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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: 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 August 11, 2003.
CPA(R):15 has 96,888,421 shares of common stock, $.001 par value
outstanding at August 11, 2003.
CORPORATE PROPERTY ASSOCIATES 15 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 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 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 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 15 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 $8,598 and
$2,323 at June 30, 2003 and December 31, 2002 $ 632,665 $557,198
Net investment in direct financing leases 68,510 21,093
Real estate under construction 51,363 20,061
Equity investments 83,824 75,606
Cash and cash equivalents 392,242 94,762
Other assets 50,768 37,578
---------- --------
Total assets $1,279,372 $806,298
========== ========
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 414,611 $374,787
Notes payable 4,043 3,705
Accrued interest 1,964 991
Due to affiliates 9,740 7,622
Accounts payable and accrued expenses 9,759 5,910
Prepaid rental income and security deposits 22,406 15,494
Deferred acquisition fees payable to affiliate 16,620 13,012
Dividends payable 11,217 5,789
---------- --------
Total liabilities 490,360 427,310
---------- --------
Minority interest 41,715 28,193
---------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized 120,000,000 shares; issued and
outstanding, 83,777,930 and 39,966,488 at June 30, 2003 and
December 31, 2002 84 40
Additional paid-in capital 757,147 355,964
Dividend in excess of accumulated earnings (14,641) (6,270)
Accumulated other comprehensive income 4,707 1,061
---------- --------
Total shareholders' equity 747,297 350,795
---------- --------
Total liabilities, minority interest and shareholders' equity $1,279,372 $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 June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Rental income $ 14,988 $ 635 $ 28,835 $ 635
Interest income from direct financing
leases 1,449 167 2,047 167
Interest and other income 1,030 380 2,458 497
------------ ------------ ------------ ------------
17,467 1,182 33,340 1,299
------------ ------------ ------------ ------------
Expenses:
Interest 5,828 254 11,257 257
Depreciation 3,226 170 6,194 170
General and administrative 1,769 190 3,037 286
Property expenses 2,238 145 5,234 167
------------ ------------ ------------ ------------
13,061 759 25,722 880
------------ ------------ ------------ ------------
Income before minority interest, equity
investments and gain on sale 4,406 423 7,618 419
Minority interest in income (930) - (1,695) -
Income from equity investments 2,171 316 4,239 429
------------ ------------ ------------ ------------
Income before gain on sale 5,647 739 10,162 848
Gain on sale (16) - 961 -
------------ ------------ ------------ ------------
Net income $ 5,631 $ 739 $ 11,123 $ 848
============ ============ ============ ============
Basic and diluted earnings per share $ .08 $ .06 $ .20 $ .11
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted 71,787,190 12,593,382 56,369,086 7,926,966
============ ============ ============ ============
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 5,631 $ 739 $11,123 $ 848
------- ------- ------- -------
Other comprehensive income:
Change in foreign currency translation
adjustment 3,447 - 3,646 -
------- ------- ------- -------
Other comprehensive income 3,447 - 3,646 -
------- ------- ------- -------
Comprehensive income $ 9,078 $ 739 $14,769 $ 848
======= ======= ======= =======
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)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 11,123 $ 848
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of financing costs 6,280 170
Equity income in excess of distributions received (985) (6)
Straight-line rent adjustments (2,291) (20)
Gain on sale (961) -
Fees paid to affiliate by issuance of stock 1,268 -
Minority interest in income 1,695 -
Increase in other assets (a) (1,259) (363)
Increase in accrued interest 954 80
Increase in accounts payable and accrued expenses 2,389 74
Increase in due to affiliates (a) 1,020 125
Increase in prepaid rent and security deposits 4,747 841
--------- ---------
Net cash provided by operating activities 23,980 1,749
--------- ---------
Cash flows from investing activities:
Distributions from operations of equity investments in excess of
equity income 282 327
Distributions of mortgage financing from equity investees 24,162 -
Acquisitions of real estate and equity investments and other
capitalized costs (169,875) (122,531)
VAT taxes paid and recoverable in connection with purchases of real
estate (5,018) -
--------- ---------
Net cash used in investing activities (150,449) (122,204)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock, net of costs of raising capital 399,959 154,876
Dividends paid (14,066) (484)
Proceeds from mortgages (b) 30,330 39,492
Mortgage principal payments (2,401) (5)
Deferred financing costs and mortgage deposits, net of
deposits refunded (1,205) (97)
Capital contributions from minority partner 11,916 -
Distributions paid to minority partners (1,281) -
--------- ---------
Net cash provided by financing activities 423,252 193,782
--------- ---------
Effect of exchange rate changes on cash 697 -
--------- ---------
Net increase in cash and cash equivalents 297,480 73,327
Cash and cash equivalents, beginning of period 94,762 188
--------- ---------
Cash and cash equivalents, end of period $ 392,242 $ 73,515
========= =========
Noncash operating and financing activities:
(a) Increases in due to affiliates and other assets excludes amounts which
relate to the raising of capital (financing activities) pursuant to the
Company's public offering.
