-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IruxwoIrN87OWW7T7zk7B7K4QMrhjzA0N1In5eVCgonlIDjnuG45yaFXpr3yv5vS /KJVK62xLGvcs1Vz3pwkCg== 0000950123-03-003970.txt : 20030408 0000950123-03-003970.hdr.sgml : 20030408 20030408092816 ACCESSION NUMBER: 0000950123-03-003970 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE PROPERTY ASSOCIATES 15 INC CENTRAL INDEX KEY: 0001138301 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 522298116 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-58854 FILM NUMBER: 03642129 BUSINESS ADDRESS: STREET 1: 50 ROCKFELLOW PLAZA STREET 2: SECOND FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 10-K/A 1 y85200a1e10vkza.txt AMENDMENT NO. 1 TO FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------- FORM 10-K/A AMENDMENT NO. 1 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________. COMMISSION FILE NUMBER: 333-58854 ------------------------- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 52-2298116 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 50 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10020 10020 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBERS: INVESTOR RELATIONS (212) 492-8920 (212) 492-1100 ------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this report, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X|. Registrant has no active market for its common stock as of March 14, 2003. Non-affiliates held 39,912,539 shares at March 24, 2003. As of March 24, 2003, there are 40,052,961 shares of common stock of Registrant outstanding. Registrant incorporates by reference its definitive Proxy Statement with respect to its 2003 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into Part III of this Report. Item 1. Business. Corporate Property Associates 15 Incorporated ("CPA(R):15") was formed as a Maryland corporation on February 26, 2001. Between November 7, 2001 and November 8, 2002, CPA(R):15 sold a total of 39,964,488 shares of common stock for a total of $399,644,880 in gross offering proceeds. CPA(R):15 is also currently in the process of offering an additional 69,000,000 shares of its common stock to the public, with anticipated total gross offering proceeds of $690,000,000. CPA(R):15 is a real estate investment trust ("REIT") engaged in the business of investing in commercial and industrial real estate. CPA(R):15 will use the proceeds of its original and current offering, combined with limited recourse mortgage debt, to acquire and own commercial properties for lease to companies nationwide and internationally. CPA(R):15'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 the tenant to pay the costs of maintenance, insurance, taxes, structural repairs and other operating expenses. CPA(R):15 also generally intends to include 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):15 for environmental and other liabilities; and - when appropriate, guarantees from parent companies or other entities. As a REIT, CPA(R):15 will not be 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):15's advisor, provides both strategic and day-to-day management for CPA(R):15, 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):15. Carey Asset Management Corp. has dedicated senior executives in each area of its organization so that CPA(R):15 functions as a fully integrated operating company. CPA(R):15 pays asset management fees to Carey Asset Management Corp. and pays certain transactional fees. CPA(R):15 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 ("CPA(R):12")and Corporate Property Associates 14 Incorporated ("CPA(R):14"). Carey Asset Management Corp. is a wholly-owned subsidiary of W. P. Carey & Co. LLC, ("W.P. Carey") a company with shares listed on the New York Stock Exchange and Pacific Exchange under the symbol "WPC." CPA(R):15'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):15 had no employees. Carey Asset Management Corp. employs 27 individuals who perform services for CPA(R):15. CPA(R):15's website address is http://www.CPA15.com. BUSINESS OBJECTIVES AND STRATEGY CPA(R):15'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. -1- CPA(R):15 seeks to achieve these objectives by purchasing and holding industrial and commercial properties each net leased to a single corporate tenant. CPA(R):15 intends its portfolio to be diversified by geography, property type and by tenant. DEVELOPMENTS DURING 2002 CPA(R):15 was formed on February 26, 2001 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in and owning property net leased to creditworthy corporations and other creditworthy entities. Subject to certain restrictions and limitations, the business of CPA(R):15 is managed by Carey Asset Management Corp. (the "Advisor"), a wholly-owned subsidiary of W.P. Carey. On April 2, 2001, the Advisor purchased 20,000 shares of common stock for $200,000 as the initial shareholder of the Company. In October 2002, CPA(R):15 completed a "best efforts" offering of 40,000,000 shares of common stock at a price of $10 per share. During the year ended December 31, 2002, CPA(R):15 issued 39,946,488 shares ($399,464,880). The Company has also registered up to 10,000,000 shares for a dividend reinvestment plan. On October 11, 2002, CPA(R):15 filed a registration statement with the United States Securities and Exchange Commission (the "SEC") for the purpose of offering up to an additional 69,000,000 shares ($690,000,000) of common stock to the public on a "best efforts" basis by Carey Financial Corporation ("Carey Financial"), a wholly-owned subsidiary of W. P. Carey & Co. LLC ("W.P. Carey"), at a price of $10 per share (the "Offering"). In 2001, CPA(R):15 and CPA(R):14, an affiliate, formed two limited partnerships which entered into net leases for 13 properties with Petsmart, Inc. ("Petsmart") and a limited partnership which entered into a net lease for three properties with Builders Firstsource, Inc. ("Builders First"). CPA(R):15 initially purchased a 0.001% interest in the Petsmart limited partnerships and a 1% interest in the Builders First partnership at the time the properties were acquired. Under the limited partnership agreements, CPA(R):15 had an obligation to CPA(R):14 to increase its ownership interests in the Petsmart and Builders First limited partnerships to 30% and 40%, respectively, subject to certain conditions, which were subsequently met. On February 28, 2002, the Company paid $10,886,369 to CPA(R):14 and purchased the additional ownership interests in the Petsmart and Builders First limited partnerships. On April 10, 2002, CPA(R):15 purchased land and buildings in Auburn, Indiana; Buffton, Ohio and Milan, Tennessee for $20,955,621 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 10-year renewal options. Annual rent is initially $2,355,875 with rent increases every three years based on a formula indexed to increases in the CPI. In connection with the purchase, CPA(R):15 obtained $12,022,870 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 $88,052 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 21, 2002, CPA(R):15 purchased land and building in Irvine, California for $13,455,497 and entered into a net lease with Racal Instruments, Inc. The lease obligations have been unconditionally guaranteed by RIG Limited, the parent company. The lease has an initial term of 20 years followed by five five-year renewal options. Annual rent is initially $1,301,929 with stated annual rent increases of 2.75%. In September 2002, CPA(R):15 obtained $9,500,000 of limited recourse mortgage financing on the property, collateralized by the property and a lease assignment. The loan provides for monthly payments of interest and principal of $61,050 at an annual interest rate of 6.66% and based on a 30-year amortization schedule. The loan matures in September 2012 at which time a balloon payment is scheduled. On June 14, 2002, CPA(R):15 purchased land and three buildings in Mesquite, Texas for $12,356,020 and entered into a master net lease with IntegraColor, Ltd. The lease has an initial term of 20 years followed by two ten-year renewal options, and grants the lessee the option to purchase the properties at the expiration of any term at fair market value, as defined in the lease. Annual rent is initially $1,256,700 with annual increases based on a formula indexed to -2- increases in the CPI. In July 2002, CPA(R):15 obtained limited recourse mortgage financing of $7,080,000 on the properties, collateralized by the properties and a lease assignment. The loan provides for monthly payments of interest and principal of $46,961 at an annual interest rate of 6.97% and based on a 30-year amortization schedule. The loan matures in August 2012 at which time a balloon payment is scheduled. On June 25, 2002, CPA(R):15 purchased land and building in Alpharetta, Georgia for $13,089,005 and entered into a net lease with Advantis Technologies, Inc. The lease obligations have been unconditionally guaranteed by Rockwood Specialties Group, the parent company of the lessee. The lease has an initial term of 15 years followed by two ten-year renewal options, and provides for initial annual rent of $1,275,000 with annual increases after the third lease anniversary based on a formula indexed to increases in the CPI, capped at 3%. In November 2002, CPA(R):15 obtained $8,500,000 of limited recourse mortgage financing on the property collateralized by the property and a lease assignment. The loan provides for monthly payments of interest and principal of $50,853 at an annual interest rate of 5.98% and based on a 30-year amortization schedule. The loan matures in December 2032. On June 28, 2002, CPA(R):15 purchased land and building in Tulsa, Oklahoma for $53,870,063 and entered into a net lease with Fleming Companies, Inc. The lease has an initial term of 15 years followed by four five-year renewal options and provides for initial annual rent of $5,508,000 with increases every five years based on a formula indexed to increases in the CPI, capped at 9%. In connection with the purchase, CPA(R):15 obtained a limited recourse mortgage loan of $30,000,000 collateralized by a mortgage and security agreement. The loan provides for monthly payments of interest and principal of $208,948 at an annual interest rate of 7.46% and based on a 30-year amortization schedule. The loan matures in July 2012, at which time a balloon payment is scheduled. On July 22, 2002, CPA(R):15 purchased land and building in Miami, Florida for $14,869,110 and entered into a net lease with Trends Clothing Corp. ("Trends"). In connection with the purchase, CPA(R):15 assumed a limited recourse mortgage loan of $8,630,041. The lease has an initial term of 15 years with two ten-year renewal options and provides Trends with an option to purchase the property at the end of the initial term and each renewal term. Annual rent is $1,420,000 with increases every three years based on a formula indexed to increases in the CPI. The limited recourse mortgage loan, which is collateralized by a deed of trust and lease assignment, provides for monthly payments of interest and principal of $70,885 at an annual interest rate of 7.4% and based on a 226-month amortization schedule. The loan is scheduled to mature in May 2016, at which time a balloon payment is scheduled. The loan is not prepayable until July 2006 and may be prepaid thereafter subject to a prepayment premium. On August 16, 2002, CPA(R):15 purchased a leasehold interest in a building in Clinton, New Jersey, subject to a long-term land lease, for $47,015,707 and entered into a net lease with Foster Wheeler Realty Services, Inc. ("Foster Wheeler"). The lease obligations of Foster Wheeler are unconditionally and jointly guaranteed by Foster Wheeler Ltd., Foster Wheeler, Inc. and Foster Wheeler International Holdings, Inc., affiliates of Foster Wheeler. The lease has an initial term of 20 years with two ten-year renewal options. Annual rent is $5,230,850 with increases every three years based on a formula indexed to increases in the CPI, capped at 10.07% during each three-year period. The ground lease has an initial term through 2100 with annual rent of $100. In connection with the purchase, CPA(R):15 obtained a limited recourse mortgage loan of $29,185,000, which is collateralized by a leasehold mortgage and a lease assignment. The loan provides for monthly payments of interest and principal of $187,744 at an annual interest rate of 6.67% and based on a 30-year amortization schedule. The loan matures in September 2012 at which time a balloon payment is scheduled. On August 28, 2002, CPA(R):15 purchased land and buildings in Danbury, Connecticut for $33,769,634 and entered into a net lease with Hologic, Inc. The lease has an initial term of 20 years with four five-year renewal terms. Annual rent is $3,155,940 with the first rent increase on the fifth anniversary of the lease and every five years thereafter. Rent increases are based on a formula indexed to increases in the CPI, capped at 5.1% for the first rent increase and 8.16% thereafter, during each five-year period. On December 17, 2002, CPA(R):15 and W. P. Carey, entered into a joint tenancy agreement and CPA(R):15 sold a 36% interest in the Hologic properties as a tenant-in-common to W. P. Carey for $11,614,766. On September 12, 2002, CPA(R):15 purchased land and buildings in Miami, Florida for $15,470,072 and entered into a net lease with BE Aerospace, Inc. The lease has an initial term of 18 years with two ten-year renewal options. Annual rent is $1,462,618 with scheduled increases of 1.5% each year. On October 29, 2002, CPA(R):15 obtained a limited recourse mortgage loan of $10,500,000 which is collateralized by a mortgage and a lease assignment. The -3- loan provides for monthly payments of principal and interest of $63,697 at an annual interest rate of 6.11% based on a 30-year amortization schedule. The loan matures in November 2012, at which time a balloon payment is scheduled. On September 27, 2002, CPA(R):15 purchased land and buildings in St. Petersburg, Florida for $23,810,133 and entered into a net lease with Danka Office Imaging Company ("Danka"). The lease obligations of Danka are unconditionally guaranteed by Danka Holding Company and Danka Business Systems, PLC, affiliates of Danka. CPA(R):15 has committed to fund retrofit and tenant improvement costs of $7,700,000 with such costs scheduled to be completed by no later than July 1, 2003. Upon completion, an initial lease term of fifteen years with two ten-year renewal terms will commence at an annual rent of $3,060,000. The lease provides for rent increases every three years based on a formula indexed to increases in the CPI. During the construction period, CPA(R):15 will receive annual rent of $871,000 on the portion of the buildings that are currently occupied by the tenant. In December 2002, CPA(R):15 obtained $12,800,000 of limited recourse mortgage financing on the properties collateralized by the property and a lease assignment. The loan provides for payments of interest at an annual rate of 6.63% until the completion of construction and for monthly payments of interest and principal of $82,000 thereafter at an annual interest rate of 6.63% and based on a 30-year amortization schedule. The loan will mature and a balloon payment is scheduled in July 2013 if construction is completed by July 1, 2003. On October 9, 2002, CPA(R):15 purchased land in Baton Rouge, Louisiana and entered into construction agency and net lease agreements with Rave Motion Pictures Baton Rouge, LLC ("Rave Motion Pictures") to construct and lease a movie theater. The construction and lease obligations of Rave Motion Pictures are unconditionally guaranteed by its parent company, Rave Reviews Cinemas, L.L.C. The total cost of the build-to-suit project is expected to amount to $11,555,239. Any excess costs to complete the project will be the obligation of Rave Motion Pictures. Upon the earlier of completion of construction or August 31, 2003, an initial term of 20 years will commence followed by options for two ten-year renewal terms. To the extent that all project costs are incurred, annual rent will be $1,285,607 and will be reduced by 11.65% of any costs not incurred. The lease provides for rent increases every two years based on a formula indexed to increases in the CPI. On October 15, 2002, CPA(R):15 purchased land and buildings in San Diego, California for $30,096,836 and assumed an existing lease with Overland Storage, Inc., as lessee. The lease has an initial term through February 2014 with one five-year renewal option. Annual rent is $2,621,285 with rent increases of 5%, effective March 2004 and every two years thereafter. In connection with the purchase, CPA(R):15 obtained a limited recourse mortgage loan of $20,000,000 which is collateralized by a deed of trust and a lease assignment. The loan provides for monthly payments of interest and principal of $122,234 at an annual interest rate of 6.18% and based on a thirty-year amortization schedule. The loan matures in August 2014 at which time a balloon payment is scheduled. On November 20, 2002, CPA(R):15 purchased land and buildings in Richmond, California for $4,967,653 and entered into a net lease with SSG Precision Optronics, Inc. The lease obligations are unconditionally guaranteed by Tinsley Laboratories, Inc. The lease has an initial term of 20 years with two seven-year renewal options. Annual rent is $509,976 with annual increases based on a formula indexed to CPI. On December 4, 2002, CPA(R):15 purchased six properties in France for Euro 40,314,136 ($40,327,843 at the date of acquisition) and assumed net leases with SA Medica France ("Medica"). The leases have remaining terms through June 30, 2011 and provide for aggregate annual rent of Euro 3,856,618 ($3,857,929 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 Medica properties, CPA(R):15 obtained limited recourse mortgage loans of Euro 34,000,000 ($34,011,560 at the date of acquisition). The loans provide for quarterly payments of interest at an annual interest rate of 5.631%. Principal installments are payable based on an initial 1.50% annuity per annum, with scheduled increases throughout the term of the loan. The loan matures on October 20, 2017, at which time a balloon payment is scheduled. On December 12, 2002, CPA(R):15 and CPA(R):14 formed a limited partnership with 60% and 40% 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 Communications, Inc. ("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 -4- 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 December 26, 2002, CPA(R):15, CPA(R):12 and CPA(R):14, through three newly-formed limited partnerships, with 50%, 15% and 35% ownership interests, 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 three master net leases with TruServ Corporation. 