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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 000-25771
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 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
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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
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such 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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ].
Registrant has no active market for its common stock as of March 5,
2004. Non-affiliates held 65,198,813 shares as of March 5, 2004.
As of March 5, 2004, there are 66,944,487 shares of common stock of
Registrant outstanding.
CPA(R):14 incorporates by reference its definitive Proxy Statement with
respect to its 2004 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART I
Item 1. Business.
Corporate Property Associates 14 Incorporated ("CPA(R):14") is a Real Estate
Investment Trust ("REIT") that acquires and owns commercial properties leased to
companies nationwide and internationally, primarily on a triple net basis. As of
December 31, 2003, CPA(R):14's portfolio consisted of 157 properties leased to
71 tenants and totaling more than 24,133 thousand square feet.
CPA(R):14's core investment strategy is to purchase and own properties leased to
a variety of companies on a single tenant net lease basis. These leases
generally place the economic burden of ownership on the tenant by requiring them
to pay the costs of maintenance, insurance, taxes, structural repairs and other
operating expenses. CPA(R):14 also generally includes in its leases:
- clauses providing for mandated rent increases or periodic
rent increases tied to increases in the consumer price
index or other indices for the jurisdiction in which the
property is located or, when appropriate, increases
tied to the volume of sales at the property;
- covenants restricting the activity of the tenant to reduce
the risk of a change in credit quality;
- indemnification of CPA(R):14 for environmental and other
liabilities; and
- when appropriate, guarantees from parent companies or
other entities.
CPA(R):14 was formed as a Maryland corporation on June 4, 1997. Between November
1997 and November 2001, CPA(R):14 sold a total of 65,794,280 shares of common
stock for a total of $657,942,800 in gross offering proceeds. Through December
31, 2003, CPA(R):14 has also issued 147,550 shares ($1,475,500) through its
dividend reinvestment plan. These proceeds are being combined with limited
recourse mortgage debt to acquire a portfolio of properties. As a REIT,
CPA(R):14 is not subject to federal income taxation as long as it satisfies
certain requirements relating to the nature of its income, the level of its
distributions and other factors.
W. P. Carey & Co. LLC ("WPC"), CPA(R):14's advisor, provides both strategic and
day-to-day management for CPA(R):14, including acquisition services, research,
investment analysis, asset management, capital funding services, disposition of
assets, investor relations and administrative services. WPC also provides office
space and other facilities for CPA(R):14. WPC has dedicated senior executives in
each area of its organization so that CPA(R):14 functions as a fully integrated
operating company. CPA(R):14 pays asset management fees to WPC and pays certain
transactional fees. CPA(R):14 also reimburses WPC for certain expenses. WPC also
serves in this capacity for Carey Institutional Properties Incorporated,
Corporate Property Associates 12 Incorporated, Corporate Property Associates 15
Incorporated and Corporate Property Associates 16 - Global Incorporated. WPC is
listed on the New York Stock Exchange and Pacific Exchange under the symbol
"WPC."
CPA(R):14's principal executive offices are located at 50 Rockefeller Plaza, New
York, NY 10020 and its telephone number is (212) 492-1100. As of December 31,
2003, CPA(R):14 had no employees. WPC employs 120 individuals who perform
services for CPA(R):14.
BUSINESS OBJECTIVES AND STRATEGY
CPA(R):14's objectives are to:
- pay quarterly dividends at an increasing rate that for taxable
shareholders are partially free from current taxation;
- provide inflation protected income;
- purchase and own a diversified portfolio of net-leased real estate
that will increase in value; and
- increase the value of its shares by increasing the equity in its
real estate by making regular mortgage principal payments.
CPA(R):14 seeks to achieve these objectives by purchasing and holding industrial
and commercial properties each net leased to a single corporate tenant.
CPA(R):14's portfolio is diversified by geography, property type and by tenant.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ACQUISITION STRATEGIES
WPC has a well-developed process with established procedures and systems for
acquiring net leased property on behalf of CPA(R):14. As a result of its
reputation and experience in the industry and the contacts maintained by its
professionals, WPC has a presence in the net lease market that has provided it
with the opportunity to invest in a significant number of transactions on an
ongoing basis. CPA(R):14 takes advantage of WPC's presence in the net lease
market to build its portfolio. In evaluating opportunities for CPA(R):14, WPC
carefully examines the credit, management and other attributes of the tenant and
the importance of the property under consideration to the tenant's operations.
Careful credit analysis is a crucial aspect of every transaction. CPA(R):14
believes that WPC has one of the most extensive underwriting processes in the
industry and has an experienced staff of professionals involved with
underwriting transactions. WPC seeks to identify those prospective tenants whose
creditworthiness is likely to improve over time. CPA(R):14 believes that the
experience of WPC's management in structuring sale-leaseback transactions to
meet the needs of a prospective tenant enables WPC to obtain a higher return for
a given level of risk than would typically be available by purchasing a property
subject to an existing lease.
WPC's strategy in structuring its net lease investments for CPA(R):14 is to:
- combine the stability and security of long-term lease payments,
including rent increases, with the appreciation potential inherent
in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type of
facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements from
the tenant when possible, such as warrants to purchase tenant
common stock.
DEVELOPMENTS DURING 2003
SIGNIFICANT ACQUISITIONS:
On February 7, 2003, the Company, and two affiliates, Corporate Property
Associates 12 Incorporated ("CPA(R):12") and Corporate Property Associates 15
Incorporated ("CPA(R):15"), through a newly-formed limited liability company
with ownership interests of 41%, 15% and 44%, respectively, purchased land and
15 health club facilities for $178,010,471 and entered into a master net lease
with Starmark Camhood, LLC ("Starmark"). The lease obligations of Starmark are
jointly and unconditionally guaranteed by seven of its affiliates. The Starmark
lease provides for an initial lease term of 20 years with three ten-year renewal
terms. Annual rent is initially $18,272,400 with CPI-based increases scheduled
in November 2006, 2010, 2014, 2018 and 2021. In connection with the purchase,
the limited liability company obtained first mortgage limited recourse financing
of $88,300,000 and a mezzanine loan of $20,000,000. The first mortgage provides
for monthly payments of interest and principal of $563,936 at an annual interest
rate of 6.6% and based on a 30-year amortization schedule. The loan matures in
March 2013 at which time a balloon payment is payable. The mezzanine loan
provides for monthly payments of interest and principal of $277,201 at an annual
interest rate of 11.15% and will fully amortize over its ten-year term. The
limited liability company was granted warrants for Class C Unit interests in
Starmark. If exercised, the Unit interests would represent a 5% interest in
Starmark as of the date of grant. The warrants may be exercised at any time
through February 7, 2023 at an exercise price of $430 per unit. The warrant
agreement does not provide for a cashless exercise of units.
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
E9,068,072 ($10,421,935 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 E867,851 to E2,306,612 ($2,650,989), 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 E7,137,000
($8,202,554) of limited recourse mortgage financing collateralized by the
property. The loan provides for quarterly payments of interest at an annual
interest rate of 5.51%. 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, with scheduled increases throughout
the term of the loan. The loan matures on April 30, 2017, at which time a
balloon payment is scheduled.
-2-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
During 2003, CPA(R):14 completed build-to-suit projects with Waddington North
America, Inc., Career Education Group and Rave Motion Pictures LLC which are
providing an increase in aggregate annual lease revenues of $2,690,902. In July
2003, the Company obtained $6,700,000 of limited recourse mortgage debt
collateralized by the UTI Holdings, Inc. property in Mooresville, North
Carolina, at an annual debt service of $586,729.
FINANCING STRATEGIES
Consistent with its investment policies, CPA(R):14 uses leverage when available
on favorable terms. CPA(R):14 has approximately $702,175,000 in property level
debt outstanding. These mortgages mature between 2006 and 2008 and have fixed
interest rates between 3.12% and 8.85%.
CPA(R):14 is a party to a mortgage financing securitization transaction with
three affiliates, W. P. Carey & Co. LLC, Carey Institutional Properties
Incorporated and Corporate Property Associates 12 Incorporated, entered into in
August 2002. CPA(R):14 and the three affiliates obtained an aggregate of
approximately $172,335,000 of limited recourse mortgage financing collateralized
by 62 leased properties. The lender pooled the loans into a trust, Carey
Commercial Mortgage Trust, a non-affiliate, whose assets consist solely of the
loans, and sold the interests in the trust as collateralized mortgage
obligations in a private placement to institutional investors. CPA(R):14 and the
three affiliates agreed to acquire a separate class of subordinated interests in
the trust (the "CPA(R) Interests"). The amount of CPA(R) Interests acquired by
CPA(R):14 was proportional to the mortgage amounts obtained. The CPA(R)
Interests were purchased for $24,129,000 of which CPA(R):14's share was
$6,032,000 or 25%, and are comprised of two components, a component that will
receive payments of principal and interest and a component that will receive
payments of interest only. CPA(R):14 is accounting for its interest in the
CPA(R) Interests as an available-for-sale security and will be 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.
WPC continually seeks opportunities and considers alternative financing
techniques to finance properties not currently subject to debt, refinance debt,
reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, WPC reviews and structures many aspects of
a transaction, including the tenant, the real estate and the lease, to determine
whether a potential acquisition can be structured to satisfy CPA(R):14's
acquisition criteria. The aspects of a transaction which are reviewed and
structured by WPC include the following:
Tenant Evaluation. WPC evaluates each potential tenant for its credit,
management, position within its industry, operating history and
profitability. WPC seeks tenants it believes will have stable or
improving credit. By leasing properties to these tenants, CPA(R):14 can
generally charge rent that is higher than the rent charged to tenants
with recognized credit and thereby enhance its current return from
these properties as compared with properties leased to companies whose
credit potential has already been recognized by the market.
Furthermore, if a tenant's credit does improve, the value of
CPA(R):14's property will likely increase (if all other factors
affecting value remain unchanged). WPC may also seek to enhance the
likelihood of a tenant's lease obligations being satisfied, such as
through a letter of credit or a guaranty of lease obligations from the
tenant's corporate parent. This credit enhancement provides CPA(R):14
with additional financial security. In evaluating a possible
investment, the creditworthiness of a tenant generally will be a more
significant factor than the value of the property absent the lease with
such tenant. While WPC will select tenants it believes are
creditworthy, tenants will not be required to meet any minimum rating
established by an independent credit rating agency. WPC's and the
investment committee's standards for determining whether a particular
tenant is creditworthy vary in accordance with a variety of factors
relating to specific prospective tenants. The creditworthiness of a
tenant is determined on a tenant by tenant, case by case basis.
Therefore, general standards for creditworthiness cannot be applied.
Leases with Increasing Rent. WPC typically includes, or attempts to
include a clause in each lease that provides for increases in rent over
the term of the lease. These increases are generally tied to increases
in indices such as the consumer price index. In the case of retail
stores, these leases often provide for participation in gross sales
above a stated level. The lease may also provide for mandated rental
increases on specific dates or other methods that may not have been in
existence or contemplated by us as of the date of this report. WPC
seeks to avoid entering into leases that provide for contractual
reductions in rents during their primary term.
-3-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Properties Important to Tenant Operations. WPC generally seeks to
acquire properties with operations that are essential or important to
the ongoing operations of the tenant. WPC believes that these
properties provide better protection in the event a tenant files for
bankruptcy, since leases on properties essential or important to the
operations of a bankrupt tenant are less likely to be terminated by a
bankrupt tenant. WPC also seeks to assess the income, cash flow and
profitability of the business conducted at the property so that, if the
tenant is unable to operate its business, CPA(R):14 can either continue
operating the business conducted at the property or re-lease the
property to another entity in the industry which can operate the
property profitably.
Lease Provisions that Enhance and Protect Value. When appropriate, WPC
attempts to include provisions in its leases that require its consent
to specified tenant activity or require the tenant to satisfy specific
operating tests. These provisions include, for example, operational and
financial covenants of the tenant, prohibitions on a change in control
of the tenant and indemnification from the tenant against environmental
and other contingent liabilities. These provisions protect CPA(R):14's
investment from changes in the operating and financial characteristics
of a tenant that may impact its ability to satisfy its obligations to
us or could reduce the value of CPA(R):14's properties.
Diversification. WPC will continue to diversify CPA(R):14's portfolio
to avoid dependence on any one particular tenant, type of facility,
geographic location or tenant industry. By diversifying CPA(R):14's
portfolio, WPC reduces the adverse effect of a single under-performing
investment or a downturn in any particular industry or geographic
region.
WPC uses a variety of other strategies in connection with its acquisitions.
These strategies include attempting to obtain equity enhancements in connection
with transactions. Typically, these equity enhancements involve warrants to
purchase stock of the tenant or the stock of the parent of the tenant. If the
value of the stock exceeds the exercise price of the warrant, equity
enhancements help CPA(R):14 to achieve its goal of increasing funds available
for the payment of distributions.
As a transaction is structured, it is evaluated by the chairman of WPC's
investment committee. Before a property is acquired, the transaction is reviewed
by the investment committee to ensure that it satisfies CPA(R):14's investment
criteria. The investment committee is not directly involved in originating or
negotiating potential acquisitions, but instead functions as a separate and
final step in the acquisition process. WPC places special emphasis on having
experienced individuals serve on its investment committee and does not invest in
a transaction unless it is approved by the investment committee.
CPA(R):14 believes that the investment committee review process gives it a
unique competitive advantage over other net lease companies because of the
substantial experience and perspective that the investment committee has in
evaluating the blend of corporate credit, real estate and lease terms that
combine to make an acceptable risk.
The following people serve on the investment committee:
- George E. Stoddard, Chairman, was formerly responsible for the direct
corporate investments of The Equitable Life Assurance Society of the
United States and has been involved with the CPA(R) programs for over
20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer was
responsible for all of Prudential's investments, including stocks,
bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice President --
Head of Bond & Corporate Finance Department of the John Hancock Mutual
Life Insurance Company. His responsibility included overseeing fixed
income investments for Hancock, its affiliates and outside clients.
- Lawrence R. Klein is the Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton School. Dr.
Klein has been awarded the Alfred Nobel Memorial Prize in Economic
Sciences and currently advises various governments and government
agencies.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
- Ralph F. Verni is a private investor and business consultant and
formerly Chief Investment Officer of The New England Mutual Life
Insurance Company.
- Karsten von Koller was formerly Chairman and Member of the Board of
Managing Directors of Eurohypo AG, the leading commercial real estate
financing company in Europe.
Each property purchased by CPA(R):14 has been and future purchases will be
appraised by an independent appraiser. CPA(R):14 will not purchase any property
that has a total property cost (the purchase price of the property plus all
acquisition fees) which is in excess of its appraised value. These appraisals
may take into consideration, among other things, the terms and conditions of the
particular lease transaction, the quality of the lessee's credit and the
conditions of the credit markets at the time the lease transaction is
negotiated. The appraised value may be greater than the construction cost or the
replacement cost of a property, and the actual sale price of a property if sold
by CPA(R):14 may be greater or less than the appraised value.
WPC's practices include performing evaluations of the physical condition of
properties and performing environmental surveys in an attempt to determine
potential environmental liabilities associated with a property prior to its
acquisition. CPA(R):14 will also consider factors peculiar to the laws of
foreign countries, in addition to the risk normally associated with real
property investments, when considering an investment located outside the United
States.
ASSET MANAGEMENT
CPA(R):14 believes that effective management of its net lease assets is
essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
WPC monitors, on an ongoing basis, compliance by tenants with their lease
obligations and other factors that could affect the financial performance of any
of its properties. Monitoring involves receiving assurances that each tenant has
paid real estate taxes, assessments and other expenses relating to the
properties it occupies and confirming that appropriate insurance coverage is
being maintained by the tenant. WPC reviews financial statements of its tenants
and undertakes regular physical inspections of the condition and maintenance of
its properties. Additionally, WPC periodically analyzes each tenant's financial
condition, the industry in which each tenant operates and each tenant's relative
strength in its industry.
HOLDING PERIOD
CPA(R):14 intends to hold each property it acquires for an extended period. The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors with a view to
achieving maximum capital appreciation and after-tax return for the CPA(R):14
shareholders. If CPA(R):14's common stock is not listed for trading on a
national securities exchange or included for quotation on NASDAQ, CPA(R):14 will
generally begin selling properties within eight years after the proceeds of its
public offerings are substantially invested, subject to market conditions. The
board of directors will make the decision whether to list the shares, liquidate
or devise an alternative liquidity strategy which is likely to result in the
greatest value for the shareholders.
COMPETITION
CPA(R):14 faces competition for the acquisition of office and industrial
properties in general, and such properties net leased to major corporations in
particular, from insurance companies, credit companies, pension funds, private
individuals, investment companies and other REITs. CPA(R):14 also faces
competition from institutions that provide or arrange for other types of
commercial financing through private or public offerings of equity or debt or
traditional bank financings. CPA(R):14 believes its management's experience in
real estate, credit underwriting and transaction structuring will allow
CPA(R):14 to compete effectively for office and industrial properties.
-5-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. CPA(R):14's leases often
provide that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.
CPA(R):14 typically undertakes an investigation of potential environmental risks
when evaluating an acquisition. Phase I environmental assessments are performed
by independent environmental consulting and engineering firms for all properties
acquired by CPA(R):14. Where warranted, Phase II environmental assessments are
performed. Phase I assessments do not involve subsurface testing, whereas Phase
II assessments involve some degree of soil and/or groundwater testing. CPA(R):14
may acquire a property which is known to have had a release of hazardous
materials in the past, subject to a determination of the level of risk and
potential cost of remediation. CPA(R):14 normally requires property sellers to
indemnify it fully against any environmental problem existing as of the date of
purchase. Additionally, CPA(R):14 often structures its leases to require the
tenant to assume most or all responsibility for compliance with the
environmental provisions of the lease or environmental remediation relating to
the tenant's operations and to provide that non-compliance with environmental
laws is a lease default. In some cases, CPA(R):14 may also require a cash
reserve, a letter of credit or a guarantee from the tenant, the tenant's parent
company or a third party to assure lease compliance and funding of remediation.
The value of any of these protections depends on the amount of the collateral
and/or financial strength of the entity providing the protection. Such a
contractual arrangement does not eliminate CPA(R):14's statutory liability or
preclude claims against CPA(R):14 by governmental authorities or persons who are
not a party to the arrangement. Contractual arrangements in CPA(R):14's leases
may provide a basis for CPA(R):14 to recover from the tenant damages or costs
for which it has been found liable.
INDUSTRY SEGMENT
CPA(R):14 operates in one industry segment, investment in net leased real
property. For the year ended December 31, 2003, no lessee represented 10% or
more of the total operating revenue of CPA(R):14.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") became effective in December 1995. The Act provides a "safe harbor" for
companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
CPA(R):14 wishes to take advantage of the "safe harbor" provisions of the Act
and is therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
CPA(R):14's future results may be affected by certain risks and uncertainties
including the following:
We are subject to the risks of real estate ownership which could reduce the
value of our properties.
Our properties may include net leased industrial and commercial property. The
performance of CPA(R):14 is subject to risks incident to the ownership and
operation of these types of properties, including:
- changes in the general economic climate;
- changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
- changes in interest rates and the availability of financing;
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
- competition from other available space; and
- changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
We may have difficulty selling or re-leasing our properties.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. Many of the
net leases we enter into or acquire are for properties that are specially suited
to the particular needs of our tenant. With these properties, if the current
lease is terminated or not renewed, we may be required to renovate the property
or to make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, we may have
difficulty selling it to a party other than the tenant due to the special
purpose for which the property may have been designed. In addition, provisions
of the Internal Revenue Code relating to REITs limit our ability to sell
properties held for fewer than four years. These and other limitations may
affect our ability to sell properties without adversely affecting returns to our
shareholders.
