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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended JUNE 30, 2002
of
W. P. CAREY & CO. LLC
("WPC")
A DELAWARE Limited Liability Company
IRS Employer Identification No. 13-3912578
SEC File Number 001-13779
50 Rockefeller Plaza,
New York, New York 10020
(212) 492-1100
WPC has LISTED SHARES registered pursuant to Section 12(b) of the Act.
WPC is registered on the NEW YORK STOCK EXCHANGE and the PACIFIC STOCK
EXCHANGE.
WPC does not have any Securities registered pursuant to Section 12(g)
of the Act.
WPC (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.
W. P. Carey & Co. LLC has 36,155,050 Listed Shares, no par value
outstanding at August 13, 2002.
W. P. CAREY & CO. LLC
INDEX
Page No.
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 2
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2002 and 2001 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 5-6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 25
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 26
Item 6. - Exhibits and Reports on Form 8-K 26
Signatures 27
*The summarized financial information contained herein is unaudited; however, in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
-1-
W.P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
June 30, 2002 December 31, 2001
(Unaudited) (Note)
ASSETS:
Real estate leased to others:
Real estate leased to others under the operating method,
net of accumulated depreciation of
$37,824 and $32,401 at June 30, 2002 and December 31, 2001 $ 444,005 $ 426,842
Net investment in direct financing leases 213,144 258,041
--------- ---------
Real estate leased to others 657,149 684,883
Operating real estate, net of accumulated depreciation of $2,341
and $2,076 at June 30, 2002 and
December 31, 2001 5,936 5,990
Real estate under construction and redevelopment 2,863 2,797
Equity investments 55,725 50,629
Assets held for sale 25,688 23,693
Cash and cash equivalents 12,906 8,870
Due from affiliates 22,774 18,789
Goodwill 40,964 40,964
Intangible assets, net of accumulated amortization 48,194 51,846
Other assets 18,870 27,422
--------- ---------
Total assets $ 891,069 $ 915,883
========= =========
LIABILITIES, MINORITY INTEREST AND
MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 172,970 $ 200,515
Mortgage notes payable on properties held for sale 10,751 --
Notes payable 69,000 95,000
Accrued interest 1,893 1,312
Dividends payable 15,347 14,836
Due to affiliates 4,581 16,790
Accrued income taxes 3,633 3,020
Deferred income taxes 11,266 6,608
Other liabilities 13,666 17,343
--------- ---------
Total liabilities 303,107 355,424
--------- ---------
Minority interest 882 794
--------- ---------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 35,773,533 and 34,742,436
shares issued and outstanding at June 30,
2002 and December 31, 2001 687,076 664,751
Dividends in excess of accumulated earnings (90,340) (97,200)
Unearned compensation (7,097) (4,454)
Accumulated other comprehensive loss (2,559) (3,432)
--------- ---------
Total members' equity 587,080 559,665
--------- ---------
Total liabilities, minority interest and members' equity $ 891,069 $ 915,883
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Note: The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited consolidated financial statements at that date.
-2-
W.P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share and share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Management income from affiliates $ 18,598 $ 13,505 $ 32,083 $ 21,048
Rental income 12,612 11,666 25,377 23,422
Interest income from direct financing leases 6,144 7,563 12,563 15,149
Other income 2,318 502 2,633 3,213
Other interest income 491 292 1,026 535
Revenue from other business operations 1,427 1,447 2,718 2,832
-------- -------- -------- --------
41,590 34,975 76,400 66,199
-------- -------- -------- --------
Expenses:
Interest 4,441 5,119 8,869 10,860
Depreciation 2,870 2,659 5,590 5,258
Amortization 2,310 3,467 4,620 6,929
General and administrative 9,339 6,648 16,714 12,886
Property expenses 1,148 2,745 3,189 4,020
Impairment loss on real estate 3,800 -- 3,800 --
Operating expenses from other business operations 1,182 1,109 2,351 2,303
-------- -------- -------- --------
25,090 21,747 45,133 42,256
-------- -------- -------- --------
Income from continuing operations before minority interest,
equity investments, gain on sale and income taxes 16,500 13,228 31,267 23,943
Minority interest in loss 29 18 44 62
Income from equity investments 442 778 629 2,230
-------- -------- -------- --------
Income from continuing operations before
gain on sale and income taxes 16,971 14,024 31,940 26,235
Gain on sales of real estate and investments 11,180 224 12,423 441
-------- -------- -------- --------
Income from continuing operations before income taxes 28,151 14,248 44,363 26,676
Provision for income taxes (4,422) (2,905) (7,316) (3,085)
-------- -------- -------- --------
Income from continuing operations 23,729 11,343 37,047 23,591
Discontinued operations:
Income from operations of discontinued properties 384 409 795 800
Impairment loss on properties held for sale (521) -- (521) --
-------- -------- -------- --------
Net income $ 23,592 $ 11,752 $ 37,321 $ 24,391
======== ======== ======== ========
-Continued-
-3-
W.P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share and share amounts)
(continued)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings per share:
Income from continuing operations $ .66 $ .33 $ 1.04 $ .69
Discontinued operations -- .01 .01 .02
----------- ----------- ----------- -----------
Net income $ .66 $ .34 $ 1.05 $ .71
=========== =========== =========== ===========
Diluted earnings per share:
Income from continuing operations $ .65 $ .33 $ 1.03 $ .68
Discontinued operations -- .01 .01 .02
----------- ----------- ----------- -----------
Net income $ .65 $ .34 $ 1.04 $ .70
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 35,588,117 34,402,356 35,440,294 34,336,036
=========== =========== =========== ===========
Diluted 36,142,003 34,719,525 36,043,107 34,652,212
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income: $23,592 $11,752 $37,321 $24,391
------- ------- ------- -------
Other comprehensive income (loss):
Change in unrealized gain on marketable securities (12) 10 (15) 135
Foreign currency translation income (loss) 1,055 (122) 888 (710)
------- ------- ------- -------
Other comprehensive income (loss) 1,043 (112) 873 (575)
------- ------- ------- -------
Comprehensive income $24,635 $11,640 $38,194 $23,816
======= ======= ======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 37,321 $ 24,391
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Income from discontinued operations (795) (800)
Depreciation and amortization 10,621 12,571
Non-cash settlement income (2,097) --
Gain on sale of real estate and equity investments, net (12,423) (441)
Minority interest in loss (44) (62)
Straight-line rent adjustments and other noncash rent adjustments (336) (744)
Equity income in excess of distributions (35) (388)
Management income received in shares of affiliates (6,675) (6,751)
Costs paid by issuance of shares 119 70
Writeoff of cumulative straight-line rent adjustment -- 1,321
Impairment losses on real estate and properties held for sale 4,321 --
Amortization of unearned compensation 1,465 958
Structuring fees receivable (4,800) (2,303)
Deferred acquisition fees received 916 --
Net change in other operating assets and liabilities 1,376 (4,598)
-------- --------
Net cash provided by continuing operations 28,934 23,224
Net cash provided by discontinued operations 853 828
-------- --------
Net cash provided by operating activities 29,787 24,052
-------- --------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 1,614 689
Proceeds from sale of property and investments 34,540 7,522
Release of funds from escrow in connection with the sale of a property 9,366 --
Purchases of real estate and equity investments (504) (8,591)
Additional capital expenditures (538) (1,469)
Payment of deferred acquisition fees (524) (520)
-------- --------
Net cash provided by (used in) investing activities 43,954 (2,369)
-------- --------
Cash flows from financing activities:
Dividends paid (29,949) (28,680)
Contributions from minority interest -- 162
Proceeds from issuance of shares, net 6,505 1,836
Payments of mortgage principal (4,296) (3,845)
Prepayments of mortgage principal and notes payable (73,564) (34,641)
Proceeds from mortgages payable and note payable 33,000 44,459
Payment of accrued preferred distributions (1,423) --
Payment of financing costs (7) (1,595)
Purchases of treasury stock -- (325)
-------- --------
Net cash used in financing activities (69,734) (22,629)
-------- --------
Effect of exchange rate changes on cash 29 (43)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,036 (989)
Cash and cash equivalents, beginning of period 8,870 10,165
-------- --------
Cash and cash equivalents, end of period $ 12,906 $ 9,176
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) -
CONTINUED
(In thousands, except share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC in
June 2000, the Company has an obligation to issue up to an
additional 2,000,000 shares over four years, if specified
performance criteria are achieved. The performance criteria
for the years ended December 31, 2001 and 2000 were achieved,
and as a result 500,000 shares were issued during each of the
six-month periods ended June 30, 2002 and 2001. The cost
attributable to such shares of $10,440 in 2002 and $8,145 in
2001 was included in goodwill in the accompanying condensed
consolidated financial statements.