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. In connection with the purchase of the properties, the limited partnerships obtained limited recourse mortgage loans totaling $49,104,774, collateralized by deeds of trust on the properties and lease assignments. Subsequent to December 31, 2002, the limited partnership obtained additional mortgage financing of $27,550,047. 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. The Company is accounting for its 50% non-controlling interests in the limited partnerships under the equity method of accounting. On December 27, 2002, CPA(R):15 purchased seven properties in France for Euro 103,780,347 ($106,966,300 at the date of acquisition) and entered into six separate net leases with Societe Logidis and one net lease with Societe CV Logistique. The lease obligations are unconditionally guaranteed by their parent companies, Carrefour France, SAS and Carrefour Hypermarches France, SAS (collectively "Carrefour"), subsidiaries of the Carrefour Group. The leases have nine-year terms and provide for aggregate annual rent of Euro 10,190,269 ($10,503,100 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):15 obtained a limited recourse mortgage loan of Euro 84,244,000 ($86,830,207 at the date of acquisition) which provides for quarterly payments of interest at an annual interest rate of 5.50%. The interest rate is fixed through 2012, at which time the loan will convert to a variable rate. Principal installments are payable based on an initial 1.60% annuity per annum, with scheduled increases throughout the term of the loan. The loan matures on December 30, 2014, at which time a balloon payment is scheduled. On December 31, 2002, CPA(R):15 purchased land and five buildings in Orlando, Florida; Macon, Georgia; Rocky Mount, North Carolina and Lewisville, Texas for $30,415,009 and entered into a net lease with Meadowbrook Meat Company. The lease obligations are unconditionally guaranteed by Fast Food Merchandisers, Inc. and Proficient Food Company, Inc. The lease has an initial term of 15 years and one month with four five-year renewal options. Annual rent is $2,660,000 with stated increases beginning on the fourth anniversary of the lease and annually thereafter. In connection with the purchase of the properties, CPA(R):15 obtained a limited recourse mortgage loan of $18,000,000 which is collateralized by a mortgage and deeds of trust on the properties. The loan provides for monthly payments of principal and interest of $108,847 at an annual interest rate of 6.08% based on a 30-year amortization schedule. The loan matures in January 2013, at which time a balloon payment is scheduled. On January 28, 2003, CPA(R):15 purchased land in Birmingham, United Kingdom for $9,038,000 and entered into a build-to-suit commitment and a net lease with Insulated Structures, Ltd. ("ISL"). The total cost for the ISL facility is estimated to amount to approximately $22,000,000. Upon completion, a lease with an initial term of 35 years will commence. Annual rent under the lease is (pound)1,033,360 (approximately $1,650,000) with annual rent increases of 2%. On February 12, 2003, CPA(R):15 purchased land and buildings in Chattanooga, Tennessee for $6,544,503 and entered into a master net lease with Waddington North America Business Trust. The lease obligations are unconditionally guaranteed by WNA American Plastic Industries, Inc. The lease has an initial term of 19 years with two ten-year renewal options. Annual rent is $637,500 with increases every three years based on a formula indexed to the CPI and capped at 3%. On February 7, 2003, CPA(R):15, CPA(R):12 and CPA(R):14, through a newly-formed limited liability company with ownership interests of 44%, 41% and 15%, 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 -5- 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 CPA(R):15. 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. On February 25, 2003, CPA(R):15 purchased land and buildings in Mooresville, North Carolina for $15,602,094 and entered into a lease agreement with Polar Plastics (NC), Inc. at an annual rent of $1,460,200. The lease has an initial term of 20 years with two ten-year renewal options and CPI-based rent increases every three years. In connection with the purchase of the properties, CPA(R):15 obtained $9,500,000 of limited recourse mortgage financing collateralized by a deed of trust and a lease assignment. The loan provides for monthly payments of interest and principal of $70,829 at an annual interest rate of 6.5% and will fully amortize over 20 years. On March 12, 2003, CPA(R):15 sold a 35% interest in the limited liability company that owns the Medica and Carrefour properties to CPA(R):12. The purchase price was based on the appraised value of the properties (based on the current exchange rate for the Euro), adjusted for capitalized costs incurred since the acquisition including fees paid to the Advisor, net of mortgage debt. Based on the formula, CPA(R):12 paid CPA(R):15 $11,916,465 and assumed CPA(R):15's $1,031,046 of the deferred acquisition payable to an affiliate. The sale was approved by the Independent Directors and is intended to facilitate CPA(R):15's ability to raise capital. The continued holding of 100% of the Carrefour and Medica interests would have required CPA(R):15 to obtain and provide financial information on the guarantors of the leases in its 1933 and 1934 Act filings in accordance with accounting principles generally accepted in the United States of America, and this information is not available to CPA(R):15. 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):15. 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):15 takes advantage of Carey Asset Management Corp.'s presence in the net lease market to build its portfolio. In evaluating opportunities for CPA(R):15, 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):15 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):15 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):15 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. -6- FINANCING STRATEGIES Consistent with its investment policies, CPA(R):15 will use leverage when available on favorable terms. CPA(R):15 has approximately $374,788,000 in property level debt outstanding. These mortgages mature between 2012 and 2032 and have interest rates between 5.2% and 7.98%. Carey Asset Management Corp. will seek opportunities and consider alternative financing techniques to finance properties not currently subject to debt, refinance debt, reduce interest expense or improve its capital structure. TRANSACTION ORIGINATION In analyzing potential acquisitions, 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):15'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):15 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):15'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):15 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 CPI. In the case of retail stores, the lease may 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 be 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):15 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):15's investment from -7- 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):15's properties. Diversification. Carey Asset Management Corp. will continue to diversify CPA(R):15's portfolio to avoid dependence on any one particular tenant, type of facility, geographic location or tenant industry. By diversifying CPA(R):15'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):15 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):15'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):15 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):15 has been and future purchases will be appraised by an independent appraiser. CPA(R):15 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):15 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):15 will also consider factors peculiar to the laws of foreign countries, in -8- addition to the risk normally associated with real property investments, when considering an investment located outside the United States. ASSET MANAGEMENT CPA(R):15 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):15 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):15 shareholders. If CPA(R):15's common stock is not listed for trading on a national securities exchange or included for quotation on Nasdaq, CPA(R):15 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):15 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):15 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):15 believes its management's experience in real estate, credit underwriting and transaction structuring will allow CPA(R):15 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):15'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):15 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):15. 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):15 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):15 normally requires property sellers to indemnify it fully against any environmental problem existing as of the date of -9- purchase. Additionally, CPA(R):15 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):15 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):15's statutory liability or preclude claims against CPA(R):15 by governmental authorities or persons who are not a party to the arrangement. Contractual arrangements in CPA(R):15's leases may provide a basis for CPA(R):15 to recover from the tenant damages or costs for which it has been found liable. INDUSTRY SEGMENT CPA(R):15 operates in one industry segment, investment in net leased real property. For the year ended December 31, 2002, Tower Automotive Company, Inc. Fleming Companies, Inc., Petsmart, Inc. and Foster Wheeler, Ltd. represented 11%, 18%, 14% and 13%, respectively, of the total lease revenue of CPA(R):15. All of the companies are public registrants and file financial statements with the United States Securities and Exchange Commission. 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):15 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):15's future results may be affected by certain risks and uncertainties including the following: We may not be able to diversify our real estate portfolio. The investment of a smaller sum of money will likely result in the acquisition of fewer properties and, accordingly, less diversification of our real estate portfolio than the investment of a larger sum in a greater number of properties. The amount we have to invest will depend on the amount raised in our current offering and the amount of money we are able to borrow. Lack of diversification will increase the potential adverse effect on us and you of a single under-performing investment. 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):15 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. The net leases we may enter into or acquire may be for properties that are specially suited to the particular needs of our tenant. With -10- 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. 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. We expect that most of our properties will each be occupied by a single tenant and, therefore, the success of our investments is materially dependent on the financial stability of such 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 any 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. 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. The bankruptcy of tenants may cause a reduction in revenue. Bankruptcy of a tenant 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. The programs managed by W. P. Carey & Co. or its affiliates have had tenants file for bankruptcy protection and are involved in litigation. Four of the prior thirteen CPA(R) funds reduced the rate of distributions to their investors as a result of adverse developments involving tenants. 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 prior to a liquidity event is likely to be less than the proportionate value of the real estate we own. -11- 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 intend to purchase 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):15: - 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 expect to 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 $374,788,000. 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. Currently, there are no balloon payment obligations due prior to 2012. 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 -12- 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 limit on the number of shares of CPA(R):15 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 in order to meet REIT qualification rules. These restrictions may discourage a change of control of CPA(R):15 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):15. We were incorporated in February 2001 and have a limited operating history. We did not commence property acquisitions until the beginning of 2002. We can not guaranty that we will continue to find suitable property investments, or that all of our tenants will fulfill all of their lease obligations. Our failure to timely invest the proceeds of our current offering or to invest in quality properties could diminish returns to investors. 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):15, which arise primarily from the involvement of W. P. Carey & Co. and its affiliates in other activities that may conflict with CPA(R):15 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):15 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):15, 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):15 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):15'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. 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; -13- - an affiliate 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 may participate in joint ventures or purchase properties jointly 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. A delay in investing funds may cause a delay in our ability to deliver expected returns to investors. We have not yet identified all of the properties to be purchased with the proceeds of our current offering. Therefore, there could be a substantial delay between the time a new investor invests in shares and the time all offering proceeds are invested by us. This could cause a substantial delay in the time it takes for an investment in us to realize its full potential return. There are special considerations for pension or profit-sharing trusts, Keoghs or IRAs. If you are investing the assets of a pension, profit sharing, 401(k), Keogh or other retirement plan, IRA or benefit plan in CPA(R):15, you should consider: - whether your investment is consistent with the applicable provisions of ERISA or the Internal Revenue Code, - whether your investment will produce unrelated business taxable income, referred to as UBTI, to the benefit plan, and - your need to value the assets of the benefit plan annually. We have obtained an opinion of Reed Smith LLP that, under current ERISA law and regulations, our assets should not be treated as "plan assets" of a benefit plan subject to ERISA and/or Section 4975 of the Internal Revenue Code which purchases shares. However, the opinion of Reed Smith is based on the facts and assumptions described in this prospectus, on our articles of incorporation and on our representations to them, and is not binding on the Internal Revenue Service or the Department of Labor. If our assets were considered to be plan assets, our assets would be subject to ERISA and/or Section 4975 of the Internal Revenue Code, and some of the transactions we have entered into with W. P. Carey & Co. and its affiliates could be considered "prohibited transactions" which could cause us, W. P. Carey & Co. and its affiliates to be subject to liabilities and excise taxes. In addition, W. P. Carey & Co. could be deemed to be a fiduciary under ERISA and subject to other conditions, restrictions and prohibitions under Part 4 of Title I of ERISA. Even if our assets are not considered to be plan assets, a prohibited transaction could occur if we, Carey Financial, any selected dealer, the escrow agent or any of their affiliates is a fiduciary (within the meaning of ERISA) with respect to a purchase by a benefit plan and, therefore, unless an administrative or statutory exemption applies in the event such persons are fiduciaries (within the meaning of ERISA) with respect to your purchase, shares should not be purchased. -14- International investments involve additional risks. We own properties in France 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. We may face competition for acquisition of properties. We face competition for the acquisition of office and industrial properties in general, and such properties not leased to major corporations in particular, from insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs. We also face 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. The loss or default of certain major tenants could adversely affect our revenues and distributions to shareholders. As of December 31, 2002, the value of the SFX Entertainment and Carrefour France properties each exceeded 10% of our gross assets. Three lessees exceeded 10% of our lease revenues. Our performance could be adversely affected in the event of bankruptcy or insolvency of any of these companies, a downturn in their businesses or their failure to renew their leases upon expiration. Existing shareholders' equity interest will be diluted by our current offering. As additional shares of our stock are sold our current offering, the equity interest of our existing shareholders is diluted. Further, because investors will pay the same price per share during the offering, the value of shares previously acquired by shareholders or during the early part of the offering will be diluted upon the purchase of shares by shareholders purchasing subsequently if investments previously acquired have appreciated in value. Conversely, if investments previously acquired by us have depreciated in value, the value of the shares purchased later in the current offering will be diluted immediately upon the purchase of the shares. -15- Item 2. Properties. Set forth below is certain information relating to CPA(R):15's properties owned as of December 31, 2002.