The inability of a tenant in a single tenant property to pay rent will reduce
our revenues.
Most of our properties are occupied by a single tenant and, therefore, the
success of our investments is materially dependent on the financial stability of
our tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and cause us
to have to find an alternative source of revenue to meet the mortgage payment
and prevent a foreclosure if the property is subject to a mortgage. In the event
of a default, we may experience delays in enforcing our rights as landlord and
may incur substantial costs in protecting our investment and reletting our
property. If a lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell the property
without incurring a loss.
The bankruptcy of tenants would cause a reduction in revenue.
A tenant in bankruptcy could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms providing for the repurchase of a property by the
tenant, a bankruptcy court could recharacterize a net lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor.
Some of the programs managed by WPC or its affiliates have had tenants file for
bankruptcy protection and are involved in litigation. Four CPA(R) programs had
to reduce the rate of distributions to their partners as a result of adverse
developments involving tenants.
If our tenants are highly leveraged, they may have a higher possibility of
filing for bankruptcy.
Of tenants that experience downturns in their operating results due to adverse
changes to their business or economic conditions, those that are highly
leveraged may have a higher possibility of filing for bankruptcy. In bankruptcy,
a tenant has the option of vacating a property instead of paying rent. Until
such a property is released from bankruptcy, our revenues would be reduced and
could cause us to reduce distributions to shareholders. We have highly leveraged
tenants at this time, and we may have additional highly leveraged tenants in the
future.
Our tenants generally do not have a recognized credit rating, which may create a
higher risk of lease defaults and therefore lower revenues than if our tenants
had a recognized credit rating.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose
-7-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
a higher risk of default than would long term leases with tenants
whose credit potential has already been recognized by the market.
There is not, and may never be a public market for our shares, so it will be
difficult for shareholders to sell shares quickly.
There is no current public market for the shares and, therefore, it will be
difficult for shareholders to sell their shares promptly. In addition, the price
received for any shares sold is likely to be less than the proportionate value
of the real estate we own.
Our success will be dependent on the performance of WPC.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of WPC in the acquisition of investments, the
selection of tenants, the determination of any financing arrangements, and upon
the management of the assets. You will have no opportunity to evaluate the terms
of transactions or other economic or financial data concerning our investments.
You must rely entirely on the management ability of WPC and the oversight of the
board of directors.
WPC may be subject to conflicts of interest.
WPC manages our business and selects our real estate investments. WPC has some
conflicts of interest in its management of CPA(R):14, which arise primarily from
the involvement of WPC and its affiliates in other activities that may conflict
with CPA(R):14 and the payment of fees by us to WPC and its affiliates. The
activities in which a conflict could arise between CPA(R):14 and WPC are:
- - the receipt of commissions, fees and other compensation by WPC and its
affiliates for property purchases, leases, sales and financing for
CPA(R):14, which may cause WPC and its affiliates to engage in
transactions that generate higher fees, rather than transactions that are
more appropriate or beneficial for our business;
- - agreements between CPA(R):14 and WPC or any of its affiliates, including
agreements regarding compensation of WPC and its affiliates, will not be
negotiated on an arm's length basis as would occur if the agreements were
with unaffiliated third parties;
- - purchases and loans from affiliates, subject to CPA(R):14's investment
procedures, objectives and policies, which will increase fees and interest
payable to affiliates, thereby decreasing our net income and possibly
causing us to incur higher leverage levels;
- - competition with certain affiliates for property acquisitions, which may
cause WPC and its affiliates to direct properties suitable for us to other
related entities;
- - disposition, incentive and termination fees, which are based on the sale
price of properties, may cause a conflict between the advisor's desire to
sell a property and our plans to hold or sell the property.
Inherent in these transactions is the conflict of interest that arises due to
the potential impact of the transaction on the amount of fees received by WPC
and/or its affiliates and the distributions to shareholders.
Liability for uninsured losses could adversely affect our financial condition.
Losses from disaster-type occurrences (such as wars or earthquakes) may be
either uninsurable or not insurable on economically viable terms. Should an
uninsured loss occur, we could lose our capital investment and/or anticipated
profits and cash flow from one or more properties.
Potential liability for environmental matters could adversely affect our
financial condition.
We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. Some of these
laws could impose the following on CPA(R):14:
- Responsibility and liability for the cost of removal or remediation of
hazardous substances released on our property, generally without regard
to our knowledge or responsibility of the presence of the contaminants.
- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of these substances.
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
Our costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to borrow using
the property as collateral.
-8-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Our use of debt to finance acquisitions could adversely affect our cash flow.
Most of our property acquisitions will be made by borrowing a portion of the
purchase price of our properties and securing the loan with a mortgage on the
property. If we are unable to make our debt payments as required, a lender could
foreclose on the property or properties securing its debt. This could cause us
to lose part or all of our investment which in turn could cause the value of the
shares and distributions to shareholders to be reduced. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity
invested in the property. We typically borrow between 55% and 65% of the
purchase price of our properties. There is no limitation on the amount borrowed
on a single property and the aggregate borrowings may not exceed 75% of the
value of all properties. Any borrowings in excess of 75% of the value of all
properties must be approved by a majority of the independent directors and
disclosed to shareholders. As of December 31, 2003, we had limited recourse
mortgage notes payable outstanding of $702,175,000.
Failure to qualify as a REIT could adversely affect our operations and ability
to make distributions.
If we fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to shareholders
because of the additional tax liability. In addition, distributions to
shareholders would no longer qualify for the distributions paid deduction and we
would no longer be required to make distributions. We might be required to
borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and
various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize
our REIT status.
The Internal Revenue Service may take the position that specific sale-leaseback
transactions we will treat as true leases are not true leases for federal income
tax purposes but are, instead, financing arrangements or loans. If a
sale-leaseback transaction were so recharacterized, we might fail to satisfy the
Asset Tests or the Income Tests and consequently lose our REIT status effective
with the year of recharacterization. Alternatively, the amount of our REIT
Taxable Income could be recalculated which could cause us to fail the
Distribution Test.
Balloon payment obligations may adversely affect our financial condition.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets. No balloon payments are scheduled in 2004 through
2007; in 2008, balloon payments totaling $5.3 million will be due.
A limit on the number of shares a person may own may discourage a takeover.
Our articles of incorporation restrict ownership of more than 9.8% of the
outstanding shares by one person. These restrictions may discourage a change of
control of CPA(R):14 and may deter individuals or entities from making tender
offers for shares, which offers might be financially attractive to shareholders
or which may cause a change in the management of CPA(R):14.
Maryland law could restrict change in control.
Provisions of Maryland law applicable to us prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting power of
outstanding shares;
- an affiliate of us who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of the
voting power of our outstanding shares ("an interested shareholder");
or
- an affiliate of an interested shareholder.
-9-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
These prohibitions last for five years after the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in shareholders' interest. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of directors prior to the time that
someone becomes an interested shareholder.
Our participation in joint ventures creates additional risk.
We participate in joint ventures with other entities, some of which may be
unaffiliated with us. There are additional risks involved in these types of
transactions. These risks include the potential of our joint venture partner
becoming bankrupt and the possibility of diverging or inconsistent economic or
business interests of us and our partner. These diverging interests could result
in, among other things, exposing us to liabilities of the joint venture in
excess of our proportionate share of these liabilities. The partition rights of
each owner in a jointly owned property could reduce the value of each portion of
the divided property. In addition, the fiduciary obligation that WPC may owe to
our partner in an affiliated transaction may make it more difficult for us to
enforce our rights.
In some of our joint venture relationships with publicly registered investment
programs or other entities sponsored by WPC or one of its affiliates, we enter
into investments as tenants-in-common. This poses risks in addition to those
mentioned above. The partition rights of each co-tenant in a tenancy-in-common
could reduce the value of each portion of the divided property. In addition, the
fiduciary obligation that WPC may owe to our partner in an affiliated
transaction may make it more difficult for us to enforce our rights.
International investments involve additional risks.
We own properties in the United Kingdom, France, the Netherlands and Finland and
we may purchase additional property located outside the United States. These
investments may be affected by factors peculiar to the laws of the jurisdiction
in which the property is located. These laws may expose us to risks that are
different from and in addition to those commonly found in the United States.
Foreign investments could be subject to the following risks:
- changing governmental rules and policies;
- enactment of laws relating to the foreign ownership of property and
laws relating to the ability of foreign persons or corporations to
remove profits earned from activities within the country to the
person's or corporation's country of origin;
- variations in the currency exchange rates;
- adverse market conditions caused by changes in national or local
economic conditions;
- changes in relative interest rates;
- change in the availability, cost and terms of mortgage funds resulting
from varying national economic policies;
- changes in real estate and other tax rates and other operating expenses
in particular countries;
- changes in land use and zoning laws; and
- more stringent environmental laws or changes in such laws.
We may incur costs to finish build-to-suit properties.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Oftentimes,
completion risk, cost overruns and on-time delivery are the obligations of the
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process we may be required to incur project costs to complete all or part of the
project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio returns.
-10-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. Properties.
Set forth below is certain information relating to CPA(R):14's properties owned
as of December 31, 2003.
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM TERM
- -----------------------------------------------------------------------------------------------------------------------------------
CARREFOUR FRANCE, SAS (3)
Boe, Carpiquet, Le Mans,
Vendin-le-Vieil, Lagnieu,
Luneville, and St.
Germain du 100% 2,973,115 $ 2.43 $8,699,513(4) INSEE(5) Mar. 2011 None
Puy, France
Lieusaint, France 100% 100,561 19.52 1,962,601(4) INSEE(5) Jun. 2011 None
Le Mans, France 100% 840,974 3.44 2,896,413(4) INSEE(5) Jul. 2012 None
--------- ----------
Total: 3,914,650 13,558,527
STARMARK CAMHOOD, L.L.C. (3)
Tampa and Boca Raton, FL;
Newton, MA; Bloomington (2),
Brooklyn Center, Bumsville, 41% interest in a
Eden Prairie (2), Fridley, limited liability
Minnetonka and St. Louis Park, company owning
MN; Albuquerque, NM (4) land and buildings(5) 1,652,154 11.06 7,491,683 CPI Feb. 2023 Feb. 2053
NORTEL NETWORKS LIMITED(3)
Richardson, TX 100% 281,758 18.77 5,287,500 Stated Dec. 2016 Dec. 2031
PETSMART, INC. (3)
Phoenix, AZ; Westlake Village,
CA; Boca Raton, Lake Mary,
Tallahassee, Plantation, FL;
Evanston, IL; Braintree, MA; 70% interest
Oxon Hill, MD; Flint, MI; in two limited
Fridley, MN; Dallas, Southlake, partnerships
TX owning land and
buildings(5) 946,177 7.68 5,083,924 Stated Nov. 2021 Nov. 2041
ATRIUM COMPANIES, INC. (3)
Dallas and
Greenville, TX 100% 823,713 2.13 1,757,940 CPI Nov. 2019 Nov. 2029
Welcome, NC; Murrysville, PA;
Wylie, TX 100% 826,702 3.38 2,791,356 CPI Nov. 2021 Nov. 2031
--------- ----------
Total: 1,650,415 4,549,296
CLEAR CHANNEL COMMUNICATIONS, INC. (3)
New York, NY 40% interest in a
limited partnership
owning land and
buildings 227,685 47.94 4,365,725 Stated Sep. 2020 Sep. 2040
ADVANCE PARADIGM, INC. (3)
Scottsdale, AZ 100% 354,888 12.12 4,300,000 Fair value Sep. 2021 Sep. 2051
TRUSERV CORPORATION (3)
Kingman, AZ; Springfield, OR; 35% interest in
Fogelsville, PA; Jonesboro, GA; three limited
Kansas City, MI; Woodland, partnerships
CA; Corsicana, TX owning land and
buildings 3,628,160 3.31 4,202,502 Stated Dec. 2022 Nov. 2042
FEDERAL EXPRESS CORPORATION(3)
Collierville, TN 60% interest in
-11-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM TERM
- -----------------------------------------------------------------------------------------------------------------------------------
a limited
liability
company
owning land
and building
TOWER AUTOMOTIVE(3)
Granite City, IL; Clinton
Township, MI; Kendallville,
IN; Upper Sandusky, OH 100% 1,047,400 3.72 3,895,126 CPI Apr. 2020 Apr. 2040
KATUN CORPORATION(3)
Davenport, IA; Bloomington, 100% 343,423 8.65 2,971,350 CPI Jul. 2022 Jul. 2042
Gorinchem, NT 100% 133,500 6.38 851,667(4) CPI Jul. 2022 Jul. 2042
--------- ---------
476,923 3,823,017
GALYAN'S TRADING COMPANY(3)
Kennesaw, GA; Plainfield, IN;
Leawood, KS 100% 401,252 8.60 3,451,027 Stated Dec. 2020 Dec. 2060
COLLINS & AIKMAN CORPORATION(3)
Manchester, MI; Albemarle,
Farmville and Old Fort, NC;
Holmesville, OH; Springfield,
TN 100% 1,948,586 1.72 3,347,485 CPI Sep. 2021 Sep. 2041
PERKINELMER, INC.(3)
Finnish
Turku, Finland 100% 266,310 12.43 3,311,137 CPI Dec. 2021 Dec. 2031
ADVANCED MICRO DEVICES, INC. (3)
33 1/3%
interest in a
limited liability
company
owning land
Sunnyvale, CA and buildings 361,965 27.01 3,258,612 CPI Dec. 2018 Dec. 2038
METALDYNE COMPANY LLC(3)
Rome, GA; Niles, IL;
Plymouth, MI; Solon and
Twinsburg, OH 100% 534,501 6.08 3,250,804 CPI Jun. 2021 Jun. 2041
APPLIED MATERIALS, INC. (ETEC SYSTEMS, INC.) (3)
49.99% interest in
a building owned
by a limited
Hayward, CA liability company 129,000 47.43 3,058,320 CPI Sep. 2014 Jan. 2030
APW NORTH AMERICA, INC. (3)
Monon, IN; Champlin, MN;
Robbinsville, NJ; North Salt
Lake City, UT; Radford, VA 100% 816,665 3.58 2,960,775 CPI May 2017 May 2027
AMERIX CORP.(3)
Columbia, MD 100% 160,000 15.61 2,497,022 CPI Feb. 2017 Feb. 2037
BUFFETS, INC.(3)
Eagan, MN 100% 154,394 14.68 2,266,366 CPI Sep. 2020 Sep. 2040
-12-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM TERM
- -----------------------------------------------------------------------------------------------------------------------------------
GERBER SCIENTIFIC, INC.(3)
South Windsor (2) and
Manchester, CT 100% 347,500 6.49 2,255,324 CPI Jul. 2018 Jul. 2038
CELESTICA CORPORATION(3)
Rochester, MN 100% 204,846 10.71 2,193,900 CPI Jul. 2017 Jul. 2026
WADDINGTON NORTH AMERICA, INC.(3)
City of Industry, CA;
Florence, KY; Chemsford,
MA; Lancaster, TX 100% 390,720 5.61 2,192,100 CPI Apr. 2021 Apr. 2041
CHECKFREE HOLDINGS, INC.(3)
Norcross, GA 50% interest in
a limited
liability
company
owning land
and building 220,676 19.29 2,128,373 CPI Dec. 2015 Dec. 2015
NEXPAK CORPORATION(3)
Duluth, GA 100% 221,374 5.93 1,313,000 CPI Mar. 2021 Mar. 2041
Helmond, The Netherlands
100% 117,000 6.33 740,974(4) CPI Jun. 2021 Jun. 2041
------- ---------
338,374 2,053,974
SPECIAL DEVICES, INC.(3)
Moorpark, CA; Mesa, AZ 50% 249,276 16.36 2,038,513 CPI Jun. 2021 Jun. 2041
MCLANE COMPANY, INC.(3)
Shawnee, KS; Burlington, NJ; 60% interest in
Manassas, VA a two limited
liability
companies
owning land and
buildings 539,428 6.25 2,021,600 CPI Nov. 2015 Nov. 2025
STELLEX TECHNOLOGIES, INC.(3)
Valencia, CA; North
Amityville, NY 100% 281,889 7.04 1,983,646 CPI Feb. 2020 Feb. 2040
CAREER EDUCATION CORPORATION
Upper Saucon Township, PA 100% 92,782 21.20 1,966,752 CPI Jun. 2023 Jun. 2043
BEST BUY CO., INC.
Torrance, CA 100% 102,470 19.00 1,946,930 Stated Jan. 2005 Jan. 2010
INSTITUTIONAL JOBBERS COMPANY(3)
Valdosta, GA; Johnson City,
TN 100% 411,417 4.72 1,942,159 Stated Dec. 2019 Dec. 2028
BUILDERS FIRSTSOURCE, INC.(3)
Harrisburg, NC 100% 174,000 6.04 1,051,102 CPI Jun. 2020 Jun. 2030
Norcross, GA; Elkwood, VA; 60% interest in
Cincinnati, OH a limited
partnership 389,261 3.56 830,626 CPI Jan. 2016 Jan. 2037
------- ---------
-13-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM TERM
- -----------------------------------------------------------------------------------------------------------------------------------
owning land
and buildings
Total: 563,261 1,881,728
RAVE REVIEWS CINEMAS, L.L.C.
Pensacola, FL 100% 58,916 18.42 1,085,164 CPI Sep. 2023 Sep. 2043
Port St. Lucie, FL 100% 53,104 13.89 737,839 CPI Jun. 2021 Jun. 2041
------- ---------
Total: 112,020 1,823,003
GIBSON GUITAR CORP. (3)
Bozeman, MT; Elgin, IL; 82.5% interest
Nashville, TN (2) in two limited
partnerships
owning land
and buildings 336,721 6.44 1,790,239 CPI Mar. 2021 Mar. 2031
PW EAGLE, INC. (3)
Tacoma, WA; West Jordan,
UT; Perris, CA; Eugene, OR 100% 1,079,424 1.53 1,650,875 CPI Feb. 2022 Feb. 2042
AMERICAN TIRE DISTRIBUTORS, INC. (FORMERLY HEAFNER TIRE GROUP, INC.) (3)
Mauldin, SC; Charlotte, NC;
Lincolnton, NC 100% 465,588 3.53 1,644,500 CPI Mar. 2022 Mar. 2042
NEW CREATIVE ENTERPRISES, INC. (3)
Milford, OH 100% 437,000 3.73 1,629,114 CPI Sep. 2021 Sep. 2046
CONSOLIDATED THEATERS HOLDING, G.P. (3)
Midlothian, VA 100% 80,730 19.21 1,550,489 Stated Aug. 2020 Aug. 2030
PRODUCTION RESOURCE GROUP
Las Vegas, NV 100% 127,796 7.68 979,034 CPI Mar. 2014 Mar. 2024
Burbank and
Los Angeles, CA 100% 49,374 8.80 434,305 CPI Oct. 2014 Oct. 2024
------- ---------
Total: 177,170 1,413,339
COMPUCOM SYSTEMS, INC. (3)
Dallas, TX 33 1/3% interest
in a limited
liability
company
owning land and
building 255,378 16.54 1,408,043 CPI Apr. 2019 Apr. 2029
FITNESS HOLDINGS, INC. (3)
Salt Lake City, UT 100% 36,851 16.80 618,949 CPI May 2020 May 2035
St. Charles, MO(3) 100% 38,432 19.46 747,790 CPI Dec. 2020 Dec. 2035
------ ---------
Total: 75,283 1,366,739
BARJAN PRODUCTS L.L.C. (3)
Rock Island, IL 100% 241,950 5.44 1,316,906 Stated Oct. 2016 Oct. 2026
UTI HOLDINGS, INC. AND NASCAR
TECHNICAL INSTITUTE, INC.
