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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 JUNE 30, 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 August 11, 2003.
CPA(R):14 has 66,478,728 shares of common stock, $.001 par value
outstanding at August 11, 2003.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of June 30, 2003 and December 31, 2002 2
Condensed Consolidated Statements of Income for the three and six months ended
June 30, 2003 and 2002 3
Condensed Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-18
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. - Controls and Procedures 19
PART II - Other Information
Item 2(d). - Use of Proceeds of Registered Offering 20
Item 4. - Submission of Matters to a Vote of Security Holders 20
Item 6. - Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22-23
* The summarized condensed financial statements contained herein are 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)
June 30, 2003 December 31, 2002
-------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Land and buildings, net of accumulated depreciation of $50,188 at
June 30, 2003 and $38,683 at December 31, 2002 $ 995,983 $ 971,459
Net investment in direct financing leases 113,946 113,428
Real estate under construction - 14,723
Equity investments 120,470 99,320
Cash and cash equivalents 46,626 74,107
Marketable securities 6,830 6,258
Other assets 39,136 40,602
-------------- --------------
Total assets $ 1,322,991 $ 1,319,897
============== ==============
LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 677,453 $ 666,740
Accrued interest 4,011 4,043
Due to affiliates 3,886 3,821
Accounts payable and accrued expenses 3,716 7,898
Prepaid rental income and security deposits 18,670 20,642
Deferred acquisition fees payable to affiliate 22,256 23,170
Dividends payable 12,564 12,488
-------------- --------------
Total liabilities 742,556 738,802
-------------- --------------
Minority interest 28,256 29,206
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000 shares;
issued and outstanding, 67,189,785 shares at June 30, 2003 and
66,836,152 shares at December 31, 2002 67 67
Additional paid-in capital 601,383 597,852
Dividends in excess of accumulated earnings (53,325) (47,508)
Accumulated other comprehensive income 9,827 6,113
-------------- --------------
557,952 556,524
Less, treasury stock at cost, 649,574 shares at June 30, 2003 and
520,911 shares at December 31, 2002 (5,773) (4,635)
-------------- --------------
Total shareholders' equity 552,179 551,889
-------------- --------------
Total liabilities, minority interest and shareholders'
equity $ 1,322,991 $ 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Rental income $ 26,753 $ 24,500 $ 53,312 $ 45,869
Interest income from direct financing leases 3,234 2,853 6,463 5,692
Interest and other income 919 462 3,995 1,185
-------------- -------------- -------------- --------------
30,906 27,815 63,770 52,746
-------------- -------------- -------------- --------------
Expenses:
Interest 12,975 10,191 25,762 20,384
Depreciation 5,617 5,173 11,213 9,742
General and administrative 2,170 1,477 4,331 2,705
Property expenses 4,277 3,354 8,869 6,252
-------------- -------------- -------------- --------------
25,039 20,195 50,175 39,083
-------------- -------------- -------------- --------------
Income from continuing operations
before minority interest, equity
investments and (loss) gain 5,867 7,620 13,595 13,663
Minority interest in income (410) (482) (882) (741)
Income from equity investments 3,354 1,301 6,492 2,589
-------------- -------------- -------------- --------------
Income from continuing operations
before (loss) gain 8,811 8,439 19,205 15,511
Unrealized (loss) gain on warrants and foreign
currency contract, net (314) 29 (104) 268
Gain on foreign currency transactions 169 - 169 -
-------------- -------------- -------------- --------------
Income from continuing operations 8,666 8,468 19,270 15,779
Discontinued operations:
Income from operations of discontinued properties - 36 - 72
Gain on sale of real estate - 333 - 333
-------------- -------------- -------------- --------------
Income from discontinued operations - 369 - 405
-------------- -------------- -------------- --------------
Net income $ 8,666 $ 8,837 $ 19,270 $ 16,184
============== ============== ============== ==============
Basic and diluted earnings per share:
Earnings from continuing operations $ .13 $ .13 $ .29 $ .24
Earnings from discontinued operations - - - -
-------------- -------------- -------------- --------------
Net income $ .13 $ .13 $ .29 $ .24
============== ============== ============== ==============
