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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 333-58854
-------------------------------
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-2298116
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-------------------------
CPA(R):15 has SHARES OF COMMON STOCK registered pursuant to
Section 12(g) of the Act.
CPA(R):15 HAS NO SECURITIES registered on any exchanges.
CPA(R):15 does not have any Securities registered pursuant to
Section 12(b) of the Act.
CPA(R):15 (1) has filed all reports required by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ].
CPA(R):15 has no active market for common stock at August 6, 2004.
CPA(R):15 has 106,624,368 shares of common stock, $.001 par value
outstanding at August 6, 2004.
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of June 30, 2004
and December 31, 2003 2
Condensed Consolidated Statements of Income for the three and six months
ended June 30, 2004 and 2003 3
Condensed Consolidated Statements of Comprehensive Income for the three
and six months ended June 30, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements 5-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3. - Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. - Controls and Procedures 18
PART II - Other Information
Item 1. - Legal Proceedings 19
Item 2. - Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 19
Item 4. - Submission of Matters to a Vote of Security Holders 19
Item 6. - Exhibits and Reports on Form 8-K 20
Signatures 21
* The summarized condensed consolidated financial statements contained herein
are unaudited; however, in the opinion of management, all adjustments necessary
for a fair presentation of such financial statements have been included.
-1-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited) (Note)
ASSETS:
Land and buildings, net of accumulated depreciation of $30,121 and $18,725
at June 30, 2004 and December 31, 2003 $ 1,226,599 $ 864,737
Net investment in direct financing leases 140,104 148,325
Intangible assets, net of accumulated amortization of $1,997 and $533 at
June 30, 2004 and December 31, 2003 96,185 32,742
Real estate under construction 67,871 61,270
Equity investments 86,441 83,984
Cash and cash equivalents 147,109 346,217
Short-term investments 43,365 37,833
Escrow assets 106,457 10,963
Other assets, net 37,187 53,081
------------- -------------
Total assets $ 1,951,318 $ 1,639,152
============= =============
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 822,965 $ 596,003
Notes payable 3,908 4,061
Accrued interest 4,307 2,464
Due to affiliates 3,120 2,912
Accounts payable and accrued expenses 7,086 6,907
Prepaid rental income and security deposits 66,469 38,504
Deferred acquisition fees payable to affiliate 26,972 24,005
Dividends payable 16,758 16,555
------------- -------------
Total liabilities 951,585 691,411
------------- -------------
Minority interest 112,316 52,650
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized 120,000,000 shares; issued and
outstanding, 106,808,640 and 105,681,019 at June 30, 2004 and December
31, 2003 107 106
Additional paid-in capital 955,357 944,788
Dividend in excess of accumulated earnings (66,204) (52,887)
Accumulated other comprehensive income 83 3,255
------------- -------------
889,343 895,262
Less, treasury stock at cost, 213,632 and 18,807 shares at June 30, 2004
and December 31, 2003 (1,926) (171)
------------- -------------
Total shareholders' equity 887,417 895,091
------------- -------------
Total liabilities, minority interest and shareholders' equity $ 1,951,318 $ 1,639,152
============= =============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Note: The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements at that date.
-2-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of INCOME (Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Rental income $ 28,220 $ 14,988 $ 50,831 $ 28,835
Interest income from direct financing leases 3,613 1,449 7,139 2,047
Other operating income 1,293 2,209 5,508 3,383
------------- ------------- ------------- -------------
33,126 18,646 63,478 34,265
------------- ------------- ------------- -------------
Operating expenses:
Depreciation and amortization 7,329 3,226 12,914 6,194
General and administrative 1,518 1,769 3,492 3,037
Property expenses 5,210 4,245 10,357 7,241
------------- ------------- ------------- -------------
14,057 9,240 26,763 16,472
------------- ------------- ------------- -------------
Income before other interest income, minority
interest, equity investments, interest
expense and gains and losses 19,069 9,406 36,715 17,793
Other interest income 666 828 1,671 1,082
Minority interest in income (1,745) (930) (3,740) (1,695)
Income from equity investments 2,123 2,171 4,194 4,239
Interest expense (11,424) (5,828) (20,423) (11,257)
------------- ------------- ------------- -------------
Income before gains and losses 8,689 5,647 18,417 10,162
(Loss) gain on sale of real estate (48) (16) (48) 961
(Loss) gain on foreign currency transactions, net (139) - 1,737 -
------------- ------------- ------------- -------------
Net income $ 8,502 $ 5,631 $ 20,106 $ 11,123
============= ============= ============= =============
Basic and diluted earnings per share $ .08 $ .08 $ .19 $ .20
============= ============= ============= =============
Weighted average shares outstanding - basic and
diluted 106,584,821 71,787,190 106,342,394 56,369,086
============= ============= ============= =============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME (Unaudited)
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 8,502 $ 5,631 $ 20,106 $ 11,123
---------- ---------- ---------- ----------
Other comprehensive income (loss):
Change in foreign currency translation
adjustment (2,311) 3,447 (2,834) 3,646
Unrealized loss on derivative instruments (138) - (338) -
---------- ---------- ---------- ----------
(2,449) 3,447 (3,172) 3,646
---------- ---------- ---------- ----------
Comprehensive income $ 6,053 $ 9,078 $ 16,934 $ 14,769
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended June 30,
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 20,106 $ 11,123
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 13,204 6,280
Equity income in excess of distributions received (136) (985)
Straight-line rent adjustments (3,424) (2,291)
Loss (gain) on sale of real estate 48 (961)
Settlement proceeds assigned to lender (2,754) -
Unrealized loss on foreign currency transactions 899 -
Realized gain on foreign currency transaction (2,636) -
Fees paid to affiliate by issuance of stock 2,705 1,268
Minority interest in income 3,740 1,695
Changes in operating assets and liabilities, net (9,230) 7,851
----------- -----------
Net cash provided by operating activities 22,522 23,980
----------- -----------
Cash flows from investing activities:
Distributions from operations of equity investments in excess of equity income 632 282
Distributions of mortgage financing from equity investees - 24,162
Acquisitions of real estate and equity investments and other capitalized costs (494,519) (169,875)
VAT taxes recovered (paid) in connection with purchases of real estate, net 5,275 (5,018)
Payment of deferred acquisition fees (3,253) -
Purchase of short-term investments (20,863) -
Redemption of short-term investments 15,400 -
Proceeds of amount receivable from sale of real estate from affiliate 3,034 -
