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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: 333-58854
-------------------------
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-2298116
(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: NONE
-------------------------
CPA(R):15 has SHARES OF COMMON STOCK registered pursuant to Section 12(g)
of the Act.
CPA(R):15 HAS NO SECURITIES registered on any exchanges.
CPA(R):15 does not have any Securities registered pursuant to Section 12(b)
of the Act.
CPA(R):15 (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):15 has no active market for common stock at May 12, 2003.
CPA(R):15 has 69,759,915 shares of common stock, $.001 par value
outstanding at May 12, 2003.
CORPORATE PROPERTY ASSOCIATES 15 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 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 5-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
Item 3. - Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. - Controls and Procedures 20
PART II - Other Information
Item 2(d). - Use of Proceeds of Registered Offering 21
Item 4. - Submission of Matters to a Vote of Security Holders 22
Item 6. - Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24-25
* 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 15 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 $5,302 and
$2,323 at March 31, 2003 and December 31, 2002 $ 581,200 $557,198
Net investment in direct financing leases 33,783 21,093
Real estate under construction 53,043 20,061
Equity investments 91,974 75,606
Cash and cash equivalents 213,814 94,762
Deferred offering costs 6,676 6,815
Other assets 32,392 30,763
---------- --------
Total assets $1,012,882 $806,298
========== ========
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 394,309 $374,787
Notes payable 3,816 3,705
Accrued interest 1,458 991
Due to affiliates 8,104 7,622
Accounts payable and accrued expenses 8,070 5,910
Prepaid rental income and security deposits 20,140 15,494
Deferred acquisition fees payable to affiliate 15,436 13,012
Dividends payable 8,259 5,789
---------- --------
Total liabilities 459,592 427,310
---------- --------
Minority interest 40,647 28,193
---------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized 120,000,000 shares; issued and
outstanding, 57,755,898 and 39,966,488 at March 31, 2003 and
December 31, 2002 58 40
Additional paid-in capital 520,362 355,964
Dividend in excess of accumulated earnings (9,037) (6,270)
Accumulated other comprehensive income 1,260 1,061
---------- --------
Total shareholders' equity 512,643 350,795
---------- --------
Total liabilities, minority interest and shareholders' equity $1,012,882 $806,298
========== ========
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 15 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 $ 13,847
Interest income from direct financing leases 598
Interest and other income 1,428 $ 117
----------- ----------
15,873 117
----------- ----------
Expenses:
Interest 5,429 3
Depreciation 2,968 -
General and administrative 1,268 96
Property expenses 2,996 22
----------- ----------
12,661 121
----------- ----------
Income before minority interest, equity
investments and gain on sale 3,212 (4)
Minority interest in income (765) -
Income from equity investments 2,068 113
----------- ----------
Income before gain on sale 4,515 109
Gain on sale 977 -
----------- ----------
Net income $ 5,492 $ 109
=========== ==========
Basic and diluted earnings per share $ .14 $ .03
=========== ==========
Weighted average shares outstanding - basic and diluted 40,779,669 3,208,701
=========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Net income $ 5,492 $ 109
---------- ---------
Other comprehensive income:
Change in foreign currency translation adjustment 199 -
---------- ---------
Other comprehensive income 199 -
---------- ---------
Comprehensive income $ 5,691 $ 109
========== =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 5,492 $ 109
Adjustments to reconcile net income to net cash provided by
operating activities: -
Depreciation and amortization of financing costs 3,013 -
Equity income in excess of distributions received (601) -
Straight-line rent adjustments (1,094) -
Gain on sale (977) -
Provision for uncollected rents 22 -
Fees paid to affiliate by issuance of stock 419 -
Minority interest in income 765 -
Decrease in other assets 364 -
Increase in accrued interest 467 -
Increase in accounts payable and accrued expenses 539 54
Increase in due to affiliates (a) 621 32
Increase in prepaid rent and security deposits 4,399 -
-------- -------
Net cash provided by operating activities 13,429 195
-------- -------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 132 307
Acquisitions of real estate and equity investments and other
capitalized costs (91,814) (10,886)
Distribution of mortgage financing from equity investees 12,460 -
-------- -------
Net cash used in investing activities (79,222) (10,579)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of stock, net of costs of raising capital 164,047 70,257
Dividends paid (5,789) -
Proceeds from mortgages (b) 16,330 -
Mortgage principal payments (1,209) -
Deferred financing costs and mortgage deposits, net of deposits
refunded 223 -
Capital contributions from minority partner 11,916 -
Distributions paid to minority partners (798) -
-------- -------
Net cash provided by financing activities 184,720 70,257
-------- -------
Effect of exchange rates on cash 125 -
-------- -------
Net increase in cash and cash equivalents 119,052 59,873
Cash and cash equivalents, beginning of period 94,762 188
-------- -------
Cash and cash equivalents, end of period $213,814 $60,061
======== =======
Noncash operating and financing activities:
(a) Increase in due to affiliates excludes amounts which relate to the
raising of capital (financing activities) pursuant to the Company's
public offering.