Weighted average shares outstanding - basic and
diluted 66,578,604 66,171,078 66,465,459 66,100,129
============== ============== ============== ==============
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 8,666 $ 8,837 $ 19,270 $ 16,184
-------------- -------------- -------------- --------------
Other comprehensive income:
Change in foreign currency translation adjustment 2,034 3,373 3,089 3,774
Unrealized appreciation of marketable securities 362 - 625 -
-------------- -------------- -------------- --------------
Other comprehensive income 2,396 3,373 3,714 3,774
-------------- -------------- -------------- --------------
Comprehensive income $ 11,062 $ 12,210 $ 22,984 $ 19,958
============== ============== ============== ==============
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)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 19,270 $ 16,184
Adjustments to reconcile net income to net cash provided by continuing operating
activities:
Income from discontinued operations - (405)
Depreciation and amortization 11,794 10,106
Straight-line rent adjustments (1,989) (2,120)
Income from equity investments in excess of distributions received (997) (10)
Issuance of shares in satisfaction of current and accrued performance fees 3,314 2,266
Minority interest in income 882 741
Funds released from escrow 1,120 -
Unrealized loss (gain) on warrants and foreign currency contract, net 104 (268)
(Decrease) increase in prepaid rents and security deposits (2,269) 1,869
Change in other operating assets and liabilities, net (1,835) (1,017)
-------------- --------------
Net cash provided by continuing operations 29,394 27,346
Net cash provided by discontinued operations - 74
-------------- --------------
Net cash provided by operating activities 29,394 27,420
-------------- --------------
Cash flows from investing activities:
Distributions from operations of equity investments in excess of equity income 564 443
Proceeds from sale of real estate - 3,634
Purchases of real estate and equity investments and additional capitalized costs (35,798) (152,748)
VAT taxes paid and recoverable from purchase of real estate (924) -
Distributions of mortgage financing proceeds received from equity investee 8,722 -
Payment of deferred acquisition fees (2,373) (1,638)
-------------- --------------
Net cash used in investing activities (29,809) (150,309)
-------------- --------------
Cash flows from financing activities:
Prepayment of mortgage principal - (3,800)
Proceeds from mortgages 4,852 105,151
Payments on mortgage principal (4,451) (2,614)
Funding of defeasance escrow account - (2,537)
Distributions to minority interest partner (1,833) (1,048)
Contributions from minority interest partner - 10,758
Proceeds from issuance of shares, net of costs 217 (1,954)
Deferred financing costs and mortgage deposits (266) (2,338)
Dividends paid (25,011) (23,716)
Purchase of treasury stock (1,138) (848)
-------------- --------------
Net cash (used in) provided by financing activities (27,630) 77,054
-------------- --------------
Effect of exchange rate changes on cash 564 332
-------------- --------------
Net decrease in cash and cash equivalents (27,481) (45,503)
Cash and cash equivalents, beginning of period 74,107 147,695
-------------- --------------
Cash and cash equivalents, end of period $ 46,626 $ 102,192
============== ==============
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 consolidated financial statements
should be read in conjunction 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:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and Carey Asset Management Corp (the "Advisor"), a
wholly-owned subsidiary of W. P. Carey & Co. LLC, provides that the Advisor
receive asset management and performance fees, each of which are 1/2 of 1% of
Average Invested Assets as defined in the 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 $1,889 and $1,373 for the
three months ended June 30, 2003 and 2002, respectively, and $3,743 and $2,601
for the six months ended June 30, 2003 and 2002, respectively, with performance
fees in like amount. For the three months ended June 30, 2003 and 2002, the
Company incurred personnel reimbursements of $797 and $547, respectively, and
$1,600 and $967 for the six months ended June 30, 2003 and 2002, 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 six months ended June 30, 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 June 30, 2003, the fair value of the Company's
interests was $6,830, reflecting an aggregate unrealized gain of $882 and
cumulative net amortization of $85 ($53 for the six months ended June 30, 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.