(b) Net of $639 held by lenders to fund escrow accounts during the six months
ended June 30, 2003.
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 (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. 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 June 30, 2003, the Company has issued 43,529,314 shares
($435,293) from the Offering. Since June 30, 2003 an additional 12,981,020
shares ($129,810) have been issued. The Company completed sales for the second
offering on August 7, 2003.
Note 3. Agreements and Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and the Advisor, Carey Asset Management Corp, 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 performance
fee is subordinated to the Preferred Return, a cumulative non-compounded
dividend return of 6%. 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. The
Company incurred asset management fees of $955 and $70 for the three months
ended June 30, 2003 and 2002, respectively, and $1,803 and $81 for the six
months ended June 30, 2003 and 2002, respectively, with performance fees in like
amount. The Company incurred personnel reimbursements of $247 and $49 for the
three months ended June 30, 2003 and 2002, respectively, and $437 and $49 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 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 during the six months ended
June 30, 2003, current and deferred fees were $5,799 and $4,639, respectively.
Subject to the Preferred Return, the initial installment of deferred fees will
be paid in January 2004.
-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 costs paid by the Advisor were $19,984 through June 30, 2003, of which the
Company has reimbursed $12,071. Unpaid costs are included in due to affiliates
in the accompanying condensed consolidated financial statements.
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 six-month periods ended June 30, 2003 and 2002 are as
follows:
2003 2002
---- ----
Per Statements of Income:
Rental income from operating leases $ 28,835 $ 635
Interest from direct financing leases 2,047 167
Adjustment:
Share of leasing revenue applicable to
minority interest (5,546) -
Share of leasing revenue from equity
investments 9,328 1,017
-------- --------
$ 34,664 $ 1,819
======== ========
For the six-month periods ended June 30, 2003 and 2002, the Company earned its
net leasing revenues from its investments from the following lease obligors:
2003 % 2002 %
---- - ---- -
Clear Channel Communications, Inc. (b) $ 4,245 12%
Carrefour France, SA (b) 3,660 11
TruServ Corporation (a) 3,611 10
Starmark Camhood, L.L.C. (a) 3,184 9
Fleming Companies, Inc. 2,754 8 $ 46 2%
Foster Wheeler, Inc. 2,620 8
Meadowbrook Meat Company 1,504 4
Overland Storage, Inc. 1,496 4
Medica - France, SA (b) 1,385 4
Petsmart, Inc. (a) 1,246 4 830 46
Tower Automotive, Inc. 1,178 3 524 29
Hologic, Inc. (a) 1,010 3
BE Aerospace, Inc. 813 2
Racal Instruments, Inc. 782 2 160 9
Trends Clothing Corp. 710 2
Advantis Technologies, Inc. 638 2 14 1
IntegraColor, Ltd. 628 2 58 3
MediMedia USA, Inc. 584 2
Qualceram Shires plc 526 2
-6-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
Polar Plastics, Inc. 505 1
Danka Office Imaging Company 436 1
Pemstar, Inc. 376 1
Builders Firstsource, Inc. (a) 277 1 187 10
SSG Precision Optronics, Inc. 255 1
WNA American Plastics Industries,Inc. 241 1 - -
------- --- ------ ---
$34,664 100% $1,819 100%
======= === ====== ===
(a) Represents the Company's proportionate share of lease revenues from its
equity investments (see Note 6).
(b) Net of amounts applicable to Corporate Property Associates 12
Incorporated's minority interest.