(b) Net of $670 held by lenders to fund escrow accounts.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 15 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 15 Incorporated ("CPA(R):15") 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. 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 consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
Note 2. Organization and Offering:
The Company was formed on February 26, 2001 under the General Corporation Law of
Maryland for the purpose of engaging in the business of investing in and owning
property net leased to creditworthy corporations and other creditworthy
entities. Subject to certain restrictions and limitations, the business of the
Company is managed by Carey Asset Management Corp. (the "Advisor"), a
wholly-owned subsidiary of W. P. Carey & Co. LLC.
On April 2, 2001, the Advisor purchased 20,000 shares of common stock for $200
as the initial shareholder of the Company. An initial offering of the Company's
shares which commenced on November 7, 2001 concluded on November 20, 2002, at
which time the Company had issued an aggregate of 39,954,941 shares ($399,549).
Since December 31, 2002, the Company commenced a second offering (the
"Offering") for a maximum of an additional 69,000,000 shares of common stock.
The shares are being offered to the public on a "best efforts" basis at a price
of $10 per share. As of March 31, 2003, the Company has issued 17,663,181 shares
($176,632) from the Offering. Since March 31, 2003 an additional 11,933,357
shares $119,334 have been issued.
Note 3. Agreements and Transactions with Related Parties:
The Company's asset and management fees are payable to the Advisor, each of
which is 1/2 of 1% of Average Invested Assets, as defined in the Advisory
Agreement. The performance fee is subordinated to the Preferred Return, a
cumulative non-compounded dividend return of 6%. The Preferred Return was met in
2002. The Advisor has elected at its option to receive the performance fee in
restricted shares of common stock of the Company 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. For the three
months ended March 31, 2003 and 2002, the Company incurred asset management fees
of $848 and $11, respectively, with performance fees in like amount. For the
three months ended March 31, 2003 and 2002, the Company incurred personnel
reimbursements of $189 and $0, 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 annual
installments over no less than four years following the first anniversary of the
date a property was purchased. Such deferred fees are only payable if the
Preferred Return has been met. The unpaid portion of the deferred fees bears
interest at an annual rate of 6% from the date of acquisition of a property
until paid. For transactions that were completed in the three months ended March
31, 2003, current and deferred fees were $4,319 and $3,455, respectively.
-5-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
Note 4. Commitments and Contingencies:
The Company is liable for certain expenses of the Offering described in the
Prospectus, which include filing, legal, accounting, printing and escrow fees,
which are to be deducted from the gross proceeds of the Offering. The Company is
reimbursing Carey Financial Corporation ("Carey Financial") or one of its
affiliates for expenses (including fees and expenses of its counsel) and for the
costs of any sales and information meetings of Carey Financial's employees or
those of one of its affiliates relating to the Offering. Total underwriting
compensation with respect to the Offering may not exceed 10% of gross proceeds
of the Offering. The Advisor has agreed to be responsible for the payment of (i)
organization and offering expenses (excluding selling commissions to Carey
Financial with respect to Shares held by selected dealers) which exceed 4% of
the gross proceeds of the offering and (ii) organization and offering expenses
(including selling commissions, fees and fees paid and expenses reimbursed to
selected dealers) which exceed 15% of the gross proceeds of the Offering. The
total of these costs paid by the Advisor was $15,503 through March 31, 2003, of
which the Company has reimbursed $8,827.
Note 5. 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
leasing revenues for the three-month periods ended March 31, 2003 and 2002 are
as follows:
2003 2002
---- ----
Per Statements of Income:
Rental income $13,847
Interest income from direct financing leases 598
Adjustment:
Share of leasing revenue applicable to minority
interest (1,708)
Share of leasing revenue from equity investments 4,246 $256
------- ----
$16,983 $256
======= ====
-6-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
For the three-month periods ended March 31, 2003 and 2002, the Company earned
its net leasing revenues from its investments from the following lease obligors:
2003 % 2002 %
---- - ---- -
Carrefour France, SA (b) $ 2,520 15
Clear Channel Communications, Inc. (b) 2,123 13
TruServ Corporation (a) 1,805 11
Fleming Companies, Inc. 1,377 8
Foster Wheeler, Inc. 1,309 8
Starmark Camhood, L.L.C. (a) 1,175 7
Medica - France, SA (b) 954 6
Meadowbrook Meat Company 752 4
Overland Storage, Inc. 748 4
Petsmart, Inc. (a) 623 4 $ 208 81
Tower Automotive, Inc. 589 3
Hologic, Inc. (a) 505 3
BE Aerospace, Inc. 407 2
Racal Instruments, Inc. 390 2
Trends Clothing Corp. 355 2
Advantis Technologies, Inc. 319 2
IntegraColor, Ltd. 314 2
Danka Office Imaging Company 218 1
Polar Plastics, Inc. 140 1
Builders Firstsource, Inc. (a) 138 1 48 19
SSG Precision Optronics, Inc. 127 1
WNA American Plastics Industries,Inc. 81 -
Pemstar, Inc. 14 -
------- --- ------- ---
$16,983 100% $ 256 100%
======= === ======= ===
(a) Represents the Company's proportionate share of lease revenues from
its equity investments (see Note 6).