One of the key variables 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 market interest rates of 1% and 2% is as follows:
Fair Value at June 30, 2003 1% Adverse Change 2% Adverse Change
--------------------------- ----------------- -----------------
Fair value of the interests $6,830 $6,486 $6,169
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 six-month periods ended June 30, 2003 and 2002 are as
follows:
2003 2002
---- ----
Per Statements of Income:
Rental income from operating leases $ 53,312 $ 45,869
Interest from direct financing leases 6,463 5,692
Adjustment:
Share of leasing revenue applicable to
minority interest (4,036) (3,553)
Share of leasing revenue from equity
investments 14,872 6,495
-------- --------
$ 70,611 $ 54,503
======== ========
For the six-month periods ended June 30, 2003 and 2002, the Company earned its
net lease revenues from its investments as follows:
2003 % 2002 %
---- ----
Carrefour France, SAS $ 5,415 8% $ 1,941 4%
Nortel Networks Limited. 3,000 4 3,000 6
Starmark Camhood, L.L.C. (b) 2,967 4 - -
Petsmart, Inc. (a) 2,906 4 3,321 6
Clear Channel Communications, Inc. (b) 2,830 4 - -
TruServ Corporation (b) 2,528 4 - -
Atrium Companies, Inc. 2,224 3 2,227 4
Advance PCS, Inc. 2,150 3 2,150 4
Federal Express Corporation 1,972 3 1,950 4
Tower Automotive, Inc. 1,948 3 866 2
Galyan's Trading Company 1,905 3 1,905 3
Katun Corporation 1,860 3 - -
Collins & Aikman Corporation 1,639 2 1,618 3
Advanced Micro Devices, Inc. (b) 1,629 2 1,629 3
Metaldyne Company LLC 1,582 2 1,560 3
Applied Materials, Inc. (b) 1,549 2 1,550 3
PerkinElmer, Inc. 1,457 2 1,185 2
APW North America Inc. 1,394 2 1,381 3
Amerix Corporation 1,229 2 1,229 2
Celestica Corporation 1,210 2 1,210 2
Institutional Jobbers Company 1,135 2 1,135 2
Buffets, Inc. 1,112 2 1,066 2
Gerber Scientific, Inc. 1,092 2 1,059 2
Checkfree Holdings Corporation, Inc. (b) 1,064 2 1,054 2
Other (c) (d) 22,814 30 21,467 38
------- --- ------- ---
$70,611 100% $54,503 100%
======= === ======= ===
(a) Net of minority interest of an affiliate.
(b) Represents the Company's proportionate share of lease revenues from its
equity investments.
(c) Includes amounts which are net of minority interest.
(d) Includes the Company's proportionate share of lease revenues from equity
investments.
-7-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
For the six-month period ended June 30, 2003, lessees were responsible for the
direct payment of approximately $6,647 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 of other income 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 for the six-month period ended June 30, 2003 in the
accompanying condensed consolidated financial statements.
Note 5. Equity Investments:
The Company owns interests in single-tenant net leased properties 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 8).
Summarized financial information of the Company's equity investees is as
follows:
(In thousands) June 30, 2003 December 31, 2002
------------- -----------------
Assets (primarily real estate) $ 783,519 $ 591,167
Liabilities (primarily mortgage notes payable) 473,410 329,330
Partners' and members' equity 310,109 261,837
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Revenues (primarily rental revenues) $ 39,705 $ 21,590
Expenses (primarily interest on mortgages and depreciation) (22,663) (12,423)
-------- --------
Net income $ 17,042 $ 9,167
======== ========
Note 6. Gain on Foreign Currency Transactions:
During the six months ended June 30, 2003, the Company transferred funds from a
consolidated operating subsidiary which uses the Euro as its functional currency
to the parent company. In connection with the transfer of cash from the
subsidiary, the Company realized a gain of $169. The Company transferred the
cash received to a U.S. dollar-denominated cash account.
Note 7. Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective for financial statements issued for fiscal years
beginning after December 15, 2001, the results of operations and gain or loss on
sales of real estate for properties sold or held for sale are to be reflected in
the consolidated statements of operations as "Discontinued Operations" for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the Company's commitment to a plan of disposition after
the date it is initially applied (January 1, 2002). Properties held for sale as
of December 31, 2001 are not included in discontinued operations.
The operations from a property in Greenville, Texas, which was sold in June 2002
are included as "Discontinued Operations." There were no discontinued operations
in 2003. A summary of Discontinued Operations for the six months ended June 30,
2002 is as follows:
-8-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Six Months Ended
----------------
June 30, 2002
-------------
Revenues (primarily rental revenues) $150
Expenses (primarily interest on mortgages,
depreciation and property expenses) (78)
Gain on sale of real estate 333
----
Income from discontinued operations $405
====
Note 8. Acquisition of Real Estate Interest:
An investment acquired during the six months ended June 30, 2003 which was
described in the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 2003 is summarized as follows:
Initial Original
Ownership Annual Mortgage Annual
Lease Obligor: Cost Interest Location Rent Financing Debt Service Date Acquired
- -------------- ---- -------- -------- ---- --------- ------------ -------------
Starmark Camhood $72,984 41% 15 health club $7,492 $44,403 $4,138 February 7, 2003
L.L.C. (a) facilities
(a) The Starmark investment is accounted for as an equity investment.
The amounts presented are pro rata.
Note 9. 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.