Effective January 1, 2001, the CPA(R) Partnerships became
wholly-owned subsidiaries of the Company when 151,964 shares
($2,811) were issued in consideration for acquiring the
remaining special partner interests.
B. During each of the six-month periods ended June 30, 2002 and
2001, the Company issued restricted shares of $67 to
affiliated parties, including directors, in consideration of
services rendered. Restricted shares valued at $3,870 and
$1,208, respectively, were issued to employees and recorded as
unearned compensation during the six-month periods ended June
30, 2002 and 2001. Issued unvested restricted shares and
options of $17 and $106, respectively, issued in prior periods
were forfeited during the six-month periods ended June 30,
2002 and 2001. Included in compensation expense for the
six-month periods ended June 30, 2002 and 2001 were $1,465 and
$958, respectively, relating to restricted shares and options
held by employees.
C. In connection with the sale of a property during the six-month
period ended June 30, 2001, the Company received a note
receivable of $700 in partial consideration for the sale.
D. During the six-month period ended June 30, 2001, the Company
purchased an equity interest in an affiliate, W. P. Carey
International LLC in consideration for issuing a promissory
note of $1,000.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share and per share amounts)
Note 1: Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of W. P.
Carey & Co. LLC ("the Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant inter-entity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
As more fully described in Note 10, effective January 1, 2002, the Company no
longer amortizes goodwill and indefinite-lived assets.
Certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Note 2. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
and six-month periods ended June 30, 2002 and 2001 were calculated as follows:
Three Months Ended June 30,
---------------------------
2002 2001
---- ----
Net income $ 23,592 $ 11,752
Weighted average shares - basic 35,588,117 34,402,356
Effect of dilutive securities: Stock options and warrants 553,886 317,169
Weighted average shares - diluted 36,142,003 34,719,525
=========== ===========
Basic earnings per share:
Income from continuing operations $ .66 $ .33
Discontinued operations -- .01
----------- -----------
Net income $ .66 $ .34
=========== ===========
Diluted earnings per share:
Income from continuing operations $ .65 $ .33
Discontinued operations -- .01
----------- -----------
Net income $ .65 $ .34
=========== ===========
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Net income $ 37,321 $ 24,391
Weighted average shares - basic 35,440,294 34,336,036
Effect of dilutive securities: Stock options and warrants 602,813 316,176
----------- -----------
Weighted average shares - diluted 36,043,107 34,652,212
=========== ===========
Basic earnings per share:
Income from continuing operations $ 1.04 $ .69
Discontinued operations .01 .02
----------- -----------
Net income $ 1.05 $ .71
=========== ===========
-7-
W. P. CAREY & CO. LLC
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Diluted earnings per share:
Income from continuing operations $1.03 $.68
Discontinued operations .01 .02
----- ----
Net income $1.04 $.70
===== ====
Note 3. Transactions with Related Parties:
The Company earns fees as the Advisor to the following real estate investment
trusts ("REITs"), Carey Institutional Properties Incorporated ("CIP(R)"),
Corporate Property Associates 12 Incorporated ("CPA(R):12"), Corporate Property
Associates 14 Incorporated ("CPA(R):14") and Corporate Property Associates 15
Incorporated ("CPA(R):15") (collectively, the "CPA(R) REITs"). Through April 30,
2002, the Company also earned fees as Advisor to Corporate Property Associates
10 Incorporated ("CPA(R):10"). Effective May 1, 2002, CPA(R):10 was merged into
CIP(R). Under the advisory agreements with the CPA(R) REITs, the Company
performs services related to the day-to-day management of the CPA(R) REITs and
transaction-related services. In addition, the Company's broker-dealer
subsidiary earns fees in connection with the "best efforts" public offering of
CPA(R):15. The Company earns an asset management fee of -1/2 of 1% per annum of
Average Invested Assets, as defined in the Agreements, for each CPA(R) REIT and,
based upon certain performance criteria for each CPA(R) REIT, may be entitled to
receive a performance fee of -1/2 of 1% of Average Invested Assets. The Company
is reimbursed for the cost of personnel provided for the administration of the
CPA(R) REITs.
For the three-month periods ended June 30 2002 and 2001, asset-based fees and
reimbursements earned were $11,052 and $9,944, respectively, and transaction
fees earned were $7,546 and $3,562, respectively, in connection with structuring
and negotiating real estate acquisitions and mortgage financing for the CPA(R)
REITs. For the six-month periods ended June 30, 2002 and 2001, asset-based fees
and reimbursements earned were $18,786 and $15,297, respectively, and
transaction fees earned were $13,297 and $5,751, respectively.
The Company had not recognized any performance fees under its Advisory Agreement
with CPA(R):10 since the Company's management operations were acquired in June
2000. In April 2002, CPA(R):10 met its "preferred return" at which time the
performance criterion was met and the Company earned a performance fee of
$1,463, including $267 relating to 2002. In addition, the Company earned
disposition fees of $248 from CPA(R):10, representing a percentage of sales
proceeds from CPA(R):10 property sales for the period from June 28, 2000 through
April 30, 2002, the date that CPA(R):10 and CIP(R) merged. The performance
criteria for CPA(R):14 were satisfied for the first time during the three months
ended June 30, 2001, resulting in the Company's recognition of $3,112 for the
period December 1997 through March 2001.
In connection with the acquisition of the majority interests in the CPA(R)
partnerships on January 1, 1998, a CPA(R) partnership had not achieved the
specified cumulative return as of the acquisition date. The subordinated
preferred return was payable to the former corporate general partner if the
Company achieved a closing price equal to or in excess of $23.11 for five
consecutive trading days. On December 31, 2001, the closing price criterion was
met, and in January 2002 the $1,423 subordinated preferred return was paid. The
subordinated preferred return was included in due to affiliates as of December
31, 2001 in the accompanying condensed consolidated financial statements.