Mooresville, NC 100% 144,995 8.91 1,291,727 Fair value Sep. 2022 Sep. 2043
THE BON-TON DEPARTMENT STORES, INC. (3)
York, PA (2) 100% 301,337 4.25 1,281,674 CPI Dec. 2020 Dec. 2046
-14-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM TERM
- -----------------------------------------------------------------------------------------------------------------------------------
METAGENICS, INC.
San Clemente, CA 100% 88,070 14.45 1,272,924 Stated Aug. 2011 Aug. 2021
TEXTRON, INC. (3)
Gilbert, AZ 50% interest in a
limited liability
company owning
land and
building 243,370 10.19 1,239,739 CPI Jan. 2019 Jan. 2039
LINCOLN TECHNICAL INSTITUTE, INC. (3)
Union, NJ; Grand Prairie, TX;
Allentown and Philadelphia, PA 100% 158,202 7.56 1,196,485 CPI Dec. 2016 Dec. 2016
MERIDIAN AUTOMOTIVE SYSTEMS, INC. (3)
Salisbury, NC 100% 333,830 3.51 1,170,830 Stated Sep. 2021 Sep. 2041
BLP GROUP PLC(3)
Doncaster, South Yorkshire,
United Kingdom 100% 225,998 4.56 1,031,530 Stated Jan. 2031 Jan. 2031
INTERNATIONAL GARDEN PRODUCTS, INC. (3)
Lakewood, NJ 100% 218,201 4.15 905,674 CPI Dec. 2021 Dec. 2031
TOWNE HOLDINGS, INC. (3)
Elk Grove Village, IL 100% 46,672 19.08 890,591 CPI Oct. 2020 Oct. 2040
LENNAR CORPORATION(3)
Houston, TX 100% 52,144 13.73 715,750 CPI Oct. 2015 Oct. 2035
BRASHEAR LP (3)
Pittsburgh, PA 100% 146,103 4.79 699,200 CPI Dec. 2013 Dec. 2023
TRANSCORE HOLDINGS INC. (3)
Albuquerque, NM 100% 74,747 8.69 649,881 Stated Sep. 2015 Sep. 2030
EARLE M. JORGENSEN COMPANY(3)
Kansas City, MO 100% 120,855 5.19 627,059 Stated Mar. 2020 Mar. 2035
MCCOY, INC. (3)
90% interest in a
limited
Houston, TX partnership
owning land and
building 140,000 4.26 536,760 Stated Sep. 2007 Sep. 2007
WEST UNION CORPORATION(3)
Tempe, AZ 100% 116,922 4.55 532,350 Stated Jan. 2015 Jan. 2035
NEWPARK RESOURCES, INC.
Lafayette, LA 100% 34,425 11.24 384,873 CPI Nov. 2017 Nov. 2027
-15-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR TERM TERM
- -----------------------------------------------------------------------------------------------------------------------------------
VARIOUS TENANTS(3)
Nashville, TN 82.5% interest in
a limited
partnership Sep. 2004 Sep. 2004
owning land and through through
building 23,178 12.69 294,217 Stated Feb. 2008 Feb. 2008
WASATCH SUMMIT
Lindon, UT 100% 20,100 12.00 241,200 CPI Mar. 2008 Mar. 2013
TELESERVICES DIRECT
Daleville, IN 100% 11,343 12.00 136,116 CPI Jul. 2005 Jul. 2007
BIG O DEVELOPMENT, INC.
Torrance, CA 100% 4,500 22.80 102,600 CPI Jun. 2012 Jun. 2022
VACANT
Daleville, IN; 100% 95,009
Gardena, CA 100% 87,693
60% interest in a
limited liability
Grand Rapids, MI company owning
land and building 107,677
Lindon, UT 100% 39,186
1. Percentage of ownership in land and building, except as noted. Fee
simple ownership interest unless otherwise noted.
2. Share of Current Annual Rents is the product of the Square Footage, the
Rent per Square Foot, and the Ownership Interest percentage.
3. These properties are encumbered by mortgage notes payable.
4. Based on exchange rates at December 31, 2003.
5. INSEE construction index, an index published quarterly by the French
Government.
6. Annual Rent will be based on value of tenant improvements upon
completion.
Item 3. Legal Proceedings.
As of the date hereof, CPA(R):14 is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2003 to a vote of security holders, through the solicitation of proxies or
otherwise.
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to CPA(R):14's common equity is hereby incorporated by
reference to page 32 of CPA(R):14's Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of
CPA(R):14's Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 2 to 11 of CPA(R):14's Annual Report contained in Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
Market risk is the exposure to loss resulting from changes in interest rates,
credit spreads, foreign currency exchange rates and equity prices. In pursuing
our business plan, the primary market risks to which we are exposed are interest
rate risk and currency exchange rates.
The value of our 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 our ability to refinance our
debt when balloon payments are scheduled.
Approximately $674,134,000 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 December 31, 2003 ranged
from 6.09% to 8.85%. The interest rate on the variable rate debt as of December
31, 2003 ranged from 3.12% to 6.49%.
2004 2005 2006 2007 2008 Thereafter Total Fair Value
(in thousands) ---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 10,513 $ 11,534 $ 12,500 $ 13,449 $ 19,613 $606,525 $674,134 $677,999
Weighted average
interest rate 7.17% 7.17% 7.17% 7.18% 7.33% 7.46%
Variable rate debt $ 580 $ 605 $ 624 $ 643 $ 662 $ 24,927 $ 28,041 $ 28,041
CPA(R):14 conducts business in the United Kingdom, Finland, France and The
Netherlands. The foreign operations were not significant to CPA(R):14's
consolidated financial position, results of operations or cash flows during the
three-year period ended December 31, 2003. Realized and unrealized foreign
currency translation gains of $349 and $691, respectively, for the year ended
December 31, 2003 are included in the accompanying consolidated financial
statements and are due to changes in foreign currency on accrued interest
receivable on notes receivable from wholly-owned subsidiaries. CPA(R):14 was not
subject to material foreign currency exchange rate risk from the effects that
exchange rate movements of foreign currencies may have on its future costs or on
future cash flows it may receive from its foreign subsidiaries. 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 rates.
One lease provides CPA(R):14 the option to receive up to $77,500 of its rents in
U.S. dollars or the functional local currency. Under accounting principles
generally accepted in the United States, this option is considered a derivative
instrument. Scheduled future minimum rents, exclusive of renewals, under
non-cancelable leases resulting from CPA(R):14's foreign operations are as
follows:
-17-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
2004 2005 2006 2007 2008 Thereafter Total
(in thousands) ---- ---- ---- ---- ---- ---------- -----
Rental income(1) $ 18,223 $ 18,223 $ 18,223 $ 18,223 $ 18,223 $ 98,337 $189,452
Interest income from direct financing
leases(1) $ 1,127 $ 1,127 $ 1,127 $ 1,232 $ 1,232 $ 38,744 $ 44,589
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2003 and thereafter are as follows:
2004 2005 2006 2007 2008 Thereafter Total
(in thousands) ---- ---- ---- ---- ---- ---------- -----
Fixed rate debt (1) $ 3,996 $ 4,406 $ 4,798 $ 5,127 $ 5,467 $115,801 $139,595
Variable rate debt(1) $ 84 $ 88 $ 94 $ 101 $ 108 $ 6,082 $ 6,557
(1) Based on December 31, 2003 exchange rate. The mortgage notes are
denominated in the functional currency of the country of each property.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data of
CPA(R):14 are hereby incorporated by reference to pages 12 to 31 of CPA(R):14's
Annual Report contained in Appendix A:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets at December 31, 2003 and 2002.
(iii) Consolidated Statements of Income for the years ended December 31,
2003, 2002, and 2001.
(iv) Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2001, 2002, and 2003.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001.
(vi) Notes to Consolidated Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
Item 9A. 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 December 31, 2003.
The Company's disclosure controls and procedures include the Company's
controls and other procedures designed to ensure that information
required to be disclosed in this and other reports filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is
accumulated and communicated to the Company's management, including its
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 chief
executive officers and chief financial officer have concluded that the
Company's disclosure controls (as defined in pursuant to Rule 13a-14(c)
promulgated under the Exchange Act) are sufficiently effective to
ensure that the information required to be disclosed by the Company in
the reports it files under the Exchange Act is recorded, processed,
summarized and reported with adequate timeliness. There have been no
significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to
the date of the evaluation referred to above.
-18-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of
CPA(R):14's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of
CPA(R):14's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of
CPA(R):14's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
CPA(R):14's fiscal year, and is hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services.
This information will be contained in CPA(R):14's definitive Proxy Statement
with respect to CPA(R):14's Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
CPA(R):14's fiscal year, and is hereby incorporated by reference.
-19-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a
part of this Report:
Report of Independent Auditors.
Consolidated Balance Sheets, December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended
December 31, 2003, 2002, 2001.
Consolidated Statement of Shareholders' Equity for the
years ended December 31, 2001, 2002, and 2003.
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated
by reference to pages 12 to 31 of CPA(R):14's Annual Report
contained in Appendix A.
(a) 2. Financial Statement Schedule:
The following schedules are filed as a part of this Report:
Report of Independent Auditors.
Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 2003.
Schedule III of Registrant is contained on pages 32 to 38
of this Form 10-K.
Financial Statement Schedules other than those listed above
are omitted because the required information is given in the
Consolidated Financial Statements, including the Notes
thereto, or because the conditions requiring their filing do
not exist.
-20-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents
other than those designated as being filed herewith are incorporated
herein by reference.
Exhibit
No. Description Method of Filing
--- ----------- ----------------
3.1 Articles of Amendment and Restatement. Exhibit 3(A) to Registration Statement
(Form S-11) No. 333-76761
3.1(2) Amended and Restated Articles of Incorporation of Registrant Exhibit 3.1(1) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
3.2 Amended Bylaws of Registrant. Exhibit 3(B) to Registration Statement
(Form S-11) No. 333-31437
3.2(2) Form of Bylaws of Registrant Exhibit 3.2(2) to Post-Effective
Amendment No. 1 dated April 28, 2000
3.2(3) Form of Bylaws of Registrant Exhibit 3.2(2) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
4.1 Dividend Reinvestment and Share Purchase Plan Exhibit 4.1 to Registrant's Form S-3D
dated July 22, 2002
5.1 Opinion of Reed Smith LLP Exhibit 5.1 to Registrant's Form S-3D
dated July 22, 2002
8.1(3) Opinion of Reed Smith LLP as to certain tax matters Exhibit 8.1 to Registrant's Form S-3D
dated July 22, 2002
10.1 Amended Advisory Agreement. Exhibit 10.1 to Registration Statement
(Form S-11) No. 333-31437
10.1(2) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.1 to Registrant's Form 8-K
QRS 14-4, as Landlord, and Best Buy Co. Inc., as Tenants. Dated February 2, 1999
10.2 Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.1 to Registrant's Form 8-K
QRS 14-4, as Landlord, and Best Buy Co. Inc., as Tenants. dated February 2, 1999
10.2(2) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2 (2) to Registration
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Statement (Form S-11) No. 333- 76761
10.2(3) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2 (3) to Registrant's Form
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Post AM dated April 19, 1999
10.2(4) Lease Agreement date July 27, 19998 by and between Best (CA) Exhibit 10.2 to Registrant's Form 10-k
QRS 14-4, as Landlord, and Best Buy Co. Inc. as Tenants. for the year ended December 31, 1998,
dated March 30, 1999
-21-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Exhibit
No. Description Method of Filing
--- ----------- ----------------
10.2(5) Lease Agreement dated February 3, 1998 by and between ESI Exhibit 10.2 to Registrant's Form 8-K
(CA) QRS 12-6 INC., as Landlord and Etec Systems, Inc. as dated February 2, 1999
Tenants.
10.2(6) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2(3) to Registrant's
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Post-Effective Amendment No. 1 dated
April 28, 2000
10.2(7) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2(3) to Registrant's
QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Post-Effective Amendment No. 2 dated
November 22, 2000
10.3(2) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(2) to Registration
(CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Statement (Form S-11) No 333- 76761
Tenants.
10.3(4) Lease Agreement dated February 3, 1998 by and between ESI Exhibit 10.3 to Registrant's Form 10-K
(CA) QRS 12-6 Inc., as Landlord and ETEC Systems, Inc., as for the year ended December 31, 1998
Tenants. dated March 30, 1999
10.3 (5) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.3 to Registrant's form 8-K
QRS 14-16, as Landlord, and Metagenics Incorporated, as dated February 2, 1999
Tenants.
10.3(6) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(3) to Registrant's
(CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
10.3(7) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(3) to Registrant's
(CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.4 Lease Agreement dated July 29, 1998 by and between META (CA) Exhibit 10.3 to Registrant's Form 8-K
QRS 14-16, as Landlord, and Metagenics Incorporated, as dated February 2, 1999
Tenants.
10.4(2) Lease Agreement dated July 29, 1998 by and between META (CA) Exhibit 10.4(2) to Registration
QRS 14-16, as Landlord, and Metagenics Incorporated, as Statement (Form S-11) No. 333- 76761
Tenants.
10.4(3) Lease Agreement dated July 29, 1998 by and between META (CA) Exhibit 10.4 (3) to Registrant's Post
QRS 14-16, as Landlord, and Metagenics Incorporated, as Effective Amendment No. 2 to Form S-11
Tenants. dated April 19, 1999
10.4(4) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.4 to Registrant's Form 10K
QRS 14-16, as Landlord, and Metagenics Incorporated, as for the year ended December 31, 1999,
Tenants. dated March 30, 1999
10.4 (5) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.4 to Registrant's Form 8-K
QRS 14-3, INC., as Landlord, and Burlington Motor Carrier as dated February 2, 1999
Tenant.
10.4(6) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.4(3) to Registrant's
QRS 14-16, as Landlord, and Metagenics Incorporated, as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
-22-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Exhibit
No. Description Method of Filing
--- ----------- ----------------
10.4(7) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.4(3) to Registrant's
QRS 14-16, as Landlord, and Metagenics Incorporated, as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.5(2) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5 (2) (Form S-11) No. 333-
QRS 14-3, as Landlord, and Burlington Motor Carrier Inc., as 76761
Tenants.
10.5(3) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5 to Registrant's Post
QRS 14-3, as Landlord, and Burlington Motor Carrier as Effective Amendment No. 2 dated April
Tenants. 19, 1999
10.5(4) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5 to Registrant's Form 10-K
QRS 14-3, INC., as Landlord, and Burlington Motor Carrier for the year ended December 31, 1998,
Inc., as Tenants. dated March 30, 1999
10.5(5) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.5 to Registrant's Form 8-k
(MO) QRS 14-10, Inc., as Landlord, and The Benjamin Ansehl dated February 2, 1999
Co., as Tenants
10.5(6) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5(3) to Registrant's
QRS 14-3, as Landlord, and Burlington Motor Carrier Inc., as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
10.5(7) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.5(3) to Registrant's
QRS 14-3, as Landlord, and Burlington Motor Carrier Inc., as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.6 Lease Agreement dated December 22, 1998 by and between Exhibit 10.6 to Registrant's Form 8-K
Conductor (CA) QRS 14-11, Inc., as Landlord, and Advance dated February 2, 1999
10.6(2) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(2) to Registration
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Statement (Form S-11) No. 333- 76761
Tenants
10.6(3) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(3) to Registrant's Post
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Effective Amendment to Form S-11 Date
Tenants. April 19, 1999
10.6 (5) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6 to Registrant's Form 10-K
(MO) QRS 14-10, Inc., as Landlord, and The Benjamin Ansehl for the year ended December 31, 1998,
Co., as Tenants. dated February 2,1999
10.6(6) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(3) to Registrant's
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Post-Effective Amendment No. 1 dated
Tenants. April 28, 2000
10.6(7) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(3) to Registrant's
(MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Post-Effective Amendment No. 2 dated
Tenants. November 22, 2000
10.7 Lease Agreement dated December 22, 1998 by and between Exhibit 10.6 to Registrant's Form 8-K
Conductor (CA) QRS 14-11, Inc., as Landlord, and Advance dated February 2, 1999
Micro Devices, Inc., as Tenants.
-23-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Exhibit
No. Description Method of Filing
--- ----------- ----------------
10.7(2) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 (2) to Registration
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Statement (Form S-11) No. 333- 76761
Devices, Inc., as Tenants.
10.7(3) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 (3) to Registrant's Post
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Effective Amendment No. 2 dated April
Devices, Inc., as Tenants. 19, 1999
10.7(4) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 to Registrant's Form 10-K
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro for year ended December 31, 1998, dated
Devices, Inc. as Tenants. March 30, 1999
10.7(5) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.7 to Registrant's Form 8-K,
(PA) QRS 14-12, Inc. as Landlord, and Contraves Brashear dated February 2, 1999
Systems L. P., as Tenants
10.7(6) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7(3) to Registrant's
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Post-Effective Amendment No. 1 dated
Devices, Inc. as Tenants. April 28, 2000
10.7(7) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7(3) to Registrant's
Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Post-Effective Amendment No. 2 dated
Devices, Inc. as Tenants. November 22, 2000
10.8(2) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8 (2) to Registration (Form
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, S-11) No. 333- 76761
L.P., as Tenants.
10.8(3) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8 (3) to Registrant's Post
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, Effective Amendment to Form S-11 dated
L.P., as Tenants. April 19, 1999
10.8(4) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8(3) to Registrant's
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, Post-Effective Amendment No. 1 dated
L.P., as Tenants. April 28, 2000
10.8(5) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8(3) to Registrant's
(PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, Post-Effective Amendment No. 2 dated
L.P., as Tenants. November 22, 2000
10.28(4) Form of Sales Agency Agreement. Exhibit 10.28(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.28(5) Form of Sales Agency Agreement. Exhibit 10.28(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
10.29(4) Form of Selected Dealer Agreement. Exhibit 10.29(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.29(5) Form of Selected Dealer Agreement. Exhibit 10.29(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
-24-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Exhibit
No. Description Method of Filing
--- ----------- ----------------
10.30(1) Advisory Agreement. Exhibit 10.30(1) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.30(2) Advisory Agreement. Exhibit 10.30(1) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
10.31(4) Form of Wholesaling Agreement. Exhibit 10.31(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.31(5) Form of Wholesaling Agreement. Exhibit 10.31(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
10.32(4) Form of Escrow Agreement. Exhibit 10.32(4) to Registrant's
Post-Effective Amendment No. 1 dated
April 28, 2000
10.32(5) Form of Escrow Agreement. Exhibit 10.32(4) to Registrant's
Post-Effective Amendment No. 2 dated
November 22, 2000
21.1 Subsidiaries of Registrant as of March 11, 2004 Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
23.2 Consent of PricewaterhouseCoopers LLP Exhibit 23.2 to Registrant's Form S-3D
dated July 22, 2002
31.1 Certification of Co-Chief Executive Officers Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith
32.1 Section 906 Certification of Co-Chief Executive Officers Filed herewith
32.2 Section 906 Certification of Chief Financial Officer Filed herewith
(b) Reports on Form 8-K
During the quarter ended December 31, 2003 the Registrant was not
required to file any reports on Form 8-K.