(b) Net of amounts applicable to minority interest.
For the three-month period ended March 31, 2003, lessees were responsible for
the direct payment of approximately $776 of real estate taxes on behalf of the
Company.
Note 6. Equity Investments:
The Company owns interests in properties leased to corporations through equity
interests in (i) various partnerships and limited liability companies in which
its ownership interests are 50% or less and the Company exercises significant
influence, and (ii) as tenants-in-common subject to common control. The
ownership interests range from 30% to 64%. All of the underlying investments are
owned with affiliates that have similar investments objectives as the Company.
The lessees are Petsmart, Inc.; Builders FirstSource, Inc.; TruServ Corporation;
Hologic, Inc. and Starmark Camhood LLC ("Starmark"). The interest in Starmark
was purchased in February 2003 and is described in Note 8.
Summarized combined financial information of the equity investees is as follows:
(in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Assets (primarily real estate) $443,096 $255,845
Liabilities (primarily mortgage notes payable) 248,502 102,022
Partners' and members' equity 194,594 153,823
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Revenues (primarily rental revenues) $ 9,492 $ 2,076
Expenses (primarily interest on mortgages and depreciation) 5,009 1,208
------- -------
Net income $ 4,483 $ 868
======= =======
-7-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
Note 7. Dividends Payable:
During the quarter ended March 31, 2003, dividends were declared to shareholders
of record as of March 28, March 29, and March 31, 2003. Each declaration was for
$.05167 per share and was paid in April 2003 ($8,259).
Note 8. Acquisitions of Real Estate:
A. On March 28, 2003, the Company purchased land in McCalla, Alabama for
$3,813 and entered into construction agency and net lease agreements
with Oxford Automotive Alabama, Inc. ("Oxford"). The construction and
lease obligations are unconditionally guaranteed by Oxford
Automotive, Inc., Oxford's parent company. The total cost of the
build-to-suit project is estimated to amount to approximately
$15,707. Upon the earlier of completion or March 1, 2004, a lease
with an initial term of 15 years will commence followed by options
for two ten-year renewal terms. To the extent that all project costs
are incurred, annual rent will be $1,575 and will be reduced by 10.5%
of amounts that are less than the estimated project cost. The lease
provides for rent increases every three years based on a formula
indexed to increases in the Consumer Price Index ("CPI").
B. On March 28, 2003, the Company purchased land and buildings in
Rochester, Minnesota for $12,565 and entered into a lease agreement
with Pemstar, Inc. at an annual rent of $1,278. The lease has an
initial term of 20 years with two ten-year renewal options and stated
annual rent increases of 2%. In connection with the purchase of the
property, the Company obtained $7,500 of limited recourse mortgage
financing collateralized by a mortgage and a lease assignment. The
loan provides for monthly payments of interest and principal of $55
at an annual interest rate of 6.36% and will fully amortize over 20
years.
C. On March 20, 2003, the Company purchased land in Miami, Florida for
$15,423, including certain capitalized costs, and entered into
construction agency and net lease agreements with Transworld Center,
Inc. ("Transworld"). The construction and lease obligations are
unconditionally guaranteed by nine of its affiliates. The total cost
of the build-to-suit project is estimated to amount to approximately
$21,000. Upon the earlier of completion or October 31, 2003, a lease
with an initial term of 20 years will commence followed by options
for two ten-year renewal terms. To the extent that all project costs
are incurred, annual rent will be $2,258 and will be reduced by
10.75% of amounts that are less then the estimated project cost. The
lease provides for rent increases every two years based on a formula
indexed to increases in the CPI.
D. On February 25, 2003, the Company purchased land and buildings in
Mooresville, North Carolina for $15,602 and entered into a lease
agreement with Polar Plastics (NC), Inc. ("Polar") at an annual rent
of $1,460. The lease obligations are unconditionally guaranteed by
Polar Plastics, Inc., Polar's parent company. The lease has an
initial term of 20 years with two ten-year renewal options and
CPI-based rent increases every three years. In connection with the
purchase of the properties, the Company obtained $9,500 of limited
recourse mortgage financing collateralized by a deed of trust and a
lease assignment. The loan provides for monthly payments of interest
and principal of $70 at an annual interest rate of 6.32% and will
fully amortize over 20 years.
E. On February 12, 2003, the Company purchased land and buildings in
Chattanooga, Tennessee for $6,545 and entered into a master net lease
with Waddington North America Business Trust. The lease obligations
are unconditionally guaranteed by WNA American Plastic Industries,
Inc. The lease has an initial term of 19 years with two ten-year
renewal options. Annual rent is $637 with increases every three years
based on a formula indexed to the CPI and capped at 3%.
