-----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, KKQTYUgT53AjLRftX2q/Wkc73qdyCqKPWMDVBzjsQOV4EL0LqErhqmwekRXIdmNc loD9c2OdW5FOXw6BamUNLg== 0000950123-00-003496.txt : 20000412 0000950123-00-003496.hdr.sgml : 20000412 ACCESSION NUMBER: 0000950123-00-003496 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE PROPERTY ASSOCIATES 14 INC CENTRAL INDEX KEY: 0001041326 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133951476 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25771 FILM NUMBER: 598595 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA 2ND FL CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA 2ND FL CITY: NEW YORK STATE: NY ZIP: 10020 10-K405 1 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K For the year ended DECEMBER 31, 1999 of CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED CPA(R):14 A MARYLAND Corporation IRS Employer Identification No. 13-3951476 SEC File Number 333-31437 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (212) 492-1100 CPA(R):14 has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the Act. CPA(R):14 is not registered on any exchanges. CPA(R):14 does not have any Securities registered pursuant to Section 12(b) of the Act. CPA(R):14 is unaware of any delinquent filers pursuant to Item 405 of Regulation S-K. CPA(R):14 (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. CPA(R):14 has no active market for common stock at March 31, 2000. Non-affiliates held 32,733,601 shares of common stock, $.001 Par Value outstanding at March 31, 2000. 2 PART I Item 1. Business. Corporate Property Associates 14 Incorporated ("CPA(R):14") is a Real Estate Investment Trust ("REIT") that acquires and owns commercial properties leased to companies nationwide, primarily on a triple net basis. As of December 31, 1999, CPA(R):14's portfolio consisted of 26 properties leased to 19 tenants and totaling more than 4.6 million square feet. CPA(R):14's core investment strategy is to purchase and own properties leased to a variety of companies on a single tenant net lease basis. These leases generally place the economic burden of ownership on the tenant by requiring them to pay the costs of maintenance, insurance, taxes, structural repairs and other operating expenses. CPA(R):14 also generally includes in its leases - clauses providing for mandated rent increases or periodic rent increases tied to increases in the consumer price index or other indices or, when appropriate, increases tied to the volume of sales at the property; - covenants restricting the activity of the tenant to reduce the risk of a change in credit quality; - indemnification of CPA(R):14 for environmental and other liabilities; - guarantees from parent companies or other entities. CPA(R):14 was formed as a Maryland corporation on June 4, 1997. Between November 1997 and December 1999, CPA(R):14 sold a total of 29,440,594 shares of common stock for a total of $294,405,940 in gross offering proceeds. These proceeds are being combined with limited recourse mortgage debt to acquire a portfolio of properties. In November 1999, CPA(R):14 commenced a second public offering of 40,000,000 shares of common stock at $10 per share on a "best efforts" basis. As a real estate investment trust, CPA(R):14 is not subject to federal income taxation as long as it satisfies certain requirements relating to the nature of its income, the level of its distributions and other factors. Carey Property Advisors, CPA(R):14's Advisor, provides both strategic and day-to-day management for CPA(R):14, including acquisition services, research, investment analysis, asset management, capital funding services, disposition of assets, investor relations and administrative services. Carey Property Advisors also provides office space and other facilities for CPA(R):14. Carey Property Advisors has dedicated senior executives in each area of its organization so that CPA(R):14 functions as a fully integrated operating company. CPA(R):14 pays asset management fees to Carey Property Advisors and pays certain transactional fees. CPA(R):14 also reimburses Carey Property Advisors for certain expenses. Carey Property Advisors also serves in this capacity for Corporate Property Associates 10 Incorporated, Carey Institutional Properties Incorporated ("CIP(R)") and Corporate Property Associates 12 Incorporated ("CPA(R):12"). On November 29, 1999, the Board of Directors of CPA(R):14 approved a pending change of control of Carey Property Advisors. If the change in control is effectuated, Carey Property Advisors will become a wholly-owned subsidiary of W.P. Carey & Co. LLC (currently known as Carey Diversified LLC), a publicly-traded company on the New York Stock Exchange and Pacific Exchange under the symbol "WPC" ("CDC" prior to the change of control). This change of control will be completed upon the approval of the shareholders of Carey Diversified LLC. CPA(R):14's principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020 and its telephone number is (212) 492-1100. As of March 31, 2000, CPA(R):14 had no employees. An affiliate of Carey Property Advisors employs 20 individuals who perform services for CPA(R):14. BUSINESS OBJECTIVES AND STRATEGY CPA(R):14's objectives are to: - pay quarterly dividend at an increasing rate that for taxable shareholders are partially free from current taxation; - purchase and own a portfolio of real estate that will increase in value; and - increase the equity in its real estate by making regular mortgage principal payments. - 1 - 3 CPA(R):14 seeks to achieve these objectives by purchasing and holding industrial and commercial properties each net leased to a single corporate tenant. CPA(R):14 's portfolio is diversified by geography, property type and by tenant. RECENT DEVELOPMENTS On February 3, 1999,through a 50% interest in a limited liability company which CPA(R):14 formed with CPA(R):12, the Company acquired an interest in land and buildings in Gilbert, Arizona and entered into a net lease with Intesys Technologies, Inc. The total purchase price of the building was $23,560,000. The Intesys lease has an initial term of 20 years with two ten-year renewal options at the tenant's option. The lease provides for annual rent of $2,274,750. There are rent increases every three years based on increases in the Consumer Price Index ("CPI") with increases capped at 9%. On March 31, 1999, CPA(R):14 and two affiliates, CPA(R):12 and CIP(R) through a newly-formed entity, in which CPA(R):14 and the two affiliates each own 1/3 interests, purchased land and building in Dallas, Texas for $39,790,500 and entered into a net lease with Compucom Systems, Inc. The Compucom Systems lease has an initial term of 20 years with two five-year renewal terms at Compucom's option. The lease initially provides for annual rent of $3,914,000 with rent increases every three years based on a formula indexed to increases in the CPI, with each increase capped at 13.3%. In connection with the purchase, the jointly-owned entity obtained a limited recourse mortgage loan of $23,000,000. The loan is collateralized by the Compucom property and an assignment of the Compucom lease and bears interest at an annual interest rate of 7.215% with monthly payments of interest and principal of $165,727 based on a 25-year amortization schedule. The loan matures in April 2009 when a balloon payment will be due. A prepayment premium will apply if the loan is prepaid prior to six months before maturity. On June 3, 1999, CPA(R):14 and Carey Diversified LLC, an affiliate, both through 50% ownership interests in a limited liability company purchased land and building in Norcross, Georgia for $30,785,340 and assumed existing net leases with CheckFree Corporation, Inc. CheckFree's lease obligations have been unconditionally guaranteed by its parent company, CheckFree Holdings, Inc. The CheckFree leases have remaining terms through December 31, 2015. The annual combined rent on the leases is currently $2,564,321. The annual rent on the land lease with CheckFree provides for annual rent of $76,577 with stated rent increases effective January 2000, 2005 and 2010. Annual rent on the building lease is $2,487,744 with rent increases scheduled for January 2004 and each year thereafter based on a formula indexed to increases in the CPI, capped at 2.5% per year. The purchase of the CheckFree property was financed with a limited recourse mortgage loan of $15,800,000 collateralized by a deed of trust on the CheckFree property and lease assignments. The loan bears interest at an annual variable rate of interest equal to the sum of the London InterBank Offered Rate and 2.5% and provides for scheduled principal payments that approximate a twenty-five year amortization schedule. The loan is scheduled to mature on June 1, 2006 at which time a balloon payment will be due. The loan is prepayable at any time without premium. CPA(R):14 and CDC also assumed an existing agreement to construct an additional office building at the CheckFree property on a build-to-suit basis at a cost not to exceed $11,060,745. Upon completion of construction, which is scheduled for June 2000, CheckFree's annual rent will increase by approximately $1,550,000. On June 29, 1999, CPA(R):14 purchased a property in Harrisburg, North Carolina for $7,805,807 upon which a build-to-suit facility was constructed and net leased to Builders' Supply and Lumber Co., Inc ("Builders' Supply"). The lease has an initial lease term of twenty years at an annual rent initially of $760,000 with rent increases each year based on a formula indexed to increases in the CPI, capped at 2% per year. The lease provides for a renewal term of ten years at the option of Builders' Supply. On July 19, 1999, CPA(R):14 purchased land and building in Gardena, California for $6,282,723 and entered into a net lease with Scott Co. of California. The lease obligations of Scott are unconditionally guaranteed by its parent company, The Scott Companies, Inc. The Scott lease has an initial term of twenty years with three five-year renewal terms at Scott's option. Annual rent is $681,000 with rent increases every three years based on a formula indexed to increases in CPI. In connection with the purchase of the Scott property, CPA(R):14 obtained $3,000,000 of limited recourse financing collateralized by a deed of trust and a lease assignment. The loan provides for monthly payments of interest and principal of $22,709 at an annual interest rate of 8.21%. The loan matures in August 2009 at which time a balloon payment will be due. - 2 - 4 On August 18 1999, CPA(R):14 and Corporate Property Associates 12, formed two limited liability companies which entered into net leases for four properties with Ameriserve Food Distribution, Inc. located in Burlington, New Jersey; Shawnee, Kansas; Grand Rapids, Michigan and Manassas, Virginia. The total cost of the transaction, including the funding of expansions and a build-to-suit facility is expected to amount to $55,779,445. CPA(R):14 holds a 60% interest in the limited liability companies. A new facility will be built at the Shawnee property and existing facilities will be expanded at the Burlington and Manassas properties. Completion of the projects is scheduled to occur no later than December 1, 2000. At the earlier of the completion of construction or December 1, 2000, a lease term of 20 years will commence, followed by two ten-year renewal terms at Ameriserve's option. The annual rent will be $5,769,073, subject to reduction if total project costs are less than $55,779,445. The leases provide for increases every three years based on a formula indexed to increases in the CPI. Ameriserve has purchase options that may be exercised at the end of the lease. In connection with the purchase of the Ameriserve properties, the limited liability companies obtained limited recourse mortgage financing of $32,000,000 collateralized by the Ameriserve properties and lease assignments. The loans bear interest at an annual rate of 8.51% with combined monthly payments of interest and principal of $246,279 and based on a 30-year amortization schedule. The loans mature September 30, 2009 at which time balloon payments will be due. In February 2000, Ameriserve filed for bankruptcy protection under Chapter 11 of the bankruptcy code in the Bankruptcy Court for the District of Delaware. As of March 31, 2000, Ameriserve is current in its payment obligations to CPA(R):12 and CPA(R):14, however there is no assurance that this will continue and it is possible that the leases could be terminated as a result of a plan of reorganization. On September 22, 1999, CPA(R):14 purchased land and a multiplex movie theater under construction in Midlothian, Virginia for $6,029,580 and assumed a lease with Richmond I Cinema L.L.C. ("Richmond I"). The lease obligations of Richmond I are unconditionally guaranteed by Consolidated Theatres Holding, G.P. Total project costs for the Richmond I multiplex are estimated to amount to approximately $14,706,000. The target opening date for the multiplex is August 15, 2000. Upon completion of the project, an initial lease term of 20 years will commence with two five-year renewal terms at Richmond I's option. Annual base rent will initially be $1,550,489 with scheduled rent increases of ten percent every five years during the initial lease term. Beginning with the third lease year, Richmond I will pay as additional rent a stated percentage of sales in excess of specific benchmark amounts. For the third through fifth lease year, CPA(R):14 will be entitled to receive five percent of sales in excess of $8,500,000; for the sixth through tenth lease years five percent of sales in excess of $8,755,000 and six percent of sales in excess of $9,193,000 thereafter. CPA(R):14 obtained a limited recourse mortgage loan for up to $9,391,159 collateralized by a deed of trust and a lease assignment. The loan provides for annual interest at the sum of the monthly London Interbank Offered Rate and two percent and will initially convert to payments of interest only. Commencing on the earlier of the rent commencement date or September 30, 2000, the loan will convert to payments of interest and principal based on a 25-year amortization schedule. The loan is scheduled to fully amortize on October 1, 2025; however the lender, at its sole option, may call the loan on either October 1, 2007, 2014 or 2021. The outstanding balance on the loan at September 30, 1999 was $611,028 On October 15, 1999, CPA(R):14 purchased two properties in Burbank and Los Angeles, California for $3,743,455 and entered into a net lease with Production Resource Group L.L.C. The PRG lease has an initial term of 15 years with two five-year renewal terms at PRG's option. Annual rent is $393,250 with increases every two years based on a formula indexed to increases