Proceeds from sale of real estate 2,752 -
----------- -----------
Net cash used in investing activities (491,542) (150,449)
----------- -----------
Cash flows from financing activities:
Proceeds from mortgages 247,688 30,330
Mortgage and note principal payments (4,518) (2,401)
Deferred financing costs and mortgage deposits, net of deposits refunded (635) (1,205)
Capital contributions from minority partner 56,241 11,916
Distributions paid to minority partners (1,888) (1,281)
Proceeds from issuance of stock, net of costs of raising capital 8,142 399,959
Dividends paid (33,220) (14,066)
Purchase of treasury stock (1,755) -
----------- -----------
Net cash provided by financing activities 270,055 423,252
----------- -----------
Effect of exchange rate changes on cash (143) 697
----------- -----------
Net (decrease) increase in cash and cash equivalents (199,108) 297,480
Cash and cash equivalents, beginning of period 346,217 94,762
----------- -----------
Cash and cash equivalents, end of period $ 147,109 $ 392,242
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of
Corporate Property Associates 15 Incorporated (the "Company" or "CPA(R):15")
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Article 10 of Regulation S-X of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the results of the interim period presented
have been included. The results of operations for the interim period are not
necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
In February 2004, the Company entered into an interest rate swap agreement. The
interest rate swap is a derivative instrument. Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments. As required by SFAS No. 133, the Company records all derivatives on
the balance sheet at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to changes in the fair value
of an asset, liability, or firm commitment attributable to a particular risk,
such as interest rate risk, are considered fair value hedges. Derivatives used
to hedge the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges. For
derivatives designated as fair value hedges, changes in the fair value of the
derivative and the hedged item related to the hedged risk are included in the
determination of net income. For derivatives designated as cash flow hedges, the
effective portion of changes in the fair value of the derivative is initially
reported in accumulated other comprehensive income, a component of shareholders'
equity. The Company assesses the effectiveness of each hedging relationship by
comparing the changes in fair value or cash flows of the derivative hedging
instrument with the changes in fair value or cash flows of the designated hedged
item or transaction.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Note 2. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and W. P. Carey & Co. LLC (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%. The Advisor has elected at its
option to receive the performance fee in restricted shares of common stock of
the Company rather than cash. The Advisor is also reimbursed for the actual cost
of personnel needed to provide administrative services necessary to the
operation of the Company. The Company incurred asset management fees of $1,648
and $955 for the three months ended June 30, 2004 and 2003, respectively, and
$3,078 and $1,803 for the six months ended June 30, 2004 and 2003, respectively,
with performance fees in like amounts, both of which are included in property
expenses in the accompanying condensed consolidated financial statements. The
Company incurred personnel reimbursements of $580 and $247 for the three months
ended June 30, 2004 and 2003, respectively, and $1,132 and $437 for the six
months ended June 30, 2004 and 2003, respectively, which are included in general
and administrative expenses in the accompanying condensed consolidated financial
statements.
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 is deferred and is payable in equal annual
installments each January over no less than four years following the first
anniversary of the date a property was purchased. Such deferred fees are only
payable if the Preferred Return has been met. The unpaid portion of the deferred
fees bears interest at an annual rate of 6% from the date of acquisition of a
property until paid. For transactions that were completed during the six months
ended June 30, 2004, current and deferred fees were $7,775 and $6,220,
respectively. During the six months ended June 30, 2003, current and deferred
fees were $5,799 and $4,639, respectively.
-5-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 3. Acquisitions of Real Estate:
A. On May 7, 2004, the Company purchased land in La Vista, Nebraska and
entered into a build-to-suit commitment and net lease with Oriental
Trading Company, Inc. The total cost of construction is estimated to
amount to approximately $31,000. Upon completion, expected to be in
July 2005, an initial lease term of 20 years will commence with four
five-year renewal terms. If the entire project costs are used,
initial annual rent will be $2,728, with annual increases beginning
on the third anniversary based on a formula indexed to increases in
the Consumer Price Index ("CPI"). The Company obtained a loan
facility of $16,400 which may be drawn upon to fund construction of
the property.
B. On May 26, 2004, the Company purchased land and building in
Pleasanton, California for $32,461 and entered into a net lease with
Shaklee Corporation. The lease obligations are unconditionally
guaranteed by Shaklee Japan Kabushiki Kaisha. The lease has an
initial term of 20 years with two seven-year renewal options and
provides for initial annual rent of $2,679 with stated rent
increases of 5% every three years.
C. On June 24, 2004, the Company purchased an office facility located
in San Marcos, Texas for $1,361 and entered into a net lease with
Grande Communications Networks, Inc. ("Grande"). The lease has an
initial term of 20 years with four five-year renewal options.
Initial annual rent is $140 with annual increases based on a formula
indexed to increases in the CPI. In August 2003, CPA(R):15 acquired
Grande's corporate headquarters and regional headquarters located in
San Marcos, Waco, Odessa and Corpus Christi, Texas for $13,800.
D. During the six-month period ended June 30, 2004, the Company
acquired properties and real estate investments which were
previously described in its Report on Form 10-K for the year ended
December 31, 2003 and its Report on Form 10-Q for the three months
ended March 31, 2004. A summary of the properties and investments
acquired is as follows:
Initial Original Annual
Annual Mortgage Debt Date
Lease Obligor: Cost Location Rent Financing Service Acquired
- -------------- ---- -------- ---- --------- ------- --------
Mercury Partners, LP and $180,250 78 locations in the United $16,465 $ 105,573 $ 8,514 4/29/2004
U-Haul Moving Partners, States
Inc.(1)
Worthington Precision Metals, 7,168 Mentor, OH and Franklin, TN 788 - - 4/14/2004
Inc.
World Airways, Inc. 8,699 Peachtree City, GA 853 5,500 502 3/26/2004
Universal Technical Institute 25,149 Rancho Cucamonga, CA 2,326 - - 2/6/2004
of California, Inc.
Affina Corporation 12,565 Peoria, IL 1,254 - - 1/8/2004
Regie des Batiments 12,120 Mons, Belgium 1,269 11,231 799 1/2/2004
Plumbmaster, Inc. 9,843 Concord Township, PA and 855 - - 1/2/2004
Oceanside, CA
(1) Amounts shown represent the Company's proportionate 57.69% share.