F. On February 7, 2003, the Company and two affiliates, Corporate
Property Associates 12 Incorporated ("CPA(R):12") and Corporate
Property Associates 14 Incorporated, through a newly-formed limited
liability company with ownership interests of 44%, 15% and 41%,
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.
-8-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
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 mortgage 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.
G. On January 28, 2003, the Company purchased land in Birmingham, United
Kingdom for $9,038 and entered into a build-to-suit commitment and a
net lease with Insulated Structures, Ltd. ("ISL"). The total cost for
the ISL facility is estimated to amount to approximately $22,000.
Upon completion, a lease with an initial term of 25 years will
commence. Annual rent under the lease is L1,033 (approximately
$1,650) with annual rent increases of 2%. The Company has obtained a
commitment for L9,300 (approximately $14,855) of limited recourse
mortgage financing which will bear interest at an annual fixed rate
which is to be determined or an annual rate equal to the sum of the
London Inter-Bank Offered Rate and 1.1%. The loan will provide for
stated principal payments which increase over the twenty-year term of
the loan. A balloon payment of L5,600 ($8,950) is payable at
maturity.
Note 9. Gain on Sale of Interest in French Properties:
In December 2002, the Company purchased, in two separate transactions, 13
properties, seven leased to affiliates of Carrefour France, S.A. ("Carrefour")
and six leased to S.A. Medica France ("Medica"). The total cost for the
properties was Euro 144,094 (approximately $147,294 as of the purchase dates)
and was financed with limited recourse mortgage loans of Euro 118,244
(approximately $120,842 as of the purchase dates). On March 12, 2003, the
Company sold a 35% interest in the limited liability company that owns the
Medica and Carrefour properties to CPA(R):12. The purchase price was based on
the appraised value of the properties (based on an exchange rate for the Euro of
$1.0959) adjusted for capitalized costs incurred since the acquisitions
including fees paid to the Advisor, net of mortgage debt. Based on the formula,
CPA(R):12 paid the Company, $11,916 and assumed $1,031 of the Company's deferred
acquisition fee payable to an affiliate.
The sale was approved by the Company's independent directors as being in the
best interests of the Company and was intended to facilitate the Company's
ability to raise capital. The continued holding of 100% of the Medica and
Carrefour interests would have required the Company to obtain and provide
financial information in its 1933 and 1934 Act filings on the lease guarantors
that is in accordance with accounting principles generally accepted in the
United States of America and this information is not available to the Company.
In connection with the sale of the 35% interests, the Company recognized a gain
on sale of $977 of which $672 is attributable to foreign currency gains and $305
is attributable to depreciation for the period from the dates of the initial
purchases of the properties through March 12, 2003, the date of the sale of the
35% interest.
-9-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
Note 10. 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 June 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.
-10-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
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. 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.
Note 11. Subsequent Events:
A. On April 29, 2003, the Company purchased six properties in England,
Northern Ireland and Ireland for $35,062 (based on the exchange rate
for the Great Britain Pound on the date of acquisition) and entered
into leases with Qualceram Shires plc ("Qualceram"). The leases have
initial terms of 25 years at an annual aggregate rent of $2,759. The
leases provide for stated annual increases of 1.75% for the first ten
years followed by stated increases of 3% per year compounded every
five years thereafter. Qualceram has annual repurchase options at the
greater of fair value, as defined in the lease, or the sum of the
Company's purchase cost and a specified premium.
The Company obtained $23,196 of limited recourse mortgage financing
collateralized by the Qualceram properties. The loan provides for
stated principal installments at an annual interest rate of 6.45%.
The loan has a ten-year term at which time a balloon payment is
payable.
B. On April 1, 2003, the Company purchased land and buildings in
Yardley, Pennsylvania for $23,979 and entered into a lease agreement
with MediMedia USA, Inc. The lease obligations are unconditionally
guaranteed by Santemedia Group Holdings SARL. The lease has an
initial term of 11 years and eight months followed by renewal options
of 10 years, 4.5 years and 5.5 years, and provides for initial annual
rent of $2,111 with stated rent increases of 10.41% every five years.
In connection with the purchase of the properties, the Company
obtained $14,000 of limited recourse mortgage financing
collateralized by a mortgage, security agreement and lease
assignment. The loan provides for monthly payments of interest and
principal of $89 at an annual interest rate of 5.90% and based on a
25-year amortization schedule, and matures in April 2018, at which
time a balloon payment is payable.
-11-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 15 Incorporated ("CPA(R):15") should
be read in conjunction with the financial statements and notes thereto as of
March 31, 2003 included in this quarterly report and CPA(R):15's Annual Report
on Form 10-K for the year ended December 31, 2002. This quarterly report
contains forward looking statements. Forward-looking statements, which are based
on certain assumptions, describe future plans, strategies and expectations of
CPA(R):15. Such statements included known and unknown risks, uncertainties and
other factors that may cause its actual results, performance or achievement 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 us that the results or conditions
described in such statements or objectives and plans will be achieved. A
description of CPA(R):15's objectives, acquisition and financing strategies and
factors that may affect future operating results is detailed in Item 1 of the
Annual Report on Form 10-K.