-9-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts 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 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 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 and believes this interpretation will not have a material impact on
its accounting for its investments in unconsolidated joint ventures as none of
these investments are 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.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain financial instruments
that are mandatorily redeemable or include an obligation to repurchase. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company is currently evaluating whether this will have an impact
on the financial statements.
-10-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 10. Subsequent Event:
On July 24, 2003, the Company completed an expansion at its existing facility in
Le Mans, France leased to Carrefour France SAS ("Carrefour") at a cost of
E9,068 ($10,422 based on the exchange rate at the completion date) and amended
and restated its existing lease with Carrefour. The amended and restated lease
has a remaining term through March 2011 and provides for an increase in annual
rent of E870 to E2,307 ($2,651), with annual rent increases based on a formula
indexed to increases in the INSEE, a French construction cost index.
In connection with the expansion, the Company obtained E7,137 ($8,203) of
limited recourse mortgage financing collateralized by the property. The loan
provides for quarterly payments of interest at an annual interest rate of 5.15%.
The interest rate is fixed through July 2010, at which time the loan will
convert to a variable rate. Principal installments are payable based on an
initial 2.60% annuity per annum, with scheduled increases throughout the term of
the loan. The loan matures on April 30, 2017, at which time a balloon payment is
scheduled.
-11-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS 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 June 30, 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 rent, residual value and holding period. 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
-12-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS 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
values 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.
CPA(R):14 consolidates its foreign subsidiaries. To the extent that these
investments and subsidiaries account for their financial position and results of
operations in a functional currency other than U.S. dollars, it is necessary for
the Company to translate from the functional currency to U.S. dollars. The
functional currency is the currency of the primary economic environment in which
the real estate investments or subsidiary operates. The translation of the
functional currency for assets and liabilities uses the current exchange rate as
of the balance sheet date and for revenues and expenses uses a weighted average
exchange rate during the period. Gains and losses resulting from foreign
currency translation adjustments are reported as a component of other
comprehensive income as part of shareholders' equity.
Foreign currency transactions may produce receivables or payables that are fixed
in terms of the amount of foreign currency that will be received or paid. A
change in the exchange rates between the functional currency and the currency in
which a transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally is included in determining net
income for the period in which the exchange rate changes. Likewise, a
transaction gain or loss measured from the transaction date or the most recent
intervening balance sheet date, whichever is later, realized upon settlement of
a foreign currency transaction generally is included in net income from the
period in which the transaction is settled. Foreign currency transactions are
not included in determining net income but are accounted for in the same manner
as foreign currency translation adjustments and reported as a component of other
comprehensive income as part of shareholders' equity if (i) they are designated
as, and are effective as, economic hedges of a net investment and are (ii)
intercompany foreign currency transactions that are of a long-term nature (that
is, settlement is not planned or anticipated in the foreseeable future), when
the entities to the transactions are consolidated or accounted for by the equity
method in the Company's financial statements.
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.
-13-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
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 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 would be 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 June 30, 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 comparable three-month and six-month periods ended June 30,
2003 and 2002 decreased by $171 and increased by $3,086, respectively, while
income from continuing operations before gains and losses for those periods
increased by $372 and $3,694, respectively. The results for the six-month period
ended June 30, 2003 included the benefit in other income from the forfeiture of
a $2,588 security deposit to CPA(R):14 by a former lessee. The increases in
income from continuing operations, net of the forfeiture benefit, are primarily
the result of an increase in CPA(R):14's real estate asset base including its
equity investments and the completion of build-to-suit projects, which are now
in service.
-14-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
Lease revenues increased by $2,634 and $8,214 for the three-month and six-month
periods primarily as a result of real estate purchases and the completion of
projects. During 2002, CPA(R):14 entered into leases with Carrefour France SA,
UTI Holdings, Inc., Tower Automotive, Inc., PW Eagle, Inc., American Tire
Distributors and Katun Corporation, which provided for $2,330 and $7,707 of the
increases in lease revenues for the three-month and six-month periods. Lease
revenues also decreased by $20 and $228 for the three-month and six-month
periods as a result of revenues earned in 2002 from Burlington Motor Carriers,
Inc. which lease was terminated in 2002 pursuant to its bankruptcy. In March
2003, Fleming Companies, Inc. filed a voluntary petition of bankruptcy and
subsequently 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. The Grand Rapids property is being remarketed.
