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, primarily on a triple net basis. As of December 31, 2002, CPA(R):14's portfolio consisted of 136 properties leased to 60 tenants and totaling more than 24.6 million 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 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. During the fourth quarter of 2002, CPA(R):14 established a dividend reinvestment plan. Through December 31, 2002, CPA(R):14 has issued 3,000 shares through the 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.
Carey Asset Management Corp., 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. Carey Asset Management Corp. also provides office space and other facilities for CPA(R):14. Carey Asset Management Corp. 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 Carey Asset Management Corp. and pays certain transactional fees. CPA(R):14 also reimburses Carey Asset Management Corp. for certain expenses. Carey Asset Management Corp. also serves in this capacity for Carey Institutional Properties Incorporated, Corporate Property Associates 12 Incorporated and Corporate Property Associates 15 Incorporated. Carey Asset Management Corp. is a wholly-owned subsidiary of W. P. Carey & Co. LLC, a company with shares 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, 2002, CPA(R):14 had no employees. Carey Asset Management Corp. employs 27 individuals who perform services for CPA(R):14. CPA(R):14's website address is http://www.CPA14.com.
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.
DEVELOPMENTS DURING 2002
In February 2002, CPA(R):14 received $10,766,000 from its affiliate, Corporate Property Associates 15 Incorporated ("CPA(R):15"), when CPA(R):15 exercised its purchase option to increase its minority interest ownership interests in limited partnerships that net lease properties to Petsmart, Inc. and Builders Firstsource, Inc. to 30% and 40%, respectively. In January 2002, the Builders Firstsource limited partnership obtained a $7,600,000 limited recourse mortgage loan on the Builders Firstsource property. The loan provides for monthly payments of principal and interest totaling $56,510 based on an annual interest rate of 7.57% and a 25-year amortization schedule.
On February 11, 2002, CPA(R):14 purchased a property in Mooresville, North Carolina on which a building was constructed on a build-to-suit basis and entered into a net lease with UTI Holdings, Inc. and Nascar Technical Institute, Inc. The total purchase price including construction costs was $11,011,356. On September 29, 2002, an initial lease term of 20 years commenced at an initial annual rent of $1,260,230. The lease provides for stated annual increases of 2.5% and three seven year renewal terms.
In December 2000, CPA(R):14 purchased a property in St. Charles, Missouri leased to Fitness Holdings, Inc., and obtained limited recourse mortgage financing of $3,800,000. On February 22, 2002, CPA(R):14 paid off the loan and obtained a new limited recourse mortgage loan of $3,800,000 collateralized by the property. The new loan provides for monthly payments of principal and interest totaling $26,648 based on an annual interest rate of 7.53% and a 30-year amortization schedule.
On February 28, 2002, CPA(R):14 purchased properties in Tacoma, Washington; Eugene, Oregon; Perris, California and West Jordan, Utah for $14,712,042 and entered into a master net lease with PW Eagle, Inc. The PW Eagle lease has an initial term of 20 years with two ten-year renewal terms and provides for an initial annual rent of $1,650,875 with increases every two years based on a formula indexed to increases in the Consumer Price Index ("CPI"). In consideration for structuring the lease, PW Eagle granted CPA(R):14 120,000 warrants for PW Eagle common stock, exercisable over twenty years at $.01 per share. CPA(R):14 obtained a limited recourse mortgage loan of $8,200,000 collateralized by deeds of trust on the PW Eagle properties and a lease assignment. The loan provides for monthly payments of interest and principal of $57,898 at an annual interest rate of 7.6% and a thirty-year amortization schedule. The loan matures in February 2012, at which time a balloon payment is scheduled.
On March 26, 2002, CPA(R):14 purchased properties in Lincolnton and Charlotte, North Carolina and Maudlin, South Carolina for $14,973,822 and entered into a net lease with Heafner Tire Group, Inc. The Heafner lease has an initial term of 20 years with two ten-year renewal options and provides for an initial annual rent of $1,644,500, with increases every two years based on a formula indexed to increases in the CPI and capped at 8.16%. In connection with the purchase, CPA(R):14 obtained a limited recourse mortgage loan of $8,750,000 collateralized by a mortgage and lease assignment. The loan provides for monthly payments of interest and principal of $64,754 at an annual interest rate of 8.09% based on a thirty-year amortization schedule. The loan matures in April 2012, at which time a balloon payment is scheduled. In consideration for structuring the leases, Heafner granted CPA(R):14 warrants for 153,597 shares of common stock representing 0.75% of the fully diluted shares of Heafner. The warrants have a per share exercise price of $3.00 and are exercisable over a ten-year period. Heafner has changed its name to American Tire Distributors, Inc.
On March 26, 2002, CPA(R):14 purchased eight properties in France for Euro 86,666,128 ($72,049,602) at the date of acquisition) and entered into seven separate net leases with Societe Logidis. The lease obligations of Societe Logidis are unconditionally guaranteed by its parent company, Carrefour France, SAS. The leases have nine-year terms and provide for aggregate annual rent of Euro 8,185,999 ($7,183,214 at the date of acquisition), with annual rent increases based on a formula indexed to increases in the INSEE, a French construction cost index. In connection with the purchase of the Carrefour properties, CPA(R):14 obtained a limited recourse mortgage loan of Euro 64,700,000 ($56,774,250 at the date of acquisition) which provides for quarterly payments of interest at an annual interest rate of 6.38%. The interest rate is fixed through 2012, at which time CPA(R):14 has the option to choose either a variable rate based on the Euribor three-month or a fixed rate based on the lenders' cost to refinance the loan. Principal installments are payable based on an initial 2.20% 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.
On July 1, 2002 CPA(R):14 purchased a property in Lieusaint, France for Euro 15,165,884 ($15,015,727 at the date of acquisition) and entered into an additional net lease with Societe Logidis. The lease obligations of Societe Logidis
are unconditionally guaranteed by Carrefour. The lease has a nine-year term and provides for annual rent of Euro 1,520,279 ($1,507,265 at the date of acquisition), with annual rent increases based on a formula indexed to increases in the INSEE. In connection with the purchase of the Carrefour property, CPA(R):14 obtained a limited recourse mortgage loan of Euro 12,400,000 ($12,295,840 at the date of acquisition) which provides for quarterly payments of interest at an annual interest rate of 6.38%. The interest rate is fixed through 2012, at which time CPA(R):14 has the option to choose either a variable rate based on the Euribor three-month rate or a fixed rate based on the lenders' cost to refinance the loan. Principal installments are payable based on an initial 2.20% 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.
On April 10, 2002, CPA(R):14 purchased land and buildings in Granite City, Illinois; Kendallville, Indiana; Clinton, Michigan and Upper Sandusky, Ohio for $34,711,184 and entered into a master net lease with Tower Automotive Products Company, Inc. and Tower Automotive Tool LLC (collectively, "Tower"). The lease obligations have been unconditionally guaranteed by Tower Automotive, Inc., the parent company. The lease has an initial term of 18 years followed by two ten-year renewal options. Annual rent is initially $3,895,125 with rent increases every three years based on a formula indexed to increases in the CPI. In connection with the purchase, CPA(R):14 obtained $19,878,130 of limited recourse mortgage financing collateralized by the Tower properties and a lease assignment. The loan provides for monthly payments of interest and principal of $145,582 at an annual interest rate of 7.89% and based on a 30-year amortization schedule. The loan matures in May 2012 at which time a balloon payment is scheduled.