-25-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
a Maryland corporation
3/10/04 BY: /s/ John J. Park
- -------- ----------------------------------
Date John J. Park
Managing Director and Chief
Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
3/10/04 BY: /s/ William Polk Carey
- -------- ----------------------------------
Date William Polk Carey
Chairman of the Board, Co-Chief
Executive Officer and Director
(Principal Executive Officer)
3/10/04 BY: /s/ Gordon F. DuGan
- -------- ----------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board,
Co-Chief Executive Officer,
Senior Managing Director and Chief
Acquisitions Officer
3/10/04 BY: /s/ Gordon J. Whiting
- -------- ----------------------------------
Date Gordon J. Whiting
President
3/10/04 BY: /s/ Charles E. Parente
- -------- ----------------------------------
Date Charles E. Parente
Director
3/10/04 BY: /s/ William Ruder
- -------- ----------------------------------
Date William Ruder
Director
3/10/04 BY: /s/ George E. Stoddard
- -------- ----------------------------------
Date George E. Stoddard
Director
3/10/04 BY: /s/ Warren G. Wintrub
- -------- ----------------------------------
Date Warren G. Wintrub
Director
3/10/04 BY: /s/ John J. Park
- -------- ----------------------------------
Date John J. Park
Managing Director and Chief
Financial Officer
(Principal Financial Officer)
3/10/04 BY: /s/ Claude Fernandez
- -------- ----------------------------------
Date Claude Fernandez
Managing Director and Chief
Accounting Officer
(Principal Accounting Officer)
-26-
REPORT of INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Corporate Property Associates 14 Incorporated:
Our audits of the consolidated financial statements referred to in our report
dated March 10, 2004 appearing in the 2003 Annual Report to Shareholders of
Corporate Property Associates 14 Incorporated (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 10, 2004
-27-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs Increase
Capitalized (Decrease)
Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- -------------- ----
Operating Method:
Vacant trucking facility in
Daleville, Indiana $ 2,100,000 $ 5,439,267 $ (3,810,000) $ 2,100,000
Retail store leased to
BestBuy Co., Inc. 13,059,980 6,933,851 $ 45,914 13,059,980
Research and development
facility leased to
Metagenics, Inc. 2,390,000 8,957,798 2,390,000
Manufacturing facility
leased to Brashear LP $ 3,903,265 620,000 6,186,283 620,000
Manufacturing and
distribution facilities
leased to Production
Resource Group L.L.C 7,299,108 3,860,000 8,263,455 3,860,000
Vacant
industrial/manufacturing
facilities in Gardena,
California 2,882,785 2,340,000 3,942,723 (2,900,000) 2,340,000
Distribution and warehouse
facility leased to McLane
Company, Inc. 20,944,044 3,604,000 8,613,172 21,321,241 3,604,000
Distribution and warehouse
facility leased to The
Retail Distribution Group,
Inc. 5,826,970 740,000 3,042,828 7,543,357 740,000
Multiplex motion picture
theater leased to
Consolidated Theaters
Holding, G.P. 2,021,698 3,515,000 3,515,000
Office and warehouse
facility leased to
Builders FirstSource, Inc. 13,787,176 3,929,891 10,397,514 8,476,016 3,945,275
Office and research facility
leased to Amerix
Corporation 13,870,677 2,622,500 20,232,580 3,113,719 2,622,500
Industrial and manufacturing
facility leased to Atrium
Companies, Inc. 13,748,732 1,596,442 23,910,092 322,771 1,596,442
Gross Amount at which Carried
at Close of Period
------------------
Life on which
Depreciation in
Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Vacant trucking facility in
Daleville, Indiana $ 1,629,267 $ 3,729,267 $ 563,065 June 29, 1998 40 yrs.
Retail store leased to
BestBuy Co., Inc. 6,979,765 20,039,745 951,899 July 28, 1998 40 yrs.
Research and development
facility leased to
Metagenics, Inc. 8,957,798 11,347,798 947,267 July 29, 1998 40 yrs.
Manufacturing facility
leased to Brashear LP 6,186,283 6,806,283 779,729 December 28, 1998 40 yrs.
Manufacturing and
distribution facilities
leased to Production March 31, 1999 and
Resource Group L.L.C 8,263,455 12,123,455 959,655 October 15, 1999 40 yrs.
Vacant
industrial/manufacturing
facilities in Gardena,
California 1,042,723 3,382,723 1,086 July 19, 1999 40 yrs.
Distribution and warehouse
facility leased to McLane
Company, Inc. 29,934,413 33,538,413 2,885,057 August 18, 1999 40 yrs.
Distribution and warehouse
facility leased to The
Retail Distribution Group,
Inc. 10,586,185 11,326,185 1,088,509 August 18, 1999 40 yrs.
Multiplex motion picture
theater leased to
Consolidated Theaters
Holding, G.P. 3,515,000 September 22, 1999 N/A
Office and warehouse
facility leased to June 29, 1999 and
Builders FirstSource, Inc. 18,858,146 22,803,421 1,359,107 December 20, 2001 40 yrs.
Office and research facility
leased to Amerix
Corporation 23,346,299 25,968,799 2,279,737 November 1, 1999 40 yrs.
Industrial and manufacturing
facility leased to Atrium November 18, 1999 and
Companies, Inc. 24,232,863 25,829,305 1,498,217 December 1, 2001 40 yrs.
28
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs Increase
Capitalized (Decrease)
Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- -------------- ----
Operating Method:
Retail and service facility
leased to Fitness
Holdings, Inc. 6,980,539 2,920,000 8,659,950 680,271 2,920,000
Office and research facility
leased to West Union
Corporation 3,261,612 940,000 4,557,382 12,498 940,000
Office and warehouse
facility leased to Barjan
Products, LLC 7,067,867 500,000 9,944,545 1,887,506 500,000
Industrial and manufacturing
facility leased to Stellex
Technologies, Inc. 12,968,598 2,932,000 16,397,988 17,904 2,932,000
Manufacturing and
distribution facility
leased to APW North
America Inc. 16,968,462 4,580,000 24,844,084 14,784 4,580,000
Distribution and warehouse
facility leased to
Langeveld International,
Inc. 6,582,526 710,000 4,531,037 3,438,798 710,000
Retail and services facility
leased to Galyan's Trading
Company 19,118,614 7,330,000 22,305,554 4,177,399 7,830,000
Land leased to Advanced
Paradigm, Inc. 8,670,575 14,600,000 14,600,000
Industrial and manufacturing
facility leased to
Transcore Holdings, Inc. 3,414,617 1,490,000 4,635,655 7,176 1,490,000
Office and research facility
leased to Lennar
Corporation 4,880,639 570,000 6,759,843 570,000
Office and research facility
leased to Buffets, Inc. 11,290,781 4,225,000 15,518,481 1,420 4,225,000
Distribution and warehouse
facility leased to Earle
M. Jorgensen Company 3,718,948 570,000 5,869,790 39,219 570,000
Gross Amount at which Carried
at Close of Period
------------------
Life on which
Depreciation in
Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Retail and service facility
leased to Fitness December 29, 1999 and
Holdings, Inc. 9,340,221 12,260,221 771,389 December 28, 2000 40 yrs.
Office and research facility
leased to West Union
Corporation 4,569,880 5,509,880 433,187 January 12, 2000 40 yrs.
Office and warehouse
facility leased to Barjan
Products, LLC 11,832,051 12,332,051 912,625 February 3, 2000 40 yrs.
Industrial and manufacturing
facility leased to Stellex
Technologies, Inc. 16,415,892 19,347,892 1,590,290 February 29, 2000 40 yrs.
Manufacturing and
distribution facility
leased to APW North
America Inc. 24,858,868 29,438,868 2,252,835 May 30, 2000 40 yrs.
Distribution and warehouse
facility leased to
Langeveld International,
Inc. 7,969,835 8,679,835 621,125 June 29, 2000 40 yrs.
Retail and services facility
leased to Galyan's Trading
Company 25,982,953 33,812,953 2,243,637 June 29, 2000 40 yrs.
Land leased to Advanced
Paradigm, Inc. 14,600,000 September 21, 2000 N/A
Industrial and manufacturing
facility leased to
Transcore Holdings, Inc. 4,642,831 6,132,831 382,066 September 25, 2000 40 yrs.
Office and research facility
leased to Lennar
Corporation 6,759,843 7,329,843 556,279 September 26, 2000 40 yrs.
Office and research facility
leased to Buffets, Inc. 15,519,901 19,744,901 1,277,141 September 28, 2000 40 yrs.
Distribution and warehouse
facility leased to Earle
M. Jorgensen Company 5,909,009 6,479,009 486,132 September 29, 2000 40 yrs.
29
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs Increase
Capitalized (Decrease)
Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- -------------- ----
Operating Method:
Distribution and warehouse
facility leased to
Institutional Jobbers
Company 12,876,605 650,000 16,889,267 409,990 650,000
Land leased to Towne
Holdings, Inc. 2,319,413 4,100,000 4,100,000
Office facility leased to
Newpark Resources, Inc. 2,485,358 660,000 3,004,921 660,000
Office and research facility
leased to Federal Express
Corporation 43,697,946 3,154,425 70,645,575 12,000 3,154,425
Retail, service,
distribution and warehouse
facility leased to The
Bon-Ton Stores, Inc. 7,298,110 1,974,000 10,067,885 2,900 1,974,000
Distribution and warehouse
facility leased to McCoy,
Inc. 4,032,872 1,025,000 4,530,120 9,419 1,025,000
Industrial and manufacturing
facility leased to
Metaldyne Company LLC 16,356,965 4,140,000 23,822,057 7,859 4,140,000
Retail and service facility
leased to Celestica
Corporation 12,113,470 3,348,824 9,275,468 8,941,752 3,348,824
Industrial and manufacturing
facility leased to Gerber
Scientific, Inc. 12,297,876 1,555,400 18,822,872 250,000 1,555,400
Industrial and manufacturing
facility leased to
Meridian Automotive
Systems, Inc. 7,185,542 1,370,000 2,671,897 6,298,329 1,370,000
Industrial and manufacturing
facility leased to
Waddington North America,
Inc. 10,787,739 4,398,000 13,418,144 3,723,160 4,643,000
Industrial and manufacturing
facility leased to New
Creative Enterprises, Inc. 9,809,192 2,000,000 12,869,110 2,000,000
Gross Amount at which Carried
at Close of Period
------------------
Life on which
Depreciation in
Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Distribution and warehouse
facility leased to
Institutional Jobbers
Company 17,299,257 17,949,257 1,387,936 October 6, 2000 40 yrs.
Land leased to Towne
Holdings, Inc. 4,100,000 October 30, 2000 N/A
Office facility leased to
Newpark Resources, Inc. 3,004,921 3,664,921 228,499 December 1, 2000 40 yrs.
Office and research facility
leased to Federal Express
Corporation 70,657,575 73,812,000 9,807,994 December 6, 2000 7 - 40 yrs.
Retail, service,
distribution and warehouse
facility leased to The
Bon-Ton Stores, Inc. 10,070,785 12,044,785 765,938 December 27, 2000 40 yrs.
Distribution and warehouse
facility leased to McCoy,
Inc. 4,539,539 5,564,539 345,234 December 27, 2000 40 yrs.
Industrial and manufacturing
facility leased to June 29, 2000 and
Metaldyne Company LLC 23,829,916 27,969,916 1,606,200 August 16, 2001 40 yrs.
Retail and service facility
leased to Celestica
Corporation 18,217,220 21,566,044 1,187,488 August 14, 2000 40 yrs.
Industrial and manufacturing
facility leased to Gerber
Scientific, Inc. 19,072,872 20,628,272 1,161,249 July 30, 2001 N/A
Industrial and manufacturing
facility leased to
Meridian Automotive
Systems, Inc. 8,970,226 10,340,226 457,775 November 16, 2000 40 yrs.
Industrial and manufacturing
facility leased to
Waddington North America,
Inc. 16,896,304 21,539,304 957,090 April 30, 2001 7 - 40 yrs.
Industrial and manufacturing
facility leased to New
Creative Enterprises, Inc. 12,869,110 14,869,110 737,293 September 6, 2001 40 yrs.
30
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Subsequent to (Decrease) in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- -------------- ----
Operating Method:
Retail and service facility
leased to Lincoln
Technical Institute, Inc. 6,126,905 2,486,384 7,601,852 2,486,384
Manufacturing and
distribution facility
leased to Gibson Guitar,
Inc. 11,774,386 3,900,000 17,937,226 13,947 (293,545) 3,900,000
Office and Research facility
leased to Nortel Networks
Limited 29,493,209 3,400,000 45,053,608 3,400,000
Industrial and manufacturing
facility leased to Perkin
Elmer, Inc. - Finland 24,105,314 801,195 23,389,834 81,315 9,710,691 1,136,644
Retail and service
facilities leased to
Petsmart, Inc. 42,428,290 17,100,000 54,742,917 17,100,000
Distribution and warehouse
facility leased to Nexpak
Corporation 7,678,985 2,167,000 11,445,566 5,231 2,167,000
Distribution and warehouse
facility leased to Nexpak
Corporation - Netherlands 6,331,729 2,230,224 3,360,091 2,217,842 3,161,213
Multiplex motion picture
theater leased to Rave
Review Cinemas, LLC 3,200,000 3,066,397 6,799,722 (4,112,076) 3,685,000
Office building in Lindon,
Utah partially leased to
Wasatch Summit LLC 1,390,000 1,122,716 6,154,192 1,390,000
Warehouse, distribution,
office, and industrial
facility to PW Eagle, Inc. 8,084,905 6,050,000 8,198,138 6,050,000
Distribution and Warehouse
facility leased to Heafner
Tire Group, Inc. 8,645,813 1,860,000 12,851,675 1,860,000
Warehouse and distribution
facility leased to
Carrefour France, SAS 102,310,644 15,724,087 75,210,660 9,761,339 36,248,565 23,369,118
Warehouse, distribution, and
office facility leased to
Katun Corporation 18,774,473 3,260,000 26,009,123 3,260,000
Gross Amount at which Carried
at Close of Period
------------------
Life on which
Depreciation in
Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Retail and service facility
leased to Lincoln
Technical Institute, Inc. 7,601,852 10,088,236 388,441 December 28, 2001 40 yrs.
Manufacturing and
distribution facility
leased to Gibson Guitar,
Inc. 17,657,628 21,557,628 1,248,161 March 19, 2001 40 yrs.
Office and Research facility
leased to Nortel Networks
Limited 45,053,608 48,453,608 2,299,610 December 19, 2001 40 yrs.
Industrial and manufacturing
facility leased to Perkin
Elmer, Inc. - Finland 32,846,391 33,983,035 1,687,760 December 28, 2001 40 yrs.
Retail and service
facilities leased to
Petsmart, Inc. 54,742,917 71,842,917 2,908,664 November 28, 2001 40 yrs.
Distribution and warehouse
facility leased to Nexpak
Corporation 11,450,797 13,617,797 799,072 March 28, 2001 40 yrs.
Distribution and warehouse
facility leased to Nexpak
Corporation - Netherlands 4,646,944 7,808,157 300,317 June 29, 2001 40 yrs.
Multiplex motion picture
theater leased to Rave
Review Cinemas, LLC 5,269,043 8,954,043 332,139 December 7, 2000 40 yrs.
Office building in Lindon,
Utah partially leased to
Wasatch Summit LLC 7,276,908 8,666,908 360,513 December 27, 2000 40 yrs.
Warehouse, distribution,
office, and industrial
facility to PW Eagle, Inc. 8,198,138 14,248,138 384,204 February 28, 2002 40 yrs.
Distribution and Warehouse
facility leased to Heafner
Tire Group, Inc. 12,851,675 14,711,675 577,194 March 26, 2002 40 yrs.
Warehouse and distribution
facility leased to
Carrefour France, SAS 113,575,533 136,944,651 4,696,390 March 26, 2002 40 yrs.
Warehouse, distribution, and
office facility leased to
Katun Corporation 26,009,123 29,269,123 948,231 July 5, 2002 40 yrs.
31
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Subsequent to (Decrease) in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---- --------- --------------- -------------- ----
Operating Method:
Industrial facility leased
to Katun Corporation -
Netherlands 6,847,332 2,374,404 3,864,260 1,603,239 3,013,680
Industrial facility leased
to Tower Automotive, Inc. 19,619,558 4,390,000 30,336,328 4,390,000
Educational facility leased
to Career Education Corp. 12,470,345 3,200,000 15,415,229 1,086,974 3,200,000
------------ ------------ ------------ ------------- ------------ ------------
$635,161,209 $183,653,756 $746,609,010 $ 103,615,920 $ 38,664,716 $194,449,885
============ ============ ============ ============= ============ ============
Gross Amount at which Carried
at Close of Period
------------------
Life on which
Depreciation in
Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (d) Date Acquired is Computed
----------- --------- ----- ---------------- ------------- -----------
Operating Method:
Industrial facility leased
to Katun Corporation -
Netherlands 4,828,223 7,841,903 176,854 July 5, 2002
Industrial facility leased
to Tower Automotive, Inc. 30,336,328 34,726,328 1,295,614 August 10, 2002 40 yrs.
Educational facility leased
to Career Education Corp. 16,502,203 19,702,203 219,444 August 10, 2002 40 yrs.
------------ -------------- -----------
$878,093,517 $1,072,543,402 $62,105,338
============ ============== ===========
32
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2003
Costs Capitalized Increase
Subsequent to (Decrease) in Net
Initial Cost to Company Acquisition Investments (b)
----------------------- ----------- ---------------
Description Encumbrances Land Buildings
----------- ------------ ---- ---------
Direct Financing Method:
Industrial/manufacturing
facilities leased to Atrium
Companies, Inc. 12,863,291 $ 459,608 $ 20,426,564 $ (3,191,407)
Multiplex theater facility leased
to Consolidated Theaters
Holding, G.P 6,991,965 10,818,996 $ 854,117 483,380
Office and research facility
leased to Advance Paradigm, Inc. 15,093,285 25,414,917
Distribution and warehouse
facility leased to Towne
Holdings, Inc. 2,362,503 4,172,251 3,920
Multiplex motion picture theater
leased to Rave Review Cinemas,
LLC 4,112,076 2,398,737
Manufacturing and distribution
facility leased to BLP Group plc 6,557,330 8,383,364 7,099 2,305,486
Industrial and manufacturing
facility leased to Collins and
Aikman Corporation 16,502,121 2,961,000 24,473,555 20,257
Office facility leased to UTI
Holdings, Inc. and Nascar
Technical Institute 6,643,119 1,600,000 9,275,962 130,053 (202,686)
----------- ------------ ------------ ----------- -------------
$67,013,614 $ 5,020,608 $107,077,685 $ 3,414,183 $ (605,227)
=========== ============ ============ =========== =============
Gross Amount
at which Carried at
Close of Period
---------------
Description Total Date Acquired
----------- ----- -------------
Direct Financing Method:
Industrial/manufacturing
facilities leased to Atrium
Companies, Inc. $ 17,694,765 November 18, 1999
Multiplex theater facility leased
to Consolidated Theaters
Holding, G.P 12,156,493 September 22, 1999
Office and research facility
leased to Advance Paradigm, Inc. 25,414,917 September 21, 2000
Distribution and warehouse
facility leased to Towne
Holdings, Inc. 4,176,171 October 30, 2000
Multiplex motion picture theater
leased to Rave Review Cinemas,
LLC 6,510,813 December 7, 2000
Manufacturing and distribution
facility leased to BLP Group plc 10,695,949 January 9, 2001
Industrial and manufacturing
facility leased to Collins and
Aikman Corporation 27,454,812 September 28, 2001
Office facility leased to UTI
Holdings, Inc. and Nascar
Technical Institute 10,803,329 February 11, 2002
------------
$114,907,249
============
33
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
and SUBSIDIARIES
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and
acquisition costs including legal fees, appraisal fees, title costs and
other related professional fees.