RENT PER SHARE OF LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM - ------------------------------------------------------------------------------------------------------------------------------------ SOCIETE LOGIDIS AND SOCIETE CV LOGISTIQUE (CARREFOUR FRANCE, SA AND CARREFOUR HYPERMARCHES FRANCE, SA) (2) Cholet, Ploufragan, Colomiers, Crepy en Vallois, 100% 4,996,086 $2.14 $10,682,459(3) INSEE(4) Dec. 2011 None Lens, Nimes, and Thuit Hebert, France SFX ENTERTAINMENT, INC. (CLEAR CHANNEL COMMUNICATIONS, INC.) (2) 60% interest in a limited partnership 227,685 47.94 6,548,587 Stated Sep. 2020 Sep. 2040 New York, NY owning land and buildings TRUSERV CORPORATION(2) Kingman, Arizona; Springfield, Oregon; Fogelsville, Pennsylvania; 50% interest in three Jonesboro, Georgia; Kansas limited partnerships City, Missouri; Woodland, owning land and 3,443,100 3.49 6,003,575 Stated Dec. 2022 Nov. 2042 California; Corsicana, Texas buldings FLEMING COMPANIES, INC. (2) Tulsa, OK 100% 757,784 7.27 5,508,000 CPI Jun. 2017 Jun. 2037 FOSTER WHEELER REALTY SERVICES, INC. (FOSTER WHEELER LTD., FOSTER WHEELER INC. AND FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.) (2) Clinton, NJ 100% 292,000 17.91 5,230,850 CPI Aug. 2022 Aug. 2042 MEDICA-FRANCE, SA (2) Paris, Rueil Malmaison, Sarcelles, Poissy, Chatou, and Rosny sous Bois, France 100% 336,766 12.01 4,042,893(3) INSEE(4) Jun. 2010 Jun. 2010 HOLOGIC, INC. 64% interest in a Danbury, CT; Bedford MA jointly controlled tenancy-in-common 269,042 11.73 2,019,802 CPI Aug. 2022 Aug. 2042 MEADOWBROOK MEAT COMPANY (FAST FOOD MERCHANDISERS, INC. AND PROFICIENT FOOD COMPANY, INC.) (2) Orlando, FL; Macon, GA; Rocky 100% 575,858 4.62 2,660,000 Stated Jan. 2018 Jan. 2038 Mount, NC (2); Lewisville, TX
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RENT PER SHARE OF LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM - ------------------------------------------------------------------------------------------------------------------------------------ OVERLAND STORAGE, INC. (2) San Diego, CA 100% 158,585 16.53 2,621,285 Stated Feb. 2014 Feb. 2019 TOWER AUTOMOTIVE PRODUCTS, INC. AND TOWER AUTOMOTIVE TOOL, LLC (TOWER AUTOMOTIVE, INC.) (2) Auburn, IN; Bluffton, OH; 100% 844,166 2.79 2,355,875 CPI Apr. 2020 Apr. 2040 Milan, TN PETSMART, INC. (2) Phoenix, AZ; Westlake Village, CA; Boca Raton, Lake Mary, Tallahassee, Plantation, FL; Evanston, IL; 30% interest Braintree, MA; Oxon Hill, MD; in two limited Flint, MI; Fridley, MN; partnerships owning 946,177 7.68 2,178,825 Stated Nov. 2021 Nov. 2041 Dallas, Southlake, TX land and buildings BE AEROSPACE, INC. (2) Miami, FL 100% 188,065 7.78 1,462,618 Stated Sep. 2017 Sep. 2037 TRENDS CLOTHING CORP. (2) Miami, FL 100% 247,264 5.74 1,420,000 CPI Jun. 2017 Jun. 2037 RACAL INSTRUMENTS, INC. (RIG LIMITED) (2) Irvine, CA 100% 98,631 13.20 1,301,929 Stated May 2022 May 2052 ADVANTIS TECHNOLOGIES, INC. (ROCKWOOD SPECIALTIES GROUP) (2) Alpharetta, GA 100% 191,975 6.64 1,275,000 CPI Jun. 2017 Jun. 2037 INTEGRACOLOR, LTD. (2) Mesquite, TX (3) 100% 358,987 3.50 1,256,700 CPI Jun. 2022 Jun. 2042 DANKA OFFICE IMAGING COMPANY (2),(5) St. Petersburg, FL (3) 100% 337,727 2.58 871,200 CPI Jul. 2018 Jul. 2038 BUILDERS FIRSTSOURCE - ATLANTIC GROUP, INC. AND BUILDERS FIRSTSOURCE - OHIO VALLEY, INC. (BUILDERS FIRSTSOURCE, INC.) (2) 40% interest in a Norcross, GA; Elkwood, VA; limited partnership Cincinnati, OH owning land and buldings 389,261 3.56 553,751 CPI Dec. 2016 Dec. 2036 SSG PRECISION OPTRONICS, INC. (TINSLEY LABORATORIES, INC.) Wilmington, MA 100% 37,696 13.53 509,992 CPI Nov. 2022 Nov. 2036 RAVE MOTION PICTURES BATON ROUGE, L.L.C. (RAVE MOTION PICTURES L.L.C.) (2) Baton Rouge, LA 100% Under Construction Aug. 2023 Aug. 2043
1. Share of Current Annual Rents is the product of the Square Footage, the Rent per Square Foot, and the Ownership Interest percentage. 2. This property is encumbered by a mortgage note payable. 3. Based on exchange rates at December 31, 2002. 4. INSEE construction index, an index published quarterly by the French Government. 5. A portion of this property is under construction. -17- Item 3. Legal Proceedings. As of the date hereof, CPA(R):14 is not a party to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the year ended December 31, 2002 to a vote of security holders, through the solicitation of proxies or otherwise. -18- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information with respect to CPA(R):15's common equity is hereby incorporated by reference to page 30 of CPA(R):15's Annual Report contained in Appendix A. Item 6. Selected Financial Data. Selected Financial Data are hereby incorporated by reference to page 1 of CPA(R):15's Annual Report contained in appendix A. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 10 of CPA(R):15's Annual Report contained in Appendix A. Item 7A. Quantitative and Qualitative Disclosures about Market Risk: Approximately $374,788,000 of CPA(R):15'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 5.52% to 7.98%. CPA(R):15 had no variable rate debt as of December 31, 2002.
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Fixed rate debt $ 4,882 $ 5,492 $ 6,024 $ 6,533 $ 7,140 $344,717 $374,788 $375,012 Weighted average interest rate 5.99% 5.98% 5.97% 5.97% 5.96% 6.10%
CPA(R):15 conducts business in France. Foreign currency transaction gains and losses from the Euro were not material to CPA(R):15's results of operations for the year ended December 31, 2002. In January 2003, CPA(R):15 purchased a property in the United Kingdom and the lease and debt on the property will be denominated in British Pounds. CPA(R):15 was not subject to material foreign currency exchange rate risk from the effects of changes in exchange rates. To date, CPA(R):15 has not entered into any foreign currency forward exchange contracts to hedge the effects of adverse fluctuations affect foreign currency exchange rates. CPA(R):15 has obtained limited recourse mortgage financing at a fixed rate of interest in the local currency. To the extent that currency fluctuations affect rental revenues as translated to dollars, the change in debt service, as translated to dollars, will partially offset the fluctuations in revenue, and, to some extent mitigate the risk from changes in foreign currency rates. Scheduled future minimum rents, exclusive of renewals, under non-cancelable leases resulting from CPA(R):15's foreign operations are as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Rental income(1) $14,725 $14,725 $14,725 $14,725 $14,725 $ 52,839 $126,464
Scheduled principal payments for the mortgage notes payable during each of the next five years following December 31, 2002 and thereafter are as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Fixed rate debt (1) $ 2,183 $ 2,479 $ 2,774 $ 3,070 $ 3,449 $110,000 $123,955
(1) Based on December 31, 2002 exchange rate. The mortgage notes are denominated in the functional currency of the country of each property. -19- Item 8. Financial Statements and Supplementary Data. The following consolidated financial statements and supplementary data of CPA(R):15 are hereby incorporated by reference to pages 11 to 29 of CPA(R):15's Annual Report contained in Appendix A: (i) Report of Independent Accountants (ii) Consolidated Balance Sheets at December 31, 2002 and 2001 (iii) Consolidated Statements of Operations for the year ended December 31, 2002 and the period from inception (February 26, 2001) through December 31, 2001 (iv) Consolidated Statement of Shareholders' Equity for the period from inception (February 26, 2001) through December 31, 2001 and the year ended December 31, 2002. (v) Consolidated Statements of Cash Flows for the year ended December 31, 2002 and the period from inception (February 26, 2001) through December 31, 2001 (vi) Notes to Consolidated Financial Statements Item 9. Disagreements on Accounting and Financial Disclosure. NONE -20- PART III Item 10. Directors and Executive Officers of the Registrant. This information will be contained in CPA(R):15's definitive Proxy Statement with respect to CPA(R):15's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of CPA(R):15's fiscal year, and is hereby incorporated by reference. Item 11. Executive Compensation. This information will be contained in CPA(R):15's definitive Proxy Statement with respect to CPA(R):15's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of CPA(R):15's fiscal year, and is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. This information will be contained in CPA(R):15's definitive Proxy Statement with respect to CPA(R):15's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of CPA(R):15's fiscal year, and is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions. This information will be contained in CPA(R):15's definitive Proxy Statement with respect to CPA(R):15's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the CPA(R):15's fiscal year, and is hereby incorporated by reference. Item 14. Controls and Procedures The Co-Chief Executive Officers and Chief Financial Officer of CPA(R):15 have conducted a review of CPA(R):15's disclosure controls and procedures as of December 31, 2002. CPA(R):15's disclosure controls and procedures include CPA(R):15'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 CPA(R):15'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, CPA(R):15's chief executive officers and chief financial officer have concluded that CPA(R):15'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 CPA(R):15 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 CPA(R):15's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above. -21- PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Consolidated Financial Statements: The following consolidated financial statements are filed as a part of this Report: Report of Independent Accountants. Consolidated Balance Sheets at December 31, 2002 and 2001. Consolidated Statements of Operations for the year ended December 31, 2002 and the period from inception (February 26, 2001) through December 31, 2001. Consolidated Statement of Shareholders' Equity for the period from inception (February 26, 2001) through December 31, 2001 and the year ended December 31, 2002. Consolidated Statements of Cash Flows for the year ended December 31, 2002 and the period from inception (February 26, 2001) through December 31, 2001. Notes to Consolidated Financial Statements. The consolidated financial statements are hereby incorporated by reference to pages 11 to 29 of CPA(R):15'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 35 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. -22- (a) 3. Exhibits: The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 3.1 Articles of Incorporation of Registrant Exhibit 3.1 to Registration Statement (Form S-11) No. 333-58854 3.2 Bylaws of Registrant Exhibit 3.2 to Registration Statement (Form S-11) No. 333-58854 3.2(1) Bylaws of Registrant Exhibit 3.2 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 4.1 2001 Dividend Reinvestment and Stock Purchase Plan Exhibit 4.1 to Registration Statement of Registrant (Form S-11) No. 333-58854 4.1(1) 2001 Dividend Reinvestment and Stock Purchase Plan Exhibit 4.1 to Amendment No. 1 to of Registrant Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 5.1 Opinion of Reed Smith LLP Exhibit 5.1 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 5.1(1) Opinion of Reed Smith LLP Exhibit 5.1 to Registration Statement (Form S-11) No. 333-100525 8.1 Opinion of Reed Smith LLP as to Certain Matters Exhibit 8.1 to Registration Statement (Form S-11) No. 333-58854 8.1(1) Opinion of Reed Smith LLP Exhibit 8.1 to Registration Statement (Form S-11) No. 333-100525 8.1(2) Opinion of Reed Smith LLP Exhibit 8.1 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-100525 dated November 21, 2002 8.2 Opinion of Reed Smith LLP Exhibit 8.2 to Registration Statement (Form S-11) No. 333-58854 8.2(1) Opinion of Reed Smith LLP Exhibit 8.2 to Registration Statement (Form S-11) No. 333-100525 10.1 Form of Sales Agency Agreement Exhibit 10.1 to Registration Statement (Form S-11) No. 333-58854 10.1(1) Form of Sales Agency Agreement Exhibit 10.1 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 10.1(3) Form of Selected Dealer Agreement Exhibit 10.1 to Registration Statement (Form S-11) No. 333-100525
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Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.2 Form of Selected Dealer Agreement Exhibit 10.2 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 10.2(1) Form of Selected Dealer Agreement Exhibit 10.2 to Registration Statement (Form S-11) No. 333-58854 10.2(2) Form of Escrow Agreement Exhibit 10.2 to Registration Statement (Form S-11) No. 333-100525 10.3 Form of Advisory Agreement Exhibit 10.3 to Registration Statement (Form S-11) No. 333-58854 10.3(1) Form of Advisory Agreement Exhibit 10.3 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 10.3(2) Form of Investor Advisor Agreement Exhibit 10.3 to Registration Statement (Form S-11) No. 333-100525 10.4 Form of Wholesaling Agreement Exhibit 10.4 to Registration Statement (Form S-11) No. 333-58854 10.4(1) Form of Wholesaling Agreement Exhibit 10.4 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 10.4(2) Sales Agency Agreement Exhibit 10.4 to Registration Statement (Form S-11) No. 333-100525 10.5 Form of Escrow Agreement Exhibit 10.5 to Registration Statement (Form S-11) No. 333-58854 10.5(1) Form of Escrow Agreement Exhibit 10.5 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 10.5(2) Opinion of Reed Smith LLP Exhibit 5.1 to Registration Statement (Form S-11/MEF) No. 333-100813 10.5(2) Advisory Agreement Exhibit 10.5 to Registration Statement (Form S-11) No. 333-100525 10.6 Form of Selected Investor Adviser Agreement Exhibit 10.6 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 10.6(1) Wholesaling Agreement Exhibit 10.6 to Registration Statement (Form S-11) No. 333-100525 10.7 Amended and Restated Sales Agency Agreement Exhibit 10.7 to Post-Effective Amendment No. 2 to Registration Statement (Form S-11/A) No. 333-58854 dated April 30, 2002 10.7(1) Amended and Restated Limited Partnership Agreement Exhibit 10.7 to Amendment No. 1 to of Goldfish (DE) LP Registration Statement (Form S-11/A) No. 333-100525 dated November 21, 2002
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Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.8 Amended and Restated Advisory Agreement Exhibit 10.8 to Post-Effective Amendment No. 2 to Registration Statement (Form S-11/A) No. 333-58854 dated April 30, 2002 10.8(1) Agreement of DE Limited Partnership of Labrador (AZ) Exhibit 10.8 to Amendment No. 1 to LP Registration Statement (Form S-11/A) No. 333-100525 dated November 21, 2002 10.9 Amended and Restated Wholesaling Agreement Exhibit 10.9 to Post-Effective Amendment No. 2 to Registration Statement (Form S-11/A) No. 333-58854 dated April 30, 2002 10.9(1) Agreement of DE Limited Partnership of BFS (DE) LP Exhibit 10.9 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-100525 dated November 21, 2002 10.10 Lease Agreement by and between Grocery (OK) QRS Exhibit 10.10 to Amendment No. 2 to 15-5, Inc., a Delaware corporation, as Landlord and Registration Statement (Form S-11/A) No. Fleming Companies, Inc., an Oklahoma corporation, as 333-100525 dated December 18, 2002 Tenant 10.11 Lease Agreement by and between Module (DE) Limited Exhibit 10.11 to Amendment No. 2 to Partnership, a Delaware limited partnership, as Registration Statement (Form S-11/A) No. Landlord and Tower Automotive Products Company, 333-100525 dated December 18, 2002 Inc., a Delaware corporation, and Tower Automotive Tool LLC, a Michigan limited liability company, collectively as Tenant 10.12 Lease Agreement by and between Chassis (DE) Limited Exhibit 10.12 to Amendment No. 2 to Partnership, a Delaware limited partnership, as Registration Statement (Form S-11/A) No. Landlord and Tower Automotive Products Company, 333-100525 dated December 18, 2002 Inc., a Delaware corporation, and Tower Automotive Tool LLC, a Michigan limited liability company, collectively as Tenant 10.13 Lease Agreement by and between Energy (NJ) QRS Exhibit 10.10 to Amendment No. 2 to 15-10, Inc., a Delaware corporation, as Landlord and Registration Statement (Form S-11/A) No. Foster Wheeler Realty Services, Inc., a Delaware 333-100525 dated December 18, 2002 corporation, as Tenant 10.14 Lease between Massachusetts Mutual Life Insurance Exhibit 10.10 to Amendment No. 2 to Company, Landlord and SFX Entertainment, Inc., Registration Statement (Form S-11/A) No. Tenant as assumed by Clear (NY) LP 333-100525 dated December 18, 2002 21.2 Subsidiaries of Registrant as of December 31, 2002 Filed herewith 99.1 Table VI: Acquisition of Properties by Prior Programs Exhibit 99.1 to Registration Statement (Form S-11) No. 333-58854
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Exhibit No. Description Method of Filing ----------- ----------- ---------------- 99.1(1) Table VI: Acquisition of Properties by Prior Programs Exhibit 99.1 to Amendment No. 1 to Registration Statement (Form S-11/A) No. 333-58854 dated November 1, 2001 99.1(2) Table VI: Acquisition of Properties by Prior Programs Exhibit 99.1 to Post-Effective Amendment No. 2 to Registration Statement (Form S-11/A) No. 333-58854 dated April 30, 2002 99.1(3) Certification of Chief Executive Officer Filed herewith 99.2 Certification of Chief Financial Officer Filed herewith