Note 4. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
lease revenues for the six-month periods ended June 30, 2002 and 2001 are as
follows:
2002 2001
---- ----
Per Statements of Income:
Rental income $25,377 $23,422
Interest income from direct financing leases 12,563 15,149
Adjustment:
Share of leasing revenues applicable to minority interests (376) (241)
Share of leasing revenues from equity investments 3,434 3,411
------- -------
$40,998 $41,741
======= =======
-8-
W. P. CAREY & CO. LLC
For the six months ended June 30, 2002 and 2001, the Company earned its net
leasing revenues (i.e., rental income and interest income from direct financing
leases) from more than 90 lessees. A summary of net leasing revenues is as
follows:
2002 % 2001 %
---- - ---- -
Dr Pepper Bottling Company of Texas $ 2,195 5% $ 2,159 5%
Detroit Diesel Corporation 2,079 5 2,031 5
Gibson Greetings, Inc., a wholly-owned subsidiary
of American Greetings, Inc. 2,069 5 2,049 5
Federal Express Corporation (a) 1,429 3 1,286 3
Bouygues Telecom, S.A. (b) 1,412 3 461 1
Orbital Sciences Corporation 1,328 3 1,328 3
Livho, Inc. 1,284 3 1,260 3
Quebecor Printing, Inc. 1,281 3 1,285 3
America West Holdings Corp. 1,269 3 1,269 3
AutoZone, Inc. 1,169 3 1,239 3
The Gap, Inc. 1,103 3 1,103 3
Sybron International Corporation 1,082 3 1,081 3
Checkfree Holdings Corporation Inc. (a) 1,054 3 1,044 2
Lockheed Martin Corporation 978 2 1,159 3
Unisource Worldwide, Inc. 866 2 867 2
AP Parts International, Inc. 850 2 808 2
CSS Industries, Inc. 829 2 803 2
Peerless Chain Company 829 2 732 2
Information Resources, Inc. (a) 822 2 822 2
Sybron Dental Specialties Inc. 807 2 807 2
Brodart, Co. 760 2 760 2
Red Bank Distribution, Inc. -- -- 790 2
Sprint Spectrum, L.P. 712 2 582 1
AT&T Corporation 630 2 380 1
Eagle Hardware & Garden, Inc., a wholly-owned
subsidiary of Lowe's Companies Inc. 628 2 545 1
United States Postal Service 617 2 667 2
BellSouth Telecommunications, Inc. 612 1 612 1
Cendant Operations, Inc. 537 1 537 1
Anthony's Manufacturing Company, Inc. 510 1 479 1
Other (b) 11,257 28 12,796 31
------- --- ------- ---
$40,998 100% $41,741 100%
======= === ======= ===
(a) Represents the Company's proportionate share of lease revenue from its
equity investment.
(b) Includes proportionate share of lease revenues from the Company's
equity investments and net of proportionate share applicable to
minority interest owners.
Note 5. Equity Investments:
The Company owns 780,269 units of the operating partnership of MeriStar
Hospitality Corporation ("MeriStar"), a publicly-traded real estate investment
trust which primarily owns hotels, and which is being accounted for under the
equity method. As of June 30, 2002, the Company's carrying value was $10,470.
The Company has the right to convert its units in the operating partnership to
shares of common stock in MeriStar at any time on a one-for-one basis.
MeriStar's financial statements for the three-month period ended March 31, 2002
reported total assets of $3,016,523 and shareholders' equity of $1,021,024. For
the six-month period ended June 30, 2002, MeriStar reported revenues of $537,919
and a net loss of $6,970.
The Company owns equity interests in two limited partnerships and two limited
liability companies that each own real estate net leased to a single tenant,
with the remaining interests owned by affiliates. The Company also owns
interests in four CPA(R) REITs and a 10% interest in W. P. Carey International
LLC ("WPCI"), an investment banking firm which structures net lease transactions
outside of the United States. The Company's interests in the CPA(R) REITs are
-9-
W. P. CAREY & CO. LLC
accounted for under the equity method due to the Company's ability to exercise
significant influence as the Advisor to the CPA(R) REITs. The Company also
exercises significant influence over WPCI. The CPA(R) REITs are publicly
registered and file financial statements with the United States Securities and
Exchange Commission. As of June 30, 2002, the Company owns 486,425 CIP(R) shares
(including 16,890 shares received in exchange for 20,000 shares of CPA(R):10 in
connection with the merger of CPA(R):10 and CIP(R)), 486,764 CPA(R):12 shares,
736,107 CPA(R):14 shares and 20,000 CPA(R):15 shares.
Combined financial information of the affiliated equity investees is summarized
as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Assets (primarily real estate) $2,565,570 $1,794,229
Liabilities (primarily mortgage notes payable) 1,200,447 804,383
Partners' capital/Shareholders' equity 1,365,123 989,846
Six Months Ended March 31,
--------------------------
2002 2001
---- ----
Revenues (primarily rental revenue) $ 114,784 $ 107,916
Expenses (primarily interest and depreciation) (77,548) (65,038)
--------- ---------
Net income $ 37,236 $ 42,878
========= =========
Note 6. Segment Reporting:
The Company operates in two business segments - management of affiliates and
real estate operations. The two segments are summarized as follows:
Six Months ended June 3 Management Real Estate Other(1) Total Company
- ----------------------- ---------- ----------- -------- -------------
Revenues:
2002 $32,083 $41,599 $2,718 $76,400
2001 21,048 42,319 2,832 66,199
Operating, interest, depreciation and amortization expenses
(excluding provision for income taxes):
2002 $19,496 $23,286 $2,351 $45,133
2001 15,945 24,008 2,303 42,256
Income from equity investments:
2002 $151 $ 478 - $ 629
2001 141 2,089 - 2,230
Net operating income(2)(3)(4):
2002 $12,738 $18,791 $ 367 $31,896
2001 5,244 20,400 529 26,173
Long-lived assets:
June 30, 2002 $67,007 $692,950 $5,936 $765,893
December 31, 2001 64,286 721,895 5,990 792,171
Total assets:
June 30, 2002 $145,457 $738,997 $6,615 $891,069
December 31, 2001 132,824 775,062 7,997 915,883
(1) Primarily consists of the Company's other business operations.
(2) Management net operating income includes charges for amortization of
intangibles of $3,653 for the six-month period ended June 30, 2002 and
amortization of intangibles and goodwill of $5,952 for the six-month
period ended June 30, 2001.
-10-
W. P. CAREY & CO. LLC
(3) Net operating income excludes gains and losses on sales, provision for
income taxes and minority interest
(4) Real estate net operating income excludes income from discontinued
operations of $795 and impairment on properties held for sale of $521
for the six-month period ended June 30, 2002 and income from
discontinued operations of $800 for the six-month period ended June 30,
2001.
Note 7. Gain on Sale of Real Estate Interests:
During the six-month period ended June 30, 2002, the Company sold six properties
in Urbana, Illinois; Maumelle, Arkansas; Burnsville, Minnesota; Colville,
Washington; McMinnville, Tennessee, and Casa Grande, Arizona for $10,455 and
recognized a net gain on sales of $1,126. The Urbana, Maumelle, Burnsville and
Casa Grande properties were classified as held for sale in the accompanying
consolidated balance sheet as of December 31, 2001. The operations of the
Colville property have been classified as discontinued operations, and the
related loss on sale of $34 is included in income from discontinued operations
in the accompanying consolidated financial statements for the three-month and
six-month periods ended June 30, 2002.
In 1999, subsequent to the termination of a lease, the Company began to consider
alternatives for redeveloping and redirecting the use of a 18.3 acre site it
owned in Los Angeles, California for use by a different type of lessee that
would allow the Company to create additional value with respect to the property.
While considering various alternatives, the Company was approached by the Los
Angeles Unified School District ("School District"), which was interested in
acquiring the property, on which it would construct a complete working public
high school. At December 31, 2001, the property was held for sale. In January
2002, the Company entered into a purchase and sales agreement with the School
District for $24,000 and in June 2002 the sale was completed. Upon completion of
the sale, the Company recognized a gain on sale of $11,160.