(b) The increase (decrease) in net investment is due to the amortization of
unearned income producing a constant periodic rate of return on the net
investment which is more (less) than lease payments received, foreign
currency translation adjustments, impairment losses and property sales.
(c) At December 31, 2003, the aggregate cost of real estate owned by
CPA(R):14 and its subsidiaries for Federal income tax purposes
$942,085,146.
(d)
Reconciliation of Real Estate Accounted for
-------------------------------------------
Under the Operating Method
--------------------------
December 31,
------------
2003 2002
---- ----
Balance at beginning of year $1,010,142,307 $ 799,046,644
Additions 19,988,102 189,179,533
Reclassification from real estate under construction 14,723,082 571,164
Reclassification to direct financing lease, net of
reclassification from direct financing lease (729,353) -
Foreign currency translation adjustment 28,419,264 21,344,966
-------------- --------------
Balance at close of year $1,072,543,402 $1,010,142,307
============== ==============
Reconciliation of Accumulated Depreciation
------------------------------------------
December 31,
------------
2003 2002
---- ----
Balance at beginning of year $38,682,696 $17,728,004
Depreciation expense 22,795,344 20,698,586
Reclassification to direct financing lease (236,973) -
Foreign currency translation adjustment 864,271 256,106
----------- -----------
Balance at close of year $62,105,338 $38,682,696
=========== ===========
34
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
2003 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except per share and share amounts)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
OPERATING DATA:
Revenues $128,452 $112,356 $ 67,141 $ 42,540 $ 9,990
Income from continuing
operations (1) 33,820 29,861 18,237 21,438 7,645
Net income 33,820 30,266 18,377 21,577 7,678
Basic and diluted earnings
from continuing
operations per share .51 .45 .36 .60 .39
Basic and diluted earnings
per share .51 .45 .36 .60 .39
Dividends paid 50,173 48,581 32,811 21,466 9,781
Dividends declared per share .76 .75 .71 .67 .65
Weighted average shares
outstanding - basic 66,638,026 66,193,674 51,422,168 32,721,141 19,909,834
Payment of mortgage
principal(2) 9,234 6,543 2,557 628 144
BALANCE SHEET DATA:
Total consolidated assets 1,345,747 1,319,897 1,097,238 645,762 331,063
Long-term obligations (3) 710,346 678,401 471,942 224,015 54,350
(1) Includes loss from sale of real estate in 2001.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents mortgage obligations and deferred acquisition fees due after
more than one year.
-1-
MANAGEMENT'S DISCUSSION AND ANALYSIS
(dollar amounts in thousands)
Overview
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 14 Incorporated ("CPA(R):14") should
be read in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2003. The following discussion includes
forward-looking statements. Forward-looking statements, which are based on
certain assumptions, describe future plans, strategies and expectations of
CPA(R):14. Forward-looking statements discuss matters that are not historical
facts. Because they discuss future events or conditions, forward-looking
statements may include words such as "anticipate", "believe", "estimate",
"intend", "could", "should", "would", "may", or similar expressions. Do not
unduly rely on forward-looking statements. They give our expectations about the
future and are not guarantees, and speak only as of the date they are made. 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 plan expressed or implied
by such forward looking statements. The risk factors are fully described in Item
1 of this Annual Report on Form 10-K. Accordingly, such information should not
be regarded as representations by CPA(R):14 that the results or conditions
described in such statements or objectives and plans of CPA(R):14 will be
achieved.
CPA(R):14 was formed in 1997 for the purpose of engaging in the business of
investing in and owning commercial and industrial real estate. Between November
1997 and November 2001, CPA(R):14 raised $657,943 in two "best efforts" public
offerings of common stock. CPA(R):14 used the proceeds from the public offerings
along with limited recourse mortgage financing to purchase properties and enter
into long-term net leases with corporate tenants. Substantially all of
CPA(R):14's net leases have been structured to place certain economic burdens of
ownership on these corporate tenants 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):14 also negotiates guarantees of the
obligations from the parent company of the lessees. The leases have generally
been structured to include periodic rent increases that are stated or based on
increases in the Consumer Price Index ("CPI") or, for certain retail properties,
may provide for additional rents based on sales in excess of a specified base
amount. In addition to investing directly, CPA(R):14 may also acquire interests
in real estate through joint ventures. These joint ventures are generally with
affiliates.
As a real estate investment trust ("REIT"), CPA(R):14 is not subject to federal
income taxes on amounts distributed to shareholders provided it meets certain
conditions including distributing at least 90% of its REIT taxable income to its
shareholders. The primary objectives of CPA(R):14 are to provide rising cash
flow and pay quarterly dividends at an increasing rate and to protect its
investors from the effects of inflation through rent escalation provisions,
property appreciation, tenant credit improvement and regular paydown of limited
recourse mortgage debt. In addition, CPA(R):14 has successfully negotiated
grants of common stock warrants from selected tenants and expects to realize the
benefits of appreciation from those grants. CPA(R):14 cannot guarantee that its
objectives will be ultimately realized.
CPA(R):14 is advised by W. P. Carey & Co. LLC ("WPC"), an affiliate, pursuant to
an Advisory Agreement. CPA(R):14's Advisory Agreement is renewable annually by
Independent Directors who are elected by CPA(R):14's shareholders. In connection
with each renewal, WPC is required to provide the Independent Directors with a
comparison of the fee structure with several similar companies. The Advisory
Agreement also provides, commencing in 2003, that an independent portfolio
valuation be performed annually. The portfolio valuation is used to determine
the asset base for calculating asset management and performance fees. Until the
initial valuation is performed, the fees are calculated based on the historical
cost of the purchased real estate assets.
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 December 31, 2003,
CPA(R):14 operates in one segment, real estate operations, and owned properties
in the United States, the Netherlands, Finland, France and the United Kingdom.
Management evaluates the results of CPA(R):14 with a primary focus on the
ability to generate cash flow necessary to meet its investment objectives of
overall property appreciation and increasing its distribution rate to its
shareholders.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
As a result, Management's assessment of operating results gives less emphasis to
the effect of unrealized gains and losses which may cause fluctuations in net
income for comparable periods but has no impact on cash flow and to other
noncash charges such as depreciation and impairment charges. While impairment
charges are intended to reflect an actual or potential decrease in the value of
an asset, accounting principles do not permit increasing an asset to fair value
when such fair value exceeds the asset's carrying value (historical cost less
accumulated depreciation). Management believes that as the portfolio matures
there is a potential for a substantial increase in the value of the portfolio
and that any increase will not be reflected in its financial statements. In
evaluating cash flow from operations, Management includes equity distributions
that are included in investing activities to the extent that the distributions
in excess of equity income is the result of noncash charges such as depreciation
and amortization. For the year ended December 31, 2003, cash flow generated from
operations was greater than dividends paid but not sufficient to fully meet
other obligations including paying scheduled mortgage principal payments and
making distributions to minority interests which hold ownership interests in
several of CPA(R):14's properties. Such deficit is met from existing cash
reserves. Management expects based on its projections that over the long-term
cash flow from operations and equity investments will meet the objective of
increasing the distribution rate and meeting other cash obligations. CPA(R):14
still has a significant amount of cash which is available for investment in real
estate. It is likely that additional investments will be made with affiliates.
As of December 31, 2003, CPA(R):14 has approximately $55,000 of cash which it
believes is in excess of its operating needs. These funds are currently invested
in money market instruments which are bearing interest at historically low
yields; however, Management intends to invest these funds in real estate
investments which Management and the Investment Committee of the Advisor believe
are suitable. While the results of operations for the years presented in the
accompanying consolidated financial statements are not fully comparable because
CPA(R):14 has not fully invested its funds, income from continuing operations
before gains has reflected increases from year to year. Cash flow from
operations and equity investments in 2003 would have increased however changes
in other operating assets and liabilities such as prepaid rents reflected a net
use of cash. CPA(R):14's operating cash flow may be affected by such short-term
fluctutations. Management's evaluation of CPA(R):14's potential for generating
cash flow is based on a long-term analysis and, therefore, its evaluation of the
ability to generate cash flow does not take into account short-term changes in
assets and liabilities for items such as changes in prepaid rents.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net income for the year ended December 31, 2003 increased by $3,554 to $33,820
and income from continuing operations before gains increased by $3,294 to
$32,800 as compared with 2002. The results of operations for 2003 included the
benefit from the forfeiture of a $2,588 security deposit to CPA(R):14 by a
former lessee and noncash impairment charges of $3,103 on real estate. The
increases in income from continuing operations, net of the forfeiture benefit
and impairment charge, are due to an increase in CPA(R):14's real estate asset
base including its equity investments and the completion of build-to-suit
projects.
Lease revenues increased by $11,805 in 2003, primarily as a result of completing
build-to-suit commitments and purchasing real estate. 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
approximately $1,131, based on current exchange rates. CPA(R):14 also completed
build-to-suit projects with Waddington North America, Inc., Career Education
Group and Rave Motion Pictures LLC during the year which are providing an
increase in aggregate annual lease revenues of $2,691. During 2002, CPA(R):14
purchased properties and 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 $9,607 of the increases
in lease revenues in 2003 as compared with 2002.
In March 2003, Fleming Companies, Inc. filed a voluntary petition of bankruptcy
and subsequently terminated its lease at a property 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. On January 1, 2004, the Company
entered into a net lease with The Retail Distribution Group for the property at
an initial annual rent of $903, of which the Company's share is $361. The Retail
Distribution lease provides for certain reductions of rent as it vacated another
property which is still subject to lease in order to lease the Grand Rapids
property. The reductions will be adjusted based on the sublease rentals Retail
Distribution receives from the other property. The Retail Distribution lease has
an initial term through August 31, 2009 with one four-year renewal term. In
November 2003, Scott Companies, Inc.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
entered into liquidation proceedings and subsequently terminated its lease at
its property in Gardena, California. The property is being remarketed. The Scott
lease had provided lease revenues of $737. CPA(R):14 owns a property in
Rochester, Minnesota leased to Celestica Corporation. In July 2003, Celestica
vacated the property but continued to pay its $2,194 annual rent. In January
2004, CPA(R):14 agreed to assign the Celestica lease to the Mayo Foundation in
exchange for payments to the Mayo Foundation of $150 from CPA(R):14 and a
payment from Celestica. CPA(R):14 believes that this provides an overall benefit
because of Mayo's strong credit rating and its unique stature in Rochester.
More than 30 leases have rent increases scheduled in 2004. The initial term of a
lease with Best Buy, Inc. for a retail property in Torrance, California is
scheduled to expire in 2005 and contributes $1,900 of annual lease revenues.
Best Buy has not indicated whether it intends to extend its lease. BLP Group plc
leases a manufacturing and distribution facility in the United Kingdom which it
may purchase at its option in 2006. Earle M. Jorgensen Company has an option to
purchase the Kansas City, Missouri distribution and warehouse facility it leases
from CPA(R):14 in 2007. CPA(R):14 has not received any indication that the
purchase options will be exercised.
Income from equity investments increased by $7,672 for the year ended December
31, 2003, primarily as the result of acquiring 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 are $7,368 in 2003. The
increase in interest and other income of $4,291 during the year ended December
31, 2003 consisted of property expense reimbursements received from lessees,
interest income earned from CPA(R):14's interest in a mortgage securitization
and the forfeiture of the $2,588 security deposit. Reimbursements from tenants
of $2,214 were used to pay real estate taxes and other property expenses that a
lessee generally incurs under a net lease, and the reimbursements, net of the
expenses, have no effect on net income. CPA(R):14 acquired its subordinated
interest in the mortgage securitization in August 2002 along with three
affiliates and earned interest income of $792 from the investment in 2003, as
compared with $278 in 2002. Interest income from cash investments decreased by
$1,415 for the current year as CPA(R):14 has used its cash to purchase real
estate.
Interest expense for the year ended December 31, 2003 increased by $7,641 as a
result of obtaining $198,455 and $27,477 of mortgage financing in 2002 and 2003,
respectively. Increases in depreciation were directly attributable to the
increase in real estate assets purchased in 2002 and 2003. Property expense for
the year increased by $5,902 due to expenses which have been reimbursed by
lessees and an increase in asset management and performance fees of $4,072 since
2002. The asset-based fees increased as a result of the growth of CPA(R):14's
asset base. Property expenses increased due to the vacancies at the Grand Rapids
and Gardena properties. The re-leasing of the Grand Rapids property will
alleviate a portion of these carrying costs, and if the Gardena property is
re-leased, CPA(R):14 expects the lessee to pay or reimburse a portion or all of
such costs. Carrying costs on the Grand Rapids property were approximately $545
in 2003 and estimated carrying costs for the Gardena property are $196. General
and administrative expense increased by $1,967 for the year due to an increase
in investor-related costs and increases in certain variable costs which
increased as CPA(R):14's asset base increased.
As of December 31, 2003, CPA(R):14 recognized realized gains on foreign currency
transactions of $349 and an unrealized foreign currency gain of $691, offset by
an unrealized loss of $20 on its holdings of warrants for common stocks. In
evaluating its ability to fund dividends, CPA(R):14 does not consider unrealized
gains and losses from these derivative instruments.
Because of the long-term nature of CPA(R):14's net leases, inflation and
changing prices have not unfavorably affected CPA(R):14's revenues and net
income. CPA(R):14's net leases generally have rent increases based on formulas
indexed to increases in the CPI, sales overrides or other periodic increases
which are designed to increase lease revenues in the future. Most of CPA(R):14's
leases provide for rent increases, either based on fixed amounts or a formula
indexed to increases in CPI. Over the past several years, the CPI has increased
within a range of approximately 1.5% to 3% per year.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net income for the year ended December 31, 2002 is not directly comparable to
net income for the year ended December 31, 2001 as a result of substantial
increase in CPA(R):14's asset base. Net income was $30,266 in 2002 as compared
to $18,377 in 2001. Since December 31, 2001, CPA(R):14's asset base increased by
more than $217,371,
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
or 20%, and by more than 100% since December 31, 2000. The asset base is
projected to continue to increase until available cash is fully invested in real
estate.
Income from continuing operations before gains and losses increased by $11,001
for the year ended December 31, 2002 as compared with the year ended December
31, 2001. The increase was due to an increase in lease revenues and an increase
in income from equity investments, which was offset, in part, by increases in
interest expense, depreciation, property and general and administrative
expenses. As a result of the on-going acquisition activity, CPA(R):14's revenue
and expense are projected to increase.
Lease revenues increased primarily as a result of real estate purchases and the
completion of built-to-suit projects during 2001 and 2002. During 2002,
CPA(R):14 purchased properties and entered into new leases with American Tire
Distributors, Carrefour, PW Eagle, UTI Holdings, Tower Automotive, Career
Education Group and Katun. These leases will provide annual revenues of $22,728
($11,594 of cash flow after debt service). These new leases contributed $14,186
of lease revenues in 2002. CPA(R):14 completed new acquisitions with thirteen
leases in 2001 and the results for 2002 reflected the first full year of results
from those lessees. Lease revenues also benefited from scheduled rent increases
on existing leases. Lease revenues for the year ended December 2002 reflect a
reduction of $605 as a result of the lease termination of the Burlington Motor
Carriers, Inc. lease in March 2002 pursuant to its reorganization in bankruptcy.
Annual revenues from the Burlington lease were $833.
Income from equity investments increased primarily due to the acquisition of
properties leased to Special Devices, Inc. and Clear Channel Communication, Inc.
in June 2001 and December 2002, respectively. In addition, equity income
benefited from rent increases on three existing leases. Of the $1,627 increase
in equity income from 2001, $387 was due to the acquisition of the interests in
the Special Devices and Clear Channel properties and $407 was due to rent
increases. An equity investment in properties leased to CheckFree Corporation
has a mortgage obligation with a variable rate indexed to the London Inter-Bank
Offered Rate. The LIBOR index declined in 2002 and 2001, and CPA(R):14's share
of income from the CheckFree investment increased by approximately $265 from
2001, solely as a result of this rate reduction. Equity income is projected to
increase due to the acquisition in December 2002 of 35% and 40% interests in
limited partnerships that lease properties to TruServ Corporation and Clear
Channel, respectively.
Interest expense for the year ended December 31, 2002 increased by $23,168,
primarily from obtaining new mortgage loans. In connection with its
participation in a mortgage securitization transaction, CPA(R):14 obtained
$42,332 of limited recourse mortgage financing on previously unencumbered
properties. As a result of this transaction, annual interest expense will
increase by $3,175. The increase in depreciation expense is the result of the
increase in real estate assets. Depreciation, a noncash charge, increased by
$8,107.
The increase in general and administrative expense of $2,130 was primarily due
to an increase in investor-related costs and other costs related to the increase
in CPA(R):14's asset base. Property expense increased primarily due to increases
in asset management and performance fees which are calculated based on the
Average Invested Assets (i.e. real estate assets) of CPA(R):14. Effective
January 1, 2003, asset management and performance fees are being determined
based on an independent valuation of CPA(R):14's real estate assets which will
be performed annually. Asset-based fees may be expected to increase as a result
of appreciation in the value of CPA(R):14's real estate assets and the
acquisition of properties. Property expense also increased to reflect the costs
of the initial valuation of CPA(R):14's real estate assets.
As of December 31, 2002, CPA(R):14 recognized an unrealized gain of $385 on its
holdings of warrants for common stocks and unrealized foreign currency loss of
$30. In evaluating its ability to fund dividends, CPA(R):14 does not consider
unrealized gains and losses from these derivative instruments. Discontinued
operations include a gain on sale of real estate property in Greenville, Texas
of $333, which was sold in June 2002, and $72 from the operations of the
Greenville property for the period prior to the sale.
Financial Condition
CPA(R):14's cash has decreased by $19,432 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 projects and maintain cash balances
sufficient to meet working capital
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
needs. As of December 31, 2003, CPA(R):14 had approximately $25,000 of cash
available for the acquisition of real estate investments.
For the year ended December 31, 2003, cash flows from operating activities and
equity investments of $60,588 were not sufficient to pay dividends to
shareholders of $50,173, meet scheduled principal payment installments on
mortgage debt of $9,234 and distribute $3,340 to minority partners ($400 from
the release of mortgage escrow funds was distributed to a minority partner).
Operating cash flow is expected to continue to increase as a result of acquiring
the Carrefour expansion and completing three build-to-suit projects, all of
which commenced paying rent in the third quarter of 2003. Annual cash flow
(lease revenues, net of property-level debt service) from the three
build-to-suit projects and the Carrefour expansion, net of property-level debt
service, is approximately $2,375. CPA(R):14's investment in Starmark is
projected to contribute annual distributions of $3,300, of which only $1,336 was
received in 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 completed
build-to-suit projects and the investment in Starmark, cash flow from operations
and equity investments is expected to be sufficient to meet operating cash flow
objectives. Accordingly, CPA(R):14 expects to have sufficient cash flow to
continue increasing the distribution rate to its shareholders. Current
distributions are determined by Management's long-term projections of cash flow
and it is willing to sustain moderate cash flow deficits as the portfolio
matures.