CPA(R):14's substantial completion of build-to-suit projects with Waddington
North America, Inc. and Career Education Group in May 2003 and June 2003,
respectively, and a lease agreement entered into in July 2003 for the former
Burlington Motor property will provide aggregate annual lease revenues of
$2,389. In July 2003, CPA(R):14 funded an expansion of an existing property
leased to Carrefour France SAS in Le Mans, France. Additional annual rent from
the expansion will provide $1,000, based on current exchange rates. More than 35
leases have rent increases scheduled in 2003 and 2004 and no leases are
scheduled to expire until 2005.
Income from equity investments increased by $2,053 and $3,903 for the
three-month and six-month periods ended June 30, 2003 over the comparable
periods for 2002. The increase was due to the acquisition of interests in
properties leased to TruServ Corporation and Clear Channel Communications, Inc.
in December 2002 and Starmark Camhood, LLC in February 2003. CPA(R):14's annual
distributions from the real estate operations of these equity investments is
estimated to be approximately $7,716.
Interest expense for the three-month and six-month periods ended June 30, 2003
over the comparable periods for 2002 increased by $2,784 and $5,378,
respectively, as a result of $196,596 of mortgage financing obtained in 2002.
Increases in depreciation were attributable to the increase in real estate
assets purchased in 2002 and 2003. Property expense for the comparable
three-month and six-month periods increased by $923 and $2,617, respectively,
primarily due to increases in asset management and performance fees as a result
of the increased asset base. Property expenses are expected to increase due to
the vacancy of a property in Grand Rapids, Michigan; however, if a lease is
entered into, CPA(R):14 intends to have such costs paid by the lessee. Estimated
annual carrying costs on the Grand Rapids property are approximately $400. The
increases in general and administrative expense of $693 and $1,626 for the
comparable three-month and six-month periods were primarily due (i) to an
increase in investor-related costs and (ii) certain variable costs which
increased as CPA(R):14's asset base increased.
FINANCIAL CONDITION:
There has been no material change in CPA(R):14's financial condition since
December 31, 2002. CPA(R):14's cash has decreased $27,481 since December 31,
2002, primarily as a result of acquiring new real estate investments. CPA(R):14
is using its cash to purchase new properties to further diversify its portfolio,
complete its commitments on build-to-suit construction and maintain cash
balances sufficient to meet working capital needs. As of June 30, 2003,
CPA(R):14 had approximately $21,000 of cash available for the acquisition of
real estate investments, including $1,994 to complete build-to-suit projects.
For the six months ended June 30, 2003, cash flows from operating activities and
equity investments of $29,958 were $1,337 less than the amounts used to pay
dividends to shareholders of $25,011, meet scheduled principal payment
installments on mortgage debt of $4,451 and distribute $1,833 to minority
partners. This was due, in part, to short-term rent arrearages which have
subsequently been received and the timing of receipt and payment of other
short-term items. Operating cash flow is expected to increase as a result of
completing two build-to-suit projects during the second quarter which commenced
paying rent in July 2003. Annual cash flow from these two projects, net of
property-level debt service, is approximately $725. CPA(R):14's investment in
Starmark is projected to contribute annual distributions of $3,300, of which
only $321 had been received through June 30, 2003. A portion of Starmark's rent
has been used to fund certain debt service escrow obligations which are to be
reimbursed by the lessee. Based on the projected increase in operating cash
flows from the two completed projects, the investment in Starmark and the
deployment of available additional real estate investments, including the
Carrefour expansion, cash flow from operations and equity investments is
projected to be sufficient to meet operating cash flows objectives.
-15-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
CPA(R):14's investing activities included using $35,798 to purchase a 41%
interest in the Starmark properties and to complete the Waddington and Career
Education projects. As of June 30, 2003, the Waddington and Career Education
build-to-suit projects were in service; however, $1,994 remained to be funded.
In July 2003, CPA(R):14 used $10,422 for the acquisition of the Carrefour
expansion ($2,219, net of mortgage financing of $8,203 based on the exchange
rate for the Euro). The annual cash flow (rent less property-level mortgage debt
service) from the expansion is projected to be approximately $368, based on
current exchange rates. In January 2003, 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 receipt of proceeds of $4,852 from the mortgage loan
collateralized by the Career Education property. In July 2003, CPA(R):14
obtained $6,700 of limited recourse mortgage debt collateralized by the UTI
Holdings, Inc. property in Mooresville, North Carolina, at an annual debt
service of $587. CPA(R):14 has no mortgage balloon payments scheduled until June
2006. Substantially all of CPA(R):14's mortgages are limited recourse and bear
interest at fixed rates. Accordingly, CPA(R):14's cash flow should not be
adversely affected by increases in interest rates which are at or near
historical lows. A lender on limited recourse mortgage debt has recourse only to
the property collateralizing such debt and not to any of CPA(R):14's other
assets, while unsecured financing would give a lender recourse to all of CPA(R):
14's assets. The use of limited recourse debt, therefore, will allow CPA(R):14
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):14 to meet its short-term and long-term
liquidity needs and will help to diversify CPA(R):14's portfolio and, therefore,
reduce concentration of risk in any particular lessee.