Note 4. Equity Investments:
The Company owns interests in single-tenant net leased properties leased to
corporations through noncontrolling interests in (i) partnerships and limited
liability companies in which its ownership interests are 50% or less and the
Company exercises significant influence, and (ii) as tenants-in-common subject
to common control. The ownership interests range from 30% to 64%. All of the
underlying investments are owned with affiliates that have similar investment
objectives as the Company. The lessees are Petsmart, Inc.; Builders FirstSource,
Inc.; TruServ Corporation; Hologic, Inc., Starmark Camhood LLC., and Actuant
Corporation ("Actuant"). The interest in the property leased to Actuant is
described below.
-6-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Summarized combined financial information of the equity investees is as follows:
(in thousands) June 30, 2004 December 31, 2003
------------- -----------------
Assets (primarily real estate) $447,353 $450,586
Liabilities (primarily mortgage notes payable) 263,835 265,972
-------- --------
Partners' and members' equity $183,518 $184,614
======== ========
Company's share of equity investees' net assets $ 86,441 $ 83,984
======== ========
Six Months Ended June 30,
(in thousands) 2004 2003
---- ----
Revenues (primarily rental income and interest income from
direct financing leases) $ 22,837 $ 20,889
Expenses (primarily interest on mortgages and depreciation) (13,492) (11,570)
-------- --------
Net income $ 9,345 $ 9,319
======== ========
Company's share of net income from equity investments $ 4,194 $ 4,239
======== ========
In December 2003, the Company purchased a 99.99% interest in a limited
partnership which purchased property in Germany and entered into a net lease
with Actuant. Under the limited partnership agreement, Corporate Property
Associates 16 - Global Incorporated ("CPA(R):16-Global"), an affiliate, had an
option to purchase, subject to certain conditions, up to a 75% interest in the
limited partnership. In May 2004, CPA(R):16-Global exercised its option and
increased its ownership interest from 0.01% to 50%. In connection with the sale
of its interest, the Company incurred a loss on sale of $48 and reclassified its
interest in the limited partnership to the equity method of accounting.
Note 5. Lease Revenues:
The Company's operations consist of the direct and indirect investment in and
the leasing of industrial and commercial real estate. The financial reporting
sources of lease revenues for the six-month periods ended June 30, 2004 and 2003
are as follows:
2004 2003
---- ----
Per Statements of Income:
Rental income from operating leases $ 50,831 $ 28,835
Interest from direct financing leases 7,139 2,047
Adjustment:
Share of lease revenue applicable to minority interest (9,480) (5,546)
Share of lease revenue from equity investments 10,179 9,328
-------- --------
$ 58,669 $ 34,664
======== ========
For the six-month periods ended June 30, 2004 and 2003, the Company earned its
net lease revenues from its investments as follows:
2004 % 2003 %
------- --- ------- ---
Starmark Camhood LLC/Wellbridge Club Management, Inc. (a) $ 5,336 9% $ 3,184 9%
Clear Channel Communications, Inc. (b) 4,245 7 4,245 12
Carrefour France, SA (b) (c) 3,770 6 3,660 11
TruServ Corporation (a) 3,618 6 3,611 10
Mercury Partners and U-Haul Moving Partners (b) 2,842 5 - -
Foster Wheeler, Inc. 2,636 4 2,620 8
Life Time Fitness, Inc. 2,464 4 - -
Qualceram Shires plc 1,974 3 526 2
Lillian Vernon Corporation 1,924 3 - -
Medica - France, SA (b) (c) 1,582 3 1,385 4
-7-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
2004 % 2003 %
------- --- ------- ---
Danka Office Imaging Company 1,530 3 436 1
Meadowbrook Meat Company 1,504 3 1,504 4
Overland Storage, Inc. 1,496 3 1,496 4
Berry Plastics Corporation 1,431 2 - -
Precise Technology, Inc. 1,326 2 - -
Petsmart, Inc. (a) 1,246 2 1,246 4
Tower Automotive, Inc. 1,178 2 1,178 3
MediMedia USA, Inc. 1,167 2 584 2
Insulated Structures, Ltd. 1,068 2 - -
Hologic, Inc. (a) 1,010 2 1,010 3
Other (a) 15,322 27 7,979 23
------- --- ------- ---
$58,669 100% $34,664 100%
======= === ======= ===
(a) Represents the Company's proportionate share of lease revenues from its
equity investments (see Note 4).
(b) Net of minority interest of an affiliate.
(c) Until March 12, 2003, the Company owned 100% interests in the applicable
properties at which time minority interests were sold to an affiliate.
Note 6. Derivative Instrument:
During the six months ended June 30, 2004, the Company obtained a (pound)12,410
($22,663) variable rate mortgage loan and entered into an interest rate swap
contract with the lender which effectively converted the variable rate debt
service obligations of the loan to a fixed rate. The interest rate swap, which
has a notional amount of $22,367 as of June 30, 2004 and a term ending February
2014, is a derivative instrument designated as a cash flow hedge. The Company's
objective in using derivatives is to add stability to interest expense and to
manage its exposure to interest rate movements. To accomplish this objective,
the Company has used interest rate swaps as part of its cash flow hedging
strategy. At June 30, 2004, the interest rate swap with a fair value liability
of $338 was included in other liabilities. The change in net unrealized losses
of $138 and $338 for the three-month and six month periods ended June 30, 2004,
respectively, for this derivative designated as a cash flow hedge is included in
accumulated other comprehensive income in shareholders' equity.
Note 7. Commitments and Contingencies:
As of June 30, 2004, the Company was not involved in any material litigation.
Following a broker-dealer examination of Carey Financial Corporation ("Carey
Financial"), the broker-dealer that managed the public offerings of the
Company's common stock (and a wholly-owned subsidiary of our advisor, W. P.
Carey & Co. LLC), by the staff of the Broker-Dealer Inspection Program
("Inspection Staff") of the Securities and Exchange Commission ("Commission"),
the Company was notified that Carey Financial had received a letter on or about
March 4, 2004 from the Inspection Staff alleging certain infractions by Carey
Financial and the Company of the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder and of the National Association of Securities Dealers, Inc. ("NASD").
Although the letter was delivered in the context of a broker-dealer examination
of Carey Financial and stated that it was for the purpose of requiring Carey
Financial to take corrective action, it contained allegations against both Carey
Financial and the Company.