CPA(R):15 was formed in 2001 and is currently using the proceeds from its "best
efforts" public offerings along with limited recourse mortgage financing to
purchase properties and enter into long-term net leases with corporate lessees.
As of March 31, 2003, CPA(R):15 had raised gross proceeds of $399,549 from its
first offering which was completed in November 2002, and $176,632 from its
second "best efforts" public offering of stock which commenced in 2003.
CPA(R):15 structures the net leases to place certain economic burdens of
ownership on these corporate lessees by requiring them to pay the costs of
maintenance and repair, insurance and real estate taxes. The lease obligations
are unconditional. When possible, CPA(R):15 also negotiates guarantees of the
lease obligations from parent companies. CPA(R):15 negotiates leases that may
provide for periodic rent increases that are stated or based on increases in the
Consumer Price Index ("CPI") or, for retail properties, may provide for
additional rents based on sales in excess of a specified base amount. CPA(R):15
has also acquired interests in real estate through joint ventures with
affiliates who have similar investment objectives as CPA(R):15. These joint
ventures also enter into net leases on a single-tenant basis.
Critical Accounting Policies
CPA(R):15 has adopted certain critical accounting policies that are crucial to
an understanding of its financial condition and results of operations. Such
policies include, but are not limited to the following:
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):15 assesses its ability to collect rent and
other tenant-based receivables and determines an appropriate charge and
allowance for uncollectable amounts. Because CPA(R):15's real estate operations
have a limited number of lessees, Management believes that it will be necessary
to evaluate specific situations rather than solely use statistical methods.
CPA(R):15 recognizes a provision for uncollected rents which typically will
range between 0.25% and 1% of lease revenues (rental income and interest income
from direct financing leases) and measures its allowance for uncollected rents
with actual rent arrearages experience and its judgment regarding collectibility
of arrearages. In future periods, CPA(R):15 will compare its allowance for
uncollected receivables to any arrearages and adjust the percentage applied,
based on its actual experience.
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):15 considers a
build-to-suit project as in service upon the completion of improvements, but no
later than a date that is negotiated
-12-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
and stated in the lease. If portions of a project are substantially completed
and occupied and other portions have not yet reached that stage, the
substantially completed portions are accounted for separately. CPA(R):15
allocates costs incurred between the portions under construction and the
portions substantially completed and only capitalizes those costs associated
with the portion under construction.
CPA(R):15 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
will be 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, residual values and holding periods. As
CPA(R):15's investment objective is to hold properties on a long-term basis,
holding period assumptions will likely range from five to ten years. In its
evaluations, CPA(R):15 will generally obtain 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 future cash flow projected in
the evaluation of long-lived assets can vary within a range of outcomes.
CPA(R):15 considers the likelihood of possible outcomes in determining the best
estimate of future cash flows. Because CPA(R):15's properties are leased to
single tenants, CPA(R):15 may be 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):15 different
from the risks faced by companies that own multi-tenant 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): 15 will perform a review of its estimated residual values of
properties at least annually to determine whether there has been an other than
temporary decline in CPA(R):15's current estimate of residual value. Currently,
there are no lessees that have experienced a change in circumstances that in
Management's opinion would require an evaluation of recoverability.
Stated rental revenue is recognized on a straight-line basis, and interest
income from direct financing leases is recognized such that CPA(R):15 earns a
constant rate of interest on its net investment, 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. CPI-based and other contingent-type rents are recognized
currently. CPA(R):15 recognizes rental income from sales overrides after the
level of sales requiring a rental payment to CPA(R):15 is reached.
CPA(R):15 and certain affiliates are investors in certain real estate ventures.
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
will represent jointly purchased properties which are net leased to a single
tenant and will be structured to provide diversification and reduce
concentration of a risk from a single lessee for CPA(R):15 and the affiliate.
The placement of an investment in a jointly-held entity requires the approval of
CPA(R):15's Independent Directors. All of the jointly held investments will be
structured so that CPA(R):15 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 condensed
consolidated financial statements is determined based on factors including, but
not limited to, 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):15 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 impaired only if Management's estimate of
the net realizable value of the impairment is less than the carrying value of
the investment. To the extent an impairment loss has occurred, the loss shall be
measured as the excess of the carrying amount of the investment over the fair
value of the investment.
-13-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CPA(R):15 classifies its directly-owned leased assets for financial reporting
purposes as either real estate leased under the operating method or net
investments in direct financing leases based on several criteria, including, but
not limited to, estimates of the remaining economic life of the leased assets
and the calculation of the present value of future minimum rents. In determining
the classification of a lease, CPA(R):15 uses estimates of remaining economic
life provided by independent appraisals of the leased assets. The calculation of
the present value of future minimum rents includes determining a lease's
implicit interest rate which requires an estimate of the residual value of
leased assets as of the end of the non-cancelable lease term. Different
estimates of residual value result in different implicit interest rates and
could possibly affect the financial reporting classification of leased assets.
