. As of March 31, 2003, CPA(R):14 operates in one segment, real
estate operations, and owned properties in the United States, the Netherlands,
Finland, France and the United Kingdom.
RESULTS OF OPERATIONS:
Net income for the three-month period ended March 31, 2003 increased by $3,257
to $10,604 as compared with net income of $7,347 for the three-month period
ended March 31, 2002. The increase was due to the continuing increase in
CPA(R):14's asset base and the completion of build-to-suit projects. The current
three-month period included $2,588 of other income recognized from a forfeiture
of a security deposit. Excluding this item, income for the comparable periods
would have reflected an increase of $669. The increase is consistent with
CPA(R):14's using its available cash to further diversify its portfolio and
increase its current base. The increase was due to an increase in lease revenues
and was offset, in part, by increases in interest, depreciation, property and
general and administrative expenses. Revenues and expenses are projected to
increase until the funds from CPA(R):14's public offering are fully invested and
additional limited recourse mortgage financing on new investments and
unencumbered properties is obtained. Since March 31, 2002, CPA(R):14's asset
base has increased 10%.
Lease revenues increased by $5,579 for the comparable three-month periods,
primarily as a result of real estate purchases and the completion of a
build-to-suit project in 2002. During 2002, CPA(R):14 purchased properties and
entered into new leases with American Tire Distributors, Carrefour France SA, PW
Eagle, Inc., UTI Holdings, Inc., Tower Automotive, Inc., Career Education Group
and Katun Corporation, which accounted for $5,378 of the increase in lease
revenues. These new leases have contributed $5,640 of lease revenues for the
period ended March 31, 2003 and will provide annual cash flow (contractual rent
less property-level mortgage debt service) of $11,594. Lease revenues for the
comparable period also reflect a reduction of $208 as a result of the lease
termination of the Burlington Motor Carriers, Inc. lease in March 2002 pursuant
to its bankruptcy. In March 2003, Fleming Companies, Inc. filed a voluntary
petition of bankruptcy and subsequently, in connection with its reorganization,
terminated its lease in Grand Rapids, Michigan. An affiliate owns a 40% minority
interest in the property. CPA(R):14's share of annual rent from the Fleming
lease was $925. More than 45 of CPA(R):14's leases have rent increases scheduled
in 2003 and 2004. The effect of future rent increases is expected to be a more
significant component of the increase in lease revenues as the portfolio
matures. The majority of rent increases are based on formulas indexed to the
Consumer Price Index ("CPI"), and future rent increases will be affected by
changes in the CPI.
Interest expense for the comparable three-month periods increased by $2,594 as a
result of $196,596 of mortgage financing obtained in 2002. The increase in
depreciation was attributable to the increase in real estate assets. Property
expense increased by $1,694 primarily due to increases in asset management and
performance fees. The
-13-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
increase in fees was due to the increase in CPA(R):14's asset base. Effective
January 1, 2003 the management and performance fees are calculated based on an
independent valuation of CPA(R):14's real estate assets, however, this change
had no significant effect on the determination of the asset management and
performance fees. Property expenses are expected to increase due to Fleming
Companies Inc.'s rejection of their lease. Annual carrying costs on the property
in Grand Rapids, Michigan are approximately $399. The increase in general and
administrative expense of $933 was primarily due (i) to an increase in
investor-related costs and (ii) other costs which increase as CPA(R):14's asset
base increases.
The increase in income from equity investments was due to the acquisition of
properties leased to TruServ Corporation and Clear Channel Communications, Inc.
in December 2002 and Starmark Camhood, LLC in February 2003. Of the $1,850
increase in equity income for the comparable three-month periods, $1,752 was due
to these acquisitions. CPA(R):14's annual distributions from these investments
is estimated to be approximately $7,716.
In August 2002, in connection with obtaining $42,332 of mortgage debt, CPA(R):14
acquired subordinated interests in a mortgage securitization. Interest income
from this investment was $210.