For the six-month period ended June 30, 2003, lessees were responsible for the
direct payment of approximately $1,871 of real estate taxes on behalf of the
Company.
Note 6. Equity Investments:
The Company owns interests in single-tenant net leased properties through equity
interests in (i) 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.
Summarized combined financial information of the equity investees is as follows:
(in thousands) June 30, 2003 December 31, 2002
------------- -----------------
Assets (primarily real estate) $451,092 $255,845
Liabilities (primarily mortgage notes payable) 266,563 102,022
Partners' and members' equity 184,529 153,823
Six Months Ended June 30,
----------------------------------
2003 2002
--------- -------
Revenues (primarily rental revenues) $ 20,889 $ 4,856
Expenses (primarily interest on mortgages and depreciation) (11,570) (2,802)
-------- -------
Net income $ 9,319 $ 2,054
======== =======
Note 7. Dividends Payable:
A dividend of $0.001717 per share per day in the period from April 1, 2003
through June 30, 2003 was declared in June 2003 and paid in July 2003 ($11,217).
Note 8. Acquisitions of Real Estate:
During the six-month period ended June 30, 2003, the Company acquired properties
and real estate investments, all of which were previously described in the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003. A
summary of the properties and investments acquired is as follows:
Original Annual
Initial Mortgage Debt
Lease Obligor: Cost Location Annual Rent Financing Service Date Acquired
-------------- ---- -------- ----------- --------- ------- -------------
Qualceram Shires plc $35,062 England, $2,759 - - April 29, 2003
Northern Ireland
and Ireland
MediMedia USA, Inc. 23,979 Yardley, PA 2,111 14,000 1,068 April 1, 2003
Oxford Automotive
Alabama, Inc. 15,707 McCalla, AL 1,575 - - (a) March 28, 2003
-7-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
Initial Original Annual
Annual Mortgage Debt
Lease Obligor; Cost Location Rent Financing Service Date Acquired
-------------- ---- -------- ---- --------- ------- -------------
Pemstar, Inc. 12,565 Rochester, MN 1,278 7,500 $ 664 March 28, 2003
Transworld Center, Inc. 21,000 Miami, FL 2,258 - - (b) March 20, 2003
Polar Plastics (NC), Inc. 15,602 Mooresville, NC 1,460 9,500 838 February 25, 2003
Waddington North America 6,545 Chattanooga, TN 637 - - February 12, 2003
Business Trust
Starmark Camhood LLC 78,324 15 health club 8,040 47,652 4,441 (c) February 7, 2003
facilities
Insulated Structures, Ltd. 22,021 Birmingham, UK 1,698 - - (d) January 28, 2003
(a) Build-to-suit commitment; lease scheduled to commence in March 2004.
(b) Build-to-suit commitment; lease scheduled to commence in October 2003.
(c) Accounted for as an equity investment; amounts are pro rata representing
the Company's 44% ownership interest.
(d) Build-to-suit commitment; lease scheduled to commence in October 2003.
Amounts shown are based on the exchange rate for the Great British Pound as
of the date of acquisition (L1 = $1.64330). The Company has obtained
a commitment for a limited recourse mortgage loan which will provide
$15,283 of financing.
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. 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 $961 of which $672 is attributable to foreign currency gains, as a
result of changes in rates from the dates of the initial purchases of the
properties, $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, and $16 is attributable to costs incurred in
connection with completing the sale.
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.
-8-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The Company adopted this Statement effective January
1, 2003 and the adoption did not have a material effect on the Company's
financial statements. The Company will no longer classify gains and losses for
the extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 was adopted
on January 1, 2003 and did not have a material effect on the Company's financial
statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. SFAS No. 147 was adopted on
January 1, 2003 and did not have a material effect on the financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require the
Company to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. The Company does not have any employees nor any stock-based
compensation plans.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when 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.
-9-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
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 the impact this will have on the
financial statements.
Note 11. Subsequent Events:
A. Lillian Vernon
On July 2, 2003, the Company purchased land and buildings in Virginia
Beach, Virginia for $38,743 and entered into a net lease with Lillian
Vernon Corporation. The lease has an initial term of 20 years followed
by two ten-year renewal options, and provides for an annual rent of
$3,848 with increases every three years based on a formula indexed to
increases in the Consumer Price Index ("CPI").