The contractual terms of CPA(R):15 leases are not necessarily different for
operating and direct financing leases; however the classification is based on
accounting pronouncements which are intended to indicate whether the risks and
rewards of ownership are retained by the lessor or transferred to the lessee.
Management believes that CPA(R):15 retains certain risks of ownership regardless
of accounting classification.
When assets are identified by Management as held for sale, CPA(R):15
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 which 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):15 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. As of March 31, 2003, no assets
are held for sale.
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. Costs incurred in
connection with leases are capitalized and amortized over the non-cancelable
terms of the related leases, and included in property expense. Unamortized
leasing costs are also charged to property expense in the event of an early
termination of a lease.
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 its portfolio of properties as a whole, rather than by
identifying discrete operating segments. This evaluation includes assessing
CPA(R):15'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 opportunities such as refinancing mortgage debt at
lower rates of interest, restructuring leases or paying off lenders at a
discount to the face value of the outstanding mortgage balance.
Results of Operations
CPA(R):15's net income of $5,492 for the three months ended March 31, 2003 is
not comparable with net income of $109 for the three months ended March 31,
2002. CPA(R):15 did not acquire its first substantial real estate interests
until February 2002 when it increased its interests in the Petsmart, Inc. and
Builders FirstSource, Inc. partnerships. CPA(R):15's assets have increased from
approximately $73,097 as of March 31, 2002 to $1,012,882 as of March 31, 2003.
During the three months ended March 31, 2003, CPA(R): 15 entered directly into
net lease transactions with six tenants, including three build-to-suit
transactions, and acquired an equity ownership interest with two affiliates in a
limited liability company which net leases properties to Starmark Camhood LLC.
CPA(R):15's portfolio as of March 31, 2003 (including the pro rata share of
equity investments) are expected to generate, after completion of build-to-suit
construction, annual cash flow (contractual rent less property-level mortgage
debt service) of approximately $39,089, as follows:
-14-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands) Annual Annual Estimated
Lease Obligor Contractual Rent Debt Service Cash Flow
- ------------- ---------------- ------------ ---------
Starmark Camhood L.L.C. (2) $ 8,040 $ 4,441 $ 3,599
TruServ Corporation (2) 6,004 2,707 3,297
Clear Channel Communications, Inc. (1) 6,549 3,467 3,082
Fleming Companies, Inc. 5,508 2,507 3,001
Foster Wheeler, Inc. 5,231 2,253 2,978
Carrefour France, SA (1) 7,154 4,436 2,718
Transworld Center, Inc. (under construction) 2,275 - 2,275
Insulated Structures, Ltd. (under construction) 1,650 - 1,650
Oxford Automotive, Inc. (under construction) 1,575 - 1,575
Meadowbrook Meat Company 2,660 1,306 1,354
Tower Automotive, Inc. 2,356 1,057 1,299
Rave Reviews Cinemas, L.L.C. (under construction) 1,286 - 1,286
Overland Storage, Inc. 2,621 1,467 1,154
Petsmart, Inc. (2) 2,179 1,107 1,072
Danka Office Imaging Company 1,966 984 982
Hologic, Inc. (2) 2,020 1,051 969
Medica - France, SA (1) 2,707 1,796 911
BE Aerospace, Inc. 1,468 764 704
IntegraColor, Ltd. 1,257 564 693
Advantis Technologies, Inc. 1,275 610 665
WNA American Plastics Industries, Inc. 637 - 637
Polar Plastics, Inc. 1,460 838 622
Pemstar, Inc. 1,278 664 614
Racal Instruments, Inc. 1,323 733 590
Trends Clothing Corp. 1,420 851 569
SSG Precision Optronics, Inc. 510 - 510
Builders FirstSource, Inc. (2) 554 271 283
-------- -------- ---------
$ 72,963 $ 33,874 $ 39,089
======== ======== =========
(1) Net of minority interest
(2) Pro rata share of equity investment
The leases generally have lease terms of 15 to 25 years with the lessees having
options for renewal terms. CPA(R):15's properties in France leased to Carrefour
and Medica-France have shorter terms (ranging from 7 1/2 to 9 years) with
rolling three-year renewal terms which is a customary practice in that market.
CPA(R):15 has not hedged the risk of foreign currency fluctuations on the cash
flow from its French investments as CPA(R):15 has obtained fixed rate mortgage
debt on the properties so that the overall risk of fluctuation is reduced as the
currency fluctuations on revenue are partially offset by fluctuations on debt
service.
As a result of its acquisition activity in 2002 and 2003, CPA(R):15 reported
lease revenues of $14,445 in the three months ended March 31, 2003. Since March
31, 2003, CPA(R): 15 has completed two net lease acquisitions, with MediMedia
USA, Inc. and Qualceram Shires plc, as lessees. MediMedia will provide annual
lease revenues of $2,111 and annual cash flow of $1,043, net of debt service,
and Qualceram Shires will contribute annual lease revenues of approximately
$2,759 (based on the current exchange rate for the Great Britain Pound). In
April 2003, Fleming Companies, Inc., a lessee of a property in Tulsa, Oklahoma,
filed a voluntary petition of bankruptcy. Although Fleming is current in its
rent obligation, there is no assurance that will affirm its lease in connection
with its reorganization. Annual revenues from the Fleming lease are $5,508.