In the March 4, 2004 letter, the Inspection Staff alleged that in connection
with public offerings of shares of the Company between September 2002 and March
2003 for which Carey Financial served as the dealer manager, the Company, Carey
Financial and its retail distributors sold certain securities without an
effective registration statement. Specifically, the Inspection Staff alleged
that the Company and Carey Financial oversold the amount of securities
registered in the first offering (the "Phase I Offering") completed in the
fourth quarter of 2002 and sold securities with respect to the second offering
(the "Phase II" Offering) before a registration statement with respect to such
offering became effective on March 19, 2003. The Inspection Staff claimed that
these sales were in violation of Section 5 of the Securities Act of 1933. In the
event the Commission pursues these allegations, or if affected
-8-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
CPA(R):15 investors bring a similar private action, the Company might be
required to offer the affected investors the opportunity to receive a return of
their investment (rescission). If the Company is required to offer rescission,
or elects voluntarily to offer rescission, it cannot be determined how many of
the affected shareholders would decide to accept rescission. Thus, the Company
cannot predict the potential effect a rescission offer may have on the
operations of the Company. There can be no assurance that such effect, if any,
would not be material. Further, if the Commission commenced any proceeding
against the Company, it could impose or seek different or additional penalties
or relief, including without limitation, injunctive relief and/or civil monetary
penalties.
The Inspection Staff also alleged in the March 4, 2004 letter that the
prospectus delivered with respect to the Phase I Offering contained material
misstatements and omissions because that prospectus did not disclose that the
proceeds of the Phase I Offering would be used to advance commissions and
expenses payable with respect to the Phase II Offering. The Inspection Staff
claimed that the failure to disclose the advances constituted a misstatement of
a material fact in violation of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
under the Securities Exchange Act of 1934. Carey Financial has reimbursed the
Company for the interest cost of advancing the commissions that were later
recovered by the Company from the Phase II Offering proceeds. It cannot be
determined at this time what relief, if any, would be granted if an action were
to be brought by the Commission or a private investor of CPA(R):15 with respect
to these allegations. It cannot be determined at this time what remedy, if any,
would be pursued by the Commission if any action were to be brought by the
Commission with respect to these allegations. As such, the Company cannot
predict the potential effect such an action may ultimately have on the Company's
operations. There can be no assurance such effect, if any, would not be
material.
The Inspection Staff also alleged in the March 4, 2004 letter that the Company's
offering documents contained material misstatements and omissions because they
did not include a discussion of the manner in which dividends would be paid to
the initial investors in the Phase II Offering. The Inspection Staff asserted
that the payment of dividends to the Phase II shareholders resulted in
significantly higher annualized rates of return than were being earned by the
Phase I shareholders, and that the Company failed to disclose to the Phase I
shareholders the various rates of return. The Inspection Staff claimed that the
failure to make this disclosure constitutes a misstatement of a material fact in
violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated under the Securities
Exchange Act of 1934. It cannot be determined at this time what relief, if any,
would be granted if an action were to be brought by the Commission or a private
investor of CPA(R):15 with respect to these allegations. It cannot be determined
at this time what remedy, if any, would be pursued by the Commission if an
action were to be brought by the Commission with respect to these allegations.
As such, the Company cannot predict the potential effect such an action may
ultimately have on the Company's operations. There can be no assurance such
effect, if any action would not be material. There can be no assurance that if
the Commission brought an action against the Company the remedy imposed would
not be material.
Commencing in June 2004, the Company, Carey Financial, and W. P. Carey & Co. LLC
have received subpoenas from the staff of the Division of Enforcement of the
Commission ("Enforcement Staff") seeking information relating to, among other
things, the events and issues addressed in the March 4, 2004 letter. The
Company, Carey Financial, and W. P. Carey & Co. LLC have commenced providing
information to the Enforcement Staff in response to the subpoenas and are
cooperating with the Enforcement Staff. It cannot be determined at this time
what action, if any, the Enforcement Staff will pursue or what relief or
remedies the Enforcement Staff may seek. There can be no assurance that the
effect of the investigation by the Enforcement Staff and any action, relief, or
remedies sought by the Enforcement Staff would not be material.
Note 8. Proposed Business Combination:
On July 2, 2004, the boards of directors of the Company and Carey Institutional
Properties Incorporated ("CIP(R)"), an affiliate, announced that they each
approved a definitive agreement under which the Company, through a wholly owned
subsidiary, will acquire CIP(R)'s business in a stock-for-stock merger. The
merger is subject to the approval of the shareholders of the Company and CIP(R)
at a special meeting of the shareholders on August 24, 2004. As described in the
proxy statement delivered to shareholders and on file with the Securities and
Exchange Commission, CIP(R) shareholders have the option of receiving 1.09
shares of the Company for each CIP(R) share or $10.90 cash per share for selling
their interests. As of June 30, 2004, CIP(R) has approximately 28,898,000 shares
-9-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
outstanding. Prior to the proposed business combination, CIP(R) will sell 16
properties to the Advisor, representing all properties which have remaining
lease terms of eight years or less. The properties to be acquired by the Company
have an appraised value totaling approximately $571,000 and include interests in
properties that CIP(R) owns with other affiliates. In connection with acquiring
the properties, the Company would assume the existing limited recourse mortgages
on such properties.
In the event that the proposed merger is approved and all CIP(R) shareholders
elect to exchange their shares for Company shares, such shares would represent
approximately 22% of the outstanding shares of the Company.
Note 9. Subsequent Events:
On July 8, 2004, the Company and CPA(R):16-Global, an affiliate, through a
limited liability company in which the Company owns a 60% interest, purchased
land and buildings in Finland for (euro)78,734 ($97,370 based on exchange rate
of the Euro on date of acquisition) and entered into two leases with TietoEnator
Plc. In connection with the purchase, the limited liability company obtained
limited recourse mortgage loans of (euro)57,200 ($70,739). Interest on the loans
is based on an annual interest rate of 5.16% with stated principal payments
increasing annually. The leases have an initial term of 12.5 years with three
five-year renewal options at an initial aggregate annual rent of (euro)5,648
($6,985). Both leases provide for annual rent increases based on a formula
indexed to a cost of living index published by Statistics Finland, Inc.