In addition to the sale of the property, a wholly-owned indirect subsidiary of
the Company has entered into a build-to-suit development management agreement
with the School District with respect to the development and construction of a
new high school on the property. The subsidiary, in turn, has engaged a general
contractor to undertake the construction project. Under the build-to-suit
agreement, the subsidiary's role is that of a development manager pursuant to
provisions of the California Education Code. Liability for completion of the
school is the responsibility of the general contractor, who is providing payment
and performance bonds for the benefit of the School District and the subsidiary,
although the subsidiary may be contingently liable to the School District. The
Company's maximum liability under the build-to-suit agreement is the amount of
build-to-suit management fees paid to the Company, up to $3,500. Upon delivery
of the school, the Company is to be released from all contractual liability and
in any event the general contractor is liable for all construction warranties.
Under the build-to-suit agreement, the subsidiary and the Company expressly have
no liability. Under the construction agreement with the general contractor, a
subsidiary is acting as a conduit for the payments made by School District and
is only obligated to make payments to the general contractor based on payments
received, except for a maximum guarantee of up to $2,000 for nonpayment.
Due to the Company's continuing involvement with the build-to-suit of the
property, the recognition of gain on sale and the subsequent build-to-suit fee
income on the build-to-suit project is being recognized using a blended profit
margin under the percentage completion method of accounting, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for
Sales of Real Estate" and Statement of Position No. 81-1, "Accounting for
Performance of Construction - Type and Certain Production - Type Contracts." The
build-to-suit development agreement provides for fees of up to $4,700 and an
early completion incentive fee of $2,000 if the project is completed before
September 1, 2004, $100 of which the subsidiary would be obligated to share with
the minority interest owner of the subsidiary. The incentive fee is not included
in the percentage of completion calculation. In addition, $2,000 of the gain on
sale has been deferred and will be recognized only when the Company is released
from its $2,000 guarantee commitment. For the periods ended June 30, 2002, the
Company recognized $69 of build-to-suit development fee management income
subsequent to the sale of the property.
For tax purposes, the transaction is structured as a Section 1033 exchange
which, under the Internal Revenue Code, would allow the Company to acquire
like-kind real properties within a specified period in order to defer a taxable
gain to shareholders of approximately $20,000. If a like-kind exchange is
accomplished, the taxable gain will not be recognized until the replacement
properties acquired are subsequently sold.
During the six months ended June 30, 2001, the Company sold seven properties and
an equity investment in a real estate partnership for proceeds of $8,222
(including a note for $700) and recognized net gain on sales of $441.
Note 8. Impairment Loss on Real Estate:
-11-
W. P. CAREY & CO. LLC
The Company owns a property in Winona, Minnesota leased to Peerless Chain
Company ("Peerless"). Based on a deterioration in the financial condition of
Peerless and its inability to meet its lease obligations, the property was
written down to its estimated fair value and an impairment loss of $3,800 was
recognized in June 2002.
The Company owns a property located in College Station, Texas leased to Texas
Digital Systems, Inc. ("Digital"). The Company has entered into an agreement
with Digital to sell the property for $844. The property sale is expected to
close during 2002 and is classified as held for sale in the accompanying
condensed consolidated financial statements as of June 30, 2002. The property
value has been written down to reflect the estimated net sales proceeds and an
impairment loss on properties held for sale of $521 was recognized in June 2002
and included in discontinued operations for the periods ended June 30, 2002.
Note 9. Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective for financial statements issued for fiscal years
beginning after December 15, 2001, the net income and gain/(loss) on sales of
real estate for properties sold or held for sale are to be reflected in the
consolidated statements of operations as "Discontinued Operations" for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the Company's commitment to a plan of disposition after
the date it is initially applied (January 1, 2002).
As of June 30, 2002, the operations of nine properties which have been sold or
are held for sale have been classified as discontinued operations. A summary of
the results of operations of those properties for the three-month and six-month
periods ended June 30, 2002 and 2001 is as follows:
Three Months Ended June 30,
---------------------------
2002 2001
---- ----
Revenues (primarily rental income and interest income from direct
financing lease) $ 691 $ 682
Expenses (primarily interest and depreciation) (273) (273)
Impairment loss on real estate (521) --
Loss on sale (34) --
----- -----
(Loss) income from discontinued operations $(137) $ 409
===== =====
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Revenues (primarily rental income and interest income from direct
financing lease) $1,390 $1,355
Expenses (primarily interest and depreciation) (561) (555)
Impairment loss on real estate (521) --
Loss on sale (34) --
------ ------
Income from discontinued operations $ 274 $ 800
====== ======
Note 10. Goodwill and Intangible Assets:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Other Intangibles," which was adopted by the Company as of January 1, 2002.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets no longer be amortized and must be tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and are
amortized over their useful lives.
-12-
W. P. CAREY & CO. LLC
The Company tests goodwill for impairment at least annually using a two-step
process. To identify any impairments, the Company first compares the estimated
fair value of the reporting unit (management services segment) with its carrying
amount, including goodwill. The Company calculates the estimated fair value of
the management services segment by applying a multiple, based on comparable
companies, to earnings. If the fair value of the management services segment
exceeds its carrying amount, goodwill is considered not impaired. If the
carrying amount of the management services unit exceeds its estimated fair
value, then the second step is performed to measure the amount of impairment
loss.
For the second step, the Company would compare the implied fair value of the
goodwill with its carrying amount and record an impairment charge for the excess
of the carrying amount over the fair value. The implied fair value of the
goodwill is determined by allocating the estimated fair value of the management
services segment to its assets and liabilities. The excess of the estimated fair
value of the management services segment over the amounts assigned to its assets
and liabilities is the implied fair value of the goodwill. In connection with
the adoption of SFAS No. 142 on January 1, 2002, the Company performed its
annual test for impairment of its management services segment, the reportable
unit of measurement, and concluded that the goodwill is not impaired.
With the acquisition of real estate management operations in 2000, the Company
allocated a portion of the purchase price to goodwill and other identifiable
intangible assets. In adopting SFAS No. 142, the Company discontinued its
amortization of existing goodwill and indefinite-lived assets.
Goodwill and other intangible assets as of June 30, 2002 are summarized as
follows:
Gross Carrying Amount Accumulated Amortization
--------------------- ------------------------
Amortized intangible assets:
Management contracts $59,135 $(14,916)
======= ========
Unamortized goodwill and indefinite-lived intangible assets:
Goodwill $40,964
Trade name 3,975
-------
Total $44,939
=======
Included in goodwill is $3,389 which prior to January 1, 2002 was recorded as
workforce. Trade name had previously been amortized using a ten-year life;
however, upon adoption of SFAS No. 142, trade name was determined to have an
indefinite useful life because it is expected to generate cash flows
indefinitely.
A summary of the effect of amortization of goodwill and intangible assets on
reported earnings for the three-month and six-month periods ended June 30, 2002
and 2001 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Goodwill amortization -- $ 845 -- $ 2,064
Trade name amortization -- 118 -- 235
Management contracts amortization $ 1,826 1,826 $ 3,653 3,653
Net income 23,592 11,752 37,321 24,391
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $23,592 $11,752 $37,321 $24,391
Add back: Goodwill amortization -- 845 -- 2,064
Trade name amortization -- 118 -- 235
------- ------- ------- -------
Adjusted net income $23,592 $12,715 $37,321 $26,690
======= ======= ======= =======
Basic earnings per share:
Reported net income $ .66 $ .34 $ 1.05 $ .71
Add back: Goodwill amortization -- .02 -- .06
Trade name amortization -- -- -- .01
------- ------- ------- -------
Adjusted basic earnings per share $ .66 $ .36 $ 1.05 $ .78
======= ======= ======= =======
-13-
W. P. CAREY & CO. LLC
Diluted earnings per share:
Reported net income $ .65 $ .34 $ 1.04 $ .70
Add back: Goodwill amortization -- .02 -- .06
Trade name amortization -- -- -- .01
------- ------- ------- -------
Adjusted diluted earnings per share $ .65 $ .36 $ 1.04 $ .77
======= ======= ======= =======
Amortization of intangibles for the next five years is estimated to be $7,280 in
2002; $6,686 in 2003 and 2004; $6,596 in 2005 and $4,519 in 2006.