During the three months ended March 31, 2003, CPA(R):15 recognized interest and
other income of $1,428, consisting of $254 of interest income on its uninvested
cash and $1,174 of property expense reimbursements received from
-15-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Clear Channel Communications, Inc., the lessee of a property in New York City.
The reimbursements are offset by property expenses, and, therefore have no
effect on net income. Interest income will decrease as the proceeds of
CPA(R):15's offerings are invested in real estate. After CPA(R):15 is fully
invested, CPA(R):15 will maintain cash balances which Management believes to be
sufficient for meeting working capital needs.
Management expects that CPA(R):15's assets will continue to increase
substantially over the next several years. As the asset base of the Company
increases, lease revenues, general and administrative, property and depreciation
expenses will increase, while interest expense will increase as mortgage loans
are placed on newly-acquired and existing properties. Property expense for the
three months ended March 31, 2003 consists primarily of $1,697 of asset
management and performance fees and the aforementioned $1,174 of expenses for
the Clear Channel property.
On March 12, 2003, CPA(R):15 sold a 35% interest in the limited liability
company that owns the Medica-France and Carrefour properties to CPA(R):12. The
purchase price was based on the appraised value of the properties (based on the
current exchange rate for the Euro) adjusted for capitalized costs incurred
since the acquisitions including fees paid to the Advisor, net of mortgage debt.
Based on the formula, CPA(R):12 paid CPA(R):15 $11,916 and assumed $1,031 of
CPA(R):15's deferred acquisition fee payable to an affiliate. CPA(R):15
recognized a gain on the sale of $977, of which $672 represents a foreign
currency gain. CPA(R):15 consolidates its controlling interests in the limited
liability company in its consolidated financial statements, and CPA(R):12's
interest is recognized as a minority interest.
The sale was approved by CPA(R):15's independent directors as being in the best
interests of CPA(R):15 and in order to facilitate CPA(R):15's ability to raise
capital. The continued holding of 100% of the Medica-France and Carrefour
interests would have required CPA(R):15 to obtain and provide financial
information in its 1933 and 1934 Act filings on the lease guarantors that is in
accordance with accounting principles generally accepted in the United States of
America and this information is not available to CPA(R):15.
Financial Condition
A major objective of CPA(R):15 is to fully invest its funds in real estate in
order to generate cash flow from operations and its equity investments
sufficient to fund dividends to shareholders at an increasing rate and to pay
scheduled mortgage debt service. Cash flows from operations and equity
investments of $13,561 were sufficient to pay dividends of $5,789, scheduled
mortgage principal payments of $1,209 and distributions to minority partners of
$798. When evaluating cash generated from operations, Management includes cash
provided from equity investments. Under accounting principles generally accepted
in the United States of America, distributions from equity investments in excess
of income from equity investments are a return of capital and presented as an
investing cash flow. The ability of the equity investees to distribute cash to
CPA(R):15 in excess of their income is primarily due to noncash charges for
depreciation. CPA(R):15 evaluates its ability to pay dividends to shareholders
by using its projections of cash flow (lease revenues, net of property-level
debt service) from both its directly-owned real estate and its equity
investments.
CPA(R):15 used $91,814 to acquire properties net leased to six lessees on a
single-tenant basis and to purchase a 44% interest, through a limited liability
company owned with two affiliates, in 15 health club facilities leased to
Starmark. Since March 31, 2003, CPA(R):15 has used an additional $45,893 to
acquire properties leased to MediMedia, Inc. and Qualceram Shires. CPA(R):15
expects to use substantially all of the net proceeds of its offerings, along
with limited recourse mortgage debt, to purchase investments in real estate
either directly or with affiliates. To the extent that the entire offering is
subscribed, acquisition activity can be expected to continue for several years,
with total real estate assets exceeding $1,500,000. CPA(R):15 has fully
subscribed its initial $400,000 public offering and commenced a second "best
efforts" offering for up to $690,000 in 2003. Management believes that a fully
invested, diversified portfolio of real estate investments will mitigate the
risk of nonpayment of rent from any single lessee. As of May 12, 2003, CPA(R):15
had in excess of $230,000 available for investment, net of $36,056 needed to
complete current build-to-suit commitments. CPA(R):15 received a special
distribution of $12,460 from an equity investee in connection with the
investee's obtaining mortgage financing on its properties.
-16-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
During the three months ended March 31, 2003, CPA(R):15 raised $164,047, net of
costs, in connection with the current public offering. Since March 31, 2003,
CPA(R):15 issued an additional 11,933,357 shares ($119,334). As of March 31,
2003, CPA(R):15 had cash balances of $213,814 of which it intends to use
$200,735 to purchase additional investments. CPA(R):15 also received $11,916
from CPA(R):12 in connection with CPA(R):12's purchase of interests in the
Medica-France and Carrefour properties. Once CPA(R):15 is fully invested, the
Company intends to hold cash balances sufficient to maintain its operations.