in the CPI. CPA(R):14 had previously entered into a net lease with PRG for a property in Las Vegas, Nevada. On November 1, 1999, CPA(R):14 purchased a property in Columbia, Maryland for $22,855,080 and entered into a net lease with Amerix Corporation. In addition, CPA(R):14 entered into a commitment to fund an expansion of up to $3,500,000 of the existing office facility. The lease has an initial term ending 15 years after the earlier of the completion of the expansion or December 1, 2001 with two ten-year renewal terms at Amerix's option. Annual rent will initially be $2,197,475 and will increase by $355,250 upon completion of the expansion, subject to a reduction if the project costs for the expansion cost are less than $3,500,000. The lease provides for rent increases on the sixth anniversary of the lease and every three years thereafter based on a formula indexed to increases in the CPI, subject to a cap on the increase of 1.04% per annum. On November 18, 1999, CPA(R):14 purchased land and a property in Dallas, Texas, and land and two properties in Greenville, Texas for $20,484,168 and entered into a master net lease with Atrium Companies, Inc. The Atrium lease has an initial term of twenty years and eight months at an annual rent of $2,075,000, with rent increases at the end of the fifth lease year and every two years thereafter based on a formula indexed to increases in the CPI. The first rent increase is capped at a maximum of 12.5% and each increase thereafter is capped at a - 3 - 5 maximum of 5%. The lease provides Atrium with purchase options on the 15th and 20th lease anniversaries with such option exercisable at the greater of (i) acquisition cost plus any prepayment premium on any existing mortgage loan (ii) and fair market value, as defined. CPA(R):14 also purchased a fourth property in Wylie, Texas on which a building is being constructed on a build-to-suit basis. The total purchase price and construction costs are expected to be $8,381,675 with Atrium having the obligation to fund any additional costs necessary to complete the project. Upon the earlier of completion and August 1, 2000, a lease term of 20 years will commence at an annual rent in an amount equal to CPA(R):14's total project costs multiplied by 10.75%, with rent increases every two years based on increases in the CPI with each increase capped at a maximum of 5%. On January 4, 2000, CPA(R):14 obtained a $13,123,000 limited recourse mortgage loan collateralized by a deed of trust and a lease assignment on the Dallas and Greenville properties. The loan provides for monthly interest only payments, at an annual interest rate of 8.7%, for the first twelve months, commencing February 2000, with monthly principal and interest payments of $102,786, thereafter. The loan matures on January, 2010 at which time a balloon payment is scheduled. On December 29, 1999, CPA(R):14 purchased land and building in Salt Lake City, Utah, assumed an existing lease guaranteed by Fitness Holdings Worldwide, Inc. and entered into an agreement to fund an expansion at the Fitness Holdings property. The purchase price and the costs of construction are $5,016,367 with Fitness Holdings having the obligation to fund any excess costs necessary to complete the project. Upon the earlier of completion or May 14, 2000, a lease term of twenty years will commence with annual rent under the Fitness Holdings lease of $526,969 and three five-year renewal options. The lease provides for rent increases commencing in the third lease year and every two years thereafter with such increases based on a formula indexed to the CPI with each increase capped at a maximum of 4%. In February 1998, CPA(R):14 entered into an agreement with Corporate Property Associates 12 Incorporated ("CPA(R):12") to form a limited liability company for the purpose of taking an ownership interest in a CPA(R):12 property in Heyward, California leased to Etec Systems, Inc. Under the agreement, CPA(R):14 agreed to advance funds necessary to represent a 49.99% interest in a new building being constructed on the Etec property at a cost of up to $52,356,000. Under the agreement, CPA(R):12 contributed its existing interest in the property and committed to fund the remaining amounts necessary to complete the new building. CPA(R):14 will share in the economic interests of the new improvements only and will not be entitled to any of the economic interests of the existing buildings. The new building was completed in July 1999 with annual rent applicable to the new improvements of approximately $5,727,000. The Etec lease has an initial term through May 2014 with three five-year renewals at Etec's option. The limited liability company subsequently has obtained a commitment for $30,000,000 of limited recourse mortgage financing on the new building. The mortgage loan will provide for monthly payments of principal and interest based on a 20-year amortization schedule and an annual interest rate of 7.11%. ACQUISITION STRATEGIES Carey Property Advisors has a well-developed process with established procedures and systems for acquiring net leased property on behalf of CPA(R):14. As a result of its reputation and experience in the industry and the contacts maintained by its professionals, Carey Property Advisors has a presence in the net lease market that has provided it with the opportunity to invest in a significant number of transactions on an ongoing basis. CPA(R):14 takes advantage of Carey Property Advisors' presence in the net lease market to build its portfolio. In evaluating opportunities for CPA(R):14, Carey Property Advisors carefully examines the credit, management and other attributes of the tenant and the importance of the property under consideration to the tenant's operations. Careful credit analysis is a crucial aspect of every transaction. CPA(R):14 believes that Carey Property Advisors has one of the most extensive underwriting processes in the industry and has an experienced staff of professionals involved with underwriting transactions. Carey Property Advisors seeks to identify those prospective tenants whose creditworthiness is likely to improve over time. CPA(R):14 believes that the experience of Carey Property Advisors' management in structuring sale-leaseback transactions to meet the needs of a prospective tenant enables Carey Property Advisors 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 Property Advisors' strategy in structuring its net lease investments for CPA(R):14 is to: - combine the stability and security of long-term lease payments, including rent increases, with the appreciation potential inherent in the ownership of real estate; - enhance current returns by utilizing varied lease structures; - 4 - 6 - reduce credit risk by diversifying investments by tenant, type of facility, geographic location and tenant industry; and - increase potential returns by obtaining equity enhancements from the tenant when possible, such as warrants to purchase tenant common stock. FINANCING STRATEGIES Consistent with its investment policies, CPA(R):14 is using leverage when available on favorable terms. Carey Property Advisors intends to continually seek opportunities and consider alternative financing techniques to finance properties not currently subject to debt and, in the future will seek opportunities to refinance debt, reduce interest expense or improve its capital structure. TRANSACTION ORIGINATION In analyzing potential acquisitions, Carey Property Advisors reviews and structures many aspects of a transaction, including the tenant, the real estate and the lease, to determine whether a potential acquisition can be structured to satisfy CPA(R):14's acquisition criteria. The aspects of a transaction which are reviewed and structured by Carey Property Advisors include the following: - Tenant Evaluation. Carey Property Advisors subjects each potential tenant to an extensive evaluation of its credit, management, position within its industry, operating history and profitability. Carey Property Advisors seeks tenants it believes will have stable or improving credit. By leasing properties to these types of tenants, CPA(R):14 can generally charge rent that is higher than the rent charged to tenants with recognized credit and, thereby, enhance its current return from these properties as compared with properties leased to companies whose credit potential has already been recognized by the market. Furthermore, if a tenant's credit does improve, the value of CPA(R):14's properties leased to that tenant will likely increase (if all other factors affecting value remain unchanged). Carey Property Advisors may also seek to enhance the likelihood of a tenant's lease obligations being satisfied, such as through a letter of credit or a guaranty of lease obligations from the tenant's corporate parent. This credit enhancement provides CPA(R):14 with additional financial security. - Leases with Increasing Rents. Carey Property Advisors seeks to include clauses in CPA(R):14's leases that provide for increases in rent over the term of the leases. These increases are generally tied to increases in certain indices such as the consumer price index, in the case of retail stores, participation in gross sales above a stated level, mandated rental increases on specific dates and through other methods. CPA(R):14 seeks to avoid entering into leases that provide for contractual reductions in rents during their primary term (other than reductions related to reductions in debt service). - Properties Important to Tenant Operations. Carey Property Advisors, on behalf of CPA(R):14, generally seeks to acquire properties with operations that are essential or important to the ongoing operations of the tenant. CPA(R):14 believes that these properties provide better protection in the event that tenants file for bankruptcy, because leases on properties essential or important to the operations of a bankrupt tenant are less likely to be rejected and terminated by a bankrupt tenant. Carey Property Advisors also seeks to assess the income, cash flow and profitability of the business conducted at the property, so that, if the tenant is unable to operate its business, CPA(R):14 can either continue operating the business conducted at the property or re-lease the property to another entity in the industry which can operate the property profitably. - Lease Provisions that Enhance and Protect Value. When appropriate, Carey Property Advisors attempts to include provisions in CPA(R):14's leases that require CPA(R):14's consent to certain tenant activity or require the tenant to satisfy certain 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. Including these provisions in its leases enables CPA(R):14 to protect its investment from changes in the operating and financial characteristics of a tenant that may impact its ability to satisfy its obligations to CPA(R):14 or could reduce the value of CPA(R):14's properties. - 5 - 7 - Diversification. Carey Property Advisors tries to diversify CPA(R):14's portfolio of properties to avoid dependence on any one particular tenant, type of facility, geographic location and tenant industry. By diversifying its portfolio, CPA(R):14 reduces the adverse effect on CPA(R):14 of a single underperforming investment or a downturn in any particular industry or geographic location. Carey Property Advisors employs a variety of other strategies and practices in connection with CPA(R):14's 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 to which the property is leased or the stock of the parent of the tenant. In certain instances, CPA(R):14 grants to the tenant a right to purchase the property leased by the tenant, but generally the option purchase price will be not less than the fair market value of the property. Carey Property Advisors' 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. As a transaction is structured, it is evaluated by the Chairman of the Investment Committee with respect to the potential tenant's credit, business prospects, position within its industry and other characteristics important to the long-term value of the property and the capability of the tenant to meet its lease obligations. Before a property is acquired, the transaction is reviewed by the Investment Committee to ensure that it satisfies CPA(R):14's investment criteria. Aspects of the transaction that are typically reviewed by the Investment Committee include the expected financial returns, the creditworthiness of the tenant, the real estate characteristics and the lease terms. 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 Property Advisors places special emphasis on having experienced individuals serve on its Investment Committee and does not invest in a transaction unless it is approved by the Investment Committee. CPA(R):14 believes that the Investment Committee review process gives it a unique, competitive advantage over other unaffiliated 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 responsibilities included overseeing $21 billion of fixed income investments for Hancock, its affiliates and outside clients. - Lawrence R. Klein is 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. Dr. Klein serves as an alternate member of the Investment Committee - 6 - 8 ASSET MANAGEMENT CPA(R):14 believes that effective management of its net lease assets is essential to maintain and enhance property values. Important aspects of asset management include restructuring transactions to meet the evolving needs of current tenants, re-leasing properties, refinancing debt, selling properties and knowledge of the bankruptcy process. Carey Property Advisors 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 Property Advisors reviews financial statements of its tenants and undertakes regular physical inspections of the condition and maintenance of its properties. Additionally, Carey Property Advisors periodically analyzes each tenant's financial condition, the industry in which each tenant operates and each tenant's relative strength in its industry. HOLDING PERIOD CPA(R):14 intends to hold each property it acquires for an extended period. The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of relevant factors with a view to achieving maximum capital appreciation and after-tax return for the CPA(R):14 shareholders. If CPA(R):14's common stock is not listed for trading on a national securities exchange or included for quotation on Nasdaq, CPA(R):14 will generally begin selling properties within ten years after the proceeds of the initial public offering 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 liquidation strategy which is likely to result in the greatest value for the shareholders. COMPETITION CPA(R):14 faces competition for the acquisition of office and industrial properties in general, and such