Note 11. Accounting Pronouncements:
In July 2001, FASB issued SFAS No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangibles," which establish accounting and reporting
standards for business combinations and certain assets and liabilities acquired
in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
the Company's financial statements. The effect of SFAS No. 142 is described in
Note 10.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on the Company's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold have been presented as a discontinued operation for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the Company's commitment to a plan of disposition after
the date it is initially applied (January 1, 2002). The effect of SFAS No. 144
on the Company's financial statements is described in Note 9.
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, the Company will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Company does not expect SFAS No. 146 to have a material effect on the
Company's financial statements.
Note 12. Subsequent Events:
On July 1, 2002, the Company sold six properties leased to Saint-Gobain
Corporation ("Saint-Gobain") located in New Haven, Connecticut; Mickelton, NJ;
Aurora, Ohio; Mantua, Ohio and Bristol, Rhode Island for approximately $26,000.
The Company used approximately $10,751 of the sales proceeds to satisfy the
limited recourse mortgage loan on the Saint-Gobain properties.
-14-
W. P. CAREY & CO. LLC
The net sales proceeds of the Saint-Gobain sale have been held by an
intermediary in an escrow account for the purpose of entering into a Section
1031 noncash exchange which, under the Internal Revenue Code, would allow the
Company to acquire like-kind real properties within a stated period in order to
defer a taxable gain of approximately $11,300. If a like-kind exchange is
accomplished, the taxable gain to shareholders will not be recognized until the
properties acquired using the proceeds in the escrow account are sold.
The Company also sold a property in Fredericksburg, Virginia for $700.
The Saint-Gobain and Federicksburg properties have been classified as assets
held for sale and the results of operations of the properties are included in
income from discontinued operations in the accompanying condensed consolidated
financial statements (also see Note 9).
On August 2, 2002, the Company entered into a purchase and sales agreement to
sell its hotel property in Petoskey, Michigan for $3,000.
-15-
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except share and per share amounts)
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto as of June 30, 2002 of W. P.
Carey & Co. LLC and its subsidiaries ("WPC") included in this quarterly report
and WPC's Annual Report on Form 10-K for the year ended December 31, 2001. This
quarterly report contains forward looking statements. Such statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievement of WPC to be materially different
from the results of operations or plans expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by WPC that the results or conditions described in such
statements or the objectives and plans of WPC will be achieved. Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2001 provides a
description of WPC's business objectives, strategies and risk factors which
could affect future operating results.
Certain accounting policies are critical to the understanding of WPC's financial
condition and results of operations. Management believes that an understanding
of financial condition and results of operations requires an understanding of
accounting policies relating to the use of estimates and revenue recognition.
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, WPC must assess its ability to collect rent and
other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because WPC's real estate operations have a limited number
of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods.
WPC also uses estimates and judgments when evaluating whether long-lived assets
are impaired. When events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, Management performs projections of
undiscounted cash flows, and if such cash flows are insufficient, the assets are
adjusted (i.e., written down) to their estimated fair value. An analysis of
whether a real estate asset has been impaired requires Management to make its
best estimate of market rents, residual values and holding periods. In its
evaluations, WPC generally obtains market information from outside sources;
however, such information requires Management to determine whether the
information received is appropriate to the circumstances. As WPC's investment
objectives are to hold properties on a long-term basis, holding periods used in
the analyses generally range from five to ten years. Depending on the
assumptions made and estimates used, the future cash flow projected in the
evaluation of long-lived assets can vary within a range of outcomes. WPC will
consider the likelihood of possible outcomes in determining the best possible
estimate of future cash flows. Because most of WPC's properties are leased to
one tenant, WPC is more likely to incur significant writedowns when
circumstances change because of the possibility that a property will be vacated
in its entirety and, therefore, it is different than the risks related to
leasing and managing multi-tenant properties. Events or changes in circumstances
can result in further noncash writedowns and impact the gain or loss ultimately
realized upon sale of the assets.
In connection with the net lease real estate asset management business, WPC
earns transaction and asset-based fees. Transaction fees are primarily earned in
connection with investment banking services provided in connection with
structuring acquisitions, refinancing and dispositions on behalf of the
affiliated real estate investment trusts. Transaction fees are earned upon
consummation of a transaction, that is, when a purchase has been completed by
the affiliate. Completion of a transaction includes determining that the
purchaser and seller are bound by a contract and all substantive conditions of
closing have been performed. When these conditions are met, acquisition-based
services have been completed and the fees are recognized.
Asset-based management services are earned when performed. A portion of the fees
are subject to subordination provisions pursuant to the Advisory Agreements and
are based on specific performance criteria. In connection with determining
whether management and performance fees are recorded as revenue, Management
performs analyses on a quarterly basis to measure whether subordination
provisions have been met. Revenue is only recognized when the specific
performance criteria are achieved.
-16-
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
WPC acquired the business operations of Carey Management in 2000, and accounted
for the acquisition as a purchase. The excess of the purchase price over the
fair value of the net assets acquired was recorded as goodwill. Commencing in
2002,WPC tests goodwill for impairment at least annually using a two-step
process. To identify any impairments, WPC first compares the estimated fair
value of the reporting unit (management services segment) with its carrying
amount, including goodwill. WPC calculates the estimated fair value of the
management services segment by applying a multiple, based on comparable
companies, to earnings. If the fair value of the management services segment
exceeds its carrying amount, goodwill is considered not impaired. If the
carrying amount of the management services unit exceeds its estimated fair
value, then the second step is performed to measure the amount of impairment
loss.
For the second step, WPC would compare the implied fair value of the goodwill
with its carrying amount and record an impairment charge for the excess of the
carrying amount over the fair value. The implied fair value of the goodwill is
determined by allocating the estimated fair value of the management services
segment to its assets and liabilities. The excess of the estimated fair value of
the management services segment over the amounts assigned to its assets and
liabilities is the implied fair value of the goodwill. In connection with the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangibles" on January 1, 2002, WPC performed its annual
test for impairment of its management services segment, the reportable unit of
measurement, and concluded that the goodwill is not impaired.
WPC recognizes rental income from sales overrides when reported by lessees, that
is, after the level of sales requiring a rental payment is reached.
Significant management judgment is required in developing WPC's provision for
income taxes, including (i) the determination of partnership-level state and
local taxes, and (ii), for its taxable subsidiaries, estimating deferred tax
assets and liabilities and any valuation allowance that might be required
against the deferred tax assets. The valuation allowance is required if it is
more likely than not that a portion or all of the deferred tax assets will not
be realized. WPC has not recorded a valuation allowance based on Management's
belief that operating income of the taxable subsidiaries will be sufficient to
realize the benefit of these assets over time. For interim periods, income tax
expense for taxable subsidiaries is determined, in part, by applying an
effective tax rate which takes into account statutory federal, state and local
tax rates.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. WPC's management
evaluates the performance of its owned and managed real estate portfolio as a
whole, but allocates its resources between two operating segments: real estate
operations with domestic and international investments and management services.
RESULTS OF OPERATIONS:
WPC is engaged in two reportable operating segments, real estate operations and
management services, primarily as the Advisor to four affiliated real estate
investment trusts (the "CPA(R) REITs"). WPC reported net income of $23,592 and
$11,752 for the three-month periods ended June 30, 2002 and 2001, respectively,
and $37,321 and $24,391 for the six-month periods ended June 30, 2002 and 2001,
respectively. The results are not fully comparable due to the adoption of
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other
Intangibles" in 2002. SFAS No. 142 discontinued the amortization of goodwill and
indefinite-lived intangible assets and is not retroactively applicable to 2001.