CPA(R):14 conducts business in Europe. While CPA(R):14 recognized a foreign
transaction gain in 2003 of $169 in connection with the transfer of cash from a
foreign subsidiary, foreign currency transaction gains and losses were not
material to CPA(R):14's results of operations for the six months ended June 30,
2003. CPA(R):14 was not subject to material foreign currency exchange rate risk
from the effects of changes in exchange rates. To date, CPA(R):14 has not
entered into any foreign currency forward exchange contracts or other derivative
financial instruments to hedge the effects of adverse fluctuations in foreign
currency exchange rates. CPA(R):14 has obtained limited recourse mortgage
financing at fixed rates of interest in the local currency. To the extent that
currency fluctuations increase or decrease rental revenues as translated to
dollars, the change in debt service, as translated to dollars, will partially
offset the effect of fluctuations in revenue, and, to some extent mitigate the
risk from changes in foreign currency rates. As of June 30, 2003, Carrefour,
which leases properties in France, contributed 8% of lease revenues (see Note 4
to the accompanying condensed consolidated financial statements). The leverage
used on the financing of Carrefour investments is higher than the average
leverage on CPA(R):14's domestic real estate investments.
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) $ 677,453 $ 4,968 $11,020 $12,018 $12,957 $13,888 $622,602
Deferred acquisition fees 22,256 - 3,204 3,386 3,386 3,386 8,894
Subordinated disposition fees 240 - - - - - 240
Commitments:
Commitments for build-to-suit
construction 1,994 1,994 - - - - -
Acquisition of real estate (2) 10,422 10,422 - - - - -
Share of minimum rents payable
under office cost-sharing
agreement 1,207 135 390 390 292 - -
--------- ------- ------- ------- ------- ------- --------
$ 713,572 $17,519 $14,614 $15,794 $16,635 $17,274 $631,736
========= ======= ======= ======= ======= ======= ========
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
(1) The mortgage notes payable were obtained in connection with the acquisition
of properties in the ordinary course of business.
(2) Purchase of real estate was completed in July 2003.
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.
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
-17-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
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 and
believes this interpretation will not have a material impact on its accounting
for its investments in unconsolidated joint ventures as none of these
investments are 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.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain financial instruments
that are mandatorily redeemable or include an obligation to repurchase. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. CPA(R):14 is currently evaluating whether this will have an impact on
the financial statements.
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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 June 30,
2003, CPA(R):14's interests in CCMT had a fair value of $6,830.
Approximately $651,580 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 June 30, 2003 ranged from
6.09% to 8.85%. The interest rate on the variable rate debt as of June 30, 2003
ranged from 3.24% to 8.76%.
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $4,610 $9,759 $10,709 $11,605 $12,492 $602,405 $651,580 $673,601
Weighted average
interest rate 7.59% 7.63% 7.61% 7.60% 7.69% 7.59%
Variable rate debt $ 358 $1,261 $ 1,309 $ 1,352 $ 1,396 $ 20,197 $ 25,873 $ 25,873
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 CPA(R):14 has 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
June 30, 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 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.
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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 June 30, 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: $324,123,578
Working capital reserves: $ 3,635,369
Temporary investments in cash and cash equivalents: $ 0
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders' meeting was held on June 10, 2003, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a one-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No Shares Abstaining
- ---------------- ------------------- ----------------- ---------------- -----------------
William P. Carey 36,242,868 35,831,613 58,394 352,861
Elizabeth P. Munson 36,242,868 35,782,984 107,023 352,861
William Ruder 36,242,868 35,763,690 126,317 352,861
George E. Stoddard 36,242,868 35,703,866 186,141 352,861
Warren G. Wintrub 36,242,868 35,843,101 46,906 352,861
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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 June 30, 2003, the Company was not
required to file any reports on Form 8-K.
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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
8/11/2003 By: /s/ John J. Park
=========== -----------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
8/11/2003 By: /s/ Claude Fernandez
=========== -----------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
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