properties net leased to major corporations in particular, from insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs. CPA(R):14 also faces competition from institutions that provide or arrange for other types of commercial financing through private or public offerings of equity or debt or traditional bank financings. CPA(R):14 believes its management's experience in real estate, credit underwriting and transaction structuring will allow CPA(R):14 to compete effectively for office and industrial properties. ENVIRONMENTAL MATTERS Under various federal, state and local environmental laws, regulations and ordinances, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and clean up hazardous or toxic chemicals, substances or waste or petroleum product or waste (collectively, "Hazardous Materials") releases on, under, in or from such property, and may be held liable to governmental entities or to third parties for certain damage and for investigation and cleanup costs incurred by such parties in connection with the release or threatened release of Hazardous Materials. Such 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 such laws has been interpreted to be joint and several under certain circumstances. CPA(R):14's leases often provide that the tenant is responsible for all environmental liability and for compliance with environmental regulations relating to the tenant's operations. CPA(R):14 typically undertakes an investigation of potential environmental risks when evaluating an acquisition. Phase I assessments are performed by independent environmental consulting and engineering firms for all acquisitions. Where warranted, Phase II assessments are performed. Phase I assessments do not involve subsurface testing, whereas Phase II assessments involve some degree of soil and/or groundwater testing. CPA(R):14 may acquire a property which is known to have had a release of Hazardous Materials in the past, subject to a determination of the level of risk and potential cost of remediation. CPA(R):14 normally requires property sellers to fully indemnify it against any environmental problem existing as of the date of purchase. Additionally, CPA(R):14 often structures its leases to require the tenant to assume most or all responsibility for environmental compliance or environmental remediation relating to the tenants operations and to provide that non-compliance with environmental laws is deemed a lease default. In certain instances, CPA(R):14 may also require a cash reserve, a letter of credit or a guarantee from the tenant, the tenant's parent company or a third party to assure lease compliance and funding of remediation. The value of any of these protections depends on the amount of the collateral and/or financial strength - 7 - 9 of CPA(R):14 providing the protection. Such a contractual arrangement does not eliminate CPA(R):14's statutory liability or preclude claims against CPA(R):14 by governmental authorities or persons who are not a party to such an arrangement. Contractual arrangements in CPA(R):14's leases may provide a basis for CPA(R):14 to recover from the tenant damages or costs for which CPA(R):14 has been found liable. CPA(R):14 operates in one industry segment, investment in net leased real property. For the year ended December 31, 1998, Advanced Micro Devices, Inc. Best Buy Co., Inc. and Etec Systems, Inc. represented 24%, 14% and 12%, respectively of total operating revenue of CPA(R):14. No other lessee represented 10% or more of operating revenue, Advanced Micro Devices, Best Buy and Etec are publicly-traded companies which file annual and quarterly reports with the U.S. 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):14 wishes to take advantage of the "safe harbor" provisions of the Act and is therefore including this section in its Annual Report on Form 10-K. The statements contained in this Annual Report, if not historical, are forward-looking statements and involve risks and uncertainties which are described below that could cause actual results to differ materially from the results, financial or otherwise, or other expectations described in such forward-looking statements. These statements are identified with the words "anticipated," "expected," "intends," "seeks" or "plans" or words of similar meaning. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results or occurrences. CPA(R):14's future results may be affected by certain risks and uncertainties including the following: SINGLE TENANT LEASES INCREASES EXPOSURE TO FAILURE OF TENANT We focus our acquisition activities on net leased real properties or interests therein. Due to the fact that our net leased real properties are leased to single tenants, the financial failure of or other default by a tenant resulting in the termination of a lease is likely to cause a reduction in the operating cash flow of CPA(R):14 and might decrease the value of the property leased to such tenant. WE DEPEND ON MAJOR TENANTS Revenues from several of our tenants and/or their guarantors may constitute a significant percentage of our consolidated rental revenues. As of December 31, 1999, CPA(R):14 had nineteen tenants. Although the number of tenants will increase, a small number of tenants may continue to represent a significant percentage of revenues. The default, financial distress or bankruptcy of any of the tenants of such properties could cause interruptions in the receipt of lease revenues from such tenants and/or result in vacancies in the respective properties, which would reduce our revenues until the affected property is re-let, and could decrease the ultimate sale value of each such property. Upon the expiration of the leases that are currently in place with respect to these properties, we may not be able to re-lease the vacant property at a comparable lease rate or without incurring additional expenditures in connection with such re-leasing. WE CAN BORROW A SIGNIFICANT AMOUNT OF FUNDS We have incurred, and may continue to incur, indebtedness (secured and unsecured) in furtherance of our activities. Neither the certificate of incorporation, bylaws nor any policy statement formally adopted by the board of directors limits either the total amount of indebtedness or the specified percentage of indebtedness (based upon the total market capitalization of CPA(R):14) which may be incurred. Accordingly, we could become more highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions. - 8 - 10 WE MAY NOT BE ABLE TO REFINANCE BALLOON PAYMENT ON MORTGAGE DEBT A significant number of the properties we leverage with debt will be subject to mortgages with balloon payments. Our ability to make such balloon payments will depend upon our ability either to refinance the mortgage related thereto, invest additional equity in the property or to sell the related property. Our ability to accomplish these goals will be affected by various factors existing at the relevant time, such as the state of the national and regional economies, local real estate conditions, available mortgage rates, our equity in the mortgaged properties, our financial condition, the operating history of the mortgaged properties and tax laws. In October 2007, a mortgage loan may be called at the option of the lender. Six mortgage loans, obtained in 1999, have balloon payments scheduled in 2009. WE MAY BE UNABLE TO RENEW LEASES OR RE-LET VACATED SPACES We will be subject to the risks that, upon expiration of leases, the premises may not be re-let or the terms of re-letting (including the cost of concessions to tenants) may be less favorable than current lease terms. If we are unable to re-let promptly all or a substantial portion of our properties or if the rental rates upon such re-letting were significantly lower than current rates, our net income and ability to make expected distributions to our shareholders would be adversely affected. There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases. Within the next five years our lease with Best Buy Co., Inc. is scheduled to expire. This lease currently represents 14% of our current annualized revenue. WE ARE SUBJECT TO POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS We own industrial and commercial properties and are subject to the risk of liabilities under federal, state and local environmental laws. Some of these laws could impose the following on CPA(R):14: - Responsibility and liability for the cost of investigation and 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 investigation and removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of such substances; and - Potential liability for common law claims by third parties based on damages and costs of environmental contaminants. WE MAY BE UNABLE TO MAKE ACQUISITIONS ON AN ADVANTAGEOUS BASIS The consummation of any future acquisition will be subject to satisfactory completion of our extensive analysis and due diligence review and to the negotiation of definitive documentation. There can be no assurance that we will be able to identify and acquire additional properties or that we will be able to finance acquisitions in the future. In addition, there can be no assurance that any such acquisition, if consummated, will be profitable for us. If we are unable to consummate the acquisition of additional properties in the future, there can be no assurance that we will be able to increase the cash available for distribution to our shareholders. WE MAY SUFFER UNINSURED LOSSES We require our tenants to carry comprehensive liability, fire, extended coverage on most of our properties, with policy specifications and insured limits customarily carried for similar properties. For those properties where a tenant is not required to obtain insurance, CPA(R):14 will obtain the appropriate insurance. However, there are certain types of losses (such as due to wars or acts of God) that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any such loss would adversely affect our financial condition. We believe that the properties are adequately insured in accordance with industry standards. - 9 - 11 CHANGES IN MARKET INTEREST RATES COULD CAUSE OUR STOCK PRICE TO GO DOWN The trading prices of equity securities issued by real estate companies have historically been affected by changes in broader market interest rates, with increases in interest rates resulting in decreases in trading prices, and decreases in interest rates resulting in increases in such trading prices. An increase in market interest rates could therefore adversely affect the trading prices of any of our equity securities. WE FACE INTENSE COMPETITION The real estate industry is highly competitive. Our principal competitors include national REITs, many of which are substantially larger and have substantially greater financial resources than us. THE VALUE OF OUR REAL ESTATE IS SUBJECT TO FLUCTUATION We are subject to all of the general risks associated with the ownership of real estate. In particular, we face the risk that rental revenue from the properties will be insufficient to cover all corporate operating expenses and debt service payments on indebtedness we incur. Additional real estate ownership risks include: - Adverse changes in general or local economic conditions; - Changes in supply of or demand for similar or competing properties; - Changes in interest rates and operating expenses; - Competition for tenants; - Changes in market rental rates; - Inability to lease properties upon termination of existing leases; - Renewal of leases at lower rental rates; - Inability to collect rents from tenants due to financial hardship, including bankruptcy; - Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate; - Uninsured property liability; - property damage or casualty losses; - Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws; and - Acts of God and other factors beyond the control of our management. WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS We depend on the efforts of the executive officers and key employees of Carey Property Advisors. The loss of the services of these executive officers and key employees could have a material adverse effect on our operations. The risk factors may have affected, and in the future could affect, our actual operating and financial results and could cause such results to differ materially from those in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically, and we cannot completely assure you that the factors we describe above list all material risks to CPA(R):14 any specific point in time. We have disclosed many of the important risk factors discussed above in our previous filings with the Securities and Exchange Commission. YEAR 2000 ISSUES. In 1999, CPA(R):14 and its affiliates formed a task force to identify year 2000 problems. The task force developed and implemented a plan that included inventory, assessment, remediation, testing and contingency planning. CPA(R):14 experienced no significant disruptions as a result of the year end date change. The task force intends to monitor other critical dates in the future, such as quarter-end dates. The impact of the year 2000 issues on the company will continue to depend on the way the issues have been addressed by third parties that provide services to CPA(R):14. To date, CPA(R):14 has not been adversely impacted to any significant extent by the failure of third parties to address year 2000 issues. The task force has developed contingency plans to address risks associated with year 2000 issues that may arise. There can be no assurance that these plans will fully mitigate any problems, if any arise. The foregoing year 2000 discussions constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Readiness and Disclosure and Disclosure Act of 1998. - 10 - 12 Item 2. Properties. The following table provides certain information with respect to the Company's properties as of March 31, 1999:
Current Rent Tenant/Guarantor Square Annual Per Ownership Initial Location of Properties Footage Rent (1) Foot Interest Term - ---------------------- ------- -------- ---- -------- ---- ETEC SYSTEMS, INC. Ownership of an May Hayward, CA 142,000 $2,872,690 40.47 interest in a limited 2014 liability company owning land and buildings BURLINGTON MOTOR 100% June CARRIERS, INC. 2018 Daleville, IN 106,352 792,000 7.45 BEST BUY CO., INC. 100% January Torrance, CA 102,470 1,741,990 17.00 2005 METAGENICS 100% August INCORPORATED 2011 San Clemente, CA 88,070 1,109,280 12.60 THE BENJAMIN 100% November ANSEHL COMPANY 2013 St. Louis, MO 154,760 649,750 4.20 CONTRAVES 100% November BRASHEAR 2013 SYSTEMS, L.P. Pittsburgh, PA 146,103 643,750 4.41 ADVANCED MICRO Ownership of a December DEVICES, INC. 33 1/3% interest in 2018 Sunnyvale, CA 362,000 3,048,500 25.27 (2) a limited liability company owning land and buildings INTESYS Ownership of a 50% February TECHNOLOGIES, INC. interest in a limited 2019 Gilbert, AZ 243,370 1,137,375 9.35 (2) liability company owning land and buildings FITNESS HOLDINGS 100% June WORLDWIDE, INC. 2020 Salt Lake City, UT 36,851 (under construction) WEST UNION 100% January CORPORATION 2015 Tempe, AZ 116,922 (under construction) BARJAN PRODUCTS 100% February L.L.C. 2016 Rock Island, IL 241,950 (under construction)