If the accounting charge for amortization had been retroactively applied, net
income would have increased by $10,877 and $10,631 for the comparable
three-month and six month periods (also see Note 10 to the accompanying
condensed consolidated financial statements). The results from continuing
operations for the three-month and six-month periods include a gain of $11,160
on the sale of a property in Los Angeles, California and a noncash impairment
charge of $3,800.
In addition to the effect of the change in amortizing goodwill and
indefinite-lived intangible assets, the increases in net income for the
comparable three-month and six-month periods were due to realized gains,
increases in management income and other income and, to a lesser extent, a
decrease in interest and property expenses. These
-17-
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
were partially offset by the noncash impairment loss on real estate in 2002 and
increases in the provision for income taxes, and general and administrative
expenses. Results for the comparable six-month periods were also affected by a
decrease in income from equity investments.
Net operating income from real estate operations (income before gains and
losses, income taxes, minority interest, and discontinued operations) increased
to $8,704 from $7,805 for the comparable three-month periods and decreased to
$18,791 from $20,400 for the comparable six-month periods ended June 30, 2002
and 2001, respectively. The increase in income for the comparable three-month
periods was primarily due to an increase in other income, and decreases in
interest and property expenses, partially offset by the $3,800 impairment loss
on real estate and a decrease in lease revenues (rental income and interest
income from direct financing leases). For the comparable six-month periods, the
decrease in net operating income was primarily due to the decrease in equity
income and a decrease in other income.
Other income generally consists of lease termination payments and non-rent
related revenues from real estate operations including, but not limited to,
settlements of claims against former lessees. WPC receives settlements in the
ordinary course of business; however, the timing and amount of such settlements
cannot always be estimated. In the second quarter of 2002, WPC earned $2,079 in
connection with a settlement of all claims and obligations with a former lessee,
which lease was terminated in 2002, and accumulated interest on escrow funds
released in connection with paying off two mortgage bonds. In the first quarter
of 2001 WPC received a settlement of approximately $2,500 from New Valley
Corporation in the final settlement of a claim relating to termination of a
lease in 1993 for WPC's property in Moorestown, New Jersey.
The decrease in income from equity investments was due to WPC's equity
investment in the operating partnership of MeriStar Hospitality Corporation.
MeriStar, a real estate investment trust that owns more than 100 hotel
properties throughout the United States and Canada, has been affected by the
decline in travel, including business travel. MeriStar's management anticipates
that its results will gradually improve in 2002. WPC recognized a loss of $172
and $498 on the MeriStar equity investment in the three-month and six-month
periods ended June 30, 2002 as compared with income of $195 and $1,061 from its
investment in MeriStar in the three-month and six-month periods ended June 30,
2001.
The decrease in interest expense for the three-month and six-month periods ended
June 30, 2002 and 2001 was primarily attributable to lower average outstanding
balances on WPC's $185,000 credit facility and a decrease in interest rates
during the comparable periods. WPC's credit facility is indexed to the London
Inter-Bank Offered Rate ("LIBOR") and the LIBOR benchmark rate has declined
substantially since June 30, 2001. The average outstanding balance on the credit
facility decreased by $20,000 and the average interest rate decreased to 3.13%
from 6.31% for the comparable six-month periods ended June 30, 2002 and 2001. In
June 2002, WPC paid off $12,580 in mortgage bonds on the Alpena and Petoskey
hotel properties. Although the satisfaction of the bonds did not have a
significant effect on the current decrease in interest expense, the payoff of
the bonds will result in an annual decrease in interest expense of more than
$1,000. The Alpena and Petoskey bonds were also collateralized by mortgages and
lease assignments on eight other properties. Subsequent to the payoff of the
bonds, WPC was able to complete the sale of a portion of its property in
McMinnville, Tennessee.
The decreases in property expenses for the three-month and six-month periods
ended June 30, 2002 and 2001 were due to a nonrecurring, noncash charge incurred
in April 2001 in connection with the writeoff of $1,321 of straight-line rents
as uncollectible in connection with a lease amendment on the Livho, Inc.
property. The lease amendment shortened the lease term and eliminated stated
rent increases. Excluding the writeoff, property expenses for the comparable
three-month and six-month periods ended June 30, 2002 and 2001, would have
increased by $276 and $490, respectively, due to increases in real estate taxes,
property insurance and maintenance expenses as a result of the termination of
the Red Bank Distribution, Inc. and Thermadyne Holdings Corp. leases in 2001 and
2002, respectively, and a charge of approximately $200 to write off unamortized
leasing costs in connection with a termination of a lease in Salisbury, North
Carolina and the sale of the Maumelle, Arkansas property.
-18-
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
Based on the weak financial condition of Peerless Chain Company and its
inability to meet its lease obligations, WPC's property in Winona, Minnesota was
written down to its estimated fair value and an impairment loss on real estate
of $3,800 was recognized in June 2002. WPC owns a property in College Station,
Texas, a portion of which is leased to Texas Digital Systems, Inc. WPC has
entered into an agreement to sell Texas Digital its portion of the property for
$844, resulting in a writedown on the property of $521 to the expected sale
price, less estimated closing costs. Annual rent from Texas Digital's lease,
which is scheduled to expire in August 2002, is $195. The other lessee at the
property, AMS Holding Group, will continue to provide annual rents of $765. The
sale is expected to close during 2002.
Lease revenues (rental income and interest income from direct financing leases)
decreased by $473 and $631 for the comparable three-month and six-month periods
ended June 30, 2002 and 2001 as a result of the sale of properties during 2001,
including the Duff-Norton, Inc. property in July 2001 which had annual rents of
$1,164, the sale of three properties classified as held for sale as of December
31, 2001 and the termination of the Thermadyne lease. This was partially offset
by a new lease in France with Bouygues Telecom, S.A. and increased rent from the
expansion of the property leased to AT&T, both of which went into effect in the
fourth quarter of 2001. Lease revenues also benefited from several rent
increases on existing leases.
In January 2002, The Gap, Inc. notified WPC that it would not renew its leases
which expire in February 2003 and contribute annual rent of $2,205. Pillowtex,
Inc. terminated its lease in April 2002 under its plan of reorganization, and
vacated WPC's property in Salisbury, North Carolina in April. Pillowtex's annual
rent was $691. Both the Gap and Pillowtex properties are warehouse/distribution
properties and are being actively remarketed. Based on current market rentals,
WPC does not expect the rents for a new lease on the Gap property to reach
current levels. Management believes that the prospects for leasing the Gap
property on a long-term basis are good; however, it may take up to two years to
remarket the property. WPC is also negotiating with the Gap for a possible
termination settlement pursuant to a make-whole provision in the lease. In June
2002, Wozniak Industries, Inc. notified WPC that it would not renew its lease,
which expires in 2003. The Wozniak lease contributes annual rent of $497, and
WPC is evaluating its strategy for the Wozniak property.
In December 2001, Thermadyne filed a petition of bankruptcy and subsequently
vacated the property in February 2002. Annual rents from Thermadyne were $2,525.
WPC has entered into an agreement-in-principle to re-lease a portion of the
space for approximately $817 to a tenant that currently occupies the space on a
month-to-month basis. WPC is also actively remarketing the remaining space.
In November 2001, WPC evicted Red Bank from its property in Cincinnati, Ohio and
entered into an agreement-in-principle that effectively terminated the net lease
because of Red Bank's inability to meet its annual rental lease obligation of
$1,579. At that time, WPC assumed control of the property and was managing a
public warehousing operation that occupies a portion of the building. Management
evaluated several alternatives, and in May 2002 signed a license agreement with
a tenant to take over the operations of the property. The agreement provides for
a one-year term and annual rent of $300. WPC is also evaluating proposals to
sell the property.