Between July 26, 2004 and August 3, 2004 in two separate transactions, the
Company and CPA(R):16-Global with 65% and 35% interests, respectively,
purchased five properties in France for (euro) 85,326 (approximately $103,200
based on the exchange rates of the Euro on the dates of acquisition) and
assumed existing net leases with Thales S.A. Four of the leases expire in
December 2011 and one lease expires in December 2010, with each lease providing
for a nine-year renewal term. Annual rent is (euro) 8,099 (approximately $9,715
based on the exchange rates of the Euro on the dates of acquisition) with
annual increases in the INSEE, a French construction cost index. In connection
with the purchases of the properties, the Company and CPA(R):16-Global obtained
(euro) 63,500 (approximately $76,835 based on the exchange rates of the Euro on
the dates of acquisition) of limited recourse mortgage financing.
Note 10. Accounting Pronouncements:
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). In December 2003, the FASB issued a revised FIN 46
which modifies and clarifies various aspects of the original Interpretation. FIN
46 applies when either (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest, (2) the equity
investment at risk is insufficient to finance that entity's activities without
additional subordinated financial support or (3) the equity investors have
voting rights that are not proportionate to their economic interest. In addition
FIN 46 requires additional disclosures. The adoption of FIN 46 did not have a
material impact on the financial statements as none of its investments in
unconsolidated joint ventures are VIEs.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). In particular, it requires
that mandatorily redeemable financial instruments be classified as liabilities
and reported at fair value and that changes in their fair values be reported as
interest cost.
This statement was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for the Company as of July 1,
2003. On November 7, 2003, the FASB indefinitely deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatorily
redeemable non-controlling interests entered into before November 5, 2003. This
deferral is expected to remain in effect while these provisions are further
evaluated by the FASB. The Company has interests in one limited partnership that
is consolidated and has minority interests that have finite lives and were
considered mandatorily redeemable noncontrolling interests prior to the issuance
of the deferral. Accordingly, in accordance with the deferral noted
-10-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
above, these minority interests have not been reflected as liabilities. The
carrying value approximates the fair value of these minority interests at June
30, 2004. Based on the FASB's deferral of this provision, the adoption of SFAS
No. 150 did not have a material effect on the Company's financial statements.
-11-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
The 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 condensed consolidated financial statements and
notes thereto as June 30, 2004 included in this quarterly report and CPA(R):15's
Annual Report on Form 10-K for the year ended December 31, 2003. The following
discussion includes forward looking statements. Forward looking statements,
which are based on certain assumptions, describe future plans, strategies and
expectations of CPA(R):15. Forward-looking statements discuss matters that are
not historical facts. Because they discuss future events or conditions,
forward-looking statements may include words such as "anticipate", "believe",
"estimate", "intend", "could", "should", "would", "may", or similar expressions.
Do not unduly rely on forward looking statements. They give our expectations
about the future and are not guarantees, and speak only as of the date they are
made. Such statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievement of
CPA(R):15 to be materially different from the results of operations or plan
expressed or implied by such forward looking statements. The risk factors are
fully described in Item 1 of the Annual Report on Form 10-K for the year ended
December 31, 2003. Accordingly, such information should not be regarded as
representations by CPA(R):15 that the results or conditions described in such
statements or objectives and plans of CPA(R):15 will be achieved. Additionally,
a description of CPA(R):15's critical accounting estimates is included in the
management's discussion and analysis in the Annual Report on Form 10-K. There
has been no significant change in such critical accounting estimates.
EXECUTIVE OVERVIEW
How CPA(R):15 Earns Revenue
The primary source of CPA(R):15's revenues are earned from leasing real estate.
CPA(R):15 acquires and owns commercial properties that are then leased to
companies domestically and internationally, primarily on a net lease basis.
Revenue is subject to fluctuation because of lease expirations, lease
terminations, the timing of new lease transactions and sales of property.
How Management Evaluates Results of Operations
Management evaluates the results of CPA(R):15 with a primary focus on the
ability to generate cash flow necessary to meet its investment objectives of
increasing its distribution rate to its shareholders and overall property
appreciation. As a result, management's assessment of operating results gives
less emphasis to the effect of unrealized gains and losses which may cause
fluctuations in net income for comparable periods but have no impact on cash
flow and to other noncash charges such as depreciation and impairment charges.
In evaluating cash flow from operations, management includes equity
distributions that are included in investing activities to the extent that the
distributions in excess of equity income are the result of noncash charges such
as depreciation and amortization. Management does not consider unrealized gains
and losses from foreign currency or derivative instruments when evaluating its
ability to fund dividends. Management's evaluation of CPA(R):15's potential for
generating cash flow is based on long-term assessments.
For the six months ended June 30, 2004, cash flow generated from operations and
equity investments were not sufficient to fund dividends paid and meet other
obligations including paying scheduled mortgage principal payments and making
distributions to minority interests which hold ownership interests in several of
CPA(R):15's properties. Refer to the "Operating Activities" section of Financial
Condition below for further analysis. Management expects based on its current
projections that over the long-term, cash flow from operations and equity
investments will meet the objective of increasing the distribution rate and
meeting other cash obligations. CPA(R):15 has cash balances of $147,100 as of
June 30, 2004 which can be used for working capital needs, future real estate
purchases and other commitments.
Current Developments and Trends
As general economic conditions continue to improve, inflation and interest rates
are expected to continue to rise as well. In addition, competition for both real
estate properties and for investors' money continues to increase. These trends
generally present challenges to the real estate leasing market. Management feels
that its objective of maintaining a diverse portfolio of properties with
long-term leases and long-term, fixed rate debt obligations provides investors
protection from these trends. In addition, the majority of lease transactions
include Consumer
-12-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Price Index escalation clauses or periodic stated rent increases that are
intended to help protect our investors against potential future inflation and
should allow CPA(R):15 to continue to increase its dividend.
Management will continue to pursue its objectives through long-term transactions
and continuing to diversify its portfolio. To that end, management is seeking to
continue to invest in the international commercial real estate market as a means
of diversifying its portfolio. While more complex and generally requiring a
longer lead time to complete, international transactions currently provide the
benefits of more favorable interest rates and greater flexibility to leverage
the underlying property.
Management believes that as the portfolio matures there is a potential for a
substantial increase in the value of the portfolio and that any increase will
not be reflected in its financial statements.