(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):15's offering of common stock which commenced November 7, 2001 (File #333-58854) is as follows: Shares registered: 40,000,000 Aggregate price of offering amount registered: $400,000,000 Shares sold: 39,910,441 Aggregated offering price of amount sold: $399,104,410 Direct or indirect payments to directors, officers, general partners of the issuer or their associates, to persons owning ten percent or more of any class of equity securities of the issuer and to affiliates of the issuer: $ 4,498,640 Direct or indirect payments to others: $ 39,090,171 Net offering proceeds to the issuer after deducting expenses: $355,515,599 Purchases of real estate: $268,224,299 Working capital reserves: $ 3,991,044 Temporary investments in cash and cash equivalents: $ 83,300,256
-26- 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 15 INCORPORATED a Maryland corporation 4/8/03 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 15 INCORPORATED 4/8/03 BY: /s/ William Polk Carey - -------------- --------------------------------------------- Date William Polk Carey Chairman of the Board and Director (Principal Executive Officer) 4/8/03 BY: /s/ Gordon F. DuGan - -------------- --------------------------------------------- Date Gordon F. DuGan Vice Chairman of the Board, Senior Managing Director and Chief Acquisitions Officer 4/8/03 BY: /s/ George E. Stoddard - -------------- --------------------------------------------- Date George E. Stoddard Director 4/8/03 BY: /s/ Ralph F. Verni - -------------- --------------------------------------------- Date Ralph F. Verni Director 4/8/03 BY: /s/ Warren G. Wintrub - -------------- --------------------------------------------- Date Warren G. Wintrub Director 4/8/03 BY: /s/ John J. Park - -------------- --------------------------------------------- Date John J. Park Managing Director and Chief Financial Officer (Principal Financial Officer) -27- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED 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 15 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 function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and 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 4/8/03 Date 4/8/03 /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) -28- CERTIFICATIONS (Continued) I, John J. Park, certify that: 1. I have reviewed this annual report on Form 10-K of Corporate Property Associates 15 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 function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this 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 4/8/03 /s/ John J. Park ----------------------- John J. Park Chief Financial Officer -29- SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "ACT") BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT THE REGISTRANT'S PROXY STATEMENT HAS NOT BEEN SENT TO SECURITY HOLDERS, AND IS TO BE FURNISHED TO SECURITY HOLDERS SUBSEQUENT TO THE FILING OF THE ANNUAL REPORT ON THIS FORM. -30- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Corporate Property Associates 15 Incorporated: Our audits of the consolidated financial statements referred to in our report dated March 12, 2003 appearing in the 2002 Annual Report to Shareholders of Corporate Property Associates 15 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 12, 2003 -31- Corporate Property Associates 15 Incorporated SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2002
Initial Cost to Company ----------------------- Costs Capitalized Subsequent to Description Encumbrances Land Buildings Acquisition (a) ----------- ------------ ---- --------- --------------- Operating Method: Indusrial facilities leased to Tower Automotive, Inc. $ 11,975,923 $ 1,180,000 $ 19,815,621 $ 16,543 Office facility leased to Racal Instruments, Inc. 3,418,441 4,930,000 Office facility leased to Advantis Technologies, Inc. 8,491,506 1,750,000 11,339,005 Distribution and warehouse facility leased to Fleming Companies, Inc. 29,886,354 1,000,000 52,870,063 16,378 Distribution and warehouse facility leased to Trends Clothing Corp. 8,558,719 3,800,000 11,069,110 33,983 Leasehold interest in office facility leased to Foster Wheeler, Ltd. 29,113,434 47,015,707 3,164 Industrial facility leased to BE Aerospace, Inc. 10,489,765 6,600,000 8,870,072 40,192 Office facilities leased to Danka Office Imaging Company 12,800,000 1,750,000 7,408,115 Office, light engineering and warehouse facilities leased to Overland Strorage, Inc. 19,980,766 8,050,000 22,046,836 24,257 Warehouse, distribution and office facilities leased to SSG Precision Optronics, Inc. 870,000 4,097,653 Assisted-living facilities leased to Medica-France, SA 35,642,200 5,329,401 35,001,068 2,932,572 Office facilities leased to Clear Channel Communications, Inc. 85,000,000 48,000,000 104,041,885 2,668,236 Warehouse and distribution facilities leased to Carrefour France, SA and Carrefour Hypermarches France, SA 88,312,986 11,249,761 95,122,572 5,545,902 Warehouse, distribution and office facilities leased to Meadowbrook Meat Company, Inc. 18,000,000 3,440,000 26,975,009 ------------ ------------ ------------ ----------- $361,670,094 $ 97,949,162 $445,672,716 $11,281,227 ============ ============ ============ ===========
Increases in Description Investment (b) Land Buildings ----------- -------------- ---- --------- Operating Method: Indusrial facilities leased to Tower Automotive, Inc. $ 1,180,000 $ 19,832,164 Office facility leased to Racal Instruments, Inc. 4,930,000 Office facility leased to Advantis Technologies, Inc 1,750,000 11,339,005 Distribution and warehouse facility leased to Fleming Companies, Inc. 1,000,000 52,886,441 Distribution and warehouse facility leased to Trends Clothing Corp. 3,800,000 11,103,093 Leasehold interest in office facility leased to Foster Wheeler, Ltd. 47,018,871 Industrial facility leased to BE Aerospace, Inc. 6,600,000 8,910,264 Office facilities leased to Danka Office Imaging Company 1,750,000 7,408,115 Office, light engineering and warehouse facilities leased to Overland Strorage, Inc. 8,050,000 22,071,093 Warehouse, distribution and office facilities leased to SSG Precision Optronics, Inc. 870,000 4,097,653 Assisted-living facilities leased to Medica-France, SA $ 2,071,238 5,584,549 39,749,730 Office facilities leased to Clear Channel Communications, Inc. 48,000,000 106,710,121 Warehouse and distribution facilities leased to Carrefour France, SA and Carrefour Hypermarches France, SA 2,546,807 11,505,760 102,959,282 Warehouse, distribution and office facilities leased to Meadowbrook Meat Company, Inc. 3,444,000 26,975,009 ----------- ------------ ------------ $ 4,618,045 $ 98,460,309 $461,060,841 =========== ============ ============
Gross Amount at which Carried at Close of Period (d) ---------------------- Life on which Depreciation in Latest Accumulated Statement of Income Description Total Depreciation (d) Date Acquired is Computed ----------- ----- ---------------- ------------- ----------- Operating Method: Indusrial facilities leased to Tower Automotive, Inc. $ 21,012,164 $ 351,035 April 10, 2002 40 years Office facility leased to Racal Instruments, Inc. 4,930,000 May 21, 2002 Office facility leased to Advantis Technologies, Inc 13,089,005 153,549 June 25, 2002 40 years Distribution and warehouse facility leased to Fleming Companies, Inc. 53,886,441 715,991 June 28, 2002 40 years Distribution and warehouse facility leased to Trends Clothing Corp. 14,903,093 127,337 July 22, 2002 40 years Leasehold interest in office facility leased to Foster Wheeler, Ltd. 47,018,871 440,776 August 16, 2002 40 years Industrial facility leased to BE Aerospace, Inc. 15,510,264 64,971 September 12, 2002 40 years Office facilities leased to Danka Office Imaging Company 9,158,115 54,018 September 27, 2002 40 years Office, light engineering and warehouse facilities leased to Overland Strorage, Inc. 30,121,093 114,945 October 15, 2002 40 years Warehouse, distribution and office facilities leased to SSG Precision Optronics, Inc. 4,967,653 12,805 November 20, 2002 40 years Assisted-living facilities leased to Medica-France, SA 45,334,279 41,405 December 4, 2002 40 years Office facilities leased to Clear Channel Communications, Inc. 154,710,121 111,156 December 12, 2002 40 years Warehouse and distribution facilities leased to Carrefour France, SA and Carrefour Hypermarches France, SA 114,465,042 107,249 December 27, 2002 40 years Warehouse, distribution and office facilities leased to Meadowbrook Meat Company, Inc. 30,415,009 28,099 December 31, 2002 40 years ------------ ---------- $559,521,150 $2,323,336 ============ ==========
-32-
Gross Amount at which Carried Initial Cost to Company at Close of Period (d) ----------------------- ---------------------- Costs Capitalized Increase in Subsequent to Net Investment Description Encumbrances Land Buildings Acquisition (a) (b) Total Date Acquired ----------- ------------ ---- --------- --------------- -------------- ----- ------------- Direct Financing Method: Office facility leased to Racal Instruments, Inc. $ 6,058,212 $ 8,525,497 $ 69,300 $142,221 $ 8,737,018 May 21, 2002 Distribution and warehouse facility leased to IntegraColor Ltd. 7,059,216 $1,513,400 10,842,621 12,356,021 June 14, 2002 ----------- ---------- ----------- -------- -------- ----------- $13,117,428 $1,513,400 $19,368,118 $ 69,300 $142,221 $21,093,039 =========== ========== =========== ======== ======== ===========
-33- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED 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 and foreign currency translation adjustments. (c) At December, 2002, the aggregate cost of real estate owned by CPA(R):15 and its subsidiaries for Federal income tax purposes is $465,033,000. (d)
Reconciliation of Real Estate Accounted for Under the Operating Method December 31, 2002 Balance at beginning of year -- Additions $ 588,387,050 Disposition (11,614,766) Reclassification to equity investment (21,869,179) Foreign currency translation adjustment 4,618,045 ------------- Balance at December 31, 2002 $ 559,521,150 =============
Reconciliation of Accumulated Depreciation December 31, 2002 Balance at beginning of year -- Depreciation expense $ 2,569,741 Reclassification to equity investment (247,910) Foreign currency translation adjustment 1,505 ------------- Balance at December 31, 2002 $ 2,323,336 =============
-34- APPENDIX A TO FORM 10-K CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED 2002 ANNUAL REPORT SELECTED FINANCIAL DATA (In thousands except per share and share amounts)
2002 2001 (1) ---- -------- OPERATING DATA: Revenues $ 14,394 $ 2 Net income (loss) 5,767 (68) Basic earnings (loss) per share .29 (3.42) Dividends paid (2) 6,179 -- Dividends declared per share .45 -- Weighted average shares outstanding - basic 19,720,070 20,000 Payment of mortgage principal (3) 386 -- BALANCE SHEET DATA: Total assets 806,298 2,206 Long-term obligations(4) 382,918 --
(1) For the period from inception (February 26, 2001) through December 31, 2001. (2) The Company paid its first dividend in April 2002. (3) Represents scheduled mortgage principal amortization paid. (4) Represents mortgage notes payable and deferred acquisition fee installments that are due after more than one year. -1- MANAGEMENT'S DISCUSSION AND ANALYSIS Overview The following discussion and analysis of financial condition and results of operations of Corporate Property Associates 15 Incorporated ("CPA(R):15") should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002. The following discussion contains forward looking statements. Forward-looking statements, which are based on certain assumptions, describe future plans, strategies and expectations of CPA(R):15. Such statements include known and unknown risks, uncertainties and other factors that may cause its actual results, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward looking statements. The risk factors are fully described in Item 1 of this Annual Report on Form 10-K. Accordingly, such information should not be regarded as representations by us that the results or conditions described in such statements or objectives and plans will be achieved. CPA(R):15 was formed in 2001 and is currently using the proceeds from its $400,000,000 "best efforts" public offering which was completed in November 2002 along with limited recourse mortgage financing to purchase properties and enter into long-term net leases with corporate lessees. As of December 31, 2002, CPA(R):15 had raised gross proceeds of $398,904,000 and intends to raise up to an additional $690,000,000 in a second "best efforts" public offering of stock. CPA(R):15 structures the net leases to place certain economic burdens of ownership on these corporate lessees by requiring them to pay the costs of maintenance and repair, insurance and real estate taxes. The lease obligations are unconditional. When possible, CPA(R):15 also negotiates guarantees of the lease obligations from parent companies. CPA(R):15 negotiates leases that may provide for periodic rent increases that are stated or based on increases in the Consumer Price Index ("CPI") or, for retail properties, may provide for additional rents based on sales in excess of a specified base amount. CPA(R):15 may also acquire interests in real estate through joint ventures with affiliates who have similar investment objectives as CPA(R):15. These joint ventures, which may be in the form of general partnerships, limited partnerships, limited liability companies or tenancies-in-common, also enter into net leases on a single-tenant basis. As of December 31, 2002, CPA(R):15 holds interests in seven limited partnerships and one jointly controlled tenancy-in-common with three affiliates, Corporate Property Associates 12 Incorporated ("CPA(R):12"), Corporate Property Associates 14 Incorporated ("CPA(R):14") and W. P. Carey & Co. LLC ("W. P. Carey"). As a real estate investment trust ("REIT"), CPA(R):15 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 stockholders. CPA(R):15's objectives are to pay quarterly dividends at an increasing rate, provide inflation-protected income through CPI-based rent increases, own a diversified portfolio of net leased properties and increase the equity in CPA(R):15's real estate portfolio by obtaining mortgage debt that provides for scheduled principal payment installments. CPA(R):15 is advised by W. P. Carey and its wholly-owned subsidiary, Carey Asset Management Corp., pursuant to an Advisory Agreement. CPA(R):15's contract with W. P. Carey is renewable annually by Independent Directors who are elected by CPA(R):15's shareholders. In connection with each renewal, W. P. Carey is required to provide the Independent Directors with a comparison of the fee structure with several similar companies. The Advisory Agreement also provides that an independent portfolio valuation be performed after a stated period and annually thereafter, and Average Invested Assets, the basis for determining asset management and performance fees, be based on the results of these independent valuations. Until the initial valuation is performed, the fees are based on the cost of the properties. Critical Accounting Policies As CPA(R):15 uses its offering proceeds to purchase investments in real estate, it has adopted certain critical accounting policies that are crucial to an understanding of its financial condition and results of operations. Such policies include, but are not limited to the following: -2- MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED The preparation of financial statements requires that Management make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. For instance, CPA(R):15 assesses its ability to collect rent and other tenant-based receivables and determines an appropriate charge and allowance for uncollectable amounts. Because CPA(R):15's real estate operations have a limited number of lessees, Management believes that it will be necessary to evaluate specific situations rather than solely use statistical methods. CPA(R):15 recognizes a provision for uncollected rents which typically will range between 0.25% and 1% of lease revenues (rental income and interest income from direct financing leases) and will measure its allowance for uncollected rents with actual rent arrearages experience and its judgment regarding collectibility of arrearages. Based on its actual experience in future years, CPA(R):15 will compare its allowance for uncollected receivables to any arrearages and adjust the percentage applied. Real estate accounted for under the operating method is stated at cost less accumulated depreciation. Costs directly related to build-to-suit projects primarily interest, if applicable are capitalized. Interest capitalized in 2002 was $321,000. CPA(R):15 considers a build-to-suit project as substantially completed upon the completion of improvements, but no later than a date that is negotiated and stated in the lease. If portions of a project are substantially completed and occupied and other portions have not yet reached that stage, the substantially completed portions are accounted for separately. CPA(R):15 allocates costs incurred between the portions under construction and the portions substantially completed and only capitalizes those costs associated with the portion under construction. CPA(R):15 uses estimates and judgments when evaluating whether long-lived assets are impaired. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, Management performs projections of undiscounted cash flows, and if such cash flows are insufficient, the assets will be adjusted (i.e., written down) to their estimated fair value. An analysis of whether a real estate asset has been impaired requires Management to make its best estimate of market rents, residual values and holding periods. As CPA(R):15's investment objective is to hold properties on a long-term basis, holding period assumptions will likely range from five to ten years. In its evaluations, CPA(R):15 will generally obtain market information from outside sources; however, such information requires Management to determine whether the information received is appropriate to the circumstances. Depending on the assumptions made and estimates used, the estimated future cash flow projected in the evaluation of long-lived assets can vary within a range of outcomes. CPA(R):15 considers the likelihood of possible outcomes in determining the best estimate of future cash flows. Because CPA(R):15's properties are leased to single tenants, CPA(R):15 may be more likely to incur significant writedowns when circumstances deteriorate because of the possibility that a property will be vacated in its entirety. This makes the risks faced by CPA(R):15 different from the risks faced by companies that own multi-tenant properties. Events or changes in circumstances can result in further writedowns and impact the gain or loss ultimately realized upon sale of the asset. For its direct financing leases, CPA(R): 15 will perform a review of its estimated residual values of properties at least annually to determine whether there has been an other than temporary decline in CPA(R):15's current estimate of residual value of the real estate of its assets subject to direct financing leases. Currently, there are no lessees that have experienced a change in circumstances that in Management's opinion would require an evaluation of recoverability. Stated rental revenue is recognized on a straight-line basis, and interest income from direct financing leases is recognized such that CPA(R):15 earns a constant rate of interest on its net investment, over the terms of the respective leases. Unbilled rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements. CPI-based and other contingent-type rents are recognized currently. CPA(R):15 recognizes rental income from sales overrides when reported by lessees, that is, after the level of sales requiring a rental payment to CPA(R):15 is reached. CPA(R):15 and certain affiliates are investors in certain real estate ventures. It is anticipated that additional properties will be purchased through real estate ventures. These investments may be held through incorporated or unincorporated jointly-held entities. Substantially all of these investments will represent jointly purchased properties which are net leased to a single tenant and will be structured to provide diversification and reduce concentration of a risk from a single lessee for CPA(R):15 and the affiliate. The placement of an investment in a jointly-held entity requires the approval of CPA(R):15's Independent Directors. All of the jointly held investments will be structured so that CPA(R):15 and the affiliate contribute equity, receive distributions and are allocated profit or -3- MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED 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 including, but not limited to, controlling interest, significant influence and whether each party has the ability to make independent decisions. Such factors will determine whether such investments are consolidated in the accounts of CPA(R):15 or accounted for under the equity method. Equity method investments are reviewed for impairment in the event of a change in circumstances that is other than temporary. An investment's value is impaired only if Management's estimate of the net realizable value of the impairment is less than the carrying value of the investment. To the extent an impairment loss has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment. CPA(R):15 classifies its directly-owned leased assets for financial reporting purposes as either real estate leased under the operating method or net investments in direct financing leases based on several criteria, including, but not limited to, estimates of the remaining economic life of the leased assets and the calculation of the present value of future minimum rents. In determining the classification of a lease, CPA(R):15 uses estimates of remaining economic life provided by independent appraisals of the leased assets. The calculation of the present value of future minimum rents includes determining a lease's implicit interest rate which requires an estimate of the residual value of leased assets as of the end of the non cancelable lease term. Different estimates of residual value result in different implicit interest rates and could possibly affect the financial reporting classification of leased assets. The contractual terms of CPA(R):15 leases are not necessarily different for operating and direct financing leases; however the classification is based on accounting pronouncements which are intended to indicate whether the risks and rewards of ownership are retained by the lessor or transferred to the lessee. Management believes that it retains certain risks of ownership regardless of accounting classification. When assets are identified by Management as held for sale, CPA(R):15 discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. If, in Management's opinion , the net sales price of the assets which have been identified for sale is less than the net book value of the assets, an impairment charge is recognized and a valuation allowance is established. If circumstances that previously were considered unlikely occur and, as a result, CPA(R):15 decides not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) the carrying value before it was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the time of the subsequent decision not to sell. As of December 31, 2002, no assets are held for sale. Costs incurred in connection with obtaining mortgages and debt financing are capitalized and amortized over the term of the related debt and included in interest expense. Unamortized financing costs are included in charges for early extinguishment of debt if a loan is retired and the costs have not been fully amortized. Costs incurred in connection with leases are capitalized and amortized over the non-cancelable terms of the related leases, and included in property expense. Unamortized leasing costs are also charged to property expense in the event of an early termination of a lease. Public business enterprises are required to report financial and descriptive information about their reportable operating segments. Operating segments are components of an enterprise about which financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management evaluates the performance of its portfolio of properties as a whole, rather than by identifying discrete operating segments. This evaluation includes assessing CPA(R):15's ability to meet distribution objectives, increase the dividend and increase value by evaluating potential investments in single tenant net lease real estate and by seeking opportunities such as refinancing mortgage debt at lower rates of interest, restructuring leases or paying off lenders at a discount to the face value of the outstanding mortgage balance. -4- MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED Results of Operations Year Ended December 31, 2002 Compared to the Period from Inception (February 26, 2001) through December 31, 2001 The results of CPA(R):15 for the year ended December 31, 2002 are not comparable to the results for the period ended December 31, 2001. CPA(R):15 recognized net income of $5,767,000 in 2002 as compared with a net loss of $69,000 in 2001. CPA(R):15 did not have any significant operating activity during 2001 and did not begin acquiring any substantial real estate interests until February 2002. During the year the Company's asset base increased from approximately $2,206,000 to approximately $806,298,000. During the fourth quarter of 2002, CPA(R):15's asset base increased by $401,147,000. Accordingly, CPA(R):15 believes that the results of operations for the year ended December 31, 2002 are not expected to be representative of future results. During the year ended December 31, 2002, CPA(R): 15 entered directly into net lease transactions with 17 tenants including a build-to-suit transaction, acquired equity ownership interests with affiliates which net lease properties to TruServ Corporation and increased its interest in the Petsmart, Inc. and Builders FirstSource, Inc. partnerships in which it owned de minimus interests in 2001. In connection with build-to-suit projects, CPA(R):15 capitalizes interest cost and, in 2002, $321,000 was capitalized. If there had been no funds applied to the development of build-to-suit projects, the interest would have been expensed and included in the determination of net income. The acquisitions (including the pro rata share of equity investments) are expected to generate annual cash flow (contractual rent less debt service on property-level mortgage debt) of approximately $29,000,000, as follows:
(In thousands) Annual Annual Estimated Lease Obligor Contractual Rent Debt Service Cash Flow - ------------- ---------------- ------------ --------- Clear Channel Communications, Inc. (1) $ 6,549 $ 3,467 $ 3,082 TruServ Corporation (2) 6,004 2,707 3,297 Fleming Companies, Inc. 5,508 2,507 3,001 Foster Wheeler, Inc. 5,231 2,253 2,978 Carrefour France, SA (3) 6,943 4,306 2,637 Hologic, Inc. (2) 2,020 -- 2,020 Meadowbrook Meat Company 2,660 1,306 1,354 Tower Automotive, Inc. 2,356 1,057 1,299 Rave Reviews Cinemas, L.L.C. (under construction) 1,286 -- 1,286 Overland Storage, Inc. 2,621 1,467 1,154 Petsmart, Inc. (2) 2,179 1,107 1,072 Danka Office Imaging Company 1,966 984 982 Medica - France, SA (3) 2,628 1,744 884 BE Aerospace, Inc. 1,468 764 704 IntegraColor, Ltd. 1,257 564 693 Advantis Technologies, Inc. 1,275 610 665 Racal Instruments, Inc. 1,323 733 590 Trends Clothing Corp. 1,420 851 569 SSG Precision Optronics, Inc. 510 -- 510 Builders FirstSource, Inc. (2) 554 271 283 ------- ------- ------- $55,758 $26,698 $29,060 ======= ======= =======
(1) Net of minority interest (2) Pro rata share of equity investment (3) Net of minority interest acquired by affiliate subsequent to December 31, 2002 The leases generally have lease terms of 15 to 20 years with the lessees having options for renewal terms. CPA(R):15's properties in France leased to Carrefour and Medica-France have shorter terms (ranging from 7 1/2 to 9 years) with rolling three-year renewal terms which is a customary practice in that market. CPA(R):15 has not hedged the risk of foreign currency fluctuations on the cash flow from its French investments as the Company has obtained mortgage debt on the properties so that the overall risk of fluctuation is reduced as the currency fluctuations on revenue are partially offset by fluctuations on debt service. -5- MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED Since December 31, 2002, CPA(R): 15 has completed four acquisitions, including the purchase of (i) land and a build-to-suit commitment with Insulated Structures Ltd. in the United Kingdom, (ii) a 44% equity investment in a limited liability company which net leases 15 health clubs to Starmark Camhood LLC pursuant to a master lease, (iii) land and buildings leased to Waddington North America, Inc. and (iv) land and buildings leased to Polar Plastics (NC), Inc. Upon completion of construction, which is expected in 2003, Insulated Structures' lease will contribute annual cash flow of approximately $1,650,000 (based on the current exchange rate for the British pound), before any debt financing is obtained. Starmark, Waddington and Polar Plastics will provide annual cash flow of $4,846,000, net of debt service. CPA(R):15's asset base increased substantially during the year as a result of completing its initial "best efforts" public offering and obtaining $371,580,000 of limited recourse mortgage financing. Management projects that CPA(R):15's asset base will continue to increase substantially over the next several years. As the asset base of the Company increases, general and administrative, property and depreciation expenses will increase, while interest expense will increase as mortgage loans are placed on newly-acquired and existing properties. Several acquisitions, including those with Clear Channel Communications, Inc., Carrefour France, SA, TruServ and Medica-France, SA, occurred in December 2002 and, therefore, their contribution to the results of operations and cash flow will increase substantially in future years as compared to 2002. Property expense for the year ended December 31, 2002 includes primarily of fees to the Advisor for its performing asset management services on behalf of CPA(R):15. Pursuant to the Advisory Agreement, the fee is based on the Average Invested Assets, that is the amounts invested in real estate. A portion of the fee may be payable in restricted shares of common stock of CPA(R):15, at the option of the Advisor. For 2002 and 2003, the Advisor has elected to receive the performance component of its fees in CPA(R):15 stock. Interest income was $1,687,000, representing a substantial portion of CPA(R):15's revenues in 2002. As the proceeds of the offering are fully invested in real estate, interest income will decrease and is expected to be a minor component of overall revenues. After CPA(R):15 is fully invested, CPA(R):15 will maintain cash balances which Management believes to be sufficient for meeting working capital needs. On March 12, 2003, CPA(R):15 sold a 35% interest in the limited liability company that owns the Medica-France and Carrefour properties to CPA(R):12. The purchase price was based on the appraised value of the properties (based on the current exchange rate for the Euro) adjusted for capitalized costs incurred since the acquisitions including fees paid to the Advisor, net of mortgage debt. Based on the formula, CPA(R):12 paid CPA(R):15 $11,916,465 and assumed $1,031,046 of CPA(R):15's deferred acquisition fee payable to an affiliate. The sale was approved by CPA(R):15's independent directors as being in the best interests of CPA(R):15 and is intended to facilitate CPA(R):15's ability to raise capital. The continued holding of 100% of the Medica-France and Carrefour interests would have required CPA(R):15 to obtain and provide financial information in its 1933 and 1934 Act filings on the lease guarantors that is in accordance with accounting principles generally accepted in the United States of America and this information is not available to CPA(R):15. CPA(R):15 will consolidate its controlling interests in the limited liability company in its consolidated financial statements, and CPA(R):12's interest will be recognized as a minority interest. Period from Inception (February 26, 2001) through December 31, 2001 For the period ended December 31, 2001, CPA(R):15 incurred a net loss of $68,479. CPA(R):15 was formed in 2001 and its revenues consisted solely of interest income from investing its initial capital of $200,000 in interest bearing money market instruments. CPA(R):15 incurred certain expenses relating primarily to legal and accounting expenses and directors fees. The results represent the period prior to raising capital from its public offering. In 2001, CPA(R):15 purchased de minimus interests in two net lease transactions with affiliates which are being accounted for under the equity method. In 2002, CPA(R):15 exercised purchase options to increase ownership interests in such net lease transactions. -6- Financial Condition A major objective of CPA(R):15 is to fully invest its funds in real estate in order to generate sufficient cash flow from operations and its equity investments to fund dividends to shareholders at an increasing rate and pay scheduled mortgage debt service. Cash flow from operations and equity investments of $14,447,000 were sufficient to pay dividends of $6,179,000, scheduled mortgage principal payments of $386,000 and distributions to minority partners of $235,000. When evaluating cash generated from operations, Management includes cash provided from equity investments. Under accounting principles generally accepted in the United States of America, distributions from equity investments in excess of income from equity investments are a return of capital and presented as cash flows from investing activities. The ability of the equity investees to distribute cash to CPA(R):15 in excess of an equity investee's income is due primarily to noncash charges for depreciation. CPA(R):15 evaluates its ability to pay dividends to shareholders by using its projections of cash flow from both its directly-owned real estate and its equity investments, which represent participations in single-tenant net lease real estate. Several of CPA(R):15 leases provide for payments of rents quarterly in advance, and $4,973,000 of operating cash flow in 2002 resulted from receiving such payments. When CPA(R):15 is fully invested, the effect of changes in prepaid rents on operating cash flow from period to period should not be as significant to overall cash flows from operating activities. During 2002, CPA(R):15 used $609,323,000 to acquire properties net leased to 17 lessees, $10,962,000 to increase its interests in the Petsmart and Builders First Source limited partnerships and $42,571,000 to purchase a 50% interest in the TruServe limited partnerships. Deferred acquisition fees payable to the Advisor are capitalized to the cost of real estate invested and $13,012,000 is payable to the Advisor over a period of no less than four years. The initial payment of deferred fees is scheduled for January 2004 and is subordinated to meeting a specified dividend return to shareholders. CPA(R):15's financing activities consisted primarily of raising $355,486,000, net of costs, from its "best efforts" public offering. As of December 31, 2002, CPA(R):15 had cash balances of $94,762,000. CPA(R):15 intends to use this cash to increase and diversify its real estate asset base and to maintain cash balances sufficient to maintain its operations. CPA(R):15 is actively evaluating potential net lease investments and is using its available cash along with limited recourse mortgage financing to purchase properties. In connection with purchasing properties, CPA(R):15 obtained $371,580,000 of limited recourse mortgage debt (including $8,630,000 which was assumed) on which $386,000 of scheduled principal payment installments have been made. Certain lenders used $3,761,000 of mortgage proceeds to fund escrow accounts. 