On July 1, 2002, WPC sold six properties subject to a master lease with
Saint-Gobain Corporation for approximately $26,000. The Company used a portion
of the sales proceeds to pay off a limited recourse mortgage of $10,751 on the
properties. The Saint-Gobain properties and the results of operations are
classified as held for sale and discontinued operations, respectively, in the
accompanying condensed consolidated financial statements as of June 30, 2002.
The Saint-Gobain lease was scheduled to expire in 2012. Based on Management's
evaluation, Saint-Gobain was unlikely to renew its leases and the six industrial
properties would have been difficult to remarket. Annual cash flow from the
Saint-Gobain lease was approximately $900; however, the interest rate on the
limited recourse mortgage loan was scheduled to reset to an increased annual
fixed rate in July 2002. After the interest rate reset, annual cash flow from
the Saint-Gobain properties would have been reduced by $196. The net sales
proceeds have been deposited in an escrow account for the purpose of entering
into a Section 1031 noncash exchange. If a like-kind exchange is accomplished,
the taxable gain to shareholders of approximately $11,300 will not be recognized
until the properties acquired using the proceeds in the escrow account are sold.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
WPC also sold a property on July 1, 2002 in Fredericksburg, Virginia for $700.
WPC continues to closely monitor the financial condition of several lessees
which it believes have been affected by current economic conditions and other
trends. Such lessees include America West Holding Corp. and Livho, Inc., which
each represent 3% of lease revenues. America West, an air carrier, has obtained
government financing subsequent to September 11, 2001 and its financial
prospects are uncertain. Livho, the lessee of a Holiday Inn in Livonia,
Michigan, is affected by the cyclical nature of the automotive industry. The
financial condition of another lessee, Peerless, has been adversely affected by
foreign competition, and it has not kept current on its annual rent of $1,561.
Peerless is currently paying only a portion of its rents and has entered into
discussions with WPC to restructure the lease, but WPC has made no commitment.
WPC has fully reserved for Peerless' unpaid rents.
Lockheed Martin Corporation has been granted a six-month extension of its lease
term, through February 2003, for its property in Oxnard, California. Lockheed's
decision to further extend the lease will be based on whether certain government
contracts are renewed. The lease expiration date was originally scheduled for
September 1, 2002. Lease revenues for the six-month extension period will total
$262. In June 2002, Federal Express Corporation notified WPC that it will renew
its leases on two properties, each for a five-year term, with annual rents from
the two leases of approximately $275.
Because of the long-term nature of WPC's net leases, inflation and changing
prices should not unfavorably affect revenues and net income or have an impact
on the continuing operations of WPC's properties. WPC's leases usually have rent
increase provisions based on the consumer price index and other similar indexes
and may have caps on such increases, or sales overrides, which should increase
operating revenues in the future. The moderate increases in the consumer price
index over the past several years will affect the rate of such future rent
increases.
WPC has been selling properties in the ordinary course of business with a
strategy of eliminating smaller properties that require more intensive property
management. The increase in the gains in 2002 was due to the $11,160 recognized
from the sale of a property in Los Angeles, California. The property had not
been leased since December 1999. The property was sold to the Los Angeles
Unified School District in June 2002 and WPC has been engaged to manage the
build-to-suit development of the property. Under the contract, WPC will earn
fees of up to $4,700 and an early completion incentive fee of $2,000 if the
project is completed before September 1, 2004. Management is evaluating whether
to seek additional development management projects and if they are consistent
with WPC's core strategies. If WPC were to seek additional development manager
business, it would likely require additional personnel and different allocations
of its resources. A subsidiary of WPC is acting as a conduit for payments made
by the School District and is only obligated to make payments to the general
contractor based on payments received, except for a maximum guarantee of $2,000
for nonpayment. The maximum liability under the build-to-suit agreement is the
extent of build-to-suit fees paid to the Company up to $3,500.
For tax purposes, the sale of the Los Angeles property has been structured as a
Section 1033 exchange which, under the Internal Revenue Code, would allow the
Company to acquire like-kind real properties within a specified period in order
to defer a taxable gain to shareholders of approximately $20,000. If a like-kind
exchange is accomplished, the taxable gain will not be recognized until the
replacement properties acquired are subsequently sold.
Net operating income from WPC's management services operations for the
three-month and six-month periods ended June 30, 2002 was $7,933 and $12,738 as
compared with $5,863 and $5,244 for the comparable three-month and six-month
periods ended June 30, 2001. Results include noncash charges for amortization of
intangible assets of $1,826 and $3,653 for the three-month and six-month periods
ended June 30, 2002 and amortization of goodwill and intangible assets of $2,789
and $5,952 for the comparable periods in 2001. Effective January 1, 2002, WPC no
longer amortizes goodwill as the result of adopting SFAS No. 142. Excluding the
charges for amortization, operating income from management services would have
been $9,759 and $16,391, respectively, for the three-month and six-month periods
ended June 30, 2002 and $8,652 and $11,196, respectively, for the comparable
periods ended June 30, 2001.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
Total revenues earned by the management services operations for the three-month
and six-month periods ended June 30, 2002 were $18,598 and $32,083,
respectively, compared with $13,505 and $21,048 for the comparable periods ended
June 30, 2001. Management fee revenues were comprised of transaction fees of
$7,546 and $13,297 for the three-month and six-month periods ended June 30, 2002
compared with $3,562 and $5,751 for the three-month and six-month periods ended
June 30, 2001 and asset-based fees and reimbursements of $11,052 and $18,786 for
the three-month and six-month periods ended June 30, 2002 and $9,944 and $15,297
for the three-month and six-month periods ended June 30, 2001. Transaction fees
included fees from structuring acquisition and refinancing transactions on
behalf of the CPA(R) REITs. WPC and affiliates structured approximately $168,000
and $285,000 of acquisitions for the three-month and six-month periods ended
June 30, 2002 compared with $74,000 and $118,000 for the three-month and
six-month periods ended June 30, 2001. Subsequent to June 30, 2002, WPC and
affiliates have structured approximately $67,000 of acquisitions on behalf of
the CPA(R) REITs, and have earned approximately $3,000 in transaction fees.
These acquisitions will generate approximately $670 in annual asset-based fees.
As of August 8, 2002, Corporate Property Associates 14 Incorporated
("CPA(R):14"), which concluded a public offering in November 2001, had
approximately $54,250 of cash available for investment in real estate. Corporate
Property Associates 15 Incorporated ("CPA(R):15"), is conducting a "best
efforts" public offering and as of August 8 2002 had approximately $121,278 of
cash available for investment which it is using along with limited recourse
mortgage financing to invest in real estate. Management believes that the CPA(R)
REITs are benefiting from several trends including the increasing use of
sale-leaseback transactions by corporations as an alternative source of
financing and individual investors seeking dividend-paying investments.
Management believes that CPA(R):15's "best efforts" offering of $400,000 will be
fully subscribed before the end of the year. CPA(R):15 intends to commence a
second "best efforts" offering upon completion of the current offering.
CPA(R):15 has entered into sales agreements with two additional major
broker-dealers. One of the broker-dealers, UBS Paine Webber, started selling
CPA(R):15 shares in May 2002. A.G. Edwards, Inc. is expected to start selling
CPA(R):15 shares in September or October.