- 11 - 13
Current Rent Tenant/Guarantor Square Annual Per Ownership Initial Location of Properties Footage Rent (1) Foot Interest Term - ---------------------- ------- -------- ---- -------- ---- STELLEX 100% March TECHNOLOGIES, INC. 2020 North Amityville, NY 228,000 Valencia, CA 53,889 --------- 281,889 (under construction) CHECKFREE Ownership of a 50% December CORPORATION, INC. interest in a limited 2015 Norcross, GA 178,584 1,243,872 13.93 liability company AMERISERVE FOOD Ownership of a 60% August DISTRIBUTION, INC. interest in two limited 2020 Burlington, NJ 184,819 liability companies Shawnee, KS 244,272 Grand Rapids, MI 176,941 Manassas, VA 100,337 --------- 706,369 2,536,262 5.98 COMPUCOM 33 1/3% interest, March SYSTEMS, INC. remaining interest 2020 Dallas, TX 497,714 1,304,667 7.86 owned by CIP(R) And CPA(R):12 PRODUCTION RESOURCE GROUP LLC Las Vegas, NV 127,796 884,000 6.92 100% March 2014 Burbank, CA 17,020 100% November Los Angeles, CA 47,216 2014 --------- 64,236 393,250 6.12 BUILDERS SUPPLY 100% November AND LUMBER CO., INC. 2019 Harrisburg, NC 112,000 760,000 6.79 SCOTT CO OF 100% August CALIFORNIA 2019 Gardenia, CA 87,693 681,000 7.77 CONSOLIDATED 100% (3) THEATERS HOLDING, G.P. Midlothian, VA 88,000 (under construction) AMERIX CORPORATION 100% December Columbia, MD 159,577 2014 (under construction) ATRIUM 100% July COMPANIES, INC. 2020 Dallas, TX 539,017 Greenville, TX 462,463 Wylie, TX 207,000 --------- (under construction) 1,208,480 2,075,000 2.07
(1) Does not include properties under construction. (2) This figure represents the rent per square foot of the property when combined with rents payable to co-owners. (3) Twenty year term commencing at the end of the construction period. - 12 - 14 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, 1999 to a vote of security holders, through the solicitation of proxies or otherwise. - 13 - 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information with respect to CPA(R):14's common equity is hereby incorporated by reference to page 21 of the Company's Annual Report contained in Appendix A. Item 6. Selected Financial Data. Selected Financial Data are hereby incorporated by reference to page 1 of CPA(R):14's Annual Report contained in appendix A. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 4 of CPA(R):14's Annual Report contained in Appendix A. Item 7A. Quantitative and Qualitative Disclosures about Market Risk: Approximately $47,656,000 of the Company'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 variable rate debt as of December 31, 1999 was the sum of LIBOR and 2%. (in thousands)
2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Fixed rate $ 413 $ 466 $ 505 $ 548 $ 585 $45,139 $47,656 $46,687 Average interest rate 7.66% 6.61% 6.59% 6.58% 6.55% 8.14% Variable rate 25 107 118 129 141 975 1,495 1,495
As of December 31, 1999, CPA(R):14 had no other material exposure to market risk. Item 8. Financial Statements and Supplementary Data. The following consolidated financial statements and supplementary data of CPA(R):14 are hereby incorporated be reference to pages 5 to 18 of CPA(R):14's Annual Report contained in Appendix A: (i) Report of Independent Accountants (ii) Consolidated Balance Sheets at December 31, 1997, 1998 and 1999. (iii) Consolidated Statements of Operations for the period from Inception (June 4, 1997) to December 31, 1997 and for the years ended December 31, 1998 and 1999. (iv) Consolidated Statements of Shareholders' Equity for the period from Inception (June 4, 1997) to December 31, 1997 and for the years ended December 31, 1998 and 1999. (v) Consolidated Statements of Cash Flows for the period from Inception (June 4, 1997) to December 31, 1997 and for the years ended December 31, 1998 and 1999. (vi) Notes to Consolidated Financial Statements. - 14 - 16 Item 9. Disagreements on Accounting and Financial Disclosure. NONE PART III Item 10. Directors and Executive Officers of the Registrant. This information will be contained in CPA(R):14's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference. Item 11. Executive Compensation. This information will be contained in CPA(R):14's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of CPA(R):14's fiscal year, and is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. This information will be contained in CPA(R):14's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of CPA(R):14's fiscal year, and is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions. This information will be contained in CPA(R):14's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the CPA(R):14's fiscal year, and is hereby incorporated by reference. - 15 - 17 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Consolidated Financial Statements: The following consolidated financial statements are filed as a part of this Report: Report of Independent Accountants. Consolidated Balance Sheets, December 31, 1998 and 1999. Consolidated Statements of Operations for the period from Inception (June 4, 1997) to December 31, 1997 and the years ended December 31, 1998 and 1999. Consolidated Statements of Shareholders' Equity for the period from Inception (June 4, 1997) to December 31, 1997 and the years ended December 31, 1998 and 1999. Consolidated Statements of Cash Flows for the period from Inception (June 4, 1997) to December 31, 1997 and the years ended December 31, 1998 and 1999. Notes to Consolidated Financial Statements. The consolidated financial statements are hereby incorporated by reference to pages 5 to 18 of the Company's Annual Report contained in Appendix A. (a) 2. Financial Statement Schedule: The following schedules are filed as a part of this Report: Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1999. Schedule III of Registrant is contained on pages 22 to 24 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. - 16 - 18 (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 Method of No. Description Filing - ------- ----------- --------- 3.1 Articles of Amendment and Restatement. Exhibit 3(A) to Registration Statement (Form S-11) No. 333-76761 3.2 Amended Bylaws of Registrant. Exhibit 3(B) to Registration Statement (Form S-11) No. 333-31437 10.1 Amended Advisory Agreement . Exhibit 10.1 to Registration Statement (Form S-11) No. 333-31437 10.1(2) Lease Agreement date July 27, 1998 by and between Best (CA) Exhibit 10.1 to Registrant's Form 8-K Dated February 2, 1999 10.2 Lease Agreement dated July 27, 1998 by and between Best Exhibit 10.1 to Registrant's Form (CA) QRS 14-4, as Landlord, and Best Buy Co. Inc., as Tenants. 8-K dated February 2, 1999 10.2(2) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2 (2) to Registration QRS 14-4, as Landlord, and Best Co. Inc., as Tenants Statement (Form S-11) No. 333- 76761 10.2(3) Lease Agreement dated July 27, 1998 by and between Best (CA) Exhibit 10.2 (3) to Registrant's QRS 14-4, as Landlord, and Best Co. Inc., as Tenants. Form Post AM dated April 19, 1999 10.2(4) Lease Agreement date July 27, 1998 by and between Best (CA) Exhibit 10.2 to Registrant's Form QRS 14-4, as Landlord, and Best Buy Co. Inc. as Tenants. 10-k for the year ended December 31, 1998, dated March 30, 1999 10.2(5) Lease Agreement date February 3, 1998 by and between ESI (CA) Exhibit 10.2 to Registrant's Form QRS 12-6 INC., as Landlord and Etec Systems, Inc. as Tenant 8-K dated February 2, 1999 10.3(2) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(2) to Registration (CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Tenants. Statement (Form S-11) No 333- 76761 10.3(3) Lease Agreement dated February 2, 1998 by and between ESI Exhibit 10.3(3). to Registrant's (CA) QRS 12-6, as Landlord, and Etec Systems, Inc., as Post Effective Amendment Tenants. to Form S-11 Dated April 19, 1999 10.3(4) Lease Agreement date February 3, 1998 by and between ESI Exhibit 10.3 to Registrant's Form (CA) QRS 12-6 Inc., as Landlord and ETEC Systems, Inc., 10-K for the year ended December February 2, 1999 31, 1998. dated March 30, 1999 10.3 (5) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.3 to Registrant's form QRS 14-16, as Landlord, and Metagenics Incorporated, as Tenants 8-K dated February 2, 1999
- 17 - 19
Exhibit Method of No. Description Filing - ------- ----------- --------- 10.4 Lease Agreement dated July 29, 1998 by and between META Exhibit 10.3 to Registrant's (CA) 14-16, as Landlord, and Metagenics Incorporated, as QRS Form 8-K dated February 2, 1999 Tenants. 10.4(2) Lease Agreement dated July 29, 1998 by and between META (CA) Exhibit 10.4(2) to Registration QRS 14-16, as Landlord, and Metagenics Incorporated, as Tenants. Statement (Form S-11) No. 333- 76761 10.4(3) Lease Agreement dated July 29, 1998 by and between META (CA) Exhibit 10.4 (3) to Registrant's QRS 14-16, as Landlord, and Metagenics Incorporated, as Post Effective Amendment No. 2 Tenants. to Form S-11 dated April 19, 1999 10.4(4) Lease Agreement date July 29, 1998 by and between META (CA) Exhibit 10.4 to Registrant's Form QRS 14-6, as Landlord and Metagenics Incorporated as Tenants For the year ended December 31, 1999, dated March 30, 1999 10.4 (5) Lease Agreement dated July 30, 1998 by and between TRUCK (IN) Exhibit 10.4 to QRS 14-3, INC., as Landlord, and Burlington Motor Registrant's Form 8-K Carrier as, Tenants. dated February 2, 1999 10.5(2) Lease Agreement dated July 30, 1998 by and between TRUCK Exhibit 10.5 (2) (IN) QRS 14-3, as Landlord, and Burlington Motor Carrier Inc., (Form S-11) as Tenants. No. 333- 76761 10.5(3) Lease Agreement dated July 30, 1998 by and between TRUCK Exhibit 10.5 to Registrant's (IN) QRS 14-3, as Landlord, and Burlington Motor Carrier Post Effective Amendment No. 2 as Tenants. dated April 19, 1999 10.5(4) Lease Agreement dated July 30, 1998 by and between TRUCK Exhibit 10.5 to Registrant's Form (IN) QRS 14-3, INC., as Landlord, and Burlington Motor Carrier 10-K for the year ended December Inc., as Tenants. 31, 1998, dated March 30, 1999 10.5(5) Lease Agreement dated November 24, 1998 by and Exhibit 10.5 to Registrant's between BAC (MO) QRS 14010, Inc., as Landlord, Form 8-k dated and The Benjamin Ansehl Co., as Tenants February 2, 1999 10.6 Lease Agreement dated December 22, 1998 by and between Exhibit 10.6 to Registrant's Form Conductor (CA) QRS 14-11, Inc., as Landlord, and 8-K dated February 2, 1999 Advance 10.6(2) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6 (2) (MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as to Registration Statement Tenants (Form S-11) No. 333- 76761 10.6(3) Lease Agreement dated November 24, 1998 by and between BAC Exhibit 10.6(3) to Registrant's (MO) QRS 14-10, as Landlord, and The Benjamin Ansehl Co., as Post Effective Amendment to Form Tenants. S-11 Date April 19, 1999 10.6 (5) Lease Agreement dated November 24, 1998 by Exhibit 10.6 to Registrant's and between BAC (MO) QRS 14-10, Inc., Form 10-K for the year as Landlord, and The Benjamin Ansehl Co., as Tenants. ended December 31, 1998, dated February 2, 1999
- 18 - 20
Exhibit Method of No. Description Filing - ------- ----------- --------- 10.7 Lease Agreement dated December 22, 1998 by and between Exhibit 10.6 to Registrant's Conductor (CA) QRS 14-11, Inc., as Landlord, and Advance Form 8-K dated Micro Devices, Inc., as Tenants. February 2, 1999 10.7(2) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 (2) Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro to Registration Statement Devices, Inc., as Tenants. (Form S-11) No. 333- 76761 10.7(3) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 (3) to Registrant's Conductor (CA) QRS 14-11, as Landlord, and Advanced Micro Post Effective Amendment No. 2 Devices, Inc., as Tenants. dated April 19, 1999 10.7(4) Lease Agreement dated December 22, 1998 by and between Exhibit 10.7 to Registrant's Conductor (CA) QRS 14-11, as Landlord, and Advance Form 10-K for year ended Micro Devices, Inc. as Tenants. December 31, 1998, dated March 30, 1999 10.7(5) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.7 to Registrant's (PA) QRS 14-12, Inc. as Landlord, and Contraves Brashear Systems Form 8-K, L. P., as Tenants dated February 2, 1999 10.8(2) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8 (2) to Registration (PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, (Form S-11) No. 333- 76761 L.P., as Tenants. 10.8(3) Lease Agreement dated December 28, 1998 by and between CBS Exhibit 10.8 (3) to Registrant's (PA) QRS 14-12, as Landlord, and Contraves Brashear Systems, Post Effective Amendment L.P., as Tenants. to Form S-11 dated April 19, 1999 21.1 Subsidiaries of Registrant as of March 31, 2000. Filed herewith 23 Consent of PricewaterhouseCoopers LLP Exhibit 23 to Registration (Form S-11) No. 333- 76761 23(1) Consent of PricewaterhouseCoopers LLP Exhibit 23(1) to Registrant's Post Effective Amendment No. 2 to Form S-11 dated April 1, 1999 23.1 Consent of PricewaterhouseCoopers LLP Dated March 5, 2000 Filed herewith
- 19 - 21 (b) Reports on Form 8-K During the quarter ended December 31, 1999 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, 1999 from the Company's offering of common stock which commenced February 2, 1996 (File # 33-99994) is as follows: Shares registered: 30,000,000 Aggregate price of offering amount registered: $300,000,000 Shares sold: 29,440,594 Aggregated offering price of amount sold: $294,405,940 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: $ 3,684,995 Direct or indirect payments to others: $ 25,477,481 Net offering proceeds to the issuer after deducting expenses: $265,243,464 Purchases of real estate: $230,724,916 Working capital reserves: $ 2,944,059 Temporary investments in cash and cash equivalents: $ 31,574,489