On May 22, 2002, CPA(R):14 purchased a property in Upper Saucon Township, Pennsylvania on which a building is being constructed on a build-to-suit basis and entered into a net lease with Allentown Business School, Ltd. The lease obligations have been unconditionally guaranteed by Career Education Corp., the parent company. The total purchase price including construction costs is estimated to be $19,371,728. On July 1, 2003, a lease term of 20 years with two ten-year renewal terms will commence at an annual rent of $1,951,750 if the entire estimated funding of the build-to-suit project is required. Initial annual rent will be increased by 10.55% of the funding of any project cost overruns resulting from lessee change orders during the construction period, or decreased by 10.55% of the amounts for a tenant improvement allowance that are not used. The lease provides for rent increases every two years based on a formula indexed to increases in the CPI, capped at 6.5%.
On June 21, 2002, CPA(R):14 sold a property in Greenville, Texas leased to Atrium Companies, Inc. ("Atrium") for $3,633,781 and recognized a gain on sale of $333,361. Atrium continues to lease five properties from CPA(R):14.
On July 5, 2002, CPA(R):14 purchased land and buildings in Davenport, Iowa, Bloomington, Minnesota and Edisonweg, Gorinchem, the Netherlands for $35,523,560 and entered into a master net lease with Katun Corporation ("Katun") for the Iowa and Minnesota properties and a net lease with Katun (E.D.C.) B.V. for the Netherlands property. The lease obligations of Katun (E.D.C.) B.V. have been unconditionally guaranteed by Katun, the parent company. Both leases have an initial term of 20 years followed by two ten-year renewal options. Annual rent is initially $2,971,350 for the Iowa and Minnesota properties and Euros 678,241 ($664,304 as of the date of acquisition) for the Netherlands property. Both leases provide for rent increases on the fourth lease anniversary and every three years thereafter based on a formula indexed to increases in the CPI. In connection with the purchase of the Iowa and Minnesota properties, CPA(R):14 obtained $19,000,000 of limited recourse mortgage financing collateralized by a mortgage on the properties and a lease assignment. The loan provides for monthly payments of interest and principal of $128,327 at an annual interest rate of 7.15% and based on a 30-year amortization schedule. The loan matures in August 2012 at which time a balloon payment is scheduled. In connection with the purchase of the Netherlands property, CPA(R):14 obtained Euros 5,600,000 ($5,486,880 as of the date of acquisition) of limited recourse mortgage financing collateralized by a mortgage on the property. The loan provides for quarterly payments of interest at an annual interest rate of 6.50%. Principal installments are payable based on an initial 1.75% annuity per annum, with scheduled increases throughout the term of the loan. The loan matures on June 30, 2022, at which time a balloon payment is scheduled.
On August 28, 2002, CPA(R):14 and three affiliates, W. P. Carey & Co. LLC, Carey Institutional Properties Incorporated and Corporate Property Associates 12 Incorporated 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.
CPA(R):14 obtained new mortgage financing proceeds in this transaction of approximately $42,332,686. The CPA(R) Interests were purchased for $24,128,739 of which CPA(R):14's share was $6,032,185, or 25%.
The loans obtained were as follows: (in thousands)
The loans provide for payments of principal and interest at an annual rate of 7.5% and are based on a 25-year amortization schedule. Balloon payments are due on the maturity dates.
In April 2001, CPA(R):14 purchased four properties for $17,801,047 and entered into a net lease with Waddington North America, Inc. The lease provided for an initial term of 20 years and annual rent of $1,810,500. On August 5, 2002, CPA(R):14 purchased land adjacent to the Waddington property in Lancaster, Texas for $480,904 and, on September 17, 2002, entered into a commitment to expand the existing property. The total cost of the expansion, including the land purchase, is estimated to amount to $3,781,545. Upon completion of improvements, which is expected to be completed in May 2003, annual rent will increase to $2,192,100.
In June 1999, CPA(R):14 purchased a property in Harrisburg, North Carolina upon which a build-to-suit facility was constructed and net leased to Builders' Supply and Lumber Co., Inc. On September 30, 2002, CPA(R):14 obtained a $6,500,000 limited recourse mortgage loan collateralized by the property. The loan provides for monthly payments of principal and interest totaling $42,718 based on an annual interest rate of 6.21% and a 25-year amortization schedule.
On December 26, 2002, CPA(R):14, CPA(R):12 and CPA(R):15 through three newly formed limited partnerships with ownership interests of 35%, 15% and 50% respectively, purchased land and seven buildings located in Kingman, Arizona; Woodland, California; Jonesboro, Georgia; Kansas City, Missouri; Springfield, Oregon; Fogelsville, Pennsylvania and Corsicana, Texas for $131,678,450, and entered into three master net leases with TruServ. The leases have initial terms of 20 years followed by one renewal term of nine years and 11 months and a second renewal term of 10 years. The leases provide for aggregate initial rent of $12,007,151, with stated annual increases. In connection with the purchase of the properties, the limited partnerships obtained limited recourse mortgage loans totaling $76,654,821 (including $27,550,047 obtained in January 2003), collateralized by deeds of trust on the properties, and lease assignments. The loans provide for aggregate monthly payments of interest and principal of $451,134, at an annual interest rate of 5.83% based on 30-year amortization schedules. The loans mature in January and February 2013 at which time balloon payments are scheduled.
On December 12, 2002, CPA(R):14 and CPA(R):15 formed a limited partnership with 40% and 60% interests, respectively and, which purchased a property in New York, New York for $152,041,885 and assumed an existing net lease with SFX Entertainment, Inc. The lease obligations are unconditionally guaranteed by the lessees' parent company, Clear Channel. The lease has a remaining term through September 2020 with two ten-year renewal options. The lease provides for an initial annual rent of $10,914,312 with stated rent increases every five years. In connection with the purchase of the properties, the limited partnership obtained limited recourse mortgage financing of $85,000,000 collateralized by a mortgage and security agreement. The loan provides for monthly payments of interest and principal of $481,473 at an annual interest rate of 5.52% based on a 30-year amortization schedule. The loan matures in December 2012 at which time a balloon payment is scheduled.
On February 7, 2003, CPA(R):14, 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 $178,010,471 and entered into a master net lease with Starmark Camhood, L.L.C. ("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 $18,272,400 with CPI-based increases scheduled in November 2006, 2010, 2014, 2018 and 2021. $167,400 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 $88,300,000 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 scheduled. 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 5,276 warrants for Class C Unit interests in Starmark and represent a 5% interest in the Company. The warrants which 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.