CPA(R):15 is actively evaluating potential net lease investments and is using
its available cash along with limited recourse mortgage financing to purchase
properties. In connection with purchasing properties, CPA(R):15 obtained $16,330
of limited recourse mortgage debt. A lender on limited recourse mortgage debt
has recourse only to the property collateralizing such debt and not to any of
CPA(R):15's other assets, while unsecured financing would give a lender recourse
to all of CPA(R): 15's assets. The use of limited recourse debt, therefore, will
allow CPA(R):15 to limit its exposure of all of its assets to any one debt
obligation. Management believes that the strategy of combining equity and
limited recourse mortgage debt will allow CPA(R):15 to meet its short-term and
long-term liquidity needs and will help to diversify CPA(R):15's portfolio and,
therefore, reduce concentration of risk in any particular lessee. Therefore,
after CPA(R):15 completes its public offering and fully invests in real estate,
it will evaluate on an ongoing basis whether to obtain additional sources of
funds such as lines of credit; however, no consideration is being given to such
additional sources at this time.
Off- Balance Sheet Arrangements, Guarantees and Aggregate Contractual
Agreements:
A summary of CPA(R):15's contractual obligations and commitments as of March 31,
2003 is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage
notes payable (1) $394,309 $ 4,015 $ 6,005 $ 6,578 $ 7,127 $ 7,779 $ 362,805
Notes payable 3,816 3,816
Deferred acquisition fees 15,436 - 3,253 3,859 3,859 3,859 606
Commitments:
Build-to-suit obligations 36,056 33,259 2,797
Share of minimum rents
payable under office
cost-sharing agreement 69 14 20 20 15 - -
-------- ------- ------- ------- ------- ------- ----------
$449,686 $41,104 $12,075 $10,457 $11,001 $11,638 $ 363,411
======== ======= ======= ======= ======= ======= ==========
(1) The limited recourse 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):15 adopted this statement effective January 1,
2003, and the adoption did not have a material affect on CPA(R):15's financial
statements. CPA(R):15 will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
-17-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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):15'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
CPA(R):15 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):15'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):15 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):15's maximum loss exposure
is the carrying value of its equity investments. CPA(R):15 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
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
-19-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risk to which CPA(R):15 is exposed is interest rate
risk and foreign currency exchange risk.
The value of CPA(R):15's real estate is subject to fluctuations based on changes
in interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect CPA(R):15's ability to
refinance its debt when balloon payments are scheduled.
All of CPA(R):15's long-term debt of $394,309 bears interest at fixed rates, and
the fair value of these instruments is affected by changes in 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 5.52% to 7.98%.
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $4,015 $6,005 $6,578 $7,127 $7,779 $362,805 $394,309 $386,438
Average interest
rate 6.01% 6.00% 6.00% 5.99% 5.98% 6.10%
CPA(R):15 has foreign operations. Accordingly, CPA(R):15 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):15's
financial position. While CPA(R):15 does not expect exchange rate movements to
have a significant effect on its results of operations, it recognized $672 of
foreign currency gains from the sale gain of partial interests in properties in
France. To date CPA(R):15 has not entered into any foreign currency forward
exchange contracts to hedge the effects of adverse fluctuations in foreign
currency exchange.
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.
-20-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
PART II
Item 2d. - USE OF PROCEEDS OF REGISTERED OFFERING
Pursuant to Rule 701 of Regulation S-K, the use of proceeds from the Company's
initial offering of common stock which commenced November 7, 2001 (File
#333-58854) is as follows as of March 31, 2003:
Shares registered: 40,000,000
Aggregate price of offering amount registered: $400,000,000
Shares sold: 39,954,941
Aggregated offering price of amount sold: $399,549,410
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: $ 4,498,640
Direct or indirect payments to others: $ 40,080,898
Net offering proceeds to the issuer after deducting expenses: $354,969,872
Purchases of real estate and equity investments: $319,555,888
Temporary investments in cash and cash equivalents: $ 35,413,984
Pursuant to Rule 701 of Regulation S-K, the use of proceeds from the Company's
offering of common stock which commenced March 19, 2003 (File #333-100525) is as
follows as of March 31, 2003:
Shares registered: 69,000,000
Aggregate price of offering amount registered: $690,000,000
Shares sold: 17,663,181
Aggregated offering price of amount sold: $176,631,810
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: $ 2,225,187
Direct or indirect payments to others: $ 10,356,071
Net offering proceeds to the issuer after deducting expenses: $164,050,552
Purchases of real estate and equity investments: -
Temporary investments in cash and cash equivalents: $164,050,552
-21-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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.
-22-
CORPORATE PROPERTY ASSOCIATES 15 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 15 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)
-23-
CORPORATE PROPERTY ASSOCIATES 15 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 15 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)
-24-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corporate Property
Associates 15 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 officers 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 officers 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
-25-