- 20 - 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED a Maryland corporation 04/07/2000 BY: /s/ John J. Park - ---------- ----------------------------- Date John J. Park Executive Vice President and Chief Financial Officer (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED 04/07/2000 BY: /s/ William P. Carey - ---------- ---------------------------------- Date William P. Carey Chairman of the Board and Director (Principal Executive Officer) 04/07/2000 BY: /s/ H. Augustus Carey - ---------- ---------------------------------- Date H. Augustus Carey President 04/07/2000 BY: /s/ William Ruder - ---------- ---------------------------------- Date William Ruder Director 04/07/2000 BY: /s/ George E. Stoddard - ---------- ---------------------------------- Date George E. Stoddard Director 04/07/2000 BY: /s/ Charles C. Townsend, Jr. - ---------- ---------------------------------- Date Charles C. Townsend, Jr. Director 04/07/2000 BY: /s/ Warren G. Wintrub - ---------- ---------------------------------- Date Warren G. Wintrub Director 04/07/2000 by: /s/ Thomas E. Zacharias - ---------- ---------------------------------- Date Thomas E. Zacharias Director 04/07/2000 BY: /s/ John J. Park - ---------- ---------------------------------- Date John J. Park Executive Vice President and Chief Financial Officer (Principal Financial Officer) 04/07/2000 BY: /s/ Claude Fernandez - ---------- ---------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) - 21 - 23 To the Board of Directors of Corporate Property Associates 14 Incorporated and Subsidiaries: Our audits of the consolidated financial statements referred to in our report dated April 7, 2000 appearing on page 16 of the 1999 Annual Report to Shareholders of Corporate Property Associates 14 Incorporated and Subsidiaries (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 14(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 April 7, 2000 - 22 - 24 CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Cost Company Capitalized -------------------------- Subsequent to Description Encumbrances Land Buildings Acquisition (a) ----------- ------------ ---- --------- --------------- Operating Method: Trucking facility leased to Burlington Motor Carriers, Inc. $ 2,100,000 $ 5,439,267 Retail store leased to BestBuy Co., Inc. 13,059,980 6,933,851 $ 41,666 Research and development facility leased to Metagenics, Inc. (under construction) 2,390,000 7,754,285 Manufacturing facility leased to Benjamin Ansehl Co. $ 3,082,872 849,000 5,172,000 Manufacturing facility leased to Contraves Systems, L.P. 4,180,555 620,000 6,186,283 Manufacturing and distribution facilities leased to Production Resource Group L.L.C 5,451,111 3,860,000 8,263,455 Distribution and warehouse facility leased to Ameriserve Food Distribution, Inc. 31,950,721 4,344,000 11,656,000 1,786,814 Multi-plex motion picture theater leased to Consolidated Theaters L.L.C. 1,494,867 3,515,000 Office and warehouse facility leased to Builders' Supply & Lumber Co., Inc. 2,769,976 3,035 3,387,968 Office and research facility leased to Amerix Corporation 2,622,500 20,232,580 60,615 ----------- ----------- ----------- ----------- $46,160,126 $36,130,456 $63,886,471 $13,031,348 =========== =========== =========== ===========
Gross Amount at which Carried at Close of Period (b) ------------------------------------------ Accumulated Description Land Buildings Total Depreciation Date Acquired ----------- ---- --------- ----- ------------ ------------- Operating Method: Trucking facility leased to Burlington Motor Carriers, Inc. $ 2,100,000 $ 5,439,267 $ 7,539,267 $ 209,639 June 29, 1998 Retail store leased to BestBuy Co., Inc. 13,059,980 6,975,517 20,035,497 254,095 July 28, 1998 Research and development facility leased to Metagenics, Inc. (under construction) 2,390,000 7,754,285 10,144,285 53,339 July 29, 1998 Manufacturing facility leased to Benjamin Ansehl Co. 849,000 5,172,000 6,021,000 145,463 November 24, 1998 Manufacturing facility leased to Contraves Systems, L.P. 620,000 6,186,283 6,806,283 161,101 December 28, 1998 Manufacturing and distribution facilities leased to Production Resource Group L.L.C March 31, 1999 and 3,860,000 8,263,455 12,123,455 133,309 October 15, 1999 Distribution and warehouse facility leased to Ameriserve Food Distribution, Inc. 4,344,000 13,442,814 17,786,814 133,297 August 18, 1999 Multi-plex motion picture theater leased to Consolidated Theaters L.L.C. 3,515,000 3,515,000 September 22, 1999 Office and warehouse facility leased to Builders' Supply & Lumber Co., Inc. 2,769,976 3,391,003 6,160,979 June 29, 1999 Office and research facility leased to Amerix Corporation 2,622,500 20,293,195 22,915,695 62,352 November 1, 1999 ----------- ----------- ------------ ---------- $36,130,456 $76,917,819 $113,048,275 $1,152,595 =========== =========== ============ ==========
Life on which Depreciation in Latest Statement of Income Description is Computed ----------- ------------- Operating Method: Trucking facility leased to Burlington Motor Carriers, Inc. 40 yrs. Retail store leased to BestBuy Co., Inc. 40 yrs. Research and development facility leased to Metagenics, Inc. (under construction) 40 yrs. Manufacturing facility leased to Benjamin Ansehl Co. 40 yrs. Manufacturing facility leased to Contraves Systems, L.P. 40 yrs. Manufacturing and distribution facilities leased to Production Resource Group L.L.C 40 yrs. Distribution and warehouse facility leased to Ameriserve Food Distribution, Inc. 40 yrs. Multi-plex motion picture theater leased to Consolidated Theaters L.L.C. N/A Office and warehouse facility leased to Builders' Supply & Lumber Co., Inc. 40 yrs. Office and research facility leased to Amerix Corporation 40 yrs.
- 23 - 25 CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Gross Amount at which Company Carried at Close of Period (b) ------------------------ ------------------------------- Description Encumbrances Land Buildings Total Date Acquired ----------- ------------ ---- --------- ----- ------------- Direct Financing Method: Industrial/manufacturing facilities leased to Atrium Companies, Inc. $ 459,608 $20,419,510 $20,879,118 November 18, 1999 Industrial/manufacturing facilities leased to Scott Companies, Inc. $2,991,008 2,340,000 3,942,723 6,282,723 July 19, 1999 ---------- ---------- ----------- ----------- $2,991,008 $2,799,608 $24,362,233 $27,161,841 ========== ========== =========== ===========
- 24 - 26 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION (a) Consists of the costs of improvements subsequent to purchase and acquisition costs including legal fees, appraisal fees, title costs and other related professional fees. (b) At December 31, 1999, the aggregate cost of real estate owned by CPA(R):14 and its subsidiaries for Federal income tax purposes is $133,861,516. (c)
Reconciliation of Real Estate Accounted for Under the Operating Method ------------------------------ December 31, ---------------------------------- 1998 1999 ------------ ---------- Balance at beginning of year $ 44,742,002 Additions $ 44,742,002 68,306,273 ------------ ------------ Balance at close of year $ 44,742,002 $113,048,275 ============ ============
Reconciliation of Accumulated Depreciation ------------------------------------------ December 31, ------------------------------- 1998 1999 ---------- ---------- Balance at beginning of year $ 175,977 Depreciation expense $ 175,977 976,618 ---------- ---------- Balance at close of year $ 175,977 $1,152,595 ========== ==========
- 25 - 27 APPENDIX A TO FORM 10-K CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED AND SUBSIDIARIES 1999 ANNUAL REPORT 28 SELECTED FINANCIAL DATA (In thousands except per share and share amounts)
1997 (1) 1998 1999 -------- ---- ---- OPERATING DATA: Revenues $2,209 $10,023 Net (loss) income ($12) 1,058 7,678 Basic earnings per share (.61) .25 .39 Dividends paid (2) 1,324 9,781 Dividends declared per share .47 .65 Weighted average Shares outstanding - basic 20,000 4,273,311 19,909,834 BALANCE SHEET DATA: Total consolidated assets 200 107,956 331,063 Long-term obligations (3) 1,629 54,350
(1) For the period from inception (June 4, 1997) through December 31, 1997. (2) The Company paid its first dividend in July 1998. (3) Represents mortgage notes payable and deferred acquisition fee installments that are due after more than one year. -1- 29 MANAGEMENT'S DISCUSSION AND ANALYSIS Overview The following discussion and analysis of the financial condition and results of operations of Corporate Property Associates 14 Incorporated should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1999. The following discussion includes forward looking statements. Forward looking statements, which are based on certain assumptions, describe our future plans, strategies and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievement to be materially different from the results of operations or plan expressed or implied by these forward looking statements. Accordingly, this information should not be regarded as representations that the results or condition described in these statements or objectives and plans will be achieved. Corporate Property Associates 14 Incorporated was formed in 1997 for the purpose of engaging in the business of investing in and owning commercial and industrial real estate. In November 1997, we commenced a public offering of 30,000,000 shares of common stock at $10 per share on a "best efforts" basis. The offering concluded in 1999 at which time we had issued 29,440,595 shares and raised $294,405,905. In November 1999, we commenced a second public offering of 40,000,000 shares of common stock at $10 per share on a "best efforts" basis. The second offering will end no later than November 16, 2001 or earlier if the entire 40,000,000 shares are subscribed prior to that date. We are using the proceeds from the public offerings along with limited recourse mortgage financing to purchase properties and enter into long-term net leases with corporate tenants. A net lease is structured to place certain economic burdens of ownership on these corporate tenants by requiring them to pay the costs of maintenance and repair, insurance and real estate taxes. The leases have generally been structured to include periodic rent increases that are stated or based on increases in the consumer price index or, for retail properties, provide for additional rents based on sales in excess of a specified base amount. Our primary objectives are to provide rising cash flow and to protect our investors from the effects of inflation through rent escalation provisions, property appreciation, tenant credit improvement and regular paydown of limited recourse mortgage debt. In addition, we have successfully negotiated grants of common stock warrants from selected tenants and expect to realize the benefits of appreciation from those grants. We cannot guarantee that our objectives will be ultimately achieved. 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 our portfolio of properties as a whole, rather than by identifying discrete operating segments. This evaluation includes assessing our ability to meet distribution objectives, increase the dividend and increase value by evaluating potential investments in single tenant net lease real estate and by seeking favorable limited recourse mortgage financing opportunities. Financial Condition We are using substantially all of the net proceeds from our offerings (except for approximately 1% to establish a working capital reserve) along with limited recourse mortgage financing to purchase a diversified portfolio of commercial and industrial real estate and enter into long-term leases with corporate tenants on a net lease, single tenant basis. Under a net lease, a tenant is generally required to pay all expenses related to the leased property in order to limit our exposure to the effects of increases in real estate taxes and property maintenance and insurance costs. Our leases, which generally have initial lease terms of 15 to 25 years, typically include rent increase provisions which are fixed or based upon increases in the Consumer Price Index. As of December 31, 1999, we raised $265,000,000, net of costs, from our first offering, including approximately $160,000,000 that we raised in 1999. We have used approximately $180,914,000 including $101,725,000 in 1999, along with mortgage proceeds of $49,661,000 to purchase real estate and interests in five single purpose entities formed with affiliates that have purchased real estate and entered into net leases. The affiliates have the same investment objectives as us. Since December 31, 1999, we have raised $33,838,000, invested an additional $36,691,000 in real estate, and as of March 31, 2000 have $111,193,000 of cash available for investment. -2- 30 We have devoted a substantial portion of our resources to build-to-suit projects because we have concluded that they should provide a better return on investment than many other opportunities being evaluated by our Advisor. In 1998, we entered into build-to-suit commitments in connection with our lease with Metagenics Incorporated for a property in San Clemente, California and a building in Hayward, California leased to Etec Systems, Inc. that we own with an affiliate. The Metagenics and Etec projects were completed during 1999. During 1999, we entered into build-to-suit commitments with Atrium Companies, Inc., Ameriserve Food Distribution, Inc., Builders' Supply and Lumber Co., Inc., CheckFree Holdings Corporation, Consolidated Theatres L.L.C., Amerix Corporation and Fitness Holdings Worldwide, Inc. The Ameriserve Food Distribution, Atrium, Amerix and CheckFree transactions also included acquisition of properties that were occupied, have provided us with operating revenues since their acquisition and do not require any additional investment by us. After the build-to-suit project at Builders' Supply was completed, we entered into a new commitment with them to fund an expansion at that property. Remaining costs to complete these projects are expected to be $25,211,000. Our build-to-suit commitments include provisions that require the lessee to fund any cost overruns. We are using the cash flow from our net leases to fund quarterly dividends at an increasing rate, and pay debt service installments on limited recourse mortgage debt. For 1999, cash flow from operations of $8,801,000 when combined with the cash flow from our equity investments in excess of equity income of $1,277,000 was sufficient to pay quarterly dividends of $9,781,000 and mortgage principal payments of $144,000. Our cash flow from our equity investments exceeds the income we recognize from these investments because of noncash charges for depreciation. Although the amounts received in excess of equity income are recorded as an investing cash flow in the accompanying consolidated financial statements, Management does not distinguish between directly owned properties and properties owned through equity investments in evaluating the ability of the company to pay dividends. As we continue to issue shares and invest the proceeds, both cash flow from operations and dividends payable are expected to increase substantially. In connection with the purchase of our properties, we require the sellers to perform environmental reviews. Management believes, based on the results of such reviews, that our properties were in substantial compliance with Federal and state environmental statutes at the time the properties were acquired. Tenants are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. In addition, our leases