ACQUISITION STRATEGIES
Carey Asset Management Corp. 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, Carey Asset Management Corp. 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 Carey Asset Management Corp.'s presence in the net lease market to build its portfolio. In evaluating opportunities for CPA(R):14, Carey Asset Management Corp. 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 Carey Asset Management Corp. has one of the most extensive underwriting processes in the industry and has an experienced staff of professionals involved with underwriting transactions. Carey Asset Management Corp. seeks to identify those prospective tenants whose creditworthiness is likely to improve over time. CPA(R):14 believes that the experience of Carey Asset Management Corp.'s management in structuring sale-leaseback transactions to meet the needs of a prospective tenant enables Carey Asset Management Corp. 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.
Carey Asset Management Corp.'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.
FINANCING STRATEGIES
Consistent with its investment policies, CPA(R):14 uses leverage when available on favorable terms. CPA(R):14 has approximately $666,740,000 in property level debt outstanding. These mortgages mature between 2008 and 2026 and have interest rates between 3.38% and 8.85%.
Carey Asset Management Corp. continually seeks opportunities and considers alternative financing techniques, including the mortgage securitization transaction described in Current Developments above, in order to finance properties not currently subject to debt, refinance debt, reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, Carey Asset Management Corp. 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 Carey Asset Management Corp. include the following:
Tenant Evaluation. Carey Asset Management Corp. evaluates each potential tenant for its credit, management, position within its industry, operating history and profitability. Carey Asset Management Corp. 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).
Carey Asset Management Corp. 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 Carey Asset Management Corp. will select tenants it believes are creditworthy, tenants will not be required to meet any minimum rating established by an independent credit rating agency. Carey Asset Management Corp.'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. Carey Asset Management Corp. 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. Carey Asset Management Corp. seeks to avoid entering into leases that provide for contractual reductions in rents during their primary term.
Properties Important to Tenant Operations. Carey Asset Management Corp. generally seeks to acquire properties with operations that are essential or important to the ongoing operations of the tenant. Carey Asset Management Corp. 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. Carey Asset Management Corp. 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, Carey Asset Management Corp. 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. Carey Asset Management Corp. 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, Carey Asset Management Corp. reduces the adverse effect of a single under-performing investment or a downturn in any particular industry or geographic region.
Carey Asset Management Corp. 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 Carey Asset Management Corp.'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. Carey Asset Management Corp. 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.
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.
Carey Asset Management Corp.'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.
Carey Asset Management Corp. 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. Carey Asset Management Corp. reviews financial statements of its tenants and undertakes regular physical inspections of the condition and maintenance of its properties. Additionally, Carey Asset Management Corp. 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.
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, 2002, 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;
- 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 are 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 Carey Asset Management Corp. 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 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 W. P. Carey & Co.
Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of W. P. Carey & Co. 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 W. P. Carey & Co. and the oversight of the board of directors.
W. P. Carey & Co. may be subject to conflicts of interest.
W. P. Carey & Co. manages our business and selects our real estate investments. W. P. Carey & Co. has some conflicts of interest in its management of CPA(R):14, which arise primarily from the involvement of W. P. Carey & Co. and its affiliates in other activities that may conflict with CPA(R):14 and the payment of fees by us to W. P. Carey & Co. and its affiliates. The activities in which a conflict could arise between CPA(R):14 and W. P. Carey & Co. are:
- - the receipt of commissions, fees and other compensation by W. P. Carey & Co. and its affiliates for property purchases, leases, sales and financing for CPA(R):14, which may cause W. P. Carey & Co. 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 W. P. Carey & Co. or any of its affiliates, including agreements regarding compensation of W. P. Carey & Co. 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 W. P. Carey 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 W. P. Carey & Co. 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.
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, 2002, we had limited recourse mortgage notes payable outstanding of $666,740,233.
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. There are no balloon payments scheduled over the next five years.
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.
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 W. P. Carey & Co. or our board 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 Carey Asset Management Corp. 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 Carey Asset Management Corp. or our board 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.
Item 2.
Item 2. Properties.
Set forth below is certain information relating to CPA(R):14's properties owned as of December 31, 2002.
1. Percentage of ownership in land and building, except as noted. Fee simple ownership interest unless otherwise no ted.
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, 2002.
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.
Item 3. Legal Proceedings.
As of the date hereof, CPA(R):14 is not a party to any material pending legal proceedings.
Item 4.
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, 2002 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5.
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 30 of CPA(R):14's Annual Report contained in Appendix A.
Item 6.
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.
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 10 of CPA(R):14's Annual Report contained in Appendix A.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
Approximately $645,793,000 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, 2002 ranged from 6.09% to 8.85%. The interest rate on the variable rate debt as of December 31, 2002 ranged from 3.38% to 8.54%.
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, 2002. Additionally, foreign currency translation gains and losses were not material to our financial condition for the three-year period ended December 31, 2002. Accordingly, we were not subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies may have on our future costs or on future cash flows we may receive from our foreign subsidiaries. To date, we have 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:
Scheduled principal payments for the mortgage notes payable during each of the next five years following December 31, 2002 and thereafter are as follows:
(1) Based on December 31, 2002 exchange rate. The mortgage notes are denominated in the functional currency of the country of each property.
Item 8.
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 11 to 31 of CPA(R):14's Annual Report contained in Appendix A:
(i) Report of Independent Accountants
(ii) Consolidated Balance Sheets at December 31, 2001 and 2002.
(iii) Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000.
(iv) Consolidated Statement of Shareholders' Equity for the years ended December 31, 2000, 2001, and 2002.
(v) Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000.
(vi) Notes to Consolidated Financial Statements.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10.
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.
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.
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.
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.
PART IV
Item 14.
Item 14. 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, 2002.
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.
Item 15.
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 Accountants.
Consolidated Balance Sheets, December 31, 2002 and 2001.
Consolidated Statements of Income for the years ended December 31, 2002, 2001, 2000.
Consolidated Statement of Shareholders' Equity for the years ended December 31, 2000, 2001, and 2002.
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by reference to pages 11 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 Accountants.
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2002.
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.
(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.
(b) Reports on Form 8-K
During the quarter ended December 31, 2002 the Registrant was not required to file any reports on Form 8-K.