Current developments include:
On July 2, 2004, the boards of directors of CPA(R):15 and Carey Institutional
Properties Incorporated (CIP(R)), an affiliate, announced plans to merge. Under
the proposed merger, CIP(R) would merge into a wholly-owned subsidiary of
CPA(R):15. The properties to be acquired by CPA(R):15 have an appraised value
totaling approximately $571,000 and include interests in properties that CIP(R)
owns with other affiliates. In connection with acquiring the properties,
CPA(R):15 would assume the existing limited recourse mortgages on such
properties. As described in the proxy, CIP(R) shareholders have the option of
receiving 1.09 shares of CPA(R):15 for each CIP(R) share or cash for selling
their interests. As of June 30, 2004, CIP(R) has approximately 28,898,000 shares
outstanding. In the event that the proposed merger is approved and all CIP(R)
shareholders elect to exchange their shares for CPA(R):15 shares, such shares
would represent approximately 22% of the outstanding shares of CPA(R):15.
The proposed merger gives CPA(R):15 the opportunity to grow and further
diversify its portfolio by acquiring properties that have already met the
advisor's due diligence standards, and managed by its advisor, W.P. Carey & Co.
LLC. The merger proposal is subject to approval by shareholders at the August
24, 2004 shareholders meeting.
In connection with an examination by the staff of the Broker-Dealer Program of
the Securities and Exchange Commission, CPA(R):15 received subpoenas from the
staff of the Division of Enforcement of the Securities and Exchange Commission
seeking information related to the examinations. CPA(R):15 is providing
information to the Staff of the Division of Enforcement in response to the
subpoenas (See Note 7 of the accompanying condensed consolidated financial
statements).
As more fully disclosed in Notes 3 and 4 of the accompanying condensed
consolidated financial statements, CPA(R):15 purchased an approximate 58%
interest in 78 properties leased to lessees that operate under the U-Haul brand
name, purchased property in Ohio and Tennessee leased to Worthington Precision
Metals, Inc., purchased land in Nebraska and entered into a build-to-suit
agreement with Oriental Trading Company, Inc., purchased property in California
leased to Shaklee Corporation, purchased property in Texas leased to Grande
Communications Networks, Inc., and sold 49.99% of its interest in a property
leased to Actuant Corporation to Corporate Property Associates 16 - Global
Incorporated ("CPA(R):16-Global"), an affiliate. Expected annual cash flow from
these transactions (contractual rent, less property-level mortgage debt service)
is approximately $11,883.
In June 2004, the Board of Directors of CPA(R):15 approved and increased the
second quarter dividend to $.1571 per share payable on July 15, 2004 to
shareholders of record as of June 30, 2004.
As more fully disclosed in Note 9 of the accompanying condensed consolidated
financial statements, subsequent to June 30, 2004, CPA(R):15 purchased a 60%
interest in a property in Finland leased to TietoEnator Plc. and in two separate
transactions, CPA(R):15 and CPA(R):16-Global, with 65% and 35% interests,
respectively, purchased five properties in France leased to Thales S.A. for
(euro) 85,326 (approximately $103,200 based on the exchange rates of the Euro on
the dates of acquisition).
-13-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Results of Operations
Lease Revenues - For the comparable quarters ended June 30, 2004 and 2003, lease
revenues (rental income and interest income from direct financing leases)
increased by $15,396 primarily due to $13,620 from 23 new leases entered into
during 2003 and 2004, $2,707 from the completion of build-to-suit projects in
2003 and 2004 for several tenants, and $175 from rent increases at seven
properties. These increases were partially offset by a reduction of $1,377 due
to a lease termination in August 2003 from Fleming Companies ("Fleming")
pursuant to their voluntary petition of bankruptcy.
For the comparable six-month periods ended June 30, 2004 and 2003, lease
revenues increased $27,088 primarily due to the same factors as described above.
New leases in 2003 and 2004 contributed $24,787, the completion of build-to-suit
projects for several tenants contributed $3,797, rent increases at seven
properties contributed $331 and the positive impact of fluctuations in foreign
currency exchange rates contributed $919 of the total increase. These increases
were partially offset by a reduction of $2,754 due to the Fleming lease
termination.
During the quarter ended June 30, 2004, CPA(R):15 entered into new net leases
with two lessees that operate under the U-Haul brand name, Worthington Precision
Metals, Inc., Shaklee Corporation and Grande Communications Networks. Aggregate
annual lease revenues related to these new leases is $20,072. A build-to-suit
project for Universal Technology Institute of Arizona, Inc. was completed during
the quarter and will generate annual lease revenue of $2,743. Several properties
have scheduled rent increases during the remainder of 2004 and a build-to-suit
project for Universal Technology Institute of Pennsylvania, Inc. was completed
in July 2004 and will contribute initial annual lease revenues of approximately
$1,800. Rent increases are generally determined by formulas that are indexed to
increases in the Consumer Price Index. The Fleming property, which remains
vacant, would have provided annual lease revenues of $5,500. CPA(R):15 is
aggressively pursuing other leasing alternatives for this property.
Other Operating Income - For the comparable quarters ended June 30, 2004 and
2003, other operating income decreased $916 primarily due to a reduction in
reimbursable costs from tenants. Such reimbursable costs are recorded as both
income and expense and therefore have no impact on net income.
For the comparable six-month periods ended June 30, 2004 and 2003, other
operating income increased $2,125. During the six-month period ended June 30,
2004, other operating income benefited from the forfeiture of Fleming's $2,754
security deposit to CPA(R):15. This increase was partially offset by a reduction
in reimbursable costs from tenants.
Depreciation and Amortization - For the comparable three and six-month periods
ended June 30, 2004 and 2003, depreciation and amortization increased $4,103 and
$6,720, respectively. The increase is due to acquisitions in 2003 and 2004 as
well as the completion of several build-to-suit projects.
General and Administrative Expenses - For the comparable quarters ended June 30,
2004 and 2003, general and administrative expenses decreased $251 primarily due
to a reduction in several general and administrative expenses including
acquisition expenses and investor related service costs which were partially
offset by increased accounting and auditing fees and personnel cost
reimbursements.
For the comparable six-month periods ended June 30, 2004 and 2003, general and
administrative expenses increased $455 primarily due to increased accounting and
auditing fees, state taxes and personnel reimbursement costs which were
partially offset by a reduction in several general and administrative expenses
including acquisition expenses and investor related service costs.
Property Expenses - For the comparable quarters ended June 30, 2004 and 2003,
property expenses increased $965 primarily due to an increase in asset
management and performance fees of $1,387 and an increase of $496 in absorbing
carrying costs at the former Transworld Center, Inc. and Fleming properties.
These increases were partially offset by a reduction in reimbursable costs from
tenants as described above in "Other Operating Income." The increase in asset
management and performance fees is based on growth of CPA(R):15's asset base.