CPA(R):14's investing activities included using $42,031 to purchase its 41%
interest in the Starmark properties, to complete the Waddington, Career
Education and Rave projects and to acquire the Carrefour expansion. In July
2003, CPA(R):14 used $10,422 for the Carrefour expansion (including obtaining
mortgage financing of $8,203 based on the exchange rate for the Euro at the
acquisition date). The annual cash flow from the expansion is projected to be
approximately $430, 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 obtaining proceeds of $21,582 from mortgage loans and $1,617
from a note payable collateralized by the Carrefour property. During 2003,
CPA(R):14 obtained the $8,203 mortgage loan collateralized by the Carrefour
property and $6,680 of additional proceeds on a mortgage loan collateralized by
the Career Education property, increasing the loan on the property to $12,500.
Annual debt service on the Carrefour and Career Education properties is $596 at
current exchange rates and $746, respectively. CPA(R):14 also 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 February 2008. 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. 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.
In 2002, CPA(R):14 purchased a participation in a mortgage pool consisting of
$172,335 of newly-issued mortgage debt collateralized by properties and lease
assignments on properties owned by CPA(R):14 and three affiliates. CPA(R):14 and
the affiliates also purchased subordinated interests of $24,129 in which
CPA(R):14 owns a 25% interest. The subordinated interests are payable only after
all other classes of ownership receive their stated interest and related
principal payments. The subordinated interests, therefore, will be affected by
any defaults or nonpayment by lessees. As of December 31, 2003, there have been
no defaults. Three Garden Ridge Corporation properties that are owned by
affiliates are included in the mortgage pool and the lessee has filed a petition
of bankruptcy. In the event the Garden Ridge leases are terminated, cash flow
from this investment might be adversely affected.
CPA(R):14 conducts business in Europe. While CPA(R):14 recognized foreign
currency transaction gains in 2003 of $349 in connection with the transfer of
cash from foreign subsidiaries, foreign currency transaction gains and losses
were not material to CPA(R):14's results of operations for the year ended
December 31, 2003. CPA(R):14 was not subject to material foreign currency
exchange rate risk from the effects of changes in exchange rates. To date,
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
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 December 31,
2003, Carrefour, which leases properties in France, contributed 8% of lease
revenues. The leverage used on the limited recourse financing of the Carrefour
investments is higher than the average leverage on CPA(R):14's domestic real
estate investments.
Off-Balance Sheet and Aggregate Contractual Agreements
A summary of CPA(R):14's contractual obligations and commitments are as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Mortgage notes payable $702,175 $11,093 $12,139 $13,124 $14,092 $20,275 $631,452
Deferred acquisition fees 22,530 3,266 3,483 3,483 3,483 3,214 5,601
Subordinated disposition fees 240 240
Commitments:
Share of minimum rents payable
under office cost-sharing
agreement 1,026 373 373 280
-------- ------- ------- ------- ------- ------- --------
$725,971 $14,732 $15,995 $16,887 $17,575 $23,489 $637,293
======== ======= ======= ======= ======= ======= ========
In connection with the purchase of its properties, CPA(R):14 requires the
sellers to perform environmental reviews. Management believes, based on the
results of such reviews, that CPA(R):14's properties were in substantial
compliance with Federal and state environmental statutes at the time the
properties were acquired. However, portions of certain properties have been
subject to some degree of contamination, principally in connection with either
leakage from underground storage tanks, surface spills from facility activities
or historical on-site activities. In most instances where contamination has been
identified, tenants are actively engaged in the remediation process and
addressing identified conditions. Tenants are generally subject to environmental
statutes and regulations regarding the discharge of hazardous materials and any
related remediation obligations. In addition, CPA(R):14's leases generally
require tenants to indemnify CPA(R):14 from all liabilities and losses related
to the leased properties with provisions of such indemnification specifically
addressing environmental matters. The leases generally include provisions which
allow for periodic environmental assessments, paid for by the tenant, and allow
CPA(R):14 to extend leases until such time as a tenant has satisfied its
environmental obligations. Certain of the leases allow CPA(R):14 to require
financial assurances from tenants such as performance bonds or letters of credit
if the costs of remediating environmental conditions are, in the estimation of
CPA(R):14, in excess of specified amounts. Accordingly, Management believes that
the ultimate resolution of any environmental matter will not have a material
adverse effect on CPA(R):14's financial condition, liquidity or results of
operations.
Critical Accounting Estimates
CPA(R):14 makes certain judgments and uses certain estimates and assumptions
when applying accounting principles generally accepted in the United States of
America in the preparation of its consolidated financial statements that affect
the reported amount of assets, liabilities, revenues and expenses. CPA(R):14
believes its most critical accounting estimates relate to its provision for
uncollected amounts from lessees, potential impairment of assets, identification
of discontinued operations, classification of real estate assets, determining
the fair value of assets and liabilities which are "marked to market" but not
actively traded in a public market and determining the interest to be
capitalized in connection with real estate under construction. CPA(R):14's
significant accounting policies are described in the notes to the financial
statements. Certain policies, while significant, may not require the use of
estimates.
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 the collectibility of these
receivables based on the facts and circumstances of each situation rather than
solely use statistical methods. CPA(R):14 generally recognizes a provision
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
for uncollected rents which typically ranges between 0.25% and 1% of lease
revenues (rental income and interest income from direct financing leases) and
will measure its allowance against actual rent arrearages and adjust the
percentage applied. For amounts in arrears, Management makes subjective
judgments based on its knowledge of a lessee's circumstances and may reserve for
the entire receivable amount from a lessee because there has been significant or
continuing deterioration in the lessee's ability to meet its lease obligations.
Under net leases, lessees are obligated to pay real estate taxes on behalf of
CPA(R):14; however, when a lessee is in bankruptcy, CPA(R):14 may pay the tax
obligation in order to preserve its interest in the property. If such a payment
relates to a pre-petition period, CPA(R):14 may record such payment as an
expense rather than as a receivable when it assumes the chance of reimbursement
by the lessee is unlikely. Based on its actual experience in 2003, CPA(R):14
recorded a provision equal to approximately .5% of lease revenues.
Operating real estate is stated at cost less accumulated depreciation. Costs
directly related to build-to-suit projects, primarily interest, if applicable,
are capitalized. Interest capitalized in 2003, 2002 and 2001 was $357, $808 and
$1,986, respectively. CPA(R):14 considers a build-to-suit project as
substantially completed 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):14 allocates costs incurred between the portions under construction and
the portions substantially completed and only capitalizes those costs associated
with the portion under construction. CPA(R):14 does not have a credit facility
and determines an interest rate to be applied for capitalizing interest based on
an average rate on its outstanding limited recourse mortgage debt.
CPA(R):14 classifies its directly-owned leased assets for financial reporting
purposes as either real estate leased under the operating method or net
investment in direct financing leases at the inception of a lease 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):14
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):14's
leases are not necessarily different for operating and direct financing leases;
however the classification is based on accounting pronouncements which are
intended to indicate whether the risks and rewards of ownership are retained by
the lessor or transferred to the lessee. Management believes that it retains
certain risks of ownership regardless of accounting classification. Assets
classified as direct financing leases are not depreciated and, therefore, the
classification of assets may have a significant impact on net income even though
it has no effect on cash flows.
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 a property accounted for under the operating method may not
be recoverable, Management must first determine if the property will be held for
use or held for sale. Management then performs projections of cash flows, and if
such cash flows are insufficient, the assets are adjusted (i.e., written down)
to their estimated fair value. An analysis of whether a real estate asset has
been impaired requires Management to make its best estimate of market rents,
residual values and holding periods. As CPA(R):14's investment objective is to
hold properties on a long-term basis, holding periods will generally 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. Because
CPA(R):14's properties are leased to single tenants, CPA(R):14 is more likely to
incur significant writedowns when circumstances affecting a tenant deteriorate
because of the possibility that a property will be vacated in its entirety. The
risk of vacancy for single tenant properties is 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 direct financing leases, CPA(R):14 performs a review of its estimated
residual value of properties at least annually to determine whether there has
been an other than temporary decline in CPA(R):14's current estimate of residual
value of the underlying real estate assets of direct financing leases. 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
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
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. While an
evaluation of potential impairment of real estate accounted for under the
operating method is determined by a change in circumstances, the evaluation of a
direct financing lease can be affected by changes in long-term market conditions
even though the obligations of the lessee are being met. Changes in
circumstances include, but are not limited to, vacancy of a property not subject
to a lease and termination of a lease. CPA(R):14 may also assess properties for
impairment because it expects a lease not to be renewed and the lease is within
one year of its expiration, a lessee is experiencing financial difficulty and
Management expects that there is a reasonable probability that the lease will be
terminated in a bankruptcy organization or a property remains vacant for a
period that exceeds the period anticipated in a prior impairment evaluation.
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 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. To the extent that a purchase and sale agreement has
been entered into, the allowance is based on the negotiated sales price. To the
extent that CPA(R):14 has adopted a plan to sell an asset but has not entered
into a sales agreement, it will make judgments of the net sales price based on
current market information. Accordingly, the initial assessment may be greater
or less than the purchase price subsequently committed to and may result in a
further adjustment to the fair value of the property. If circumstances arise
that previously were considered unlikely and, as a result, the Company 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) its carrying amount before the
property 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 date 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 and the fair
value will be adjusted. CPA(R):14 measures derivative instruments, including
certain 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 right
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 (i.e., the
forecasted event occurs). For derivatives designated as cash flow hedges, the
effective portions of the derivatives are reported in other comprehensive income
and are subsequently reclassified into earnings when the hedged item affects
earnings. Changes in the fair value of derivative instruments not designated as
hedging and ineffective portions of hedges are recognized in earnings in the
affected period. To determine the value of warrants for common stock which are
classified as derivatives, various estimates are included in the options pricing
model used to determine the value of a warrant.
In connection with the acquisition of properties, purchase costs will be
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values. The value of the tangible assets, consisting of
land, buildings and tenant improvements, will be determined as if vacant.
Intangible assets including the above-market or below-market value of leases,
the value of in-place leases and the value of tenant relationships will be
recorded at their relative fair values.
The value attributed to tangible assets will be determined in part using a
discount cash flow model which is intended to approximate what a third party
would pay to purchase the property as vacant and rent at "market" rates. In
applying the model CPA(R):14 assumes that the disinterested party would sell the
property at the end of a market lease term. Assumptions used in the model are
property-specific as it is available; however, when certain necessary
information is not available, CPA(R):14 will use available regional and
property-type information. Assumptions and estimates include a discount rate or
internal rate of return, marketing period necessary to put a lease in place,
carrying costs during the marketing period, leasing commissions and tenant
improvements allowances, market rents and growth factors of such rents, market
lease term and a cap rate to be applied to an estimate of market rent at the end
of the market lease term.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
Above-market and below-market lease intangibles will be based on the difference
between the market rent and the contractual rents and will be discounted to a
present value using an interest rate reflecting CPA(R):14's assessment of the
risk associated with the lease acquired. CPA(R):14 acquires properties subject
to net leases and considers the credit of the lessee in negotiating the initial
rent.
The total amount of other intangible assets will be allocated to in-place lease
values and tenant relationship intangible values based on our evaluation of the
specific characteristics of each tenant's lease and our overall relationship
with each tenant. Characteristics considered in allocating these values include
the nature and extent of the existing relationship with the tenant, prospects
for developing new business with the tenant, the tenant's credit quality and the
expectation of lease renewals, among other factors. The aggregate value of other
intangible assets acquired will be measured based on the difference between (i)
the property valued with an in-place lease adjusted to market rental rates and
(ii) the property valued as if vacant. Independent appraisals or our estimates
will be used to determine these values.
Factors considered include the estimated carrying costs of the property during a
hypothetical expected lease-up period, current market conditions and costs to
execute similar leases. Estimated carrying costs will include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods, based on
assessments of specific market conditions. Estimated costs to execute leases
include commissions and legal costs to the extent that such costs are not
already incurred with a new lease that has been negotiated in connection with
the purchase of the property.
Significant accounting policies are described in the notes to the consolidated
financial statements.
Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require
CPA(R):14 to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on CPA(R):14's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions for valuing stock-based compensation 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"). In December 2003, the FASB issued a revised FIN 46
which modifies and clarifies various aspects of the original Interpretation. FIN
46 applies when either (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest, (2) the equity
investment at risk is insufficient to finance that entity's activities without
additional subordinated financial support or (3) the equity investors have
voting rights that are not proportionate to their economic interest. In addition
FIN 46 requires additional disclosures.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
FIN 46 is effective immediately for VIEs created after January 31, 2003, and to
VIEs in which an enterprise obtains an interest after that date. For variable
interests in a VIE created or obtained prior to February 1, 2003, FIN 46 is
effective for periods ending after March 15, 2004.
CPA(R):14 has evaluated the potential impact 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. CPA(R):14's
maximum loss exposure is the carrying value of its equity investments.
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 adoption of FASB No.
149 did not have a material effect on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). In particular, it requires
that mandatorily redeemable financial instruments be classified as liabilities
and reported at fair value and that changes in their fair values be reported as
interest cost.
This statement was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for CPA(R):14 as of July 1, 2003.
On November 7, 2003, the FASB indefinitely deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatorily
redeemable non-controlling interests. This deferral is expected to remain in
effect while these provisions are further evaluated by the FASB. Based on the
FASB's deferral of this provision, the adoption of SFAS No. 150 did not have a
material effect on CPA(R):14's financial statements.
-11-
REPORT of INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Corporate Property Associates 14 Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Corporate Property
Associates 14 Incorporated and its subsidiaries at December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of W. P. Carey & Co. LLC (the "Advisor"); our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the Advisor, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 10, 2004
-12-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
December 31,
------------
2003 2002
---- ----
ASSETS:
Real estate leased to others:
Accounted for under the operating method
Land $ 194,450 $ 181,834
Buildings 878,093 828,308
---------- ----------
1,072,543 1,010,142
Less, accumulated depreciation 62,105 38,683
---------- ----------
1,010,438 971,459
Net investment in direct financing leases 114,907 113,428
Real estate under construction - 14,723
Equity investments 120,388 99,320
Cash and cash equivalents 54,675 74,107
Marketable securities 6,792 6,258
Other assets, net of accumulated amortization of $2,360
and $1,252 in 2003 and 2002 and allowance for
uncollected rents of $619 and $574 in 2003 and 2002 38,547 40,602
---------- ----------
Total assets $1,345,747 $1,319,897
========== ==========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS'
EQUITY:
Liabilities:
Mortgage notes payable $ 702,175 $ 666,740
Accrued interest 4,461 4,043
Due to affiliates 4,559 3,821
Accounts payable and accrued expenses 5,968 7,898
Prepaid rental income and security deposits 19,607 20,642
Deferred acquisition fees payable to affiliate 22,530 23,170
Dividends payable 12,662 12,488
---------- ----------
Total liabilities 771,962 738,802
---------- ----------
Minority interest 27,356 29,206
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000
shares; issued and outstanding, 67,694,702 and
66,836,152 shares at December 31, 2003 and 2002 68 67
Additional paid-in capital 606,380 597,852
Dividends in excess of accumulated earnings (64,036) (47,508)
Accumulated other comprehensive income 11,150 6,113
---------- ----------
553,562 556,524
Less, treasury stock at cost, 802,642 and 520,911 shares
at December 31, 2003 and 2002 (7,133) (4,635)
---------- ----------
Total shareholders' equity 546,429 551,889
---------- ----------
Total liabilities, minority interest and
shareholders' equity $1,345,747 $1,319,897
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
-13-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
CONSOLIDATED STATEMENTS of INCOME
(In thousands except share and per share amounts)
For the years ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Rental income $ 108,705 $ 98,112 $ 55,490
Interest income from direct financing leases 13,010 11,798 8,899
Interest and other income 6,737 2,446 2,752
------------ ----------- -----------
128,452 112,356 67,141
------------ ----------- -----------
Expenses:
Interest 52,890 45,249 22,081
Depreciation 22,795 20,699 12,592
General and administrative 8,405 6,438 4,308
Property expense 19,962 14,060 9,247
Impairment charges on real estate 3,103 - 3,810
------------ ----------- -----------
107,155 86,446 52,038
------------ ----------- -----------
Income from continuing operations before minority
interest, equity investments and gains 21,297 25,910 15,103
Minority interest in income (1,489) (1,724) (291)
Income from equity investments 12,992 5,320 3,693
------------ ----------- -----------
Income from continuing operations before gains 32,800 29,506 18,505
Unrealized gain on derivative instruments and foreign currency
transactions, net 671 355 78
Gain on foreign currency transactions 349 - -
------------ ----------- -----------
Income from continuing operations before loss on sale of
real estate 33,820 29,861 18,583
Discontinued operations:
Income from operation of discontinued properties - 72 140
Gain on sale of real estate - 333 -
------------ ----------- -----------
Income from discontinued operations - 405 140
------------ ----------- -----------
Loss on sale of real estate - - (346)
------------ ----------- -----------
Net income $ 33,820 $ 30,266 $ 18,377
============ =========== ===========
Basic and diluted earnings per share:
Income from continuing operations $ .51 $ .45 $ .36
Discontinued operations - - -
------------ ----------- -----------
Net income $ .51 $ .45 $ .36
============ =========== ===========
Weighted average shares outstanding - basic and diluted 66,638,026 $66,193,674 $51,422,168
============ =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-14-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
CONSOLIDATED STATEMENT of SHAREHOLDERS' EQUITY
(In thousands except share amounts)
For the years ended December 31, 2001, 2002, and 2003
Dividends in
Excess of Accumulated Other
Common Additional Comprehensive Accumulated Comprehensive Treasury
Stock Paid-in Capital Income Earnings Income Stock Total
----- --------------- ------ ----------- ------ ----- -----
Balance at December 31, 2000 $ 43 $ 386,341 $ (9,185) $ (1,338) $375,861
23,233,922 shares issued
$.001 par, at $10 per
share, net of offering costs 23 207,146 207,169
Dividends declared (37,215) (37,215)
Purchase of treasury stock,
183,289 shares (1,612) (1,612)
Comprehensive income:
Net income $ 18,377 18,377 18,377
Other comprehensive income:
Foreign currency translation
adjustment (101) $ (101) (101)
------------
$ 18,276
------ ------------ ============ ------------ --------- -------- --------
Balance at December 31, 2001 66 593,487 (28,023) (101) (2,950) 562,479
520,686 shares issued $.001
par, at $10 per share, net
of offering costs 1 4,365 4,366
Dividends declared (49,751) (49,751)
Purchase of treasury stock,
190,935 shares (1,685) (1,685)
Comprehensive income:
Net income $ 30,266 30,266 30,266
------------
Other comprehensive income:
Unrealized appreciation on
marketable securities 257
Foreign currency
translation adjustment 5,957
------------
6,214 6,214 6,214
------------
$ 36,480
------ ------------ ============ ------------ --------- -------- --------
Balance at December 31, 2002 67 597,852 (47,508) 6,113 (4,635) 551,889
------ ------------ ------------ --------- -------- --------
858,550 shares issued $.001
par, at $10 per share, net
of offering costs 1 8,528 8,529
Dividends declared (50,348) (50,348)
Purchase of treasury stock,
281,731 shares (2,498) (2,498)
Comprehensive income:
Net income $ 33,820 33,820 33,820
------------
Other comprehensive income:
Unrealized appreciation on
marketable securities 641
Foreign currency
translation adjustment 4,396
------------
5,037 5,037 5,037
------------
$ 38,857
------ ------------ ============ ------------ --------- -------- --------
Balance at December 31, 2003 $ 68 $ 606,380 $ (64,036) $ 11,150 $ (7,133) $546,429
====== ============ ============ ========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
For the year ended December 31,
-------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 33,820 $ 30,266 $ 18,377
Adjustments to reconcile net income to net cash provided by continuing
operations:
Income from discontinued operations, including gain on sale of real
estate - (405) (140)
Depreciation and amortization 23,964 21,548 12,951
Straight-line rent adjustments (3,965) (4,201) (3,192)
Income from equity investments in excess of distributions received (1,529) (30) (58)
Minority interest in income 1,489 1,724 291
Loss on sale of real estate - - 346
Issuance of shares in satisfaction of current and accrued performance
fees 7,105 5,092 5,012
Impairment charge on real estate 3,103 - 3,810
Funds released from (deposited in) escrow - - 6,144
(Decrease) increase in prepaid rents and security deposits (1,727) 2,545 8,435
Realized gain on foreign currency transactions (349) - -
Unrealized gain on derivative instruments and foreign currency
transactions, net (643) (355) (78)
Change in other operating assets and liabilities, net (a) (1,858) 4,311 1,233
-------- -------- --------
Net cash provided by continuing operations 59,410 60,495 53,131
Net cash provided by discontinued operations - 74 144
-------- -------- --------
Net cash provided by operating activities 59,410 60,569 53,275
-------- -------- --------
Cash flows from investing activities:
Equity distributions received in excess of equity income 1,178 1,456 1,738
Purchases of real estate and equity investments and other
capitalized costs, net (b) (50,385) (269,117) (372,835)
Value added taxes recoverable on purchase of real estate 827 1,448 -
Purchase of securities - (8,396) -
Proceeds from sale of real estate and securities - 5,998 2,903
Payment of deferred acquisition fees (2,373) (1,638) (722)
Capital distributions received from equity investments 8,722 - 22,664
-------- -------- --------
Net cash used in investing activities (42,031) (270,249) (346,252)
-------- -------- --------
Cash flows from financing activities:
Dividends paid (50,173) (48,581) (32,811)
Proceeds from stock issuance, net of costs 1,424 (1,725) 203,155
Prepayment of mortgage principal - (3,800) (15,529)
Release of mortgage funds by lenders 2,776 - -
Proceeds from mortgages 21,582 196,596 262,136
Proceeds from note 1,617 - -
Payments of mortgage principal (9,234) (6,543) (2,557)
Funding of defeasance escrow account - (2,537) -
Deferred financing costs and mortgage deposits - (4,050) (6,546)
Purchase of treasury stock (2,498) (1,685) (1,612)
Distributions paid to (contributions from) minority interest partner, net (3,340) 7,661 (1,111)
-------- -------- --------
Net cash (used in) provided by financing activities (37,846) 135,336 405,125
-------- -------- --------
- Continued -
- 16 -
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Effect of exchange rates on cash 1,035 756 -
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (19,432) (73,588) 112,148
Cash and cash equivalents, beginning of year 74,107 147,695 35,547
-------- -------- --------
Cash and cash equivalents, end of year $ 54,675 $ 74,107 $147,695
======== ======== ========
Noncash operating, investing and financing activities:
In connection with the acquisition of properties during the year ended December
31, 2001, the Company assumed mortgage payable obligations of $2,076.