(c) Pursuant to Rule 701 of Regulation S-K, the use of proceeds through December 31, 2002 from CPA(R):14's offering of common stock which commenced November 17, 1999 (File # 333-76761) is as follows:
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
3/25/03 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
3/25/03 BY: /s/ William Polk Carey - ------- ---------------------------------------- Date William Polk Carey Chairman of the Board and Director (Principal Executive Officer)
3/25/03 BY: /s/ Gordon F. DuGan - ------- ---------------------------------------- Date Gordon F. DuGan Vice Chairman of the Board, Senior Managing Director and Chief Acquisitions Officer
3/25/03 BY: /s/ Gordon J. Whiting - ------- ---------------------------------------- Date Gordon J. Whiting President
3/25/03 BY: /s/ Elizabeth P. Munson - ------- ---------------------------------------- Date Elizabeth P. Munson Director
3/25/03 BY: /s/ William Ruder - ------- ---------------------------------------- Date William Ruder Director
3/25/03 BY: /s/ George E. Stoddard - ------- ---------------------------------------- Date George E. Stoddard Director
3/25/03 BY: /s/ Warren G. Wintrub - ------- ---------------------------------------- Date Warren G. Wintrub Director
3/25/03 BY: /s/ John J. Park - ------- ---------------------------------------- Date John J. Park Managing Director and Chief Financial Officer (Principal Financial Officer)
3/25/03 BY: /s/ Claude Fernandez - ------- ---------------------------------------- Date Claude Fernandez Managing Director and Chief Accounting Officer (Principal Accounting Officer)
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this annual report on Form 10-K of Corporate Property Associates 14 Incorporated (the "Registrant");
2. Based on our knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on our knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and we are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and we have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and we have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date 3/25/03 Date 3/25/03
/s/ William Polk Carey /s/ Gordon F. DuGan - --------------------------- -----------------------------
William Polk Carey Gordon F. DuGan Chairman Vice Chairman (Co-Chief Executive Officer) (Co-Chief Executive Officer)
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this annual report on Form 10-K of Corporate Property Associates 14 Incorporated (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date 3/25/03
/s/ John J. Park - ---------------------------
John J. Park Chief Financial Officer
REPORT of INDEPENDENT ACCOUNTANTS
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 20, 2003 appearing in the 2002 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 20, 2003
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2002
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2002
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2002
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2002
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2002
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, 2002, the aggregate cost of real estate owned by CPA(R):14 and its subsidiaries for Federal income tax purposes $916,934,104.
(d)
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
2002 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except per share and share amounts)
(1) The Company paid its first dividend in July 1998.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents mortgage notes payable and deferred acquisition fee installments that are due after more than one year.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(dollar amounts in thousands)
Overview
The following discussion and analysis of the 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, 2002. The following discussion includes forward looking statements. Forward looking statements, which are based on certain assumptions, describe CPA(R):14's future plans, strategies and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause CPA(R):14's actual results, performance or achievement to be materially different from the results of operations or plan expressed or implied by these forward looking statements. Accordingly, this information should not be regarded as representations that the results or condition described in these statements or objectives and plans 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 issued 65,794,281 shares of common stock at $10 per share on a "best efforts" basis, raising $657,943. CPA(R):14 is using 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 Carey Asset Management Corp., a wholly-owned subsidiary of W. P. Carey & Co. LLC, 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, Carey Asset Management 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 and Average Invested Assets, the basis for determining asset management and performance fees, are based on the results of this independent valuation. Until the initial valuation is performed, the fees are calculated based on the historical cost of the purchased real estate assets.
Critical Accounting Policies
Certain accounting policies are critical to the understanding of CPA(R):14's financial condition and results of operations. Management believes that an understanding of financial condition and results of operations requires an understanding of accounting policies relating to the use of estimates.
The preparation of financial statements requires that Management make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. For instance, CPA(R):14 must assess its ability to collect rent and other tenant-based receivables and determine an appropriate charge for uncollected amounts. Because CPA(R):14's real estate operations have a limited number of lessees, Management believes that it is necessary to
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
evaluate specific situations rather than solely use statistical methods. CPA(R):14 recognized a provision for uncollected rents which typically ranges between 0.25% and 1% of lease revenues (rental income and interest income from direct financing leases) and will measure its allowance against actual rent arrearages and adjust the percentage applied. Based on its actual experience, CPA(R):14 incurred a charge of approximately 0.25% of lease revenues and believes that its current allowance is adequate.
Real estate accounted for under the operating method is stated at cost less accumulated depreciation. Costs directly related to build-to-suit projects, primarily interest, if applicable, are capitalized. Interest capitalized in 2002, 2001 and 2000 was $808, $1,986 and $1,910, respectively. CPA(R):14 considers a build-to-suit project as substantially completed upon completion of improvements, but no later than a date that is negotiated and stated in the lease. If portions of a project are substantially completed and occupied and other portions have not reached that stage, the substantially completed portions are accounted for separately. CPA(R):14 allocates costs incurred between the portions under construction and the portions completed and only capitalizes costs for the portion under construction.
CPA(R):14 also uses estimates and judgments when evaluating whether long-lived assets are impaired. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, Management performs projections of undiscounted cash flows, and if such cash flows are insufficient, the assets are adjusted (i.e., written down) to their estimated fair value. An analysis of whether a real estate asset has been impaired requires Management to make its best estimate of market rents and residual values. As CPA(R):14's investment objective is to hold properties on a long-term basis, holding periods will range from five to ten years. In its evaluations, CPA(R):14 obtains market information from outside sources; however, such information requires Management to determine whether the information received is appropriate to the circumstances. Depending on the assumptions made and estimates used, the estimated cash flow projected in the evaluation of long-lived assets can vary within a range of outcomes. CPA(R):14 considers the likelihood of possible outcomes in determining the best estimate of future cash flows. Because CPA(R):14's properties are leased to single tenants, CPA(R):14 is more likely to incur significant writedowns when circumstances deteriorate because of the possibility that a property will be vacated in its entirety. This makes the risks faced by CPA(R):14 different from the risks faced by companies that own multi-tenant properties. Events or changes in circumstances can result in further writedowns and impact the gain or loss ultimately realized upon sale of the asset. For its direct financing leases, CPA(R):14 performs a review of its estimated residual value of properties at least annually to determine whether there has been an other than temporary decline in CPA(R):14's current estimate of residual value of the underlying real estate assets. If the review indicates a decline in residual values that is other than temporary, a loss is recognized and the accounting for the direct financing lease will be revised using the changed estimate, that is, a portion of the future cash flow from the lessee will be recognized as a return of principal rather than as revenue.
When assets are identified by Management as held for sale, CPA(R):14 discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. If, in Management's opinion , the net sales price of the assets which have been identified for sale is less than the net book value of the assets, an impairment charge is recognized and a valuation allowance is established. If circumstances that previously were considered unlikely occur and, as a result, CPA(R):14 decides not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) the carrying value before it was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the time of the subsequent decision not to sell.
In 2002, CPA(R):14 acquired a subordinated interest in a mortgage trust that consists of limited recourse loans on 62 properties that are owned by CPA(R):14 or three of its affiliates. The fair value of the interests in the trust is determined using a discounted cash flow model with assumptions of market rates and the credit quality of the underlying lessees. If there are adverse changes in either market rates or the credit quality of the lessees, the model and, therefore, the income recognized from the subordinated interests as well as the fair value, will be adjusted.
Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in property expense. Unamortized leasing costs are also charged to property expense upon early termination of the lease. Costs incurred in connection with obtaining mortgages and debt financing are capitalized and amortized over the term of the related debt and included in interest expense. Unamortized financing costs are included in charges for early extinguishment of debt if a loan is retired early and the costs have not been
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
fully amortized.
Stated rental revenue and interest income from direct financing leases are recognized on a straight-line basis and a constant rate of interest, respectively, over the terms of the respective leases. Unbilled rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements. The majority of CPA(R):14's leases provide for periodic rent increases based on formulas indexed to increases in the CPI. CPI-based and other contingent-type rents are recognized currently. CPA(R):14 recognizes rental income from sales overrides when reported by lessees, that is, after the level of sales requiring a rental payment to CPA(R):14 is reached.