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):15's other assets, while unsecured financing provides a lender recourse to all of CPA(R): 15's assets. The use of limited recourse debt, therefore, will allow CPA(R):15 to limit the exposure of its assets to any one debt obligation. Management believes that the strategy of combining equity and limited recourse mortgage debt will allow CPA(R):15 to meet its short-term and long-term liquidity needs and will help to diversify CPA(R):15's portfolio and, therefore, reduce concentration of risk in any particular lessee, industry type and property type. The loans, all of which provide for fixed rates of interest, generally do not mature for at least ten years. After CPA(R):15 completes its public offering and fully invests in real estate, it will evaluate on an ongoing basis whether to obtain additional sources of funds such as lines of credit; however, no consideration is being given to such additional sources at this time. In December 2002, CPA(R):15 received $28,340,000 from CPA(R):14 for a 40% interest in the Clear Channel limited partnership. In accordance with the partnership agreement, CPA(R):15 has distributed $235,000 to CPA(R):14 for its share of cash flow from the Clear Channel property. During 2002, CPA(R):15 paid dividends to shareholders of $6,179,000, with the initial distribution made in the second quarter. Since December 31, 2002, CPA(R):15 has used an additional $48,302,000 to acquire the Insulated Storage, Waddington and Polar Plastic properties and to purchase a 44% interest in the Starmark properties. A second "best efforts" offering for 69,000,000 shares ($690,000,000) commenced in March 2003. To the extent that the second "best efforts" offering is fully subscribed, acquisition and property-level financing activity can be expected to continue for several years with total real estate assets projected to exceed $1,500,000,000. As of February 28, 2003, CPA(R):15 had approximately $41,687,000 available for investment and completion of build-to-suit commitments. -7- MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED Off-Balance Sheet Arrangements, Guarantees and Aggregate Contractual Arrangements A summary of CPA(R):15's contractual obligations, guarantees and commitments as of December 31, 2002 is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter -------- ------- ------ ------ ------- -------- ---------- Obligations: Limited recourse mortgage notes payable (1) $374,788 $ 4,882 $5,492 $6,024 $ 6,533 $ 7,140 $344,717 Notes payable 3,704 3,704 Deferred acquisition fees 13,012 3,253 3,253 3,253 3,253 Commitments: Build-to-suit obligations 35,671 35,671 Share of minimum rents payable under office cost-sharing agreement 75 20 20 20 15 -------- ------- ------ ------ ------- -------- -------- $427,250 $44,277 $8,765 $9,297 $ 9,801 $ 10,393 $344,717 ======== ======= ====== ====== ======= ======== ========
(1) The limited recourse mortgage notes payable were obtained in connection with the acquisition of properties in the ordinary course of business. In connection with the purchase of its properties, CPA(R):15 requires the sellers to perform environmental reviews. Management believes, based on the results of such reviews, that CPA(R):15'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):15's leases generally require tenants to indemnify CPA(R):15 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):15 to extend leases until such time as a tenant has satisfied its environmental obligations. Certain of the leases allow CPA(R):15 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):15'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):15'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 useful lives. The adoption of SFAS No. 142 on January 1, 2002 did not have a material effect on CPA(R):15's financial statements. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED 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):15 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):15'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 the company'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):15 will no longer classify gains and losses for the extinguishment of debt as extraordinary items and will adjust comparative periods presented. CPA(R):15 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):15 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): 15 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):15 does not have any employees nor any stock-based compensation plans. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," ("FIN 45") which changes the accounting for, and disclosure of certain guarantees. Beginning with transactions entered into after December 31, 2002, certain guarantees are required to be recorded at fair value, which is different from prior practice, under which a liability was recorded only when a loss was probable and reasonably estimable. In general, the change applies to contracts or indemnification agreements that contingently require CPA(R):15 to make payments to a guaranteed third-party based on changes in an underlying asset, liability, or an equity security of the guaranteed party. The 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):15'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 disclosure requirements will take effect almost immediately and are required for all financial statements initially issued after January 31, 2003. CPA(R):15 is assessing the impact of this interpretation on its accounting for its investments in unconsolidated joint ventures; however, it does not believe that any of its investments will be consolidated as a result of being classified as VIEs. -10- REPORT of INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Corporate Property Associates 15 Incorporated: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Corporate Property Associates 15 Incorporated and its subsidiaries at December 31, 2002, and 2001 and the results of their operations and their cash flows for the year ended December 31, 2002 and for the period from inception (February 26, 2001) to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; 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 management, 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 12, 2003 -11- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED Consolidated Balance Sheets
December 31, ------------ ASSETS: 2002 2001 ------------- ----------- Real estate leased to others: Accounted for under the operating method: Land $ 98,460,309 -- Buildings 461,060,841 -- ------------- 559,521,150 -- Less, accumulated depreciation 2,323,336 -- ------------- 557,197,814 -- Net investment in direct financing leases 21,093,039 -- Real estate under construction 20,061,425 -- Equity investments 75,606,383 $ 128,995 Cash and cash equivalents 94,762,199 188,207 Deferred offering costs 6,814,983 1,888,548 Other assets 30,762,652 -- ------------- ----------- Total assets $ 806,298,495 $ 2,205,750 ============= =========== LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY: Liabilities: Limited recourse mortgage notes payable $ 374,787,522 -- Notes payable 3,704,566 -- Accrued interest 991,064 -- Due to affiliates 7,621,814 $ 2,039,774 Accounts payable and accrued expenses 5,909,954 34,455 Prepaid rental income and security deposits 15,494,464 -- Deferred acquisition fees payable to affiliate 13,011,836 -- Dividends payable 5,789,147 -- ------------- ----------- Total liabilities 427,310,367 2,074,229 ------------- ----------- Minority interest 28,193,032 -- ------------- ----------- Commitments and contingencies Shareholders' equity: Common stock, $.001 par valued; authorized 120,000,000 shares; issued and outstanding, 39,966,488 and 20,000 at December 31, 2002 and 2001 39,966 20 Additional paid-in capital 355,963,860 199,980 Dividend in excess of accumulated earnings (6,269,658) (68,479) Accumulated other comprehensive income 1,060,928 -- ------------- ----------- Total shareholders' equity 350,795,096 131,521 ------------- ----------- Total liabilities and shareholders' equity $ 806,298,495 $ 2,205,750 ============= ===========
The accompanying notes are an integral part of the consolidated financial statements. -12- CONSOLIDATED STATEMENTS of OPERATIONS For the year ended December 31, 2002 and the period from inception (February 26, 2001) to December 31, 2001
2002 2001 ------------ -------- Revenues: Rental income $ 11,372,204 Interest income from direct financing leases 1,322,319 Interest and other income 1,699,116 $ 2,304 ------------ -------- 14,393,639 2,304 ------------ -------- Expenses: Interest expense 4,187,968 Depreciation 2,569,741 General and administrative 1,288,967 71,138 Property expense 1,558,760 -- ------------ -------- 9,605,436 71,138 ------------ -------- Income (loss) before minority interest and income from equity investments 4,788,203 (68,834) Minority interest in income (88,113) -- ------------ -------- Income (loss) before income from equity investments 4,700,090 (68,834) Income from equity investments 1,066,835 355 ------------ -------- Net income (loss) $ 5,766,925 $(68,479) ============ ======== Basic earnings (loss) per share $.29 $(3.42) ==== ====== Weighted average shares outstanding - basic 19,720,070 20,000 ============ ========
The accompanying notes are an integral part of the consolidated financial statements. -13- CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the period from inception (February 26, 2001) through December 31, 2001 and for the year ended December 31, 2002
Dividends in Accumulated Excess of Other Common Additional Comprehensive Accumulated Comprehensive stock paid-in capital (loss) income Earnings Income Total 20,000 shares issued $.001 par, at $10 per share $ 20 $ 199,980 $ 200,000 Net loss $ (68,479) $ (68,479) (68,479) ========= Balance at --------- ------------- ------------- ------------ December 31, 2001 20 199,980 (68,479) 131,521 39,946,488 shares issued $.001 par, at $10 per share, net of offering costs 39,946 355,763,880 355,803,826 Dividends (11,968,104) (11,968,104) Comprehensive Income: Net income 5,766,925 5,766,925 5,766,925 Other comprehensive income: Foreign currency translation adjustment 1,060,928 $1,060,928 1,060,928 ---------- $6,827,853 Balance at ========== ------- ------------- ----------- ----------- ------------ December 31, 2002 $39,966 $355,963,860 $(6,269,658) $1,060,928 $350,795,096 ======= ============ ============ ========== ============
The accompanying notes are an integral part of the consolidated financial statements. -14- CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from inception Year Ended (February 26, 2001) December 31, 2002 through December 31, 2001 Cash flows from operating activities: Net income (loss) $ 5,766,925 $ (68,479) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization of financing costs 2,582,259 -- Equity income in excess of distributions received -- (355) Minority interest in income 88,113 -- Straight-line rent adjustments (245,051) -- Fees paid to affiliate by issuance of stock 317,489 -- Increase in other assets (2,651,082) -- Increase in accrued interest 982,676 -- Increase in accounts payable and accrued expenses 733,707 34,455 Increase in due to affiliates (a) 784,245 22,586 Increase in prepaid rent 4,973,416 -- ------------- --------- Net cash provided by (used in) operating activities 13,332,697 (11,793) ------------- --------- Cash flows from investing activities: Distributions from equity investments in excess of equity income 1,113,990 -- Acquisitions of real estate and equity investments and other capitalized costs (b) (662,856,165) -- VAT taxes recoverable on purchases of real estate (4,035,763) -- Proceeds from sale of real estate 11,614,766 -- ------------- --------- Net cash used in investing activities (654,163,172) -- ------------- --------- Cash flows from financing activities: Proceeds from stock issuance, net of costs 355,486,337 200,000 Dividends paid (6,178,957) -- Proceeds from mortgages (c) (d) 359,189,168 -- Proceeds from note payable 3,622,142 -- Mortgage principal payments (385,575) -- Distributions to minority partners (234,716) -- Contributions from minority partners 28,339,635 -- Deferred financing costs and mortgage deposits (4,511,703) -- ------------- --------- Net cash provided by financing activities 735,326,331 200,000 ------------- --------- Effect of exchange rate changes on cash 78,136 -- ------------- --------- Net increase in cash and cash equivalents 94,573,992 188,207 Cash and cash equivalents, beginning of period 188,207 -- ------------- --------- Cash and cash equivalents, end of period $ 94,762,199 $ 188,207 ============= =========
Non cash investing and financing activities: (a) Increase in due to affiliates excludes amounts which relate to the raising of capital (financing activities) pursuant to the Company's public offering. At December 31, 2002 and 2001, the amount due to the Company's Advisor, Carey Asset Management Corp., was $6,814,983 and $1,888,548, respectively. (b) Included in the cost basis of real estate investments acquired in 2002 are deferred acquisition fees payable of $13,011,836. (c) Net of $3,760,529 held back by lenders to fund escrow accounts. (d) In connection with acquiring properties in 2002, the Company assumed mortgage notes payable of $8,630,041. The Company assigned a security deposit of $10,461,700 to a lender which is included in Other assets and Prepaid rental income and security deposits, respectively. The accompanying notes are an integral part of the consolidated financial statements. -15- CORPORATE PROPERTY ASSOCIATES 15 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 15 Incorporated, its wholly-owned subsidiaries and controlling minority-owned partnership interests (collectively, the "Company"). All material inter-entity transactions are 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the assessment of the realizability of real estate assets and investments. Actual results could differ from those estimates. Real Estate Leased to Others: The Company leases real estate to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including real estate taxes, insurance, maintenance, repairs, renewals and improvements. During the year ended December 31, 2002, lessees were responsible for the direct payment of real estate taxes of $2,247,357. 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, by property type and geographically. The leases are accounted for under either the direct financing or operating methods. Such methods are described below: Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment. 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. Operating method - Real estate is recorded at cost less accumulated depreciation, rental revenue is recognized on a straight-line basis over the term of the leases and expenses (including depreciation) are charged to operations as incurred. When events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company will assess 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 will be 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. For properties under construction, interest is capitalized rather than expensed and rentals received recorded as a reduction of capitalized project (i.e., construction) costs. -16- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Substantially all of the Company's leases provide for either scheduled rent increases, periodic increases based on formulas indexed to the Consumer Price Index ("CPI") or sales overrides. Rents from sales overrides (percentage of sales rent) are recognized as reported by lessees, that is, after the level of sales requiring a rental payment to the Company is reached. Depreciation: Depreciation is computed using the straight-line method over the estimated useful lives of the properties--generally not to exceed 40 years. Offering Costs: 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. Equity Investments: The Company's ownership interests in (i) entities in which it owns 50% or less and has the ability to exercise significant influence and (ii) jointly controlled tenancies-in-common 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 and 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. All of the Company's cash and cash equivalents were held in the custody of three financial institutions at December 31, 2002 and one financial institution at December 31, 2001, 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 France. The functional currency for the investments is the Euro. The translation from the Euro is performed for assets and liabilities using current exchange rates in effect at the 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. In January 2003, the Company purchased a property in the United Kingdom for which the functional currency is the British pound. Other Assets: Included in other assets are deferred charges and deferred rental income. Deferred charges are costs incurred in connection with mortgage note financing and are amortized over the term of the mortgage and included in interest expense in the accompanying consolidated financial statements. Deferred rental income is the aggregate difference between contractual rents that vary during the term and income recognized on a straight-line basis. 