generally require tenants to indemnify us fully from all liabilities and losses related to the leased properties with provisions of such indemnification specifically addressing environmental matters. The leases generally include provisions that allow for periodic environmental assessments, paid for by the tenant, and allow us to extend leases until such time as a tenant has satisfied its environmental obligations. We also attempt to negotiate lease provisions to require financial assurances from tenants such as performance bonds or letters of credit if the costs of remediating environmental conditions are, in our estimation, in excess of specified amounts. Accordingly, we believe that the ultimate resolution of any environmental matters would not have a material adverse effect on our financial condition, liquidity or results of operations. Since December 31, 1999, Ameriserve Food Distribution filed a petition of voluntary bankruptcy. Ameriserve is expected to prepare a plan of reorganization and under such a plan could seek to terminate lease obligations. Accordingly, there is no assurance that Ameriserve Food distribution will affirm its leases with us. Ameriserve Food Distribution; however, continues to meet its lease obligations and Management believes that the properties acquired and being constructed are necessary to Ameriserve Food Distribution's operations. Accordingly, we currently expect Ameriserve Food Distribution to continue to lease our properties during its reorganization and thereafter. In 1999, we, along with our affiliates, formed a task force to identify year 2000 problems. The task force developed and implemented a plan that included inventory, assessment, remediation, testing and contingency planning. We experienced no significant disruptions as a result of the year end date change. The task force intends to monitor other critical dates in the future, such as quarter-end dates. In connection with the procedures, our share of expenses was minimal. The impact of the year 2000 issues on the company will continue to depend on the way the issues have been addressed by third parties that provide services to the company. To date, we have not been adversely impacted to any significant extent by the failure of third parties to address year 2000 issues. The task force has developed contingency plans to address risks associated with year 2000 issues that may arise. There can be no assurance that these plans will fully mitigate any problems, if any arise. The foregoing year 2000 discussions constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Readiness and Disclosure and Disclosure Act of 1998. -3- 31 Results of Operations Net income for 1999 as compared with 1998 increased to $7,678,000 from $1,058,000 and increased by 56% on a per share basis. The increase in net income was due to our investment of offering proceeds in real estate, either directly owned or in equity investments with affiliates in single tenant, net lease properties. During 1999, our asset base in real estate (including equity investments) increased from approximately $80,000,000 to $235,000,000. Our cash balances have increased from $26,747,000 to $91,420,000 as a result of the issuance of shares and resulted in a substantial increase in interest income. Interest income, however, represents a lower proportion of overall revenues as lease revenues (rental income and interest income from direct financing leases) increased by approximately $6,000,000 and income contributed from equity investments increased from 2% of earnings in 1998 to 38% in 1999. Increases in depreciation and amortization and property and general administrative expenses were attributable to the increase in our asset base, and the increase in interest expense was due to our obtaining limited recourse mortgage debt during the year. Results for future periods are expected to reflect increases in these revenue and expense categories except for interest income which is projected to decrease as funds from our offerings are invested fully in accordance with our objectives. Because of the commencement of our second offering in November 1999, it may be several years before the decrease in interest income is realized. Interest income is earned solely as a result of using uninvested cash to purchase money market instruments. Our results of operations for 1998 are not comparable with the results for 1997. During 1997, we had no real estate operations and had no revenues. The commencement of our public offering did not begin until November, 1997. During 1998, we issued our initial shares of common stock pursuant to the common stock offering, and purchased our first property in June 1998. The trend of acquisitions activity started to accelerate during the fourth quarter of 1998 and thereafter. The results for 1998, therefore, are not representative of results for future periods. Accounting principles require that construction period rents on build-to-suit projects be recorded as a reduction of cost rather than rental income. As a result, rents on build-to-suit projects are not currently being reflected in income nor cash flow from operations even though we believe that these projects provide an economic return on our investment during the construction period. The results for 1998 and 1999, therefore, did not reflect earnings from investments during their construction periods. If the revenue of build-to-suit projects was able to be recognized currently, our net income would have been higher than the amounts presented in the accompanying consolidated financial statements. We believe that the return on investment on our build-to-suit projects will produce long-term returns that are superior to those of other opportunities that we have evaluated. -4- 32 REPORT of INDEPENDENT ACCOUNTANTS To the Board of Directors of Corporate Property Associates 14 Incorporated and Subsidiaries: 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 14 Incorporated and Subsidiaries at December 31, 1998 and 1999, and the results of their operations and their cash flows for the period from inception (June 4, 1997) to December 31, 1997 and the years ended December 31, 1998 and 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of Carey Property Advisors, a Pennsylvania limited partnership (the "Advisor"); our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Advisor, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP New York, New York April 7, 2000 -5- 33 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and Subsidiaries Consolidated BALANCE SHEETS December 31,
1998 1999 ---- ---- ASSETS: Real estate leased to others: Accounted for under the operating method Land $ 19,018,980 $ 36,130,456 Buildings 25,723,022 76,917,819 ------------ ------------ 44,742,002 113,048,275 Accumulated depreciation 175,977 1,152,595 ------------ ------------ 44,566,025 111,895,680 Net investment in direct financing leases 27,161,841 Real estate under construction leased to others 45,775,407 ------------ ------------ Real estate leased to others 44,566,025 184,832,928 Equity investments 36,097,004 50,344,119 Cash and cash equivalents 26,747,058 91,420,457 Other assets 545,842 4,465,449 ------------ ------------ Total assets $107,955,929 $331,062,953 ============ ============ LIABILITIES: Limited recourse mortgage notes payable $ 49,517,692 Accrued interest 292,118 Accounts payable to affiliates $ 537,874 2,046,441 Accounts payable and accrued expenses 169,735 265,889 Prepaid rental income and security deposits 343,767 1,324,379 Deferred acquisition fees payable to affiliate 1,628,828 5,905,602 Dividends payable 1,365,622 4,515,213 Escrow funds 1,105,530 ----------- ------------ Total liabilities 4,045,826 64,972,864 ----------- ------------ Minority interest 8,212,097 ------------ Commitments and contingencies SHAREHOLDERS' EQUITY: Common stock, $.001 par value; authorized, 120,000,000 shares; issued and outstanding, 11,837,901 and 29,460,594 shares at December 31, 1998 and 1999 11,838 29,460 Additional paid-in capital 105,705,582 265,487,028 Dividends in excess of accumulated earnings (1,643,957) (6,896,632) ------------ ------------ 104,073,463 258,619,856 Less, treasury stock at cost, 16,900 and 79,839 shares at December 31, 1998 and 1999 (163,360) (741,864) ------------ ------------ Total shareholders' equity 103,910,103 257,877,992 ------------ ------------ Total liabilities and shareholders' equity $107,955,929 $331,062,953 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. -6- 34 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and Subsidiaries CONSOLIDATED STATEMENTS of OPERATIONS For the period from Inception (June 4, 1997) to December 31, 1997 and the years ended December 31, 1998 and 1999
1997 1998 1999 ---- ---- ---- Revenues: Rental income $ 1,296,441 $ 6,643,697 Interest income from direct financing leases 688,810 Other interest income 912,759 2,690,097 ------------ ------------ 2,209,200 10,022,604 ------------ ------------ Expenses: Interest expense 20,745 1,352,113 Depreciation and amortization 175,977 991,513 General and administrative $ 12,255 702,828 1,164,036 Property expense 272,582 1,585,807 ------------ ------------ ------------ 12,255 1,172,132 5,093,469 ------------ ------------ ------------ (Loss) income before minority interest in income and income from equity investments (12,255) 1,037,068 4,929,135 Minority interest in income (152,219) ------------ ------------ ------------ (Loss) income before income from equity investments (12,255) 1,037,068 4,776,916 Income from equity investments 21,200 2,901,253 ------------ ------------ ------------ Net (loss) income $ (12,255) $ 1,058,268 $ 7,678,169 ============ ============ ============ Basic (loss) income per share $ (.61) $ .25 $ .39 ============ ============ ============ Weighted average shares outstanding - basic 20,000 4,273,311 19,909,834 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. -7- 35 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED CONSOLIDATED STATEMENTS of SHAREHOLDERS' EQUITY For the period from Inception (June 4, 1997) to December 31, 1997 and the years ended December 31, 1998 and 1999
DIVIDENDS IN Additional Excess of COMMON PAID-IN ACCUMULATED TREASURY Stock Capital Earnings Stock Total ----- ------- -------- ----- ----- 20,000 shares issued $.001 par, at $10 per share $ 20 $ 199,980 $ 200,000 Net loss $ (12,255) (12,255) ------- ------------ ----------- ------------ Balance at December 31, 1997 20 199,980 (12,255) 187,745 11,817,901 shares issued $.001 par, at $10 per share, net of offering costs 11,818 105,505,602 105,517,420 Dividends declared (2,689,970) (2,689,970) Purchase of treasury stock, 16,900 shares $(163,360) (163,360) Net income 1,058,268 1,058,268 ------- ------------ ----------- -------- ------------ Balance at December 31, 1998 11,838 105,705,582 (1,643,957) (163,360) 103,910,103 17,622,693 shares issued $.001 par, at $10 per share, net of offering costs 17,622 159,781,446 159,799,068 Dividends declared (12,930,844) (12,930,844) Purchase of treasury stock, 62,939 shares (578,504) (578,504) Net income 7,678,169 7,678,169 ------- ------------ ----------- --------- ------------ Balance at December 31, 1999 $29,460 $265,487,028 $(6,896,632) $(741,864) $257,877,992 ======= ============ =========== ========= ============
The accompanying notes are an integral part of the consolidated financial statements. -8- 36 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and Subsidiaries CONSOLIDATED STATEMENTS of CASH FLOWS For the period from Inception (June 4, 1997) to December 31, 1997 and the years ended December 31, 1998 and 1999
1997 1998 1999 ---- ---- ---- Cash flows from operating activities: Net (loss) income $(12,255) $ 1,058,268 $ 7,678,169 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 175,977 991,513 Straight-line rent adjustments (65,686) (234,261) Income from equity investments (21,200) Minority interest income 152,219 Provision for uncollected rent 54,994 Change in operating assets and liabilities, net (a) 12,255 558,965 158,487 -------- ------------ ------------ Net cash provided by operating activities -- 1,706,324 8,801,121 -------- ------------ ------------ Cash flows from investing activities: Equity distributions received in excess of equity income 1,277,311 Purchase of equity investments, net (b) (35,440,551) (15,524,426) Purchases of real estate and other capitalized costs, net (b) (43,748,427) (135,861,217) -------- ----------- ------------ Net cash used in investing activities -- (79,188,978) (150,108,332) -------- ------------ ------------ Cash flows from financing activities: Proceeds from stock issuance, net of costs 200,000 105,517,420 159,799,068 Proceeds from mortgages 49,661,425 Contributions received from minority partner 8,059,878 Payments of mortgage principal (143,733) Deferred financing costs and mortgage deposits (1,036,271) Dividends paid (1,324,348) (9,781,253) Purchase of treasury stock (163,360) (578,504) -------- ------------ ------------ Net cash provided by financing activities 200,000 104,029,712 205,980,610 -------- ------------ ------------ Net increase in cash and cash equivalents 200,000 26,547,058 64,673,399 Cash and cash equivalents, beginning of period -- 200,000 26,747,058 -------- ------------ ------------ Cash and cash equivalents, end of period $200,000 $ 26,747,058 $ 91,420,457 ======== ============ ============