CPA(R):14 and certain affiliates are investors in certain real estate ventures. It is anticipated that additional properties will be purchased through real estate ventures. These investments may be held through incorporated or unincorporated jointly-held entities. Substantially all of these investments represent jointly purchased properties which were net leased to a single tenant and were structured to provide diversification and reduce concentration of a risk from a single lessee for CPA(R):14 and the affiliate. The placement of an investment in a jointly held entity or tenancy in common requires the approval of CPA(R):14's Independent Directors. All of the jointly held investments are structured so that CPA(R):14 and the affiliate contribute equity, receive distributions and are allocated profit or loss in amounts that are proportional to their ownership interests. All of the jointly-held investments are subject to contractual agreements. No fees are payable to affiliates under any of the limited partnership and joint venture agreements. The presentation of these jointly held investments and their related results in the accompanying consolidated financial statements is determined based on factors such as controlling interest, significant influence and whether each party has the ability to make independent decisions. Such factors will determine whether such investments are consolidated in the accounts of CPA(R):14 or accounted for under the equity method. Equity method investments are reviewed for impairment in the event of a change in circumstances that is other than temporary. An investment's value is only impaired if Management's estimate of the net realizable value of the investment is less than the carrying value of the investment. To the extent an impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment.
CPA(R):14 measures derivative instruments, including derivative instruments embedded in other contracts, if any, at fair value and records them as an asset or liability, depending on CPA(R):14's rights or obligations under the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income, a component of shareholders' equity, and are subsequently reclassified into earnings when the hedged item affects earnings (i.e., the forecasted event occurs). Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in the determination of earnings.
Public business enterprises are required to report financial and descriptive information about their reportable operating segments. Operating segments are components of an enterprise about which financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management evaluates the performance of CPA(R):14's portfolio of properties as a whole, rather than by identifying discrete operating segments. This evaluation includes assessing CPA(R):14's ability to meet distribution objectives, increase the dividend and increase value by evaluating potential investments in single tenant net lease real estate and by seeking favorable limited recourse mortgage financing opportunities. As of December 31, 2002, CPA(R):14 operates in one segment, real estate operations, and owned properties in the United States, the Netherlands, Finland, France and the United Kingdom.
Results of Operations
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 has increased by more than
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
$217,371, 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 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 (formerly Heafner Tire Group, Inc.), Carrefour France SAS, PW Eagle, Inc., UTI Holdings, Inc, Tower Automotive, Inc., Career Education Group and Katun Corporation. 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 current year 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. 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. More than 45 leases have rent increases scheduled in 2003 and 2004 and no leases are scheduled to expire until 2005.
Income from equity and investments ("equity income") 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 the prior year, $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. In February 2003, CPA(R):14 also acquired a 41% interest in a limited liability company which leases properties to Starmark Camhood, LLC. The Starmark limited liability company acquired 15 properties for $178,010 and obtained $108,300 of limited recourse mortgage financing.
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 will be 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
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
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.
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.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net income for the year ended December 31, 2001 is not directly comparable to net income for the year ended December 31, 2000. CPA(R):14's total assets have increased by approximately 70% since December 31, 2000. During 2001, CPA(R):14 acquired 52 new properties and obtained $262,136 of new limited recourse mortgage financing and raised more than $203,000, net of costs, in connection with its public offering. Accordingly, the results of operations for the years ended December 31, 2001 and 2000 are not fully comparable. Net income for 2001 decreased by $3,200 to $18,377 in 2002 from $21,577 in 2000 because the results for 2000 include a nonrecurring item included in other income which contributed approximately $6,017 to earnings. Results for both 2000 and 2001 include noncash impairment charges of $2,462 and $3,810, respectively. Excluding the effect of these two items, income would have reflected an increase of $4,165. The increase in earnings, as adjusted for nonrecurring items and the impairment charge, was due to the increase in CPA(R):14's asset base. CPA(R):14 expects its real estate assets to continue to increase as it still has substantial cash available for additional investment.
Lease revenues have increased $37,733 due to the acquisition of properties. Properties acquired and build-to-suit projects completed in 2000 and 2001 are leased to 40 lessees. As of December 31, 1999, CPA(R):14 had eleven lessees. In 2001, CPA(R):14 recorded an impairment loss of $3,810 on a property leased to Burlington.
Interest expense increased due to a full year's effect of $166,222 of limited recourse mortgage debt obtained in 2000 and $264,211 obtained in 2001. Property expense reflects increases in asset management and performance fees which are calculated based on the Average Invested Assets. The increase in depreciation expense of $8,299 is the result solely of the increase in real estate assets.
Earnings for 2000 include (nonrecurring) other income of $10,029 relating to the settlement proceeds from the Ameriserve Food Distribution Inc. bankruptcy. Of this settlement, 40% ($4,012) is allocable to the minority interest owner of the subsidiaries, an affiliate, which owns the affected properties.
Financial Condition
CPA(R):14's cash and cash equivalents at December 31, 2002 decreased by $73,588 to $74,107 as cash was used to acquire properties. CPA(R):14 intends to use its cash to meet working capital needs, acquire new properties to further diversity its portfolio and complete its commitments on build-to-suit construction. After CPA(R):14 is fully invested, CPA(R):14 will maintain cash balances which Management believes to be sufficient for meeting working capital needs.
For the year ended December 31, 2002, cash flows from continuing operations and equity investments of $61,951 were sufficient to pay dividends to shareholders of $48,581, meet scheduled principal payment installments on mortgage debt of $6,543 and distribute $3,105 to minority interests. Operating cash flow is expected to continue to increase as a result of the new leases that have been entered into since December 31, 2001. These new leases have not yet provided a full year of cash flow, and the cash flow is expected to allow CPA(R):14 to meet its objective of paying quarterly dividends at an increasing rate. CPA(R):14 invests its available cash in conservative, low-yielding money market instruments until suitable real estate investments have been selected.
CPA(R):14's investing activities for 2002 included investing $269,117 in real estate acquisitions, acquiring interests in properties through equity interests in limited partnerships and limited liability companies with affiliates, and funding construction on build-to-suit commitments. Acquisitions in 2002 include properties leased to UTI Holdings, Inc. PW Eagle, American Tire Distributors, Carrefour France, Tower Automotive, and Katun. CPA(R):14 also acquired
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
land and entered into a build-to-suit commitment with Career Education Corp. and ownership interests were acquired in limited partnerships which lease properties to TruServ, and Clear Channel. In February 2003, CPA(R):14 acquired a 41% interest in properties leased to Starmark. CPA(R):14's share of annual cash flow from the properties acquired in 2002 and the Starmark properties is projected to be $14,947. In addition, in 2002 CPA(R):14 used $6,032 to acquire an interest in a mortgage trust and $1,638 to pay its Advisor its annual installment of deferred acquisition fees. CPA(R):14 sold a property for $3,634. CPA(R):14's remaining funding commitment for the Career Education build-to-suit scheduled to be completed by July 1, 2003 is $6,386. CPA(R):14 has funding commitments of $2,443 on other properties.