In structuring a lease with Exodus Communications, Inc, in December 2000,
CPA(R):14 negotiated a cash security deposit of $2,588 from Exodus, representing
approximately 18 months rent. In connection with CPA(R):14's claim in the Exodus
bankruptcy proceedings, it was determined that the security deposit has been
forfeited to CPA(R):14. The release of the security deposit is included in other
income for the quarter ended March 31, 2003 in the accompanying condensed
consolidated financial statements.
FINANCIAL CONDITION:
In November 2001, CPA(R):14 completed a second public offering of shares of
common stock, at which time it had raised equity of approximately $660,000.
CPA(R):14 is using proceeds of the offerings to make investments in net lease
real estate. As of March 31, 2003, CPA(R):14 had more than approximately $33,374
of cash available for the acquisition of real estate investments.
There has been no material change in CPA(R):14's financial condition.
CPA(R):14's cash has decreased $19,682, since December 31, 2002, primarily as a
result of acquiring new real estate investments. CPA(R):14 intends to use its
cash to meet working capital needs, acquire new properties to further diversify
its portfolio and complete its commitments on build-to-suit construction. After
CPA(R):14 is fully invested, CPA(R):14 will maintain cash balances which
Management believes to be sufficient for meeting working capital needs.
For the three months ended March 31, 2003, cash flows from operating activities
and equity investments of $15,929 were sufficient to pay dividends to
shareholders of $12,488, meet scheduled principal payment installments on
mortgage debt of $2,099 and distribute $754 to minority interests. As a result
of the new leases that have been entered into since December 31, 2002, operating
cash flow is projected to continue to be sufficient to meet CPA(R):14's
quarterly dividends as they increase.
CPA(R):14's investing activities include using $29,563 to purchase a 15%
interest in the Starmark properties and to fund build-to-suit projects for
properties leased to Waddington North America, Inc. and Career Education Group.
CPA(R):14's share of annual cash flows from the Starmark properties is projected
to be $3,350. CPA(R):14 has remaining commitments on the Waddington and Career
Education build-to-suit projects of $4,932. The build-to-suit projects with
Waddington and Career Education are expected to be completed in May 2003 and
July 2003, respectively. Upon completion of the build-to-suit projects, the
annual cash flow from these properties is projected to be $2,535. CPA(R):14
received $8,722 from its share of mortgage proceeds obtained by an equity
investee. CPA(R):14 also paid an annual installment of deferred acquisition fees
in January 2003 of $2,373.
In addition to paying dividends to shareholders, principal payments on mortgage
debt and paying distributions to minority interest owners, CPA(R):14's financing
activities included proceeds of $3,017 from the mortgage loan collateralized by
the Career Education property and which were used to fund the build-to-suit
project. CPA(R):14 has no mortgage balloon payments scheduled until June 2006.
-14-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CPA(R):14's contractual obligations and commitments is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
-------- -------- -------- -------- -------- -------- ----------
Obligations:
Mortgage notes payable (1) $670,920 $ 7,812 $ 10,669 $ 11,640 $ 12,555 $ 13,465 $614,779
Deferred acquisition fees 22,257 - 3,204 3,386 3,386 3,386 8,895
Subordinated disposition fees 240 240
Commitments:
Commitments for build-to-suit
construction 4,932 4,932
Share of minimum rents payable
under office cost-sharing
agreement 1,336 264 390 390 292 - -
-------- -------- -------- -------- -------- -------- --------
$699,685 $ 13,008 $ 14,263 $ 15,416 $ 16,233 $ 16,851 $623,914
======== ======== ======== ======== ======== ======== ========
(1) The mortgage notes payable were obtained in connection with the acquisition
of properties in the ordinary course of business.
ACCOUNTING PRONOUNCEMENTS:
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. CPA(R):14 adopted this statement effective January 1,
2003, and the adoption did not have a material affect on CPA(R):14's financial
statements. CPA(R):14 will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on CPA(R):14's financial
statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
-15-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require
CPA(R):14 to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on CPA(R):14's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. CPA(R):14 does not have any employees nor any stock-based
compensation plans.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. CPA(R):14's maximum loss exposure
is the carrying value of its equity investments. CPA(R):14 has evaluated the
impact of this interpretation on its accounting for its investments in
unconsolidated joint ventures and it does not expect to consolidate those
investments as none of these investments will be classified as VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively.