Noncash investing and financing activities: (a) Excludes changes in accounts payable and accrued expenses and accounts payable to affiliates balances that relate to the raising of capital (financing activities) rather than the Company's real estate operations. (b) Deferred acquisition fee payable to affiliate -- $1,628,828 $4,276,774 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -9- 37 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Basis of Consolidation The consolidated financial statements include the accounts of Corporate Property Associates 14 Incorporated, its wholly-owned subsidiaries and a majority interest in two limited liability companies (collectively, the "Company"). All material inter-entity transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates will relate to the assessment of recoverability of real estate assets and investments. Actual results could differ from those estimates. Real Estate Leased to Others: Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Company diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States. The leases are accounted for under either the operating or direct financing method. Such methods are described below: Operating method - Real estate is recorded at cost, revenue is recognized on a straight-line basis over the terms of the lease and expenses (including depreciation) are charged to operations as incurred. Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Company's net investment in the lease. The Company assesses the recoverability of its real estate assets and investments, including residual interests based on projections of undiscounted cash flows 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. Substantially all of the Company's leases provide for either scheduled rent increases or periodic rent increases based on formulas indexed to increases in the Consumer Price Index ("CPI"). For properties under construction, interest charges, if any, are capitalized rather than expensed and rentals received are recorded as a reduction of capitalized project (i.e., construction) costs. Depreciation: Depreciation is computed using the straight-line method over the estimated useful lives of the properties - generally 40 years. -10- 38 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Equity Investments: The Company's interests in five limited liability companies in which its ownership interests are 50% or less are accounted for under the equity method, i.e. at cost, increased or decreased by the Company's share of earnings or losses, less distributions. Cash Equivalents: The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Company's cash and cash equivalents at December 31, 1998 and 1999 were held in the custody of two financial institutions, and which balances at times exceed federally insurable limits. The Company mitigates this risk by depositing funds with major financial institutions. Other Assets: Included in other assets are deferred rental income and deferred charges. Deferred rental income is the aggregate difference for operating method leases between scheduled rents which vary during the lease term and rent recognized on a straight-line basis. Deferred charges are costs incurred in connection with mortgage refinancing and are amortized over the terms of the mortgages. 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. Treasury Stock: Treasury stock is recorded at cost Deferred Acquisition Fees: Fees are payable for services provided by Carey Property Advisors (the "Advisor") to the Company relating to the identification, evaluation, negotiation, financing and purchase of properties. A portion of such fees are deferred and are payable in annual installments with each installment equal to .25% of the purchase price of the properties over no less than eight years following the first anniversary of the date a property was purchased. Payment of such fees is subject to the 2%/25% Guidelines (see Note 3). Earnings Per Share: The Company has a simple equity capital structure with only common stock outstanding. As a result, the Company has presented basic per-share amounts only for all periods presented in the accompanying consolidated financial statements. Federal Income Taxes: The Company qualifies and intends to continue to qualify as a Real Estate Investment Trust ("REIT"). The Company is not subject to Federal income taxes, provided it distributes at least 95% of its REIT taxable income to its shareholders and meets certain other conditions necessary to retain REIT status. -11- 39 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Operating Segments Accounting standards have been established for the way public business enterprises report selected information about operating segments and guidelines for defining the operating segment of an enterprise. Based on the standards' definitions, the Company has concluded that it engages in a single operating segment. 2. Organization and Offering: The Company was formed on June 4, 1997 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in and owning industrial and commercial real estate. Subject to certain restrictions and limitations, the business of the Company is managed by the Advisor. An initial offering of the Company's shares which commenced on November 10, 1997 concluded on November 10, 1999 at which time the Company had issued an aggregate of 29,440,594 shares ($294,405,940). On November 17, 1999, the Company commenced an offering for a maximum of 40,000,000 shares of common stock. The shares are being offered to the public on a "best efforts" basis at a price of $10 per share. The initial issuance of shares under the second offering occurred on February 23, 2000 at which time 3,383,846 shares ($33,838,460) were issued. In connection with performing services relating to the Company's real estate purchases, affiliates of the Company received acquisition fees of $581,726 and $1,282,550 in 1998 and 1999, respectively. 3. Transactions with Related Parties: The Company has entered into an Advisory Agreement with the Advisor pursuant to which the Advisor performs certain services for the Company including the identification, evaluation, negotiation, purchase and disposition of property, the day-to-day management of the Company and the performance of certain administrative services. The Advisor and certain affiliates will receive fees and compensation in connection with the offering and the operation of the Company as described in the Prospectus of the Company. An affiliate of the Company received structuring and development fees of $1,454,315 and $3,206,374 , in 1998 and 1999, respectively. The affiliate is also entitled to receive deferred acquisition fees. As of December 31, 1999, deferred acquisition fees totaled $5,905,602. The deferred acquisition fees are payable in equal installments over a period of no less than eight years with the initial installment applicable to transactions completed in 1998 paid in January 2000. The initial installment for transactions completed in 1999 is not payable until January 2001. The Company's interests in properties jointly held with affiliates range from 33 1/3% to 60%. Ownership interests in limited liability companies owned with affiliates in which the Company's ownership interest is 50% or less are accounted for under the equity method. Ownership interests in limited liability companies which are greater than 50% are consolidated with the ownership interest of the affiliate accounted for as a minority interest. The Company will account for any individual interests in assets and liabilities relating to tenants-in-common interests on a proportional basis. The Company's asset management and performance fees payable to the Advisor are each 1/2 of 1% per annum of Average Invested Assets, as defined in the Advisory Agreement. Until 7% cumulative rate of cash flow from operations, as defined in the Advisory Agreement, is achieved, the Advisor will not be entitled to receive the performance fee. The Company, however, is recognizing performance fee expense currently. At such time as the Advisor is entitled to receive the performance fee, the Advisor will have the option of electing to receive the fee in cash or restricted shares of the Company. As of December 31, 1999, the cumulative cash flow from operations criterion had not been achieved. Unpaid performance fees are accrued and included in accounts payable to affiliates in the accompanying consolidated financial statements. For the years ended December 31, 1998 and 1999, the Company incurred asset management 12 40 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued fees of $129,746 and $730,285, respectively. Performance fees were in like amount. General and administrative expense reimbursement consists primarily of the actual cost of personnel needed in providing administrative services. For the years ended December 31, 1998 and 1999 general and administrative reimbursements were $370,000 and $415,353, respectively. No fees or reimbursements were incurred in 1997. The Advisor shall reimburse the Company at least annually for the amount by which operating expenses of the Company exceed the 2%/25% Guidelines (2% of Average Invested Assets or 25% of net income) as defined in the Advisory Agreement. To the extent that operating expenses payable or reimbursable by the Company exceed the 2%/25% Guidelines and the independent directors find that such expenses were justified based on such unusual and nonrecurring factors which they deem sufficient, the Advisor may be reimbursed in future years for the full amount or any portion of such excess expenses, but only to the extent such reimbursement would not cause the Company's operating expenses to exceed the 2%/25% Guidelines in any such year. 4. Real Estate Leased to Others Accounted for Under the Operating Method: Scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to $11,132,000 in 2000, $11,149,000 in each of the years 2001 through 2003 $11,060,000 in 2004 and aggregate approximately $158,345,000 through 2020. No contingent rents were realized in 1998 and 1999. 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, 1999 Minimum lease payments receivable $56,103,417 Unguaranteed residual value 27,161,841 ----------- 83,265,258 Less: unearned income 56,103,417 ----------- $27,161,841 ===========
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases are approximately $2,756,000 in each of the years 2000 through 2004 and aggregate approximately $56,103,000 through 2020. No contingent rents were realized in 1998 and 1999. 6. Mortgage Notes Payable: Mortgage notes payable, all of which are limited recourse to the Company, are collateralized by an assignment of various leases and by real property with a carrying value of $90,019,554. As of December 31, 1999, mortgage notes payable had annual interest rates ranging from 7.39% to 8.51%. Scheduled principal payments during each of the five years following December 31, 1999 are as follows:
2000 $ 804,863 2001 572,598 2002 623,225 2003 677,398 2004 726,526 Thereafter 46,113,082 ----------- Total $49,517,692 ===========
No interest payments were made in 1997 and 1998. Interest paid, excluding any capitalized interest, was $1,059,995 in 1999. In connection with the placement of mortgages, fees of $496,999 were paid to an affiliate of the Company in 1999. No fees were paid in 1997 and 1998. -13- 41 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 7. Commitments and Contingencies: The Company is liable for certain expenses of the second offering, including but not limited to filing, legal, accounting, printing and escrow fees, which are being deducted from the gross proceeds of the second offering and are presently estimated to aggregate a maximum of $16,000,000 assuming the sale of 40,000,000 shares. The Company will also be liable for selling commissions of up to $0.60 (6%) per share sold except for any shares sold to the Advisor, its Affiliates, the selected dealers or any of their employees for their own accounts. The Company is reimbursing Carey Financial for expenses (including fees and expenses of its counsel) and for the costs of sales, wholesaling services and information meetings of Carey Financial's employees relating to the offering. To the extent, if any, that all offering expenses, excluding selling commissions, and any fees paid and expenses reimbursed to the selected dealers or paid on behalf of the selected dealers, exceed 3.5% of the gross proceeds of the Second Offering, such excess will be paid by the Advisor. 8. Dividends: Dividends paid to shareholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. Since the inception of the Company, dividends per share reported for tax purposes were as follows:
1998 1999 -------- -------- Ordinary income $ .31 $ .55 Return of capital -- .10 -------- -------- $ .31 $ .65 ======== ========
A dividend of $.001773 per share per day in the period from October 1, 1999 through December 31, 1999 ($4,515,213) was declared in December 1999 and paid in January 2000. 9. Lease Revenues: The Company's operations consist of the investment in and the leasing of industrial and commercial real estate. For the years ended December 31, 1998 and 1999, the financial reporting sources are as follows:
1998 1999 ------------ ------------ Per Statements of Income Rental income from operating leases $ 1,296,441 $ 6,643,697 Interest income from direct financing leases 688,810 Adjustment: Share of lease revenues applicable to minority interest (378,849) Share of leasing revenues from equity investments 84,672 7,472,522 ------------ ------------ $ 1,381,113 $ 14,426,180 ============ ============
-14- 42 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued In 1998 and 1999, the Company earned its share of net lease revenues from its direct and indirect ownership of real estate from the following lease obligations:
1998 1999 ---- ---- Advanced Micro Devices, Inc. (a) $ 84,672 6% $ 3,048,500 21% Best Buy Co. Inc. 824,582 60 1,973,824 14 Etec Systems, Inc. (a) 1,675,736 12 Intesys Technologies, Inc. (a) 1,028,831 7 Compucom Systems, Inc. (a) 982,213 7 Burlington Motor Carriers, Inc. 398,200 29 792,000 6 Production Resource Group L.L.C. 782,050 5 CheckFree Holdings Corporation (a) 737,242 5 The Benjamin Ansehl Company 66,607 5 649,750 5 Contraves Brashear Systems, L.P. 7,052 643,500 4 Ameriserve Food Distribution, Inc. (b) 568,274 3 Metagenics, Inc. 429,957 3 Atrium Companies, Inc. 386,402 3 Amerix Corporation 366,246 3 Scott Companies, Inc. 302,408 2 Builders' Supply and Lumber Co., Inc. 59,247 ---------- ---- ----------- ---- $1,381,113 100% $14,426,180 100% ========== ==== =========== ====