CPA(R):14 participated in a mortgage pool consisting solely of $172,335 of newly-issued mortgage loans collateralized by properties and lease assignments on properties owned by CPA(R):14 and three affiliates. Interests representing $148,206 of the securitized mortgage assets were offered to institutional investors and subordinated interests of $24,129 were purchased by CPA(R):14 and its affiliates. As of December 31, 2002, CPA(R):14 owned approximately $6,032, 25% of the subordinated interests. The subordinated interests are payable only after all other classes of ownership receive their stated interest and, therefore, will be affected by any defaults or nonpayments of rents by lessees at the mortgaged properties, regardless of which affiliate owns the underlying property. The cash flow of CPA(R):14, therefore, may be affected by events that occur at affiliates. To the extent that there are no defaults or nonpayments, CPA(R):14 may realize up to approximately $895 in annual cash flow from its subordinated interest. Because the subordinated interests incur any losses before the other interests, the risk of loss in cash flow and market value of the investment is greatest for this interest, and there is no assurance that there will be no adverse events that would significantly diminish cash flow from this investment. The mortgage pool allowed CPA(R):14 and its affiliates to use a non-traditional source of mortgage financing with favorable terms, including a 7.5% annual interest rate and a 25-year amortization schedule on properties such as health clubs which traditional mortgage lenders are currently financing at higher annual interest rates. CPA(R):14 and its affiliates may seek to obtain additional limited recourse mortgages through a mortgage securitization in the future, although there are no current plans for an additional securitization transaction. All of the loans from the securitization are limited recourse loans and have maturity dates between March 2010 and September 2012 at which time balloon payments are scheduled. CPA(R):14 has no mortgage balloon payments scheduled until June 2006.
In addition to paying dividends to shareholders, paying scheduled mortgage principal payments and making distributions to minority partners, CPA(R):14's financing activities for 2002 include receiving $196,596 of mortgage proceeds, paying off a mortgage loan of $3,800, using $4,050 to pay deferred financing costs and mortgage deposits and funding $2,537 into a defeasance escrow account. The defeasance escrow account was funded from proceeds of the sale. The Greenville property mortgage note payable did not allow for a prepayment. In order to meet the debt service requirements under the mortgage loan, including a balloon payment of $1,852 in January 2010, the defeasance account was funded with fixed rate instruments with maturity dates and amounts scheduled to meet the debt service requirements of the mortgage loan.
In the first quarter of 2002, CPA(R):14 received $10,766 from its minority partner and affiliate, Corporate Property Associates 15 Incorporated ("CPA(R):15"), when CPA(R):15 exercised its purchase option to increase its ownership interests in the Petsmart, Inc. and Builders Firstsource, Inc. limited partnerships to 30% and 40%, interests, respectively. CPA(R):14 owns the remaining 70% and 60% interests.
CPA(R):14 is continuing to diversify its portfolio by using its cash balances along with additional limited recourse mortgage financing to purchase properties subject to long-term net leases with corporate tenants on a single tenant basis. CPA(R):14 uses limited recourse mortgage debt because a lender on limited recourse mortgage debt has recourse only to the property (and lease assignments) collateralizing such debt and not to any of CPA(R):14's other assets, while unsecured financing would allow 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 the exposure 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, industry type and property type. The loans, most of which provide for fixed rates of interest, generally have a term of at least ten years. After CPA(R):14 fully invests the proceeds of its offerings in real estate, it will evaluate on an ongoing basis whether to obtain additional sources of funds such as lines of credit; however, no consideration is being given to such additional sources at this time. As of
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(dollar amounts in thousands)
March 14, 2003, CPA(R):14 had approximately $40,998 available for additional acquisitions and completion of build-to-suit construction commitments.
Off-Balance Sheet and Aggregate Contractual Agreements
A summary of CPA(R):14's contractual obligations and commitments is as follows:
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), 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.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangibles," which establish accounting and reporting standards for business combinations and certain assets and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be accounted for under the purchase method, establishes specific criteria for the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. Use of the pooling-of-interests method for business combinations is no longer permitted. The adoption of SFAS No. 141 did not have a material effect on CPA(R):14's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and indefinite-lived intangible assets are no longer amortized but are tested for impairment at least annually. Intangible assets acquired and liabilities assumed in business combinations are only amortized if such assets and liabilities are capable of being separated or divided and sold, transferred, licensed, rented or exchanged or arise from contractual or legal rights (including leases), and will be amortized over their
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
useful lives. The adoption of SFAS No. 142 on January 1, 2002 did not have a material effect on CPA(R):14's financial statements.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143 was issued to establish standards for the recognition and measurement of an asset retirement obligation. SFAS No. 143 requires retirement obligations associated with tangible long-lived assets to be recognized at fair value as the liability is incurred with a corresponding increase in the carrying amount of the related long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. CPA(R):14 does not expect SFAS No. 143 to have a material effect on its financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of Long-Lived Assets" which addresses the accounting and reporting for the impairment and disposal of long-lived assets and supercedes SFAS No. 121 while retaining SFAS No. 121's fundamental provisions for the recognition and measurement of impairments. SFAS No. 144 removes goodwill from its scope, provides for a probability-weighted cash flow estimation approach for analyzing situations in which alternative courses of action to recover the carrying amount of long-lived assets are under consideration and broadens that presentation of discontinued operations to include a component of an entity. The adoption of SFAS No. 144 on January 1, 2002 did not have a material effect on CPA(R):14's financial statements; however, the revenues and expenses relating to an asset held for sale or sold will be presented as a discontinued operation for all periods presented. The provisions of SFAS No. 144 are effective for disposal activities initiated by CPA(R):14's commitment to a plan of disposition after the date of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections" which eliminates the requirement that gains and losses from the extinguishment of debt be classified as extraordinary items unless it can be considered unusual in nature and infrequent in occurrence. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon adoption, CPA(R):14 will no longer classify gains and losses for the extinguishment of debt as extraordinary items and will adjust comparative periods presented. CPA(R):14 has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. CPA(R):14 does not expect SFAS No. 146 to have a material effect on its financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the acquisitions of certain financial institutions and includes long-term customer relationships as intangible assets within the scope of SFAS No. 144. CPA(R):14 does not expect SFAS No. 147 to have a material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting for Stock Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation (i.e., recognition of a charge for issuance of stock options in the determination of income.). However, SFAS No. 148 does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation, description of transition method utilized and the effect of the method used on reported results. The transition and annual disclosure provisions of SFAS No. 148 are to be applied for fiscal years ending after December 15, 2002. CPA(R):14 does not have any employees nor any stock-based compensation plans.
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(dollar amounts in thousands)
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 accounting provisions only apply for certain new transactions entered into or existing guarantee contracts modified after December 31, 2002. The adoption of the accounting provisions of FIN 45 is not expected to have a material effect on CPA(R):14's financial statements.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights ("variable interest entities" or "VIEs") and to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model applies when either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without additional financial support. In addition, FIN 46 requires both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosures requirements will take effect almost immediately and are required for all financial statements initially issued after January 31, 2003. CPA(R):14 is assessing the impact of this interpretation on its accounting for its investments in unconsolidated joint ventures and does not expect FIN 46 to have a material effect on its financial statements. CPA(R):14's maximum loss exposure is the carrying value of its equity investments.