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 in the accompanying financial statements. -17- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Income Taxes: In 2002, the Company qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986. As a REIT, the Company is not subject to Federal income taxes on amounts distributed to shareholders (except income from foreclosure property), provided it distributes at least 90% of its REIT taxable income to its shareholders and meets certain other conditions. 2. Organization and Offering: The Company was formed on February 26, 2001 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in and owning property net leased to creditworthy corporations and other creditworthy entities. Subject to certain restrictions and limitations, the business of the Company is managed by Carey Asset Management Corp. (the "Advisor"), a wholly-owned subsidiary of W. P. Carey & Co. LLC. On April 2, 2001, the Advisor purchased 20,000 shares of common stock for $200,000 as the initial shareholder of the Company. In October 2002, the Company completed a "best efforts" offering of 40,000,000 shares of common stock at a price of $10 per share. During the year ended December 31, 2002, the Company issued 39,890,441 shares ($398,904,410). The Company has also registered up to 10,000,000 shares for a dividend reinvestment plan. On October 11, 2002, the Company filed a registration statement with the United States Securities and Exchange Commission (the "SEC") for the purpose of offering up to an additional 69,000,000 shares ($690,000,000) of common stock to the public on a "best efforts" basis by Carey Financial Corporation ("Carey Financial"), a wholly-owned subsidiary of W. P. Carey & Co. LLC ("W. P. Carey"), at a price of $10 per share (the "Offering"). The filing is currently being reviewed by the SEC. 3. Agreements and Transactions with Related Parties: In connection with performing management 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 non-compounded dividend return of 6%. As of December 31, 2002, the Preferred Return has been met. The Advisor has elected at its option to receive the performance fee in restricted shares of common stock of the Company rather than cash. The Advisor is also reimbursed for the actual cost of personnel needed to provide administrative services necessary to the operation of the Company. For the year ended December 31, 2002, the Company incurred asset management fees of $736,788. Performance fees were in like amount. For the year ended December 31, 2002, the Company incurred personnel reimbursements of $192,700. No asset management and performance fees nor personnel reimbursements were incurred by the Company in 2001. Fees are payable to the Advisor for services provided to the Company relating to the identification, evaluation, negotiation, financing and purchase of properties. A portion of such fees are deferred and are payable in equal annual installments over no less than four years following the first anniversary of the date a property was purchased. Such deferred fees are only payable if the Preferred Return has been met. The unpaid portion of the deferred fees bears interest at an annual rate of 6% from the date of acquisition of a property until paid. For transactions that were completed in 2002, current and deferred fees were $16,264,794 and $13,011,836, 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 -18- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 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 Company owns interests in limited partnerships which range from 30% to 60% and a 64% interest in jointly controlled tenancy-in-common which owns two properties subject to a master net lease. The remaining interests in the limited partnerships and tenancy-in-common are owned by affiliates. Controlling interests in jointly-owned entities are consolidated and non-controlled interests in which the Company has a significant interest 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 sharing the associated costs. Pursuant to the terms of the agreement, the Company's share of rental occupancy and leasehold improvement costs is based on gross revenues. Expenses of $2,607 were incurred in 2002. The Company's share of future minimum lease payments as of December 31, 2002, is $75,000 through 2006. 4. Real Estate Leased to Others Accounted for Under the Operating Method: Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases amount to $50,776,000 in 2003, $52,002,000 in 2004, $52,389,000 in 2005, $53,666,000 in 2006, and $53,768,000 in 2007 and aggregate approximately $805,746,000 through 2022. No contingent rents were realized in 2002 or 2001. 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, 2002 ----------------- Minimum lease payments receivable $48,520,236 Unguaranteed residual value 20,950,818 ----------- 69,471,054 Less: unearned income 48,378,015 ----------- $21,093,039
Scheduled future minimum rents, exclusive of renewals, under non-cancelable direct financing leases are approximately $2,099,000 in 2003, $2,135,000 in 2004, $2,173,000 in 2005, $2,211,000 in 2006 and $2,250,000 in 2007, and aggregate approximately $48,520,000 through 2031. No contingent rents were realized in 2002 or 2001. -19- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 6. Mortgage Notes Payable: Mortgage notes payable, all of which are limited recourse obligations, are collateralized by the assignment of various leases and by real property with a carrying value of approximately $568,406,000. As of December 31, 2002, mortgage notes payable had fixed interest rates ranging from 5.52% to 7.98% per annum. The Company had no variable rate debt as of December 31, 2002. Scheduled principal payments during each of the five years following December 31, 2002 and thereafter are as follows:
Year Ending December 31, Fixed Rate Debt ------------------------ --------------- 2003 $ 4,881,550 2004 5,492,189 2005 6,023,755 2006 6,533,461 2007 7,139,858 Thereafter 344,716,709 ------------ Total $374,787,522 ============
Interest paid, excluding capitalized interest, was $3,318,962 in 2002. No interest was paid in 2001. Capitalized interest was $321,477 in 2002. 7. Commitments and Contingencies: The Company is liable for certain expenses of the Offering described in the Prospectus, which include filing, legal, accounting, printing and escrow fees, which are to be deducted from the gross proceeds of the Offering. The Company reimburses Carey Financial or one of its affiliates for expenses (including fees and expenses of its counsel) and for the costs of any sales and information meetings of Carey Financial's employees or those of one of its affiliates relating to the Offering. Total underwriting compensation of the Offering shall not exceed 10% of gross proceeds of the Offering. The Advisor has agreed to be responsible for the payment of (i) organization and offering expenses (excluding selling commissions to Carey Financial with respect to Shares held by selected dealers) which exceed 4% of the gross proceeds of the offering and (ii) organization and offering expenses (including selling commissions, fees and fees paid and expenses reimbursed to selected dealers) which exceed 15% of the gross proceeds of the Offering. The total costs paid by the Advisor relating to the initial offering and the Offering were $12,142,173 through December 31, 2002, of which the Company has reimbursed $5,327,190. 8. Dividends: Dividends paid to shareholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. The Company paid its first dividend in April 2002. Dividends per share reported for tax purposes for the year ended December 31, 2002 were as follows:
2002 ---- Ordinary income $ .45 Return of capital -- -------- $ .45
A dividend of $.001671 per share per day in the period from October 1, 2002 through December 31, 2002 ($5,789,147) was declared in December 2002 and paid in January 2003. -20- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 9. Lease Revenues: The Company's operations consist of the investment in and the leasing of industrial and commercial real estate. The financial reporting sources of the leasing revenues below for the year ended December 31, 2002 are as follows:
2002 ---- Per Statements of Income: Rental income from operating leases $ 11,372,204 Interest from direct financing leases 1,322,319 Adjustment: Share of lease revenues applicable to minority interests (234,716) Share of leasing revenue from equity investments 2,637,426 ------------ $ 15,097,233 ============
For the year ended December 31, 2002, the Company earned its net leasing revenues from its investments from the following lease obligors:
2002 % ---- --- Fleming Companies, Inc. $ 2,799,900 19% Petsmart, Inc. (a) 2,075,857 14 Foster Wheeler, Inc. 1,961,569 13 Tower Automotive, Inc. 1,701,465 11 Hologic, Inc. (b) 1,015,652 7 Racal Instruments, Inc. 933,762 6 IntegraColor, Ltd. 680,807 5 Advantis Technologies, Inc. 651,473 4 Trends Clothing Corp. 619,170 4 Overland Storage, Inc. 607,926 4 BE Aerospace, Inc. 479,067 3 Builders Firstsource, Inc. (a) 463,766 3 Clear Channel Communications, Inc. (c) 352,075 2 Medica - France, SA 300,143 2 Danka Office Imaging Company 226,689 2 Carrefour France, SA 147,674 1 SSG Precision Optronics, Inc. 56,569 -- TruServ Corporation (a) 16,279 -- Meadowbrook Meat Company 7,390 -- ----------- --- $15,097,233 100% =========== ===
(a) Represents the Company's proportionate share of lease revenues from its equity investments. (b) As of December 17, 2002, 36% of the Company's interest in these properties was acquired by an affiliate, W. P. Carey, and the remaining 64% interest is accounted for as an equity investment. (c) Net of rental amount applicable to Corporate Property Associates 14's ("CPA(R):14") 40% minority interest. 10. Acquisitions of Real Estate and Real Estate Interests: A. On December 31, 2002, the Company purchased land and five buildings in Orlando, Florida; Macon, Georgia; Rocky Mount, North Carolina and Lewisville, Texas for $30,415,009 and entered into a net lease with Meadowbrook Meat Company. The lease obligations are unconditionally guaranteed by Fast Food Merchandisers, Inc. and Proficient Food Company, Inc. The lease has an initial term of 15 years and one month with four five-year renewal options. Annual rent is $2,660,000 with stated increases beginning on the fourth anniversary of the lease and annually thereafter. -21- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued In connection with the purchase of the properties, the Company obtained a limited recourse mortgage loan of $18,000,000 which is collateralized by a mortgage and deeds of trust on the properties. The loan provides for monthly payments of principal and interest of $108,847 at an annual interest rate of 6.08% based on a 30-year amortization schedule. The loan matures in January 2013, at which time a balloon payment is scheduled. B. On December 26, 2002, the Company and two affiliates, Corporate Property Associates 12 Incorporated ("CPA(R):12") and Corporate Property Associates 14 Incorporated ("CPA(R):14"), through three newly-formed limited partnerships with 50%, 15% and 35% ownership interests, 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 Corporation. 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. In connection with the purchase of the properties, the limited partnerships obtained limited recourse mortgage loans totaling $49,104,774, collateralized by deeds of trust on the properties and lease assignments. Subsequent to December 31, 2002, the limited partnership obtained additional mortgage financing of $27,550,047. 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. The Company is accounting for its 50% non-controlling interests in the limited partnerships under the equity method of accounting. C. On December 27, 2002, the Company purchased seven properties in France for Euro 103,780,347 ($106,966,300 at the date of acquisition) and entered into six separate net leases with Societe Logidis and one net lease with Societe CV Logistique. The lease obligations are unconditionally guaranteed by their parent companies, Carrefour France, SAS and Carrefour Hypermarches France, SAS (collectively "Carrefour"). The leases have nine-year terms and provide for aggregate annual rent of Euro 10,190,269 ($10,503,100 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, the Company obtained a limited recourse mortgage loan of Euro 84,244,000 ($86,830,207 at the date of acquisition) which provides for quarterly payments of interest at an annual interest rate of 5.55%. The interest rate is fixed through 2012, at which time the loan will convert to a variable rate. Principal installments are payable based on an initial 1.60% annuity per annum, with scheduled increases throughout the term of the loan. The loan matures on December 30, 2014, at which time a balloon payment is scheduled. On December 4, 2002, the Company purchased six properties in France for Euro 40,314,136 ($40,327,843 at the date of acquisition) and assumed net leases with SA Medica France ("Medica"). The leases have remaining terms through June 30, 2011 and provide for aggregate annual rent of Euro 3,856,618 ($3,857,929 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 Medica properties, the Company obtained limited recourse mortgage loans of Euro 34,000,000 ($34,011,560 at the date of acquisition). The loans provide for quarterly payments of interest at an annual interest rate of 5.631%. Principal installments are payable based on an initial 1.50% annuity per annum, with scheduled increases throughout the term of the loan. The loan matures on October 20, 2017, at which time a balloon payment is scheduled. On March 12, 2003, the Company sold a 35% interest in the limited liability company that owns the Medica-France and Carrefour properties to CPA(R):12. The purchase price was based on the appraised value of the properties (based on the current exchange rate for the Euro) adjusted for capitalized costs incurred since the acquisitions including fees paid to the Advisor, net of mortgage debt. Based on the formula, CPA(R):12 paid the Company, $11,916,465 and assumed $1,031,046 of the Company's deferred acquisition fee payable to an affiliate. -22- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued The sale was approved by the Company's independent directors as being in the best interests of the Company and is intended to facilitate the Company's ability to raise capital. The continued holding of 100% of the Medica-France and Carrefour interests would have required the Company to obtain and provide financial information in its 1933 and 1934 Act filings on the lease guarantors that is in accordance with accounting principles generally accepted in the United States of America and this information is not available to the Company. The Company will consolidate its 65% controlling interests in the limited liability company in its consolidated financial statements, and CPA(R):12's interest will be recognized as a minority interest. D. On December 12, 2002, the Company and CPA(R):14 formed a limited partnership with 60% and 40% interests, respectively, 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 Communications, Inc. ("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 property, 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. E. On November 20, 2002, the Company purchased land and buildings in Richmond, California for $4,967,653 and entered into a net lease with SSG Precision Optronics, Inc. The lease obligations are unconditionally guaranteed by Tinsley Laboratories, Inc. The lease has an initial term of 20 years with two seven-year renewal options. Annual rent is $509,976 with annual increases based on a formula indexed to CPI. F. On October 15, 2002, the Company purchased land and building in San Diego, California for $30,096,836 and assumed an existing net lease with Overland Storage, Inc. ("Overland"). The lease has a remaining term through February 2014 with one five-year renewal option. Annual rent is $2,621,285 with stated increases beginning in March 2004 and every two years thereafter. In connection with the purchase of the Overland property, the Company obtained a limited recourse mortgage loan of $20,000,000 which is collateralized by a deed of trust and lease assignment. The loan provides for monthly payments of principal and interest of $122,234 at an annual interest rate of 6.18% based on a 30-year amortization schedule. The loan matures in August 2014, at which time a balloon payment is scheduled. G. On October 9, 2002, the Company purchased a property in Baton Rouge, Louisiana on which a building is being constructed on a build-to-suit basis and entered into a net lease with Rave Motion Pictures Baton Rouge, LLC. The lease obligations are unconditionally guaranteed by Rave Reviews Cinemas, LLC ("Rave Reviews"). The total purchase price including construction costs is estimated to be $11,555,239, with Rave Reviews having the obligation to fund any additional costs necessary to complete the project. Upon the earlier of completion or August 31, 2003, a lease term of 20 years with two ten-year renewal terms will commence with annual rent of $1,285,607 if the entire estimated funding of the build-to-suit project is required. The lease provides for rent increases every two years based on a formula indexed to increases in the CPI. -23- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued H. Properties acquired prior to September 30, 2002 are described as follows:
Original Initial Mortgage Annual Lease Obligor: Cost Location Annual Rent Financing Debt Service Date Acquired - ---------------------------- ----------- ------------------ ---------- ----------- ------------ ----------------- Danka Office Imaging Company $23,810,133 St. Petersburg, FL $3,060,000 $12,800,000 $ 984,026 September 27, 2002 BE Aerospace, Inc. 15,470,072 Miami, FL 1,462,618 10,500,000 764,364 September 12, 2002 Hologic, Inc. (1) 33,769,634 Bedford, MA 3,155,940 -- -- August 28, 2002 Foster Wheeler Realty Services, Inc. 47,015,707 Clinton, NJ 5,230,850 29,185,000 2,252,928 August 16, 2002 Trends Clothing Corp. 14,869,110 Miami, FL 1,420,000 8,630,041 850,620 July 22, 2002 Fleming Companies, Inc. 53,870,063 Tulsa, OK 5,508,000 30,000,000 2,507,376 June 28, 2002 Advantis Technologies, Inc. 13,089,005 Alpharetta, GA 1,275,000 8,500,000 610,231 June 25, 2002 IntegraColor Ltd. 12,356,020 Mesquite, TX 1,256,700 7,080,000 563,530 June 14, 2002 Racal Instruments, Inc. 13,455,497 Irvine, CA 1,301,929 9,500,000 732,600 May 21, 2002 Tower Automotives, Inc. 20,995,621 Auburn, IN; 2,355,875 12,022,870 1,056,624 April 10, 2002 Buffton, OH and Milan, TN
a. Subsequent to acquisition, a 36% interest was sold to an affiliate (see Note 1). 11. Equity Investments: In 2001, the Company and Corporate Property Associates 14 Incorporated ("CPA(R):14"), an affiliate, formed two limited partnerships which entered into net leases for 13 properties with Petsmart, Inc. ("Petsmart") and a limited partnership which entered into a net lease for three properties with Builders Firstsource, Inc. ("Builders First") with CPA(R):14 as the general partner. The Company initially purchased a 0.001% interest in the Petsmart limited partnerships and a 1% interest in the Builders First partnership at the time the properties were acquired. In February 2002, the Company increased its ownership interests in the Petsmart and Builders First limited partnerships to 30% and 40%, respectively, in accordance with the limited partnership agreements. On February 28, 2002, the Company satisfied the conditions for increasing its interests and paid $10,961,939 to CPA(R):14 to purchase the additional ownership interests in the Petsmart and Builders First limited partnerships. The amounts paid to CPA(R):14 were based on the fair value of the underlying properties, less mortgage debt and reimbursements of $626,820, representing its share of structuring and acquisition fees. The reimbursement is equal to the fee that the Company would have incurred if it had purchased 30% and 40% interests when the Petsmart and Builders First properties were acquired. On December 17, 2002, the Company sold 36% of its interest in two properties leased to Hologic, Inc. ("Hologic") to W. P. Carey, an affiliate. The Company's remaining 64% interest is accounted for under the equity method as the Hologic properties are a jointly controlled tenancy-in-common. The amount paid to the Company was based on the fair value of the Hologic properties. No gain or loss was recognized on this transaction. On December 26, 2002, the Company and CPA(R):14 and CPA(R):12, through three newly-formed limited partnerships entered into net leases for seven properties with TruServ Corporation, of which the Company's interests are 50%. The interests in the partnerships are accounted for under the equity method as the Company's ownership interests are 50% or less and the Company exercises significant influence, but does not control. 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. -24- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Summarized combined financial information of the equity investees is as follows:
December 31, 2002 December 31, 2001 ----------------- ----------------- (in thousands) Assets (primarily real estate) $255,845 $87,325 Liabilities (primarily mortgage notes payable) 102,022 43,824 Partners' capital 153,823 43,501
For the period from inception (February 26, Year Ended 2001) through December 31, 2002 December 31, 2001 ----------------- ----------------- Revenues (primarily rental revenues) $10,795 $ 681 Expenses (primarily interest on mortgages and depreciation) (6,064) (491) ------- ----- Net income $ 4,731 $ 190 ======= =====
12. Segment Information: The Company has determined that it operates in one business segment with domestic and foreign investments. The Company acquired its first foreign real estate investments in December 2002 and has investments in France. For 2002, geographic information for the real estate operations segment is as follows:
Domestic Foreign Total -------- ------- ----- Revenues $ 13,945,821 $ 447,818 $ 14,393,639 Expenses 9,211,308 394,128 9,605,436 Income from equity investments 1,066,835 -- 1,066,835 Net operating income 5,713,235 53,690 5,766,925 Total assets 633,824,101 172,474,394 806,298,495 Total long-lived assets 514,307,995 159,650,666 673,958,661
13. Disclosure About Fair Value of Financial Instruments: The Company estimates that the fair value of mortgage notes payable at December 31, 2002 was $375,012,000. The fair value of debt instruments was evaluated using discounted cash flow model with rates which take into account the credit of the tenants and interest rates risks. 14. 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 the Company's financial statements. -25- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 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 are amortized over their useful lives. The adoption of SFAS No. 142 on January 1, 2002 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 its financial statements. In October 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 the Company'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 the Company'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, 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 the Company's financial statements. In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the acquisitions of certain financial institutions and includes long-term customer relationships as intangible assets within the scope of SFAS No. 144. 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 -26- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 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; however, it does not believe that any of its investments will be classified as VIEs. 15. Selected Quarterly Financial Data (unaudited):
Three Months Ended ------------------ March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002 -------------- ------------- ------------------ ----------------- Revenues $116,637 $1,182,772 $4,813,187 $8,281,043 Expenses 120,863 759,017 3,102,135 5,623,420 Net income 108,808 739,230 2,022,688 2,896,200 Net income per share - Basic and diluted .03 .06 .08 .08 Dividends declared per share .1499 .1513 .1525 .1537
Three Months Ended ------------------ September 30, 2001 December 31, 2001 ------------------ ----------------- Revenues $1,118 $1,186 Expenses -- 71,138 Net income (loss) 1,118 (69,952) Basic earnings per share Basic and diluted .06 (3.48) Dividends declared per share -- --
The Company had no activity from the period of inception (February 26, 2001) to June 30, 2001. -27- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 16. Subsequent Events: A. On January 28, 2003, the Company purchased land in Birmingham, United Kingdom for $9,038,000 and entered into a build-to-suit commitment and a net lease with Insulated Structures, Ltd. ("ISL"). The total cost for the ISL facility is estimated to amount to approximately $22,000,000. Upon completion, a lease with an initial term of 30 years will commence. Annual rent under the lease is (pound)1,033,330 (approximately $1,650,000) with annual rent increases of 2%. B. On February 7, 2003, the Company, CPA(R):12 and CPA(R):14, through a newly-formed limited liability company with ownership interests of 44%, 41% and 15%, 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 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. C. On February 12, 2003, the Company purchased land and buildings in Chattanooga, Tennessee for $6,544,503 and entered into a master net lease with Waddington North America Business Trust. The lease obligations are unconditionally guaranteed by WNA American Plastic Industries, Inc. The lease has an initial term of 19 years with two ten-year renewal options. Annual rent is $637,500 with increases every three years based on a formula indexed to the CPI and capped at 3%. D. On February 25, 2003, the Company purchased land and buildings in Mooresville, North Carolina for $15,602,094 and entered into a lease agreement with Polar Plastics (NC), Inc. at an annual rent of $1,460,200. The lease has an initial term of 20 years with two ten-year renewal options and CPI-based rent increases every three years. In connection with the purchase of the properties, the Company obtained $9,500,000 of limited recourse mortgage financing collateralized by a deed of trust and a lease assignment. The loan provides for monthly payments of interest and principal of $69,826 at an annual interest rate of 6.32% and will fully amortize over 20 years. E. Two proposed transactions have been approved by the Investment Committee of the Advisor and are currently subject to negotiations with the proposed lessees. There is no assurance that these acquisitions will be completed, and, if completed, that the actual terms will not differ from the proposed terms. The Company is seeking to purchase land and building in Yardley, Pennsylvania for $24,250,000 and to enter into a net lease with MediMedia USA, Inc. The lease, as proposed, would have an initial lease term of fifteen years. Annual rent would initially be approximately $2,135,000 with stated increases of 10.4% every five years. In the event that the purchase of the property is completed, the Company intends to seek limited recourse mortgage financing of approximately $14,500,000. -28- CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued The Company is seeking to purchase land in Birmingham, Alabama and enter into a build-to-suit commitment and a net lease with Oxford Automotive Alabama, Inc. The estimated total costs of the project, including the purchase of the land, are $15,707,000. The lease, as proposed, would have an initial lease term of fifteen years. Annual rent would initially be approximately $1,575,000 with rent increases every three years based on a formula indexed to increases in the CPI. The Company intends to obtain financing upon the completion of construction. -29- 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 13,858 holders of record of the Shares of the Company. The Company is required to distribute annually 90% of its Distributable REIT Taxable Income to maintain its status as a REIT. Quarterly dividends paid by the Company since its inception are as follows:
Cash Dividends Paid Per Share ----------------------------- 2002 ---- First quarter -- Second quarter $.1499 Third quarter .1513 Fourth quarter .1525 ------ $.4537 ======
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. -30- EX-21.1 3 y85200a1exv21w1.txt SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT QRS 15 PAYING AGENT INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME QRS 15 PAYING AGENT INC. MODULE (DE) LMITED PARTNERSHIP, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME MODULE (DE) LMITED PARTNERSHIP. SUSPENSION (DE) QRS 15-1 INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME SUSPENSION (DE) QRS 15-1 INC. RII (CA) QRS 15-2, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME RII (CA) QRS 15-2, INC. ICG-GP (TX) QRS 15-3,INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME ICG-GP (TX) QRS 15-3,INC. ICG(TX) LIMITED PARTNERSHIP, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME ICG(TX) LIMITED PARTNERSHIP. ADVA 15 (GA) LLC, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME ADVA 15 (GA) LLC. ADV-QRS15(GA) QRS 15-4 INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME ADV-QRS15(GA) QRS 15-4 INC. GROCERY(OK) QRS 15-5, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME GROCERY(OK) QRS 15-5, INC. TRENDS (FL) QRS 15-6, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME TRENDS (FL) QRS 15-6, INC. ENERGY (NJ) QRS 15-10 INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME ENERGY (NJ) QRS 15-10 INC. ONE CABIN INTERIOR (FL) QRS 15-9 INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME ONE CABIN INTERIOR (FL) QRS 15-9 INC. THREE OVERHEAD LIGHTS QRS (DE) 15-11 INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME THREE OVERHEAD LIGHTS QRS (DE) 15-11 INC. THREE CABIN INTERIORS (MD),A MARYLAND BUSINESS TRUST, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND AND DOING BUSINESS UNDER THE NAME THREE CABIN INTERIORS (MD),A MARYLAND BUSINESS TRUST. DAN (FL) QRS 15-7 INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME DAN (FL) QRS 15-7 INC. SALTED PEANUTS (LA) QRS 15-13, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME SALTED PEANUTS (LA) QRS 15-13, INC. SUBSIDIARIES OF REGISTRANT (CONTINUED) BONE (DE) QRS 15-12, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME BONE (DE) QRS 15-12, INC. OPTICAL (CA) QRS 15-8, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME OPTICAL (CA) QRS 15-8, INC. OVERTAPE (CA) QRS 15-14, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME OVERTAPE (CA) QRS 15-14, INC. OX (AL) LLC, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME OX (AL) LLC. OX-GP (AL) QRS 15-15, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME OX-GP (AL) QRS 15-15, INC. LEADING ASP MD QRS 15-16 INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME LEADING ASP MD QRS 15-16 INC. MBM-BEEF (DE) QRS 15-18, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME MBM-BEEF (DE) QRS 15-18, INC. WELL (MULTI) QRS 15-17, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME WELL (MULTI) QRS 15-17, INC. WADD-II (TN) LP, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME WADD-II (TN) LP. WADD-II GENERAL PARTNER (TN) QRS 15-19, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME WADD-II GENERAL PARTNER (TN) QRS 15-19, INC. CLEAR (NY) QRS 15-20, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME CLEAR (NY) QRS 15-20, INC. ANAD (DE) LIMITED PARTNERSHIP, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME ANAD (DE) LIMITED PARTNERSHIP. FRAME BOY (DE) QRS 15-23, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME FRAME BOY (DE) QRS 15-23, INC. MEDI (PA) LIMITED PARTNERSHIP, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME MEDI (PA) LIMITED PARTNERSHIP. MEDI (PA) QRS 15-21, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME MEDI (PA) QRS 15-21, INC. BOLT (DE) QRS 15-26, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME BOLT (DE) QRS 15-26, INC. SUBSIDIARIES OF REGISTRANT (CONTINUED) QSHIRE (IRELAND) QRS 15-29, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME QSHIRE (IRELAND) QRS 15-29, INC. QSHIRE (UK) QRS 15-30, INC, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME QSHIRE (UK) QRS 15-30, INC. AUTO LOAN LIMITED PARTNERSHIP, A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME AUTO LOAN LIMITED PARTNERSHIP. AUTOMONEY (TX) QRS 15-28, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME AUTOMONEY (TX) QRS 15-28, INC. DEYKIN AVENUE (UK) QRS 15-22, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME DEYKIN AVENUE (UK) QRS 15-22, INC. HAMMER (DE) LP QRS 15-32, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME HAMMER (DE) LP QRS 15-32, INC. HAMMER (DE) LP QRS 15-33, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME HAMMER (DE) LP QRS 15-33, INC. WRENCH (DE) QRS 15-31, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME WRENCH (DE) QRS 15-31, INC. EX-99.1.3 4 y85200a1exv99w1w3.txt CERTIFICATION OF CEO Exhibit 99.1 CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Corporate Property Associates 15 Incorporated (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, William Polk Carey, Co-Chief Executive Officer of the Company, and Gordon F. DuGan, Co-Chief Executive Officer of the Company, certify, to the best of our knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /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) 3/24/03 3/24/03 -------------------------------- -------------------------- Date Date EX-99.2 5 y85200a1exv99w2.txt CERTIFICATION OF CFO Exhibit 99.2 CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Corporate Property Associates 15 Incorporated (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John J. Park, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John J. Park --------------------------- John J. Park Chief Financial Officer 3/24/03 --------------------------- Date -----END PRIVACY-ENHANCED MESSAGE-----