B. Qualserv, Corporation
On July 31, 2003, the Company purchased land and buildings in Fort
Smith Arkansas for $6,492 and entered into a net lease with Qualserv,
Corporation. The lease has an initial term of 15 years followed by two
seven-year renewal options and provides for an annual rent of $666.5
with increases every three years based on a formula indexed to
increases in the CPI.
C. Grande Communications Networks, Inc.
On August 7, 2003, the Company purchased land and buildings in Corpus
Christi; Odessa; San Marcos and Waco, Texas for $13,822 and entered
into a net lease with Grande Communications Networks, Inc. The lease
has an initial term of 20 years followed by four five-year renewal
options and provides for an annual rent of $1,379 with annual increases
based on a formula indexed to increases in the CPI, capped at 3%.
D. Galyan's Trading Company
On August 8, 2003, the Company purchased buildings in Cheektowaga, New
York and Greenwood, Indiana for $12,665 and entered into net leases
with Galyan's Trading Company, Inc. ("Galyan's"). The leases have lease
terms through January 31, 2024 with five five-year renewal options. The
leases provide for an aggregate rent of $1,283 with rent increases
every five years based on a formula indexed to increases in the CPI,
with each rent increase capped at 10%.
The Company also entered into a construction agency agreement with
Galyan's for a property in Freehold, New Jersey. The total cost will
not exceed $9,424 and an initial lease term of 20 years will commence
when the building has been completed but no later than November 5,
2004. If the entire project costs are used, initial annual rent will be
$967.5. The lease provides for six five-year renewal terms and rent
-10-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except share and per share amounts)
increases every five years based on a formula indexed to increases in
the CPI, with each rent increase capped at 10%.
In connection with acquiring the Cheektowaga and Greenwood properties,
the Company obtained $8,200 of limited recourse mortgage financing. The
loans provide for aggregate monthly payments of principal and interest
of $63 at an annual interest rate of 6.95% based on a 20-year
amortization schedule. The loans mature on September 1, 2023 at which
time they will fully amortize.
-11-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except share amounts)
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
June 30, 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 June 30, 2003, CPA(R):15 had raised gross proceeds of $399,549 from its
first offering which was completed in November 2002, and $438,230 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. CPA(R):15 compares its allowance for uncollected receivables to
any arrearages and adjusts 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 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.
-12-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
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 rent, residual value and holding period. 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 generally 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 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.
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.
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
-13-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
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 June 30, 2003, no assets
are held for sale.
CPA(R):15 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 assts 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.
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.
-14-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Results of Operations
Between December 31, 2002 and June 30, 2003, CPA(R):15 invested approximately
$170,000 in real estate. CPA(R):15's asset base has increased from approximately
$806,298 at December 31, 2002 to $1,279,372 at June 30, 2003. As of August 7,
2003, CPA(R):15 has approximately $423,145 of cash available for investment.
Accordingly, the asset base is projected to continue to increase until the
available cash is deployed fully in real estate. As a result of the on-going
acquisition activity, the results of operations for the three-month and
six-month periods ended June 30, 2003 are not directly comparable to the results
for the three and six-month periods ended June 30, 2002 and are not expected to
be indicative of future operating results.