REPORT of INDEPENDENT ACCOUNTANTS
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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Carey Asset Management Corp. (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 20, 2003
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS of INCOME (In thousands except share and per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENT of SHAREHOLDER'S EQUITY (In thousands except share amounts) For the years ended December 31, 2000, 2001, and 2002
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS (In thousands)
- Continued -
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
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 2002, 2001, and 2000 are deferred acquisition fees payable of $6,146, $6,554 and $7,193, respectively.
The accompanying notes are an integral part of the consolidated financial statements.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
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"). 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. 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 years ended December 31, 2002, lessees were responsible for the direct payment of real estate taxes of approximately $11,448. 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 terms 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 6). 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 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.
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.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
Depreciation:
Depreciation is computed using the straight-line method over the estimated useful lives of the properties - generally 40 years.
Equity Investments:
The Company's interests in entities in which its ownership interests are 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, 2002 and 2001 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.
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 $6,001 and reflected a fair value of $6,258 at December 31, 2002. The Company held no marketable securities at December 31, 2001.
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. As of December 31, 2002, the Company recognized an unrealized gain of $385 on warrants issued to the Company by PW Eagle, Inc., American Tire Distributors, Inc. and Consolidated Theaters Holding, G.P.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
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. As of December 31, 2002, the Company recognized a cumulative unrealized foreign currency gain of $48.
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.
Deferred Acquisition Fees:
Fees are payable for services provided by Carey Asset Management Corp. (the "Advisor"), a wholly-owned subsidiary of W. P. Carey & Co. LLC, 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 2%/25% Guidelines (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, 2002 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.
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. Based on the standards' definition, the Company has reported its real estate operations both domestically and internationally (see Note 12).
Reclassification:
Certain prior year amounts have been reclassified to conform to the current year's financial statement presentation.
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.
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
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 $5,514, $3,592, and $1,599 in 2002, 2001, and 2000 respectively, with performance fees in like amount. The Company incurred personnel reimbursements of $2,234, $1,372, and $945 in 2002, 2001, and 2000, 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 2002, 2001, and 2000, current fees were $8,489, $8,193 and $8,873, respectively and deferred fees were $6,773, $6,554 and $7,193, respectively.
The Advisor is obligated to reimburse the Company for the amount by which operating expenses of the Company exceeds 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, 2002. Payment of such amount, however, cannot be made until the subordination provisions are met. Management 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.
The Company owns interests in entities which range from 33.33% to 70% and a jointly-controlled 50% tenancy-in-common interest in property subject to a net lease with remaining interests held by affiliates. Controlling interests in jointly-owned entities are consolidated and non-controlled interests in which the Company has a significant influence 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
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Company's share of rental, occupancy and leasehold improvement costs is based on gross revenues. Expenses incurred in 2002, 2001, 2000 were $376, $237 and $77, respectively. The Company's current share of future minimum lease payments is $1,462 through 2006.
4. Mortgage Financing Through Securitization:
On August 28, 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 agreed to acquire 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 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 Offered Interests consist 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 will be reflected in interest income. Interest income, including all related amortization, will be 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. As of December 31, 2002, the fair value of the Company's CPA(R) Interests was $6,258, reflecting an unrealized gain of $257 and net amortization of $31. 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 Company obtained new mortgage financing, collateralized by real estate with a carrying value of $60,939, as follows:
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
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, 2002 is as follows:
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.
5. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases amount to $99,533 in 2003, $99,790 in 2004, $98,535 in 2005, $98,165 in 2006, and $98,494 in 2007 and aggregate approximately $1,586,000 through 2022.
Contingent rentals (including CPI-based increases) were approximately $532 in 2002, $249 in 2001 and $24 in 2000.
6. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
Scheduled future minimum rents, exclusive of renewals, under non-cancelable direct financing leases are approximately $12,284 in 2003 $12,365 in 2004, $12,429 in 2005 and $12,520 in 2006 and $12,608 in 2007 and aggregate approximately $253,369 through 2031.
Contingent rents (including CPI-based increases) were approximately $63 in 2002 and $36 in 2001. No contingent rents were realized in 2000.
7. 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 $1,019,908. As of December 31, 2002, mortgage notes payable had fixed interest rates ranging from 6.09% to 8.85% and variable interest rates ranging from 3.38% to 8.54% and maturity dates ranging from 2008 to 2026.
Scheduled principal payments during each of the five years following December 31, 2002 are as follows:
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Interest paid, excluding capitalized interest, was $42,813, $20,271, and $6,246 in 2002, 2001, and 2000 respectively. Capitalized interest payments were $808 in 2002, $1,986 in 2001, and $1,910 in 2000.
8. Dividends:
Dividends paid to shareholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. Since the inception of the Company, dividends per share reported for tax purposes were as follows:
A dividend of $.18820 per share for the quarter ended December 31, 2002 ($12,488) was declared in December 2002 and paid in January 2003.
9. 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, 2002, 2001, and 2000 the financial reporting sources are as follows:
In 2002, 2001 and 2000, the Company earned its share of net lease revenues from its direct and indirect ownership of real estate from the following lease obligations:
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(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.
10. Acquisitions of Real Estate and Financing:
The Company acquired the following properties, described below, prior to September 30, 2002:
(a) Variable rate obligation
(b) Includes a loan which is a variable rate obligation
(c) Build-to-suit commitment, lease scheduled to commence in 2003. On October 9, 2002, the Company entered into a construction loan agreement which will provide up to $12,500 of financing.
No properties were acquired during the fourth quarter of 2002 except as described in Note 11.
11. Equity Investments:
The Company owns interests in properties leased to corporations through equity interests in various partnerships and limited liability companies in which its ownership interests are 50% or less and the Company exercises significant influence, and as tenants-in-common subject to common control. 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 Company. The lessees are Advanced Micro Devices, Inc., Compucom Systems, Inc., Textron, Inc., Special Devices, Inc., Etec Systems, Inc. and Checkfree Holdings, Inc. As described below, the Company along with two affiliates, CPA(R):12 and Corporate Property Associates 15 Incorporated ("CPA(R):15") formed three limited partnerships, and, on December 26, 2002, entered into net leases with TruServ Corporation ("TruServ"). On December 12, 2002, the Company and CPA(R):15 formed a limited partnership with 40% and 60% interests, respectively, and assumed an existing net lease with Clear Channel Communications, Inc. ("Clear Channel"). The TruServ and Clear Channel purchases are described below.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Summarized combined financial information of the Company's equity investees is as follows:
On December 26, 2002, the Company, CPA(R):12 and CPA(R):15 formed three newly-formed limited partnerships with ownership interests of 35%, 15% and 50% respectively, which purchased land and seven buildings located in Kingman, Arizona; Woodland, California; Jonesboro, Georgia; Kansas City, Missouri; Springfield, Oregon; Fogelsville, Pennsylvania and Corsicana, Texas for $131,678, and entered into three master net leases with TruServ. The leases have initial terms of 20 years followed by one renewal term of nine years and 11 months and a second renewal term of 10 years. The leases provide for aggregate initial rent of $12,007, with stated annual increases.