-14-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
For the comparable six-month periods ended June 30, 2004 and 2003, property
expenses increased $3,116 primarily due to the same factors as described above.
Asset management and performance fees increased $2,550 and absorption costs on
vacant properties increased $972 and were partially offset by a reduction in
reimbursable costs by tenants.
CPA(R):15 is aggressively remarketing the Transworld and Fleming properties
which remain vacant. Annual carrying costs on both properties total
approximately $1,550.
Minority Interest in Income - For the comparable three and six-month periods
ended June 30, 2004 and 2003, minority interest in income increased $815 and
$2,045, respectively. The increase is primarily due to the U-Haul acquisition in
April 2004, which contributed $551 of income for both periods as well as the
2003 acquisitions of Carrefour and Medica, which contributed additional income
of $1,513 for the six months ended June 30, 2004.
Income from Equity Investments - For the comparable three and six-month periods
ended June 30, 2004 and 2003, income from equity investments remained constant
as a result of minimal equity investment activity.
Interest Expense - For the comparable three and six-month periods ended June 30,
2004 and 2003, interest expense increased $5,596 and $9,166, respectively.
CPA(R):15's mortgage balances have increased by $226,962 in 2004 as a result of
financing recent acquisition activity. The increase in mortgage balances
resulted in a corresponding increase in interest expense for both periods.
Net Income - For the quarter ended June 30, 2004, net income increased by $2,871
to $8,502 as compared with net income of $5,631 for the quarter ended June 30,
2003. For the six-month period ended June 30, 2004, net income increased by
$8,983 to $20,106 as compared with net income of $11,123 for the comparable
prior year period. For both the three and six-month periods ended June 30, 2004,
CPA(R):15 benefited from significant revenue growth as a result of the
completion of several acquisitions and build-to-suit projects in 2003 and 2004.
The revenue growth was partially offset by higher costs, including depreciation
and interest as a result of acquisition activity.
Financial Condition
Uses of Cash During the Period
Cash and cash equivalents totaled $147,109 as of June 30, 2004, a decrease of
$199,108 from the December 31, 2003 balance. Management believes CPA(R):15 has
sufficient cash balances to meet its working capital needs including its
distribution rate. CPA(R):15's use of cash during the period is described below.
Operating Activities - Cash flows from operating activities and distributions
from the operations of equity investments in excess of equity income of $23,154
were not sufficient to fund dividend payments of $33,220, scheduled mortgage
principal payments of $4,518 and distributions to minority interests of $1,888.
Cash used in operating activities included approximately $7,200 of funding of
certain escrow accounts to be held by lenders and VAT deposits, both of which
will be ultimately returned to CPA(R):15 in the ordinary course of business.
Management believes that the annual cash flow of approximately $15,508 provided
by acquisitions completed during the first half of 2004, inclusive of the
TietoEnator transaction in July, combined with additional cash flow expected
from the proposed merger with CIP(R), expected completion in the second half of
2004 of several build-to-suit projects as well as scheduled rent increases will
provide sufficient operating cash flow to fund dividends to shareholders and
amounts payable to minority interests and mortgage lenders.
Investing Activities - CPA(R):15's investing activities are generally comprised
of real estate purchases and payment of its annual installation of deferred
acquisition fees. CPA(R):15 used $494,519 for real estate purchases and to fund
build-to-suit projects in 2004, of which $314,646 relates to the U-Haul
transaction and $35,920 relates to the build-to-suit projects for Universal
Technical Institute properties in Arizona, California and Pennslyvania. The
annual installment of deferred acquisition fees is paid each January and was
$3,253 for 2004. During the period, CPA(R):15 purchased $20,863 in short-term
investments (i.e., money-market type investments with maturities of more than 90
-15-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
days but less than one year) and redeemed $15,400 for a net increase of $5,463.
Cash receipts during the period included $5,275 from the recovery of VAT taxes
and $5,786 from the sale of real estate.
Financing Activities - In addition to making scheduled mortgage principal
payments, paying dividends to shareholders and making distributions to minority
partners, CPA(R):15 obtained $247,688 in mortgage loans to finance 2004
acquisitions and received $56,241 from minority partners related to the U-Haul
transaction. During the period CPA(R):15 also obtained $8,142 as a result of
issuing shares through its dividend and reinvestment plan, and used $1,755 to
purchase treasury shares.
Currently, all of CPA(R):15's mortgages are limited recourse and bear interest
at fixed rates, including a loan which has a fixed rate as the result of
entering into an interest rate swap agreement. Accordingly, CPA(R):15's cash
flow should not be adversely affected by increases in interest rates which are
near historical lows. However, financings on future acquisitions will likely
bear higher rates of interest. A lender on limited recourse mortgage debt has
recourse only to the property collateralizing such debt and not to any of
CPA(R):15's other assets, while unsecured financing would give a lender recourse
to all of CPA(R):15's assets. The use of limited recourse debt, therefore, will
allow CPA(R):15 to limit its exposure of all of its assets to any one debt
obligation. Management believes that the strategy of combining equity and
limited recourse mortgage debt will allow CPA(R):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.
Cash Resources
As of June 30, 2004, CPA(R):15 has $147,109 in cash and cash equivalents which
can be used for working capital needs, future real estate purchases,
distributions and other commitments. In addition, debt may be incurred on
unleveraged properties with a carrying value of $166,024 as of June 30, 2004 and
any proceeds may be used to finance future real estate purchases.
Cash Requirements
During the next twelve months, cash requirements will include scheduled mortgage
principal payments (CPA(R):15 has no mortgage balloon payments scheduled until
May 2012), paying dividends to shareholders, making distributions to minority
partners as well as other normal recurring operating expenses. CPA(R):15 may
also seek to use its cash to purchase new properties to further diversify its
portfolio and maintain cash balances sufficient to meet working capital needs.
Based on the projected increase in operating cash flows as described above, cash
flow from operations and distributions from operations of equity investments in
excess of equity income is expected to be sufficient to meet operating cash flow
objectives. Accordingly, CPA(R):15 expects to have sufficient cash flow to
continue increasing the distribution rate to its shareholders. Distributions are
determined by management's long-term projections of cash flow. Pending approval
of the merger and subject to the election to receive cash by CIP(R)'s
shareholders, CPA(R):15 may need to use a substantial amount of its existing
cash available for real estate investments to complete the proposed transaction.