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
Market risk is the exposure to loss resulting from changes in interest and
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risks to which CPA(R):14 is exposed are interest rate
risk and foreign currency exchange risk.
The value of CPA(R):14's real estate is subject to fluctuations based on changes
in interest and foreign currency exchange rates, local and regional economic
conditions and changes in the creditworthiness of lessees, and which may affect
CPA(R):14's ability to refinance its debt when balloon payments are scheduled.
CPA(R):14 owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuation based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of March 31,
2003, CPA(R):14's interests in CCMT had a fair value of $6,495.
Approximately $647,113 of CPA(R):14's long-term debt bears interest at fixed
rates, and therefore the fair value of these instruments is affected by changes
in the market interest rates. The following table presents principal cash flows
based upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. The interest rate on the fixed rate debt as of March 31, 2003 ranged from
6.09% to 8.85%. The interest rate on the variable rate debt as of March 31, 2003
ranged from 3.34% to 6.50%.
2003 2004 2005 2006 2007 Thereafter Total Fair Value
-------- -------- -------- -------- -------- ---------- -------- ----------
Fixed rate debt $ 6,806 $ 9,568 $ 10,498 $ 11,376 $ 12,247 $596,618 $647,113 $655,381
Weighted average
interest rate 7.80% 7.63% 7.61% 7.60% 7.67% 7.61%
Variable rate debt $ 1,006 $ 1,101 $ 1,142 $ 1,179 $ 1,218 $ 18,161 $ 23,807 $ 23,807
CPA(R):14 has foreign operations. Accordingly, CPA(R):14 is subject to foreign
currency exchange risk from the effects of exchange rate movements of foreign
currencies and this may affect future costs and cash flows; however, exchange
rate movements to date have not had a significant effect on CPA(R):14's
financial position or results of operations. To date we have not entered into
any foreign currency forward exchange contracts to hedge the effects of adverse
fluctuations in foreign currency exchange. One of CPA(R):14's lease agreements
provides the option to receive a portion of the rent in dollars or the local
currency; this option is considered a derivative financial instrument and
changes in the fair value of the option, which were not significant, are
included in the determination of net income.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
March 31, 2003.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
-17-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART II
Item 2 (d). - USE OF PROCEEDS OF REGISTERED OFFERING
Pursuant to Rule 701 of Regulation S-K, the use of proceeds from the Company's
offering of common stock which commenced November 17, 1999 (File # 333-76761) is
as follows as of March 31, 2003:
Shares registered: 40,000,000
Aggregate price of offering amount registered: $400,000,000
Shares sold: 36,353,686
Aggregated offering price of amount sold: $363,536,860
Direct or indirect payments to directors, officers, general
partners of the issuer or their associates, to persons owning
ten percent or more of any class of equity
securities of the issuer and to affiliates of the issuer: $6,756,359
Direct or indirect payments to others: $29,021,554
Net offering proceeds to the issuer after deducting expenses: $327,758,947
Purchases of real estate: $317,968,274
Working capital reserves: $3,635,369
Temporary investments in cash and cash equivalents: $6,155,304
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2003, no matters were submitted to a
vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
99.1 Certification of Co-Chief Executive Officers Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2003, the Company was not
required to file any reports on Form 8-K.
-18-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
5/13/2003 By: /s/ John J. Park
--------- -----------------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
5/13/2003 By: /s/ Claude Fernandez
--------- -----------------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
-19-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 14 Incorporated (the "Registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and we have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and we have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 5/13/2003 Date 5/13/2003
/s/ William Polk Carey /s/ Gordon F. DuGan
--------------------------- --------------------------
William Polk Carey Gordon F. DuGan
Chairman Vice Chairman
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 14 Incorporated (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 5/13/2003
/s/ John J. Park
---------------------------------
John J. Park
Chief Financial Officer
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