In connection with the purchase of the properties, the limited partnerships obtained limited recourse mortgage loans totaling $76,655 (of which $27,550 was obtained in January 2003), collateralized by deeds of trust on the properties, and lease assignments. The loans provide for aggregate monthly payments of interest and principal of $451, at an annual interest rate of 5.83% based on 30-year amortization schedules. The loans mature in January and February 2013 at which time balloon payments are scheduled.
On December 12, 2002, the Company and CPA(R):15 formed a limited partnership with 40% and 60% interests, respectively, which purchased a property in New York, New York for $152,042 and assumed an existing net lease with SFX Entertainment, Inc. The lease obligations are unconditionally guaranteed by the lessees' parent company, Clear Channel. The lease has a remaining term through September 2020 with two ten-year renewal options. The lease provides for an initial annual rent of $10,914 with stated rent increases every five years.
In connection with the purchase of the properties, the limited partnership obtained limited recourse mortgage financing of $85,000 collateralized by a mortgage and security agreement. The loan provides for monthly payments of interest and principal of $481 at an annual interest rate of 5.52% based on a 30-year amortization schedule. The loan matures in December 2012 at which time a balloon payment is scheduled.
12. 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 2002, geographic information for the real estate operations segment is as follows:
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
For 2001, geographic information for the real estate operations segment is as follows:
The Company had no foreign operations in 2000.
(1) Income from continuing operations before (loss) gain.
13. Gain and Loss on Sale and Impairment Charges:
In June 2002, the Company sold a property in Greenville, Texas leased to Atrium Companies, Inc. ("Atrium") for $3,634 and recognized a gain on sale of $333. The results of operations of the Greenville property and the related gain on sale have been included in income from discontinued operations in the accompanying consolidated financial statements (see Note 14). Atrium continues to lease five properties from the Company.
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.
During 2000, the Company sold excess land at two properties for $1,104 and recognized a loss on sale of $304.
The Company purchased a property in St. Louis, Missouri in November 1998 and entered into a net lease with the Benjamin Ansehl Company ("Benjamin Ansehl"). During 2000, Benjamin Ansehl filed a petition of bankruptcy, and subsequently vacated the property. Due to the expected termination of the lease, the Company incurred an impairment charge of $2,462 in 2000. In August 2001, the Company sold the property for $2,903 and recognized a loss on sale of $346.
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.
As of December 31, 2002, the operations from a property in Greenville, Texas, which was sold in June 2002 are included as "Discontinued Operations." A summary of Discontinued Operations for the years ended December 31, 2002, 2001 and 2000 is as follows:
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage and notes payable at December 31, 2002 and 2001 was approximately $681,711 and $461,953, 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):
(1) Includes unrealized and realized gains (losses) of $239, $29, $(133) and $220 for the three-month periods ended March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, respectively.
(1) Includes impairment charges on real estate of $3,810 for the three-month period ended December 31, 2001.
(2) Includes unrealized and realized losses of $75 and $193 for the three month periods ended September 30, 2001 and December 31, 2001, respectively.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangibles," which establish accounting and reporting standards for business combinations and certain assets and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method, establishes specific criteria for the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. Use of the pooling-of-interests method for business combinations is no longer permitted. The adoption of SFAS 141 did not have a material effect on the Company's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition and the accounting for asset acquisitions. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001 and must be adopted at the beginning of a fiscal year. SFAS No. 142 provides that goodwill and indefinite-lived intangible assets will no longer be amortized but will be tested for impairment at least annually. Intangible assets acquired and liabilities assumed in business combinations will only be amortized if such assets and liabilities are capable of being separated or divided and sold, transferred, licensed, rented or exchanged or arise from contractual or legal rights (including leases), and will be amortized over their useful lives. The adoption of SFAS 142 did not have a material effect on the Company's financial statements.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143 was issued to establish standards for the recognition and measurement of an asset retirement obligation. SFAS No. 143 requires retirement obligations associated with tangible long-lived assets to be recognized at fair value as the liability is incurred with a corresponding increase in the carrying amount of the related long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect SFAS No. 143 to have a material effect on the financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of Long-Lived Assets" which addresses the accounting and reporting for the impairment and disposal of long-lived assets and supercedes SFAS No. 121 while retaining SFAS No. 121's fundamental provisions for the recognition and measurement of impairments. SFAS 144 removes goodwill from its scope, provides for a probability-weighted cash flow estimation approach for analyzing situations in which alternative courses of action to recover the carrying amount of long-lived assets are under consideration and broadens that presentation of discontinued operations to include a component of an entity. The adoption of SFAS 144 did not have a material effect on the Company's financial statements; however, the revenues and expenses relating to an asset held for sale or sold must be presented as a discontinued operation for all periods presented.
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections" which eliminates the requirement that gains and losses from the extinguishment of debt be classified as extraordinary items unless it can be considered unusual in nature and infrequent in occurrence. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon adoption, the Company will no longer classify gains and losses for the extinguishment of debt as extraordinary items and will adjust comparative periods presented. The Company has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect SFAS No. 146 to have a material effect on its Company's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the acquisitions of certain financial institutions and includes long-term customer relationships as intangible assets within the
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
scope of SFAS No. 144. The Company does not expect SFAS No. 147 to have a material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting for Stock Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation (i.e., recognition of a charge for issuance of stock options in the determination of income.). However, SFAS No. 148 does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation, description of transition method utilized and the effect of the method used on reported results. The transition and annual disclosure provisions of SFAS No. 148 are to be applied for fiscal years ending after December 15, 2002. The Company does not have any employees nor any stock-based compensation plans.
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 accounting provisions only apply for certain new transactions entered into or existing guarantee contracts modified after December 31, 2002. The adoption of the accounting provisions of FIN 45 is not expected to have a material effect on the Company's financial statements.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), the primary objective of which is to provide guidance on the identification of entities for which control is achieved through means other than voting rights ("variable interest entities" or "VIEs") and to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model applies when either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without additional financial support. In addition, FIN 46 requires both the primary beneficiary and all other enterprises with a significant variable interest in a VIE to make additional disclosures. The transitional disclosures requirements will take effect almost immediately and are required for all financial statements initially issued after January 31, 2003. The Company is assessing the impact of this interpretation on its accounting for its investments in unconsolidated joint ventures and believes the adoption will not have a material effect on the Company's financial statements. The Company's maximum loss exposure is the carrying value of its equity investments.
18. Subsequent Events:
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 Camhood, L.L.C. ("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 mortage limited recourse financing of $88,300 and a mezzanine loan of $20,000. The first mortgage provides for monthly payments of interest and principal of $564 at an annual interest rate of 6.6% and based on a 30-year amortization schedule. The loan matures in March 2013 at which time a balloon payment is 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.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
The limited liability company was granted 5,276 warrants for Class C Unit interests in Starmark and represent a 5% interest in the Company. 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.
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, 2002, there were 21,160 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, 1999 are as follows:
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, 2002 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.