Other Matters
CPA(R):15 conducts business in Europe and may recognize transaction gains and
losses from its foreign operations. Foreign currency transaction gains and
losses were not material to CPA(R):15's results of operations for the current
quarter. CPA(R):15 is subject to foreign currency exchange rate risk from the
effects of changes in exchange rates. CPA(R):15 has obtained limited recourse
mortgage financing at fixed rates of interest in the local currency. To the
extent that currency fluctuations increase or decrease rental revenues as
translated to dollars, the change in debt service, as translated to dollars,
will partially offset the effect of fluctuations in revenue, and, to some extent
mitigate the risk from changes in foreign currency rates.
-16-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Off-Balance Sheet Arrangements, Guarantees and Aggregate Contractual Agreements:
A summary of CPA(R):15's contractual obligations and commitments as of June 30,
2004 is as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- --- ----------
Obligations:
Limited recourse mortgage
notes payable (1) $822,965 $ 6,705 $ 13,897 $ 14,982 $ 16,171 $ 17,471 $ 753,739
Deferred acquisition fees 26,972 - 6,001 7,556 7,556 4,303 1,556
Commitments:
Build-to-suit obligations 55,160 42,118 13,042 - - - -
payable under office
cost-sharing agreement 430 56 214 160 - - -
-------- ------- -------- -------- -------- -------- ----------
$905,527 $48,879 $ 33,154 $ 22,698 $ 23,727 $ 21,774 $ 755,295
======== ======= ======== ======== ======== ======== ==========
(1) The limited recourse mortgage notes payable were obtained in connection
with the acquisition of properties in the ordinary course of business.
-17-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risk to which CPA(R):15 is exposed is interest rate
risk and foreign currency exchange risk.
The value of CPA(R):15's real estate is subject to fluctuations based on changes
in interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect CPA(R):15's ability to
refinance its debt when balloon payments are scheduled.
All of CPA(R):15's long-term debt of $822,965 either bears interest at fixed
rates or is hedged through the use of interest rate swap instruments that
convert variable rate debt service obligations to a fixed rate. The fair value
of these instruments is affected by changes in market interest rates. The
following table presents principal cash flows based upon expected maturity dates
of the debt obligations and the related weighted-average interest rates by
expected maturity dates for the fixed rate debt. The interest rate on the fixed
rate debt as of June 30, 2004 ranged from 5.52% to 7.98%.
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $6,705 $13,897 $14,982 $16,171 $17,471 $753,739 $822,965 $802,775
Average interest
rate 6.27% 6.23% 6.22% 6.22% 6.21% 6.26%
Changes in interest rates would have no effect on annual interest expense as all
of CPA(R):15's long-term debt bears interest at fixed rates. CPA(R):15 has
entered into an interest rate swap agreement to hedge cash flows on a variable
rate debt. The objective in using this derivative instrument is to add stability
to interest expense and manage exposure to interest rate movements.
CPA(R):15 conducts business in France, Germany, Belgium and the United Kingdom.
CPA(R):15 is subject to 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
affecting 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 affecting 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.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
June 30, 2004.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in Rule 13a-14(c) promulgated under the Exchange Act) are sufficiently
effective to ensure that the information required to be disclosed by the Company
in the reports it files under the Exchange Act is recorded, processed,
summarized and reported with adequate timeliness.
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
PART II
Item 1. - LEGAL PROCEEDINGS
As reported in the Company's Annual Report on Form 10-K for fiscal year 2003,
Carey Financial Corporation ("Carey Financial"), the broker-dealer that managed
the public offerings of the Company's common stock, received a letter from the
Securities and Exchange Commission (the "Commission"), on or about March 4,
2004, alleging certain infractions in connection with the offerings by Carey
Financial of Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder and of the National
Association of Securities Dealers, Inc. The letter was delivered for the purpose
of requiring Carey Financial to take corrective action and without regard to any
other action the Commission may take with respect to the broker-dealer
examination.
Commencing in June 2004, the Company, Carey Financial, and W. P. Carey & Co. LLC
have received subpoenas from the staff of the Division of Enforcement of the
Commission ("Enforcement Staff") seeking information relating to, among other
things, the events and issues addressed in the March 4, 2004 letter. The
Company, Carey Financial, and W. P. Carey & Co. LLC have commenced providing
information to the Enforcement Staff in response to the subpoenas and are
cooperating with the Enforcement Staff.
Item 2. - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(c) For the three and six-month periods ended June 30, 2004, 143,007 and
270,506 shares, respectively, were issued to the Advisor as
consideration for performance fees and 445,615 and 857,115 shares,
respectively, were issued pursuant to the Company's Stock Purchase
and Dividend Reinvestment Plan. Shares were issued at $10.00 per
share.
(e) Issuer Purchases of Equity Securities
Total Number of Shares Purchased
Total Number of Average Price as Part of Publicly Announced
Period Shares Purchased Paid Per Share Plans or Programs (1)
------ ---------------- -------------- --------------------------------
January 1, 2004 - January 31, 2004 45,331 $9.00 N/A
February 1, 2004 - February 29, 2004 17,358 9.00 N/A
March 1, 2004 - March 31, 2004 12,520 9.00 N/A
April 1, 2004 - April 30, 2004 25,461 9.00 N/A
May 1, 2004 - May 31, 2004 87,639 9.00 N/A
June 1, 2004 - June 30, 2004 6,516 9.00 N/A
-------
Total 194,825
=======
(1) All shares were purchased pursuant to the Company's Redemption Plan. The
maximum amount of shares purchasable in any period depends on the
availability of funds generated by the Dividend Reinvestment Plan and
other factors at the discretion of the Company's Board of Directors.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders' meeting was held on June 10, 2004, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a one-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No Shares Abstaining
- ---------------- ------------------- ----------------- ---------------- -----------------
William P. Carey 56,199,514 55,066,968 88,089 1,044,457
George E. Stoddard 56,199,514 54,896,947 258,110 1,044,457
Francis X. Diebold 56,199,514 55,138,716 16,341 1,044,457
Elizabeth P. Munson 56,199,514 55,059,512 95,545 1,044,457
Charles E. Parente 56,199,514 55,087,139 67,918 1,044,457
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
During the quarter ended June 30, 2004, the Company furnished a
report on Form 8-K on May 20, 2004, to report an event under Items
2, 7 and 9.
-20-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
8/6/2004 By: /s/ John J. Park
-------- -------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
8/6/2004 By: /s/ Claude Fernandez
-------- -------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
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