As a result of its acquisition activity in 2002 and 2003, CPA(R):15's net income
of $5,631 and $11,123 for the three-month and the six-month periods ended June
30, 2003 is not directly comparable with net income of $739 and $848 for the
three-month and six-month periods ended June 30, 2002. During the six months
ended June 30, 2003, CPA(R): 15 entered directly into net lease transactions
with eight 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
June 30, 2003 (including the pro rata share of equity investments) is expected
to generate, after completion of build-to-suit construction projects, annual
cash flow (contractual rent less property-level mortgage debt service) of
approximately $43,443, as follows:
(In thousands) Annual Annual Estimated % of Estimated
Lease Obligor Contractual Rent Debt Service Cash Flow Cash Flow
------------- ---------------- ------------ --------- ---------
Starmark Camhood L.L.C. (2) $ 8,040 $ 4,441 $ 3,599 8%
TruServ Corporation (2) 6,004 2,707 3,297 8
Clear Channel Communications, Inc. (1) 6,549 3,467 3,082 7
Qualceram Shires plc 3,045 - 3,045 7
Fleming Companies, Inc. 5,508 2,507 3,001 7
Foster Wheeler, Inc. 5,231 2,253 2,978 7
Carrefour France, SA (1) 7,577 4,698 2,879 7
Transworld Center, Inc. (under construction) 2,275 - 2,275 5
Insulated Structures, Ltd. (under construction) 1,705 - 1,705 4
Oxford Automotive, Inc. (under construction) 1,575 - 1,575 4
Meadowbrook Meat Company 2,660 1,306 1,354 3
Tower Automotive, Inc. 2,356 1,057 1,299 3
Rave Reviews Cinemas, L.L.C. (under construction) 1,286 - 1,286 3
Overland Storage, Inc. 2,621 1,467 1,154 3
Petsmart, Inc. (2) 2,179 1,107 1,072 2
MediMedia USA, Inc. 2,111 1,072 1,039 2
Danka Office Imaging Company 1,966 984 982 2
Hologic, Inc. (2) 2,020 1,051 969 2
Medica - France, SA (1) 2,867 1,902 965 2
BE Aerospace, Inc. 1,468 764 704 2
IntegraColor, Ltd. 1,257 564 693 2
Advantis Technologies, Inc. 1,275 610 665 2
WNA American Plastics Industries, Inc. 637 - 637 2
Polar Plastics, Inc. 1,460 838 622 1
Pemstar, Inc. 1,278 664 614 1
Racal Instruments, Inc. 1,323 733 590 1
Trends Clothing Corp. 1,420 851 569 1
SSG Precision Optronics, Inc. 510 - 510 1
Builders FirstSource, Inc. (2) 554 271 283 1
-------- ------- --------- ---
$ 78,757 $35,314 $ 43,443 100%
======== ======= ========= ===
(1) Net of minority interest
(2) Pro rata share of equity investment
-15-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
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 but CPA(R):15 has reduced the risk from
fluctuations by obtaining fixed rate mortgage debt on the properties in the
functional currency.
Since June 30, 2003, CPA(R): 15 has completed net lease acquisitions, with
Lillian Vernon Corporation, Galyan's Trading Company, Inc., Grande
Communications Networks, Inc. and Qualserv Corporation as lessees. Annual rent
from these leases is $7,177. 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
it will affirm its lease in connection with its reorganization. Annual lease
revenues and cash flow from the Fleming lease are $5,508 and $3,001,
respectively. In the event that the Fleming lease is terminated, CPA(R):15
believes the prospects of re-leasing the property are favorable.
During the three-month and the six-month periods ended June 30, 2003, CPA(R):15
recognized interest and other income of $1,030 and $2,458, respectively,
consisting of $828 and $1,082 of interest income on its uninvested cash and $202
and $1,376 of property expense reimbursements received from lessees. The
reimbursements are used to pay property expenses that a lessee generally incurs
under a net lease, and, the reimbursements, net of the expenses, 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.
Property expense for the three-month and the six-month periods ended June 30,
2003 consists primarily of $1,910 and $3,606 of asset management and performance
fees and $202 and $1,376 of expenses which have been reimbursed by lessees.
Asset management and performance fees are based on CPA(R):15's assets invested
in real estate and have increased solely as a result of the increase in the
asset base. CPA(R):15's asset base will continue to increase as it invests its
cash from its offerings.
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 $961, 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. This information is not
available to CPA(R):15.
CPA(R):15 completed sales of its second offering of shares of common stock as of
August 7, 2003, at which time the gross amount raised from the two offerings
aggregated approximately $1,000,000. CPA(R):15 is continuing to use the proceeds
of the offerings to make investments in net lease real estate. 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.
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, pay
scheduled principal installments and pay distributions to minority partners in
certain consolidated entities. Cash flows from operations and equity investments
of $24,262 were sufficient to pay dividends of $14,066, scheduled mortgage
principal
-16-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
payments of $2,401 and distributions to minority partners of $1,281. 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 $169,875 to acquire properties net leased to eight 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 June 30, 2003, CPA(R):15 has used an additional $70,288 to
acquire properties leased to Lillian Vernon Corporation, Galyan's, Grande
Communications Networks and Qualserv. CPA(R):15 obtained $8,200 of mortgage
financing on the Galyan's properties and is likely to seek mortgage financing on
the other newly-acquired properties. 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.