(a) Represents the Company's proportionate share of lease revenues from equity investment. (b) Net of rental amount applicable to minority interest of Corporate Property Associates 12 Incorporated. 10. Acquisitions of Real Estate: A summary of acquisitions of real estate for the period from October 1, 1999 through December 31, 1999 is as follows: Production Resource Group L.L.C. On October 15, 1999, the Company purchased two properties in Burbank and Los Angeles, California for $3,743,455 and entered into a net lease with Production Resource Group L.L.C. ("PRG"). The PRG lease has an initial term of 15 years with two five-year renewal terms at PRG's option. Annual rent is $393,250 with increases every two years based on a formula indexed to increases in the CPI. The Company had also entered into a net lease with PRG in March 1999 for a property in Las Vegas, Nevada. Amerix Corporation On November 1, 1999, the Company purchased a property in Columbia, Maryland for $22,855,080 and entered into a net lease with Amerix Corporation ("Amerix"). The Company also entered into a commitment to fund up to $3,500,000 for an expansion of the existing office facility. The lease has an initial term ending 15 years after the earlier of the completion of the expansion or December 1, 2001 with two ten-year renewal terms at Amerix's option. Annual rent will initially be $2,197,475 and will increase by $355,250 upon completion of the expansion, subject to a reduction if the project costs for the expansion cost are less than $3,500,000. The lease provides for rent increases on the sixth anniversary of the lease and every three years thereafter based on a formula indexed to increases in the CPI, subject to a cap on the increase of 1.04% per annum. -15- 43 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Atrium Companies, Inc. On November 18, 1999, the Company purchased land and a property in Dallas, Texas, and land and two properties in Greenville, Texas for $20,484,168 and entered into a master net lease with Atrium Companies, Inc. ("Atrium"). The Atrium lease has an initial term of twenty years and eight months at an annual rent of $2,075,000, with rent increases at the end of the fifth lease year and every two years thereafter based on a formula indexed to increases in the CPI. The first rent increase is capped at a maximum of 12.5% and each increase thereafter is capped at a maximum of 5%. The lease provides Atrium with purchase options on the 15th and 20th lease anniversaries with such option exercisable at the greater of (i) acquisition cost plus any prepayment premium on any existing mortgage loan (ii) and fair market value, as defined. The Company also purchased a fourth property in Wylie, Texas on which a building is being constructed on a build-to-suit basis. The total purchase price and construction costs are expected to be $8,381,675 with Atrium having the obligation to fund any additional costs necessary to complete the project. Upon the earlier of completion and August 1, 2000, a lease term of 20 years will commence at an annual rent in an amount equal to the Company's total project costs multiplied by 10.75%, with rent increases every two years based on increases in the CPI with each increase capped at a maximum of 5%. On January 4, 2000, the Company obtained a $13,123,000 limited recourse mortgage loan collateralized by a deed of trust and a lease assignment on the Dallas and Greenville properties. The loan provides for monthly interest only payments, at an annual interest rate of 8.7%, for the first twelve months, commencing February 2000, with monthly principal and interest payments of $102,786, thereafter. The loan matures on January, 2010 at which time a balloon payment is scheduled. Fitness Holdings Worldwide, Inc. On December 29, 1999, the Company purchased land and building in Salt Lake City, Utah, assumed an existing lease guaranteed by Fitness Holdings Worldwide, Inc. ("Fitness Holdings") and entered into an agreement to fund an expansion at the Fitness Holdings property. The purchase price and the costs of construction are $5,016,367 with Fitness Holdings having the obligation to fund any excess costs necessary to complete the project. Upon the earlier of completion or May 14, 2000, a lease term of twenty years will commence with annual rent under the Fitness Holdings lease of $526,969 and three five-year renewal options. The lease provides for rent increases commencing in the third lease year and every two years thereafter with such increases based on a formula indexed to the CPI with each increase capped at a maximum of 4%. 11. Equity Investments: The Company holds interests in five limited liability companies at December 31, 1999 (and two at December 31, 1998) in which its ownership interest is 50% or less. All of the underlying investments were formed and are owned with affiliates that have similar investment objectives as the Company. The Company owns a 33.33% interest in CHIP LLC which in December 1998 purchased property that is net leased to Advanced Micro Devices, Inc.. The Company owns interests, purchased in 1999, of 50%, 33.33% and 50% in Gilbert Plastics LLC, Comp LLC, and Carey Norcross LLC, respectively, that net lease properties to Intesys Technologies, Inc., Compucom Systems, Inc. and CheckFree Holdings Corporation, respectively. During 1999 and 1998 the Company held an interest in ET LLC, a limited liability company that net leases a property to Etec Systems, Inc. ("Etec"). The interest in the Etec investment is a 49.99% interest in a building on the Etec property for which construction was completed in July 1999. Corporate Property Associates 12 Incorporated, an affiliate, owns all remaining interests in the Etec property. -16- 44 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued Summarized financial information of the Company's equity investees is as follows: (In thousands)
December 31, 1998 December 31, 1999 ----------------- ----------------- Assets (primarily real estate) $147,327 $260,115 Liabilities (primarily mortgage notes payable 84,458 169,286 -------- -------- Members' equity $ 62,869 $ 90,829 ======== ======== Revenues (primarily rental revenues) $ 2,977 $ 21,966 Expenses (primarily interest on mortgage and depreciation) 1,466 13,446 -------- -------- Net income $ 1,511 $ 8,520 ======== ========
12. Subsequent Events: West Union Corporation On January 12, 2000, the Company purchased land and building in Tempe, Arizona for $5,744,765 and entered into a net lease with West Union Corporation ("West Union"). The lease provides for annual rent of $530,250 with stated rent increases of 14.525% every five years. The initial lease term is fifteen years with a ten year renewal term at the option of West Union. Barjan Products LLC On February 3, 2000, the Company purchased land and a building under construction in Rock Island, Illinois and entered into net lease and construction agency agreements with Barjan Products L.L.C. ("Barjan"). Total purchase price and construction costs are expected to be approximately $11,900,000. During the construction period, Barjan will pay monthly installments based on an amount indexed to project costs advanced by the Company. Upon the earlier of completion of construction or October 1, 2000, a lease term of sixteen years with a ten-year renewal term at Barjan's option will commence at an expected annual rent of $1,164,286 if the entire estimated funding of the build-to-suit project is required. The lease provides for stated rent increases of 6% every three years during the initial term of the lease. Stellex Technologies, Inc. On February 24, 2000, the Company purchased two properties in North Amityville, New York and Valencia, California for $19,329,988 and entered into net leases with two subsidiaries of Stellex Technologies, Inc. ("Stellex"). The lease obligations of the subsidiaries are unconditionally guaranteed be Stellex. The leases have initial terms of twenty years with two ten-year renewal terms at the option of the lessees. Combined annual rent under the Stellex leases is $1,886,934 with rent increases every two years based on a formula indexed to the CPI. 13. Disclosures About Fair Value of Financial Instruments: The carrying amounts of cash, receivables and accounts payable and accrued expenses approximate fair value because of the short maturity of these items. In conjunction with structuring its leases with certain tenants, the Company was granted warrants that will allow the company to purchase common stock of the tenant company at a stated price. To the extent that the tenant companies are not publicly traded companies, the warrants are judged at the time of issuance to be speculative in nature and a nominal cost basis is attributed to them. The Company believes that it is not practicable to estimate the fair value of its stock warrants for closely-held companies. The Company estimates that the fair value of mortgage notes payable at December 31, 1999 was approximately $48,181,000. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates that take into account the credit of the tenants and interest rate risk. -17- 45 CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 14. Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective January 1, 2000, which establishes accounting and reporting standards for derivative instruments. The Company believes that upon adoption SFAS will not have a material impact on the consolidated financial statements. -18- 46
PROPERTIES - ---------- NAME OF LEASE TYPE OF TYPE OF OWNERSHIP OBLIGOR PROPERTY LOCATION INTEREST - ------- -------- -------- -------- ETEC SYSTEMS, INC. Office/Manufacturing Hayward, California Ownership of a 49.99% interest Facilities (under construction) in a building under construction and owned through an interest in a limited liability company (1) BURLINGTON MOTOR Trucking Facility Daleville, Indiana Ownership of land and building CARRIERS, INC. BEST BUY CO., INC. Retail Store Torrance, California Ownership of land and building METAGENICS Research and San Clemente, California Ownership of land and building Development Facility THE BENJAMIN Manufacturing Facility St. Louis, Missouri Ownership of land and building ANSEHL COMPANY CONTRAVES BRASHEAR Manufacturing Pittsburgh, Ownership of land and building SYSTEMS, L.P.(1) Facility Pennsylvania ADVANCED MICRO Manufacturing Sunnyvale, Ownership of a 33 1/3% DEVICES, INC. Facility California interest in a limited liability company owning land and buildings (1) INTESYS Manufacturing Gilbert, Ownership of a 50% interest TECHNOLOGIES, INC. Facility Arizona in a limited liability company owning land and buildings (1) Compucom Systems, Inc. Office/Research Dallas, Texas Ownership of a 33 1/3% interest Facility in a limited liability company owning land and buildings (1) PRODUCTION RESOURCE Industrial/Manufacturing Las Vegas, Nevada Ownership of land and building (1) GROUP LLC Facility CHECKFREE Office/Research Norcross, Georgia Ownership of a 50% interest CORPORATION, INC. Facility in a limited liability company owning land and building (1) BUILDERS' SUPPLY AND Office/Warehouse Harrisburg, Ownership of land and building LUMBER CO., INC. Facility North Carolina SCOTT CO. OF CALIFORNIA Industrial/Manufacturing Gardenia, California Ownership of land and building (1) Facility AMERISERVE FOOD Distribution/Warehouse Burlington, New Jersey Ownership of a 60% interest CORPORATION, INC. Shawnee, Kansas; in a limited liability company Grand Rapids, Michigan; owning land and building (1) and Manassas, Virginia CONSOLIDATED THEATERS Multi-plex Motion Picture Midlothian, Virginia Ownership of land and building (1) HOLDING, G.P. Theater (under construction) AMERIX CORPORATION Office/Research - 1 Columbia, Maryland Ownership of land and building (1) location (under construction) ATRIUM COMPANIES, INC. Industrial/Manufacturing Dallas - 1, Greenville, Ownership of land and building - 3 locations (under - 2 and Wylie - 1, Texas construction) FITNESS HOLDINGS Health Club (under Salt Lake City, Utah Ownership of land and building WORLDWIDE, INC. construction) WEST UNION CORPORATION Office/Research Tempe, Arizona Ownership of land and building (under construction)
-19- 47
BARAJAN PRODUCTS, L.L.C. Industrial/Manufacturing Rock Island, Illinois Ownership of land and building (under construction) STELLEX Office/Manufacturing North Amityville, New York Ownership of land and building TECHNOLOGIES, INC. Facilities and Valencia, California
(1) This property is encumbered by a mortgage note payable. -20- 48 MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Except for limited or sporadic transactions, there is no established public trading market for the Shares of the Company. As of December 31, 1999, there were 10,777 holders of record of the Shares of the Company. The Company is required to distribute annually its Distributable REIT Taxable Income, as defined in the Prospectus, to maintain its status as a REIT. Quarterly dividends paid by the Company since its inception are as follows:
1998 1999 ------------ ------------ First quarter -- .161000 Second quarter -- .162504 Third quarter .147560 .162700 Fourth quarter .159528 .162932 ------------ ------------ $ .307088 .649136 ============ ============
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 for the year ended December 31, 1999 as filed with the Securities and Exchange Commission. 21 EX-21.1 2 SUBSIDIARIES 1 EXHIBIT 21.1 - 26 - 2 SUBSIDIARIES OF REGISTRANT TRUCK (IN) QRS 14-3, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME TRUCK (IN) QRS 14-3, INC. BEST (CA) QRS 14-4, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME BEST (CA) QRS 14-4, INC. META (CA) QRS 14-6, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME META (CA) QRS 14-6, INC. BAC (MO) QRS 14-10, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME BAC (MO) QRS 14-10, INC. CONDUCTOR (CA) QRS 14-11, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME CONDUCTOR (CA) QRS 14-11, INC. CBS (PA) QRS 14-12, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME CBS (PA) QRS 14-12, INC. QRS 14-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 14-PAYING AGENT, INC. MOLD (AZ) QRS 14-13, INC. A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME MOLD (AZ) QRS 14-13, INC. THEATRE (DE) QRS 14-14, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME THEATRE (DE) QRS 14-14, INC. COMP (TX) QRS 14-15, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME COMP (TX) QRS 14-15, INC. PLAY (CA) QRS 14-16, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME PLAY (CA) QRS 14-16, INC. NOR (GA) QRS 14-17, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME NOR (GA) QRS 14-17, INC. CONSTRUCT (CA), INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME CONSTRUCT (CA), INC. FAST (DE) QRS14-22, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME FAST (DE) QRS14-22, INC. STORAGE (DE) QRS 14-23, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME STORAGE (DE) QRS 14-23, INC. MOVIE (VA) QRS 14-24, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME MOVIE (VA) QRS 14-24, INC. FRAME (TX) QRS 14-25, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME FRAME (TX) QRS 14-25, INC. PANE (TX) QRS 14-26, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME PANE (TX) QRS 14-26, INC. WU (AZ) QRS 14-27, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME WU (AZ) QRS 14-27, INC. FIT (UT) QRS 14-28, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME FIT (UT) QRS 14-28, INC. STOP (IL) QRS 14-30, INC., A WHOLLY-OWNED SUBSIDIARY OF REGISTRANT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE AND DOING BUSINESS UNDER THE NAME STOP (IL) QRS 14-30, INC. - 27 - EX-23.1 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 - 28 - 2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-11 (File No. 333-76761) of Corporate Property Associates 14 Incorporated and Subsidiaries of our report dated April 7, 2000, relating to the consolidated financial statements and financial statement schedule which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP New York, New York April 7, 2000 - 29 - EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 91,420,457 0 0 0 0 91,420,457 185,985,523 1,152,595 331,062,953 9,549,570 49,517,692 0 0 29,460 257,848,532 331,062,953 0 10,022,604 0 0 3,741,356 0 1,352,113 7,679,169 0 7,678,169 0 0 0 7,678,169 .39 .39
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