During 2002, a security deposit of $5,287,500 was assigned to a lender.
(a) Excludes changes in accounts payable and accrued expenses and accounts
payable to affiliates balances that relate to the raising of capital
(financing activities) rather than the Company's real estate operations.
(b) Included in the cost basis of real estate investments acquired in 2003,
2002 and 2001 are deferred acquisition fees payable of $1,733, $6,146 and
$6,554, respectively.
The accompanying notes are an integral part of the consolidated
financial statements.
-17-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Amounts in thousands, except share and per share amounts
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of
Corporate Property Associates 14 Incorporated, its
wholly-owned subsidiaries and controlling majority-owned
interests in limited liability companies and partnerships
(collectively, the "Company"). The Company is not the primary
beneficiary of any variable interest entity. All material
inter-entity transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The most significant estimates will relate to the
assessment of recoverability of real estate assets and
investments, classification of real estate leased by others
and identification of any intangible assets identified in
connection with asset acquisitions. Actual results could
differ from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby
the tenant is generally responsible for all operating expenses
relating to the property, including property taxes, insurance,
maintenance, repairs, renewals and improvements. For the year
ended December 31, 2003, lessees were responsible for the
direct payment of real estate taxes of approximately $13,197.
Expenditures for maintenance and repairs including routine
betterments are charged to operations as incurred, significant
renovations which increase the useful life of the properties
are capitalized.
The Company diversifies its real estate investments among
various corporate tenants engaged in different industries and
by property type.
The leases are accounted for under either the operating or
direct financing method. Such methods are described below:
Operating method - Real estate is recorded at cost
less accumulated depreciation, revenue is recognized
on a straight-line basis over the term of the lease
and expenses (including depreciation) are charged to
operations as incurred.
Direct financing method - Leases accounted for under
the direct financing method are recorded at their net
investment (Note 5). Unearned income is deferred and
amortized to income over the lease terms so as to
produce a constant periodic rate of return on the
Company's net investment in the lease.
When events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable,
the Company assesses the recoverability of its long-lived
assets, including residual interests of real estate assets and
investments, based on projections of undiscounted cash flows,
without interest charges, over the life of such assets. In the
event that such cash flows are insufficient, the assets are
adjusted to their estimated fair value. Residual values of
direct financing leases are reviewed at least annually. If a
decline in the estimated residual value is other than
temporary, the accounting for the net investment in direct
financing lease will be revised using the changed estimate.
The resulting reduction in the net investment in the direct
financing lease is recognized as a loss in the period in which
the estimate is changed.
-18-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
In connection with the Company's acquisition of properties,
purchase costs are allocated to the tangible and intangible
assets and liabilities acquired based on their estimated fair
values. The value of the tangible assets, consisting of land,
buildings and tenant improvements, are determined as if
vacant. Intangible assets including the above-market or
below-market value of leases, the value of in-place leases and
the value of tenant relationships are recorded at their
relative fair values.
Above-market and below-market in-place lease values for owned
properties are recorded based on the present value (using an
interest rate reflecting the risks associated with the leases
acquired) of the difference between (i) the contractual
amounts to be paid pursuant to the leases negotiated and
in-place at the time of acquisition of the properties and (ii)
management's estimate of fair market lease rates for the
property or equivalent property, measured over a period equal
to the remaining non-cancelable term of the lease. The
capitalized above-market lease value is amortized as a
reduction of rental income over the remaining non-cancelable
term of each lease. The capitalized below-market lease value
is amortized as an increase to rental income over the initial
term and any fixed rate renewal periods in the respective
leases.
The total amount of other intangible assets is allocated to
in-place lease values and tenant relationship intangible
values based on management's evaluation of the specific
characteristics of each tenant's lease and the Company's
overall relationship with each tenant. Characteristics
considered in allocating these values include the nature and
extent of the existing relationship with the tenant, prospects
for developing new business with the tenant, the tenant's
credit quality and the expectation of lease renewals, among
other factors. The aggregate value of other intangible assets
acquired will be measured based on the difference between (i)
the property valued with an in-place lease adjusted to market
rental rates and (ii) the property valued as if vacant.
Independent appraisals or management's estimates are used to
determine these values.
Factors considered in the analysis include the estimated
carrying costs of the property during a hypothetical expected
lease-up period, current market conditions and costs to
execute similar leases. The Company also considers information
obtained about a property in connection with its
pre-acquisition due diligence. Estimated carrying costs
include real estate taxes, insurance, other property operating
costs and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, based on management's
assessment of specific market conditions. Estimated costs to
execute leases, including commissions and legal costs to the
extent that such costs are not already incurred with a new
lease that has been negotiated in connection with the purchase
of the property, are also considered.
The value of in-place leases will be amortized to expense over
the remaining initial term of each lease. The value of tenant
relationship intangibles will be amortized to expense over the
initial and renewal terms of the leases but no amortization
period for intangible assets will exceed the remaining
depreciable life of the building.
For properties under construction, operating expenses
including interest charges are capitalized rather than
expensed and rentals received are recorded as a reduction of
capitalized project (i.e., construction) costs.
Substantially all of the Company's leases provide for either
scheduled rent increases, periodic rent increases based on
formulas indexed to increases in the Consumer Price Index
("CPI") or sales overrides. Rents from sales overrides
(percentage rent) are recognized as reported by lessees, that
is, after the level of sales requiring a rental payment to the
Company is reached.
Assets Held For Sale:
Assets held for sale are accounted for at the lower of
carrying value or fair value less costs to dispose. Assets are
classified as held for sale when the Company has committed to
a plan to actively market a property for sale and expects that
a sale will be completed within one year. The results of
operations and the related gain or loss on sale of properties
classified as held for sale by the Company after December 31,
2001, are included in discontinued operations.
If circumstances arise that previously were considered
unlikely and, as a result, the Company decides not to sell a
property previously classified as held for sale, the property
is reclassified as held and used. A property that is
-19-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
reclassified is measured and recorded individually at the
lower of (a) its carrying amount before the property 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, (b) the fair value
at the date of the subsequent decision not to sell, or (c) the
current carrying value.
The Company recognizes gains and losses on the sale of
properties when among other criteria, the parties are bound by
the terms of the contract, all consideration has been
exchanged and all conditions precedent to closing have been
performed. At the time the sale is consummated, a gain or loss
is recognized as the difference between the sale price less
any closing costs and the carrying value of the property.
Depreciation:
Depreciation is computed using the straight-line method over
the estimated useful lives of the properties - generally 40
years. Depreciation of tenant improvements is computed using
the straight-line method over the remaining term of the lease.
Equity Investments:
The Company's interests in entities in which the entity is not
considered to be a VIE, the Company is not deemed to be the
primary beneficiary and the Company's ownership is 50% or
less, and has the ability to exercise significant influence
are accounted for under the equity method, i.e. at cost,
increased or decreased by the Company's share of earnings or
losses, less distributions.
Cash Equivalents:
The Company considers all short-term, highly liquid
investments that are both readily convertible to cash and have
a maturity of generally three months or less at the time of
purchase to be cash equivalents. Items classified as cash
equivalents include commercial paper and money market funds.
Substantially all of the Company's cash and cash equivalents
at December 31, 2003 and 2002 were held in the custody of two
financial institutions, and which balances at times exceed
federally insurable limits. The Company mitigates this risk by
depositing funds with major financial institutions.
Foreign Currency Translation:
The Company consolidates its real estate investments in the
Netherlands, Finland, France and the United Kingdom. The
functional currencies for these investments are the Euro and
British Pound. The translation from these local currencies to
the U.S. dollar is performed for assets and liabilities using
current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average
exchange rate during the period. The gains and losses
resulting from such translation are reported as a component of
other comprehensive income as part of shareholders' equity. As
of December 31, 2003, the cumulative foreign currency
translation adjustment gain was $10,252.
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 will
be 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
will be included in net income for the period in which the
transaction is settled. Foreign currency transactions that are
(i) designated as, and are effective as, economic hedges of a
net investment and (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 will not be included in
-20-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
determining net income but will be accounted for in the same
manner as foreign currency translation adjustments and
reported as a component of other comprehensive income as part
of shareholder's equity. The contributions to the equity
investments were funded in part through subordinated debt.
Foreign currency intercompany transactions that are scheduled
for settlement, consisting primarily of accrued interest and
the translation to the reporting currency of intercompany
subordinated debt with scheduled principal repayments, are
included in the determination of net income, and, for the year
ended December 31, 2003, the Company recognized unrealized
gains of $720 from such transactions. In 2003, the Company
recognized realized gains of $349 on foreign currency
transactions, in connection with the transfer of cash from
foreign operations of subsidiaries to the parent company.
Marketable Securities:
Marketable securities are classified as available for sale
securities and reported at fair value with the Company's
interest in unrealized gains and losses on these securities
reported as a component of other comprehensive income (loss)
until realized. Such marketable securities had a cost basis of
$5,894 and $6,001 and reflected a fair value of $6,792 and
$6,258 at December 31, 2003 and 2002, respectively.
Other Assets:
Included in other assets are deferred rental income and
deferred charges. Deferred rental income is the aggregate
difference for operating method leases between scheduled rents
which vary during the lease term and rent recognized on a
straight-line basis. Deferred charges are costs incurred in
connection with mortgage financing, and structuring leases.
Such financing and lease costs are amortized over the terms of
the mortgages and leases and included in interest expense and
property expense, respectively.
Derivative Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities"
established accounting and reporting standards for derivative
instruments. Stock warrants granted to the Company by lessees
in connection with structuring the initial lease transactions
are defined as derivative instruments if such stock warrants
are readily convertible to cash or provide for net settlement
upon conversion. Pursuant to SFAS No. 133, changes in the fair
value of such derivative instruments as determined using an
option pricing model are recognized currently in earnings as
gains or losses. The Company recognized an unrealized loss of
$20 and an unrealized gain of $385 in 2003 and 2002,
respectively on warrants issued to the Company by PW Eagle,
Inc., American Tire Distributors, Inc. and Consolidated
Theaters Holding, G.P. No unrealized gain or loss were
recognized in 2001. The Company also holds stock warrants
which were not defined as derivative instruments and have been
recorded at nominal values. The Company has only recognized
unrealized gains or losses on stock warrants that are
derivative instruments.
A lease for a property located in the Netherlands provides the
Company with an option to receive a portion of rental payments
in Euros or U.S. dollars. Pursuant to the adoption of SFAS No.
133, the option is a derivative instrument and changes in the
fair value of the option are recognized in earnings as gains
or losses. An unrealized gain on the option of $78 was
recognized in 2001 and unrealized losses of $29 and $30 were
recognized in 2003 and 2002, respectively. As of December 31,
2003, the Company's cumulative unrealized foreign currency
gain was $19.
Costs of Raising Capital:
Costs incurred in connection with the raising of capital
through the sale of common stock are charged to shareholders'
equity upon the issuance of shares.
Treasury Stock:
Treasury stock is recorded at cost.
-21-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
Deferred Acquisition Fees:
Fees are payable for services provided by W. P. Carey & Co.
LLC (the "Advisor"), an affiliate, 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 annual installments with each installment
equal to .25% of the purchase price of the properties over no
less than eight years following the first anniversary of the
date a property was purchased. Payment of such fees is subject
to the Preferred Return (see Note 3).
Earnings Per Share:
The Company has a simple equity capital structure with only
common stock outstanding. As a result, the Company has
presented basic per-share amounts only for all periods
presented in the accompanying consolidated financial
statements.
Federal Income Taxes:
The Company is qualified as a real estate investment trust
("REIT") as of December 31, 2003 as defined under the Internal
Revenue Code of 1986. The Company is not subject to Federal
income taxes on amounts distributed to shareholders provided
it distributes at least 90% of its REIT taxable income to its
shareholders and meets certain other conditions. The Company
and subsidiaries are subject to state and local and foreign
taxes, which aggregate $255 in 2003 and $152 in 2002, and are
included in general and administrative expenses.
Operating Segments
Accounting standards have been established for the way public
business enterprises report selected information about
operating segments and guidelines for defining the operating
segment of an enterprise. The Company has reported its real
estate operations both domestically and internationally (see
Note 11).
Reclassification:
Certain prior year amounts have been reclassified to conform
to the current year's financial statement presentation.
Accounting Pronouncements:
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.
-22-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
The transition and annual disclosure provisions for valuing
stock-based compensation 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"). In December 2003, the FASB issued a revised FIN
46 which modifies and clarifies various aspects of the
original Interpretation. FIN 46 applies when either (1) the
equity investors (if any) lack one or more of the essential
characteristics of controlling financial interest, (2) the
equity investment at risk is insufficient to finance that
entity's activities without additional subordinated financial
support or (3) the equity investors have voting rights that
are not proportionate to their economic interest. In addition
FIN 46 requires additional disclosures.
FIN 46 is effective immediately for VIEs created after January
31, 2003, and to VIEs in which an enterprise obtains an
interest after that date. For variable interests in a VIE
created or obtained prior to February 1, 2003, FIN 46 is
effective for periods ending after March 15, 2004.
The Company has evaluated the potential impact 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. The Company's
maximum loss exposure is the carrying value of its equity
investments.
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 adoption of SFAS No. 149 did not have a material
effect on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards
for the classification and measurement of certain financial
instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an
asset in some circumstances). In particular, it requires that
mandatorily redeemable financial instruments be classified as
liabilities and reported at fair value and that changes in
their fair values be reported as interest cost.
This statement was effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective for CPA(R):14 as of July 1, 2003. On November 7,
2003, the FASB indefinitely deferred the classification and
measurement provisions of SFAS No. 150 as they apply to
certain mandatorily redeemable non-controlling interests. This
deferral is expected to remain in effect while these
provisions are further evaluated by the FASB. Based on the
FASB's deferral of this provision, the adoption of SFAS No.
150 did not have a material effect on the Company's financial
statements.
2. Organization and Offering:
The Company was formed on June 4, 1997 under the General Corporation
Law of Maryland for the purpose of engaging in the business of
investing in and owning industrial and commercial real estate. Subject
to certain restrictions and limitations, the business of the Company is
managed by the Advisor.
-23-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
An initial offering of the Company's shares which commenced on November
10, 1997 concluded on November 10, 1999 at which time the Company had
issued an aggregate of 29,440,594 shares ($294,406). On November 17,
1999, the Company commenced an offering for a maximum of 40,000,000
shares of common stock. The shares were offered to the public on a
"best efforts" basis at a price of $10 per share. The second offering
concluded on November 15, 2001, by which time 36,353,686 shares
($363,537) were issued.
3. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the
Advisory Agreement between the Company and the Advisor 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 rate of cash flow from operations of 7%.
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 $7,550, $5,514
and $3,592 in 2003, 2002 and 2001, respectively, with performance fees
in like amount. The Company incurred personnel reimbursements of
$3,088, $2,234 and $1,372 in 2003, 2002 and 2001, respectively.
Fees are payable to the Advisor for services provided to the Company
relating to the identification, evaluation, negotiation, financing and
purchase of properties and refinancing of mortgages. A portion of such
fees are deferred and payable in equal installments over no less than
eight 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 and refinancings that were completed in 2003,
2002 and 2001, current fees were $2,166, $8,489 and $8,193,
respectively and deferred fees were $1,733, $6,773 and $6,554,
respectively.
The Advisor is obligated to reimburse the Company for the amount by
which operating expenses of the Company exceed the 2%/25% Guidelines
(the greater of 2% of Average Invested Assets or 25% of Net Income) as
defined in the Advisory Agreement for any twelve-month period. If in
any year the operating expenses of the Company exceed the 2%/25%
Guidelines, the Advisor will have an obligation to reimburse the
Company for such excess, subject to certain conditions. Only if the
Independent Directors find that such excess expenses were justified
based on any unusual and nonrecurring factors which they deem
sufficient, the Advisor may be paid in future years for the full amount
or any portion of such excess expenses, but only to the extent that
such reimbursement would not cause the Company's operating expenses to
exceed this limit in any such year. Charges related to asset
impairment, bankruptcy of lessees, lease payment defaults,
extinguishment of debt or uninsured losses are generally not considered
unusual and nonrecurring. A determination that a charge is unusual and
nonrecurring, such as the costs of significant litigation that are not
associated with day-to day operations, or uninsured losses that are
beyond the size or scope of the usual course of business based on the
event history and experience of the Advisor and Independent Directors,
is made at the sole discretion of the Independent Directors. The
Company will record any reimbursement of operating expenses as a
liability until any contingencies are resolved and will record the
reimbursement as a reduction of asset management and performance fees
at such time that a reimbursement is fixed, determinable and
irrevocable. The operating expenses of the Company have not exceeded
the amount that would require the Advisor to reimburse the Company.