Acquisition activity can be expected to continue for at least one more year,
with total real estate assets expected to range from $1,500,000 to $2,000,000.
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 August 7, 2003 $14,106 was committed to complete build-to-suit projects.
During the six months ended June 30, 2003, CPA(R):15 received special
distributions of $24,162 from equity investees in connection with the investees'
obtaining mortgage financing on their properties.
During the six months ended June 30, 2003, CPA(R):15 raised $399,959, net of
costs, in connection with the its recently completed offering. Since June 30,
2003, CPA(R):15 issued an additional 12,981,020 shares ($129,810). CPA(R):15
also received $11,916 from CPA(R):12 in connection with CPA(R):12's purchase of
minority interests in the Medica-France and Carrefour properties. After
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, during the six months ended June 30, 2003, CPA(R):15
obtained $30,330 of limited recourse mortgage debt. Currently, all of
CPA(R):15's mortgage debt bears interest at fixed rates with no loans maturing
before May 2012. CPA(R):15 has benefited from historically low interest rates.
As it continues to place mortgage debt on its properties, it may be subject to
increases in interest rates. 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 the 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.
CPA(R):15 is investing its available uninvested cash in money market
instruments. The spread between short-term rates on money market instruments and
rates of return on real estate investments has increased significantly,
primarily as the result of low money market interest rates. A significant
portion of CPA(R):15's cash balances represent funds to be invested in real
estate. If the use of these cash balances are not invested in real estate over
the next several months, there is a risk that cash flow from operations and
equity investments will not meet Management's projections. Management believes
that any deficit would be short term and will ultimately be eliminated after
available cash is fully deployed in diversified real estate portfolios.
Off-Balance Sheet Arrangements, Guarantees and Aggregate Contractual Agreements:
A summary of CPA(R):15's contractual obligations and commitments as of June 30,
2003 is as follows:
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage
notes payable (1) $ 414,611 $ 3,041 $ 6,405 $ 7,013 $ 7,598 $ 8,289 $ 382,265
Notes payable 4,043 4,043 - - - - -
Deferred acquisition fees 16,620 - 3,253 4,155 4,155 4,155 902
Commitments:
Build-to-suit obligations 21,492 18,891 2,601
Share of minimum rents
payable under office
cost-sharing agreement 334 51 103 103 77 - -
--------- -------- -------- -------- -------- -------- ----------
$ 457,100 $ 26,026 $ 12,362 $ 11,271 $ 11,830 $ 12,444 $ 383,167
========= ======== ======== ======== ======== ======== ==========
(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. CPA(R):15 adopted this Statement effective January 1, 2003
and it did not have a material effect on CPA(R):15's financial statements.
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.
-18-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
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 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):15 is currently evaluating the impact this will have on the
financial statements.
-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 $414,611 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 June 30, 2003 ranged from 5.52% to 7.98%.
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $3,041 $6,405 $7,013 $7,598 $8,289 $382,265 $414,611 $412,242
Average interest
rate 5.98% 5.99% 5.98% 5.98% 5.97% 6.09%
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 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
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.
-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 June 30, 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: $354,969,872
Temporary investments in cash and cash equivalents: -
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 June 30, 2003:
Shares registered: 69,000,000
Aggregate price of offering amount registered: $690,000,000
Shares sold: 43,529,314
Aggregated offering price of amount sold: $435,293,140
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: $ 4,329,666
Direct or indirect payments to others: $ 32,972,612
Net offering proceeds to the issuer after deducting expenses: $397,990,862
Purchases of real estate and equity investments: $ 17,926,539
Temporary investments in cash and cash equivalents: $380,064,323
-21-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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 36,682,926 36,093,732 53,913 535,281
Francis X. Diebold 36,682,926 36,121,695 25,950 535,281
Elizabeth P. Munson 36,682,926 36,086,189 61,456 535,281
George E. Stoddard 36,682,926 35,878,563 269,082 535,281
Ralph F. Verni 36,682,926 36,130,378 17,267 535,281
Warren G. Wintrub 36,682,926 36,064,675 82,970 535,281
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.
-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
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)
-23-