The Advisor will be entitled to receive subordinated disposition fees
based upon the cumulative proceeds arising from the sale of Company
assets since the inception of the Company, subject to certain
conditions. Pursuant to the subordination provisions of the Advisory
Agreement, the disposition fees may be paid only after the shareholders
receive 100% of their initial investment from the proceeds of asset
sales and a cumulative annual return of 6% (based on an initial share
price of $10) since the inception of the Company. The Advisor's
interest in such disposition fees amounts to $240 as of December 31,
2003. Payment of such amount, however, cannot be made until the
subordination provisions are met. The Company has concluded that
payment of such disposition fees is probable and all fees from
completed property sales have been accrued. Subordinated disposition
fees are included in the determination of realized gain or loss on the
sale of properties. The obligation for disposition fees is included in
due to affiliates in the accompanying consolidated financial
statements.
-24-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
The Company owns interests in entities which range from 33 1/3% to 90%
and a jointly-controlled 50% tenancy-in-common interest in two
properties subject to a net lease with the remaining interests held by
affiliates. The Company has a significant influence in these
investments, which are accounted for under the equity method of
accounting.
The Company is a participant in an agreement with certain affiliates
for the purpose of leasing office space used for the administration of
real estate entities and for sharing the associated costs. Pursuant to
the terms of the agreement, the Company's share of rental, occupancy
and leasehold improvement costs is based on gross revenues. Expenses
incurred in 2003, 2002 and 2001 were $470, $376 and $237, respectively.
The Company's current share of future minimum lease payments is $1,026
through 2006.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases amount are approximately as follows:
Year Ending December 31,
- -------------------------
2004 $ 102,738
2005 101,391
2006 101,440
2007 102,836
2008 102,315
Thereafter through 2022 1,035,965
----------
Total $1,546,685
==========
Contingent rentals (including CPI-based increases) were approximately
$1,405 in 2003, $532 in 2002 and $249 in 2001.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
--------------------------
2003 2002
---- ----
Minimum lease payments receivable $246,161 $253,369
Unguaranteed residual value 111,645 112,667
-------- --------
357,806 366,036
Less: unearned income 242,899 252,608
-------- --------
$114,907 $113,428
======== ========
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable direct financing leases are approximately as follows:
Year Ending December 31,
2004 $ 12,481
2005 12,545
2006 12,636
2007 12,724
2008 12,724
Thereafter through 2031 183,052
--------
Total $246,162
========
Contingent rents (including CPI-based increases) were approximately
$108 in 2003, $63 in 2002 and $36 in 2001.
6. Equity Investments:
The Company owns interests in properties leased to corporations through
non-controlling interests. The ownership interests range from 33.33% to
50%. Contributions, distributions and allocations of income or loss
from the equity investees are based on ownership percentages and no
fees are paid by the Company or the partnerships to any of the general
partners of the limited partnerships. All of the underlying investments
are owned with affiliates that have similar investment objectives as
the
-25-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
Company. The lessees are Advanced Micro Devices, Inc., Compucom
Systems, Inc., Textron, Inc., Special Devices, Inc., Applied Materials,
Inc. and CheckFree Holdings, Inc., Clear Channel Communications, Inc.
and TruServ Corporation. The Company along with two affiliates,
CPA(R):12 and Corporate Property Associates 15 Incorporated
("CPA(R):15") formed a limited liability company and, on February 7,
2003, entered into a net lease with Starmark Camhood, L.L.C.
("Starmark").
Summarized combined financial information of the Company's equity
investees is as follows:
December 31,
------------------------
2003 2002
---- -----
Assets (primarily real estate) $781,144 $591,167
Liabilities (primarily limited recourse mortgage notes payable) 471,052 329,330
Members' equity 310,092 261,837
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues (primarily rental revenues) $80,329 $34,521 $ 31,060
Expenses (primarily interest on mortgage and depreciation) (46,429) (20,352) (19,539)
------- ------- --------
Net income $33,900 $14,169 $ 11,521
======= ======= ========
On February 7, 2003, the Company, CPA(R):12 and CPA(R):15, through a
newly-formed limited liability company with ownership interests of 41%,
15% and 44%, respectively, purchased land and 15 health club facilities
for $178,010 and entered into a master net lease with Starmark. The
lease obligations of Starmark are jointly unconditionally guaranteed by
seven of its affiliates.
The Starmark lease provides for an initial lease term of 20 years with
three ten-year renewal terms. Annual rent is initially $18,272 with
CPI-based increases scheduled in November 2006, 2010, 2014, 2018 and
2021. $167 of annual rent will not be included in the determination of
the future rent increases.
In connection with the purchase, the limited liability company obtained
first mortgage limited recourse financing of $88,300 and a mezzanine
loan of $20,000. The first mortgage provides for monthly payments of
interest and principal of $564 at an annual interest rate of 6.6% and
based on a 30-year amortization schedule. The loan matures in March
2013 at which time a balloon payment is scheduled. The mezzanine loan
provides for monthly payments of interest and principal of $277 at an
annual interest rate of 11.15% and will fully amortize over its
ten-year term.
The limited liability company was granted 5,276 warrants for Class C
Unit interests in Starmark that represent a 5% interest in Starmark.
The warrants may be exercised at any time through February 7, 2023 at
an exercise price of $430 per unit. The warrant agreement does not
provide for a cashless exercise of units.
7. Mortgage Financing Through Securitization:
In 2002, the Company and three affiliates, W.P. Carey & Co. LLC ("W. P.
Carey"), Carey Institutional Properties Incorporated ("CIP(R)") and
Corporate Property Associates 12 Incorporated ("CPA(R):12") obtained an
aggregate of approximately $172,335 of limited recourse mortgage
financing collateralized by 62 leased properties. The lender pooled the
loans into a trust, Carey Commercial Mortgage Trust, a non-affiliate,
whose assets consist solely of the loans, and sold the interests in the
trust as collateralized mortgage obligations in a private placement to
institutional investors (the "Offered Interests"). The Company and the
three affiliates acquired a separate class of subordinated interests in
the trust (the "CPA(R) Interests"). The amount of CPA(R) Interests
acquired by the Company was proportional to the mortgage amounts
obtained.
All of the mortgage loans provide for payments of principal and
interest at an annual rate of 7.5% and are based on a 25-year
amortization schedule. Each loan is collateralized by mortgages on the
properties and lease assignments. Under the lease assignments, the
lessees direct their rent payment to the mortgage servicing company
which in turn
-26-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
distributes amounts in excess of debt service requirements to the
applicable lessors. Under certain limited conditions, a property may be
released from its mortgage by the substitution of another property.
Such substitution is subject to the approval of the trustee of the
trust.
The initial Offered Interests consisted of $148,206 of mortgage loan
balances with different tranches of principal entitled to distributions
at annual interest rates as follows: $119,772 - 5.97%, $9,478 - 6.58%,
$9,478 - 7.18% and $9,478 - 8.43%. The assumed final distribution dates
for the four classes of Offered Interests range from December 2011
through March 2012.
The CPA(R) Interests were purchased for $24,129 of which the Company's
share was $6,032, or 25%, and are comprised of two components, a
component that will receive payments of principal and interest and a
component that will receive payments of interest only. The CPA(R)
Interests are subordinated to the Offered Interests and will be payable
only when and if all distributions to the Offered Interests are
current. The assumed final distribution date for the CPA(R) Interests
is June 30, 2012. The distributions to be paid to the CPA(R) Interests
do not have a stated rate of interest and will be affected by any
shortfall in rents received from the lessees or defaults at the
mortgaged properties. As of the purchase date, the Company's cost basis
attributable to the principal and interest and interest only components
was $3,612 and $2,420, respectively. Over the term of its ownership
interest in the CPA(R) Interests, the value of the interest only
component will fully amortize to $0 and the principal and interest
component will amortize to its anticipated face value of its share in
the underlying mortgages (which currently is $6,032). For financial
reporting purposes, the effect of such amortization is reflected in
interest income. Interest income, including all related amortization,
is recognized using an effective interest method.
The Company is accounting for its interest in the CPA(R) Interests as
an available-for-sale security and it 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. The fair
value of the Company's CPA(R) Interests was $6,792 and $6,258,
reflecting an unrealized gain of $898 and $257 and accumulated
amortization of $138 and $31 at December 31, 2003 and 2002,
respectively. 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.
The key variable in determining the fair value of the CPA(R) Interests
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 CPA(R)
Interests based on adverse changes in the market interest rates of 1%
and 2% as of December 31, 2003 is as follows:
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Fair value of CPA(R) Interests $6,792 $6,461 $6,152
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.
8. Mortgage Notes Payable:
Mortgage notes payable, all of which are limited recourse to the
Company, are collateralized by an assignment of various leases and by
real property with a carrying value of $1,069,454. As of December 31,
2003, mortgage notes payable had fixed interest rates ranging from
6.09% to 8.85% and variable interest rates ranging from 3.12% to 6.49%
and maturity dates ranging from 2008 to 2026.
Scheduled principal payments during each of the five years following
December 31, 2003 are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
- ------------------------ ---------- --------------- ------------------
2004 $ 11,093 $ 10,513 $ 580
2005 12,139 11,534 605
2006 13,124 12,500 624
2007 14,092 13,449 643
2008 20,275 19,613 662
Thereafter through 2026 631,452 606,525 24,927
-------- -------- -------
Total $702,175 $674,134 $28,041
======== ======== =======
-27-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
Interest paid, excluding capitalized interest, was $50,445, $42,813 and
$20,271 in 2003, 2002 and 2001, respectively. Capitalized interest was
$357 in 2003, $808 in 2002 and $1,986 in 2001.
9. Dividends:
Dividends paid to shareholders consist of ordinary income, capital
gains, return of capital or a combination thereof for income tax
purposes. For the three years ended December 31, dividends per share
reported for tax purposes were as follows:
2003 2002 2001
---- ---- ----
Capital gain dividend $ .01
Ordinary income $ .57 .36 $ .44
Return of capital .19 .38 .27
----- ----- -----
$ .76 $ .75 $ .71
===== ===== =====
A dividend of $.18920 per share for the quarter ended December 31, 2003
($12,662) was declared in December 2003 and paid in January 2004.
10. Lease Revenues:
The Company's operations consist of the investment in and the leasing
of industrial and commercial real estate. For the years ended December
31, 2003, 2002, and 2001 the financial reporting sources are as
follows:
2003 2002 2001
---- ---- ----
Per Statements of Income:
Rental income from operating leases $108,705 $ 98,112 $55,490
Interest income from direct financing leases 13,010 11,798 8,899
Share of lease revenues applicable to minority
interest (7,838) (7,629) (4,579)
Share of leasing revenues from equity
investments 30,556 13,279 11,769
-------- -------- -------
$144,433 $115,560 $71,579
======== ======== =======
-28-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
In 2003, 2002 and 2001, the Company earned its share of net lease
revenues from its direct and indirect ownership of real estate from the
following lease obligations:
2003 % 2002 % 2001 %
---- ---- ----
Carrefour France, SAS $ 11,597 8% $ 6,671 6% - -
Starmark Camhood, L.L.C. (b) 6,713 5 - - - -
Nortel Networks Limited 6,001 4 6,001 5 $ 157 -
Petsmart, Inc. (a) 5,812 4 6,228 5 635 1%
Clear Channel Communications, Inc. 5,660 4 - - - -
TruServ Corporation (b) 5,056 4 11 - - -
Atrium Companies, Inc. 4,457 3 4,451 4 2,810 4
Advance PCS, Inc. 4,300 3 4,300 4 4,300 6
Federal Express Corporation (a) 3,958 3 3,915 3 3,872 5
Tower Automotive, Inc. 3,895 3 2,813 2 - -
Galyan's Trading Company 3,811 3 3,811 3 3,811 5
Katun Corporation 3,739 3 1,746 2 - -
Collins & Aikman Corporation 3,296 2 3,249 3 836 1
Advanced Micro Devices, Inc. (b) 3,259 2 3,259 3 3,049 4
Metaldyne Company LLC 3,207 2 3,142 3 2,071 3
Applied Materials, Inc. (b) 3,097 2 3,099 3 3,072 4
Perkin Elmer, Inc. 2,985 2 2,494 2 26 -
APW North America Inc. 2,857 2 2,761 2 2,650 4
Amerix Corporation 2,477 2 2,458 2 2,393 3
Celestica Corporation 2,421 2 2,420 2 1,614 2
Institutional Jobbers Company 2,271 2 2,271 2 2,271 3
Buffets, Inc. 2,224 2 2,133 2 2,131 3
Gerber Scientific, Inc. 2,202 2 2,134 2 894 1
CheckFree Holdings, Inc. (b) 2,128 2 2,108 2 2,088 3
McLane Company, Inc. (a) 2,113 1 2,090 2 2,075 3
Gibson Guitar Corp. (c) 2,053 1 1,892 2 1,493 2
Waddington North America, Inc. 2,038 1 1,811 2 1,202 2
Best Buy Co., Inc. 2,004 1 1,959 2 1,989 3
Special Devices, Inc. (b) 1,995 1 1,962 2 1,119 2
Stellex Technologies, Inc. 1,984 1 1,883 3 1,563 4
Builders FirstSource, Inc. (a) 1,871 1 1,944 2 1,052 1
Consolidated Theaters Holding, G.P. 1,733 1 1,711 1 1,691 2
PW Eagle, Inc. 1,651 1 1,374 1 - -
American Tire Distributors, Inc. 1,645 1 1,261 1 - -
New Creative Enterprises, Inc. 1,590 1 1,576 1 504 -
Rave Reviews Cinemas, L.L.C. 1,531 1 1,405 1 780 -
Other (a) (b) (c) 24,802 17 23,217 18 19,431 29
-------- --- -------- --- ------- ---
$144,433 100% $115,560 100% $71,579 100%
======== === ======== === ======= ===
(a) Net of minority interest of an affiliate.
(b) Represents the Company's proportionate share of lease revenues from its
equity investments.
(c) Net of unaffiliated third party's minority interest.
11. Segment Information:
The Company has determined that it operates in one business segment,
real estate operations with domestic and foreign investments. The
Company acquired its first foreign real estate investment in January
2001.
For 2003, geographic information for the real estate operations segment
is as follows:
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
Domestic Foreign Total Company
---------- -------- ------------
Revenues $ 109,622 $ 18,830 $ 128,452
Expenses 88,026 19,129 107,155
Income from equity investments 12,992 - 12,992
Net operating income (loss) (1) 33,099 (299) 32,800
Total assets 1,143,581 202,166 1,345,747
Total long-lived assets 1,055,321 190,412 1,245,733
For 2002, geographic information for the real estate operations segment
is as follows:
Domestic Foreign Total Company
---------- -------- ------------
Revenues $ 101,202 $ 11,154 $ 112,356
Expenses 76,348 10,098 86,446
Income from equity investments 5,320 - 5,320
Net operating income(1) 28,451 1,055 29,506
Total assets 1,151,723 168,174 1,319,897
Total long-lived assets 1,043,682 155,248 1,198,930
For 2001, geographic information for the real estate operations segment
is as follows:
Domestic Foreign Total Company
---------- -------- ------------
Revenues $65,845 $1,296 $67,141
Expenses 51,032 1,006 52,038
Income from equity investments 3,693 - 3,693
Net operating income(1) 18,215 290 18,505
Total assets 1,058,123 39,115 1,097,238
Total long-lived assets 889,238 38,092 927,330
(1) Income from continuing operations before (loss) gain.
12. Impairment Charges:
2003
The Company owns a property in Gardena, California leased to Scott
Companies Inc. Scott has rent arrearages of $474 as of December 31,
2003 and as a result of its financial difficulties has defaulted on its
lease. The Company has written down the property to its estimated fair
value and recognized an impairment charge of $2,900.
In connection with the Company's annual review of the estimated
residual values on its properties classified as net investments in
direct financing leases, the Company determined that an other than
temporary decline in estimated residual value had occurred at its
property in Mooresville, North Carolina leased to NASCAR Technical
Institute, Inc., and the accounting for the direct financing lease was
revised using the changed estimates. The resulting change in estimate
resulted in the recognition of an impairment charge of $203.
2001
The Company purchased a property in Daleville, Indiana in June 1998 and
entered into a net lease with Burlington Motor Carriers, Inc.
("Burlington"). Subsequent to Burlington's petition of bankruptcy, the
lease was terminated. The Company recorded an impairment charge of
$3,810 on the Burlington property in 2001.
13. Purchases of Real Estate:
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.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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.
14. 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.
No properties are held for sale as of December 31, 3003. At December
31, 2002, the operations from a property in Greenville, Texas which was
sold in June 2002 at a gain of $333 were included as "Discontinued
Operations." A summary of Discontinued Operations for the years ended
December 31, 2002 and 2001 is as follows.
Year Ended December 31,
-----------------------
2002 2001
---- ----
Revenues (primarily rental revenues) $150 $317
Expenses (primarily interest on mortgages,
depreciation and property expenses) (78) (177)
Gain on sale of real estate 333 -
---- ---
Income from discontinued operations $405 $140
==== ====
15. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage and notes payable
at December 31, 2003 and 2002 was approximately $706,040 and $681,711,
respectively. The fair value of debt instruments was evaluated using a
discounted cash flow model with rates that take into account the credit
of the tenants and interest rate risk.
16. Selected Quarterly Financial Data (unaudited):
Three Months Ended
------------------
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-------------- ------------- ------------------ -----------------
Revenues $32,864 $30,906 $32,815 $31,867
Expenses 25,136 25,039 30,418 26,562
Net income 10,604 8,666 6,124 8,426
Net income per share - Basic and diluted .16 .13 .09 .13
Dividends declared per share .1884 .1887 .1889 .1892
Three Months Ended
------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-------------- ------------- ------------------ -----------------
Revenues $24,931 $27,815 $29,500 $30,110
Expenses 18,888 20,195 22,556 24,807
Income from continuing operations 7,311 8,468 7,784 6,298
Income from continuing operations per
share - Basic and diluted .11 .13 .12 .09
Net income 7,347 8,837 7,784 6,298
Net income per share - Basic and diluted .11 .13 .12 .09
Dividends declared per share .1875 .1877 .1879 .1882
-31-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the Company. As
of December 31, 2003, there were 21,137 holders of record of the Shares of the
Company.
The Company is required to distribute annually at least 90% of its Distributable
REIT Taxable Income to maintain its status as a REIT. Quarterly dividends paid
by the Company since December 31, 2000 are as follows:
Cash Dividends Paid Per Share
----------------------------------------
2003 2002 2001
---- ---- ----
First quarter $.188200 $.186245 $.171249
Second quarter .188400 .187500 .175005
Third quarter .188700 .187700 .178751
Fourth quarter .188900 .187900 .182500
-------- -------- --------
$.754200 $.749345 $.707505
======== ======== ========
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and
without charge, a copy of the Annual Report on Form 10-K ("10-K") for
the year ended December 31, 2003 as filed with the Securities and
Exchange Commission ("SEC"). The 10-K may also be obtained through the
SEC's EDGAR database at www.sec.gov.
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