The asset-based management income includes fees based on the value of CPA(R)
REIT real estate assets under management. A portion of the CPA(R) REIT
management fees is based on each CPA(R) REIT meeting specific performance
criteria (the "performance fee") and WPC earns this performance fee income only
when the performance criteria of each CPA(R) REIT are achieved. The performance
criterion for CPA(R):10 was satisfied during the three-month period ended June
30, 2002, resulting in WPC's recognition of $1,463 in performance fees for the
period June 2000 through March 2002. The performance criterion for CPA(R):14 was
satisfied for the first time during the three-month period ended June 30, 2001,
resulting in the Company's recognition of $3,112 for the period December 1997
through March 2001. Total asset-based fees for the three-month and six-month
periods ended June 30, 2002 were $7,458 and $12,936, respectively, compared with
$7,977 and $11,619 for the three-month and six-month periods ended June 30,
2001. As the real estate asset bases of CPA(R):14 and CPA(R):15 continue to
increase, management and performance fees will continue to increase.
In April 2002, the shareholders of Corporate Property Associates 10 Incorporated
("CPA(R):10") and Carey Institutional Properties Incorporated ("CIP(R)") both
CPA(R) REITs, approved a merger agreement providing for the merger of CPA(R):10
into CIP(R). The merger, which was effective on May 1, 2002, will not result in
a change in assets under management, so that the asset-based fees earned by WPC
will not be affected by the merger. As a result of the merger, WPC received $248
in property disposition fees which were earned in April 2002 when subordination
provisions in the CPA(R):10 Advisory Agreement were met.
Income tax expense for the three-month and six-month periods ended June 30, 2002
increased by approximately $1,517 and $4,231 over the comparable three-month and
six-month periods ended June 30, 2001. Income tax expense increased because
approximately 85% of management revenues are earned by a taxable, wholly-owned
subsidiary which reflected a substantial increase in earnings for the comparable
periods.
The increase in general and administrative costs was primarily a result of an
increase in personnel-related costs. The portion of personnel costs necessary to
administer the CPA(R) REITs is reimbursed to WPC by the CPA(R) REITs and is
included in management income. Such income increased by $355 from $1,362 to
$1,717 and $594 from $2,515 to $3,109 for the comparative three-month and
six-month periods ended June 30, 2002 and 2001. A portion of
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
personnel costs is directly related to CPA(R) REIT capital raising and
acquisitions which have contributed to the increase in personnel-related costs.
The increase in personnel-related costs also included an increase of $507 from
noncash charges relating to restricted shares and options from WPC's share
incentive plans for the six-month period ended June 30, 2002 over the comparable
2001 period.
FINANCIAL CONDITION:
There has been no material change in WPC's financial condition since December
31, 2001. Management believes that WPC will generate sufficient cash from
operations and, if necessary, from the proceeds of limited recourse mortgage
loans, unsecured indebtedness and the issuance of additional equity securities
to meet its short-term and long-term liquidity needs. WPC assesses its ability
to access capital on an ongoing basis.
Cash flows from operations and distributions from equity investments for the
six-month period ended June 30, 2002 of $31,401 were sufficient to fund
dividends to shareholders of $29,949. Cash flows from operations are projected
to increase as a result of the expected growth of the management business
segment. Annual cash flow from operations is projected to fund distributions;
however, operating cash flow may fluctuate on a quarterly basis due to the
timing of certain compensation costs that are paid in the second quarter and the
timing of transaction-related activity. In January 2002, WPC received its first
installment of deferred acquisition fees of $916 in connection with structuring
transactions on behalf of the CPA(R) REITs.
Investing activities included using $1,042 for purchases of real estate and
additional capital expenditures, including $504 for the final funding of the
commitments at the AT&T and Sprint properties, which were completed in late 2001
and $538 to fund other improvements. WPC also received $34,540 in connection
with the sales of properties and investments including the sale of a property
located in Los Angeles, CA for $24,000. The proceeds from the sale of the
property were primarily used to pay down WPC's outstanding balance on its credit
facility. Funds from the Duff-Norton property sale completed in 2001 were placed
in an escrow account for the purposes of structuring a like-kind exchange for
tax purposes. The exchange was not completed and $9,366 in escrow was released
to WPC. In January 2002, WPC paid an installment of deferred acquisition fees of
$524 to WPC's former management company relating to 1998 and 1999 property
acquisitions. Deferred acquisition fees are payable over a period of no less
than eight years. The remaining obligation is $2,758. Commitments for capital
expenditures on the Livonia, Alpena and Petoskey, Michigan hotels are currently
estimated to be approximately $516. WPC currently has no other significant
capital expenditure commitments.
In addition to paying dividends to shareholders, WPC's financing activities for
the six-month period ended June 30, 2002 included reducing its outstanding
balance of its credit facility by $26,000, paying off $12,580 in revenue bonds
on the Alpena and Petoskey hotel properties. WPC made draws of $33,000 on the
credit facility and repayments of $59,000. Debt service on the Alpena and
Petoskey bonds was approximately $1,600. WPC also made scheduled principal
payment installments of $4,296 on existing mortgages. WPC uses limited recourse
mortgages as a substantial portion of its long-term financing because the cost
of this financing the recourse by a lender is limited to the assets provided as
collateral for each loan.
WPC received proceeds of $6,505 from the issuance of shares primarily through
WPC's dividend reinvestment plan, stock purchase plan, and the exercise of
options by employees. WPC issued additional shares pursuant to its merger
agreement for the management services operations (500,000 shares valued at
$10,440 were issued during the six-month period ended June 30, 2002 based on
meeting performance criteria as of December 31, 2001). In addition, in
connection with the acquisition of the majority interests in the CPA(R)
partnerships on January 1, 1998 a CPA(R) partnership had not yet achieved the
specified cumulative return as of the acquisition date. The subordinated
preferred return was payable currently only if WPC achieved a closing price
equal to or in excess of $23.11 for five consecutive trading days. On December
31, 2001, the closing price criterion was met, and the $1,423 subordinated
preferred return was paid in January of 2002.
In March 2001, WPC entered into a revolving credit agreement for a $185,000 line
of credit which renewed and extended its original revolving unsecured line of
credit. The credit agreement has a three-year term through March
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
2004. WPC has a one-time right to increase the commitment to up to $225,000.
Borrowings on the credit facility were $69,000 as of June 30, 2002 and $75,000
as of August 7, 2002. The revolving credit agreement has financial covenants
that require WPC to maintain a minimum equity value and to meet or exceed
certain operating and coverage ratios. As advances on the credit facility are
not restricted, WPC believes that the remaining capacity on the credit line will
allow WPC to meet its liquidity needs on a short-term basis and that renewing
the facility after the current term is likely.
WPC expects to meet its capital requirements to fund future property
acquisitions, construction costs on build-to-suit transactions, any capital
expenditures on existing properties, scheduled debt maturities through long-term
limited recourse mortgages and unsecured indebtedness and the possible issuance
of additional equity securities. Other than its limited mortgage debt and
amounts outstanding on its credit line, WPC has no other significant
commitments. WPC has guaranteed loans of $8,170 made to officers which are
collateralized by shares of WPC owned by the officers and held by WPC. These
shares were issued in connection with equity incentive plans and the acquisition
of the management operations.
A summary of WPC's obligations under contractual arrangements is as follows:
(in thousands) Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes payable $183,721 $14,816 $10,967 $25,041 $7,896 $25,431 $ 99,570
Unsecured note payable 69,000 69,000
Deferred acquisition fees 2,758 -- 524 524 524 524 662
Commitments:
Development guarantee 2,000 2,000
Share of minimum rents payable under
office cost-sharing agreement 2,036 221 484 484 484 363 --
-------- ------- ------- ------- ------ ------- --------
$259,515 $17,037 $80,975 $26,049 $8,904 $26,318 $100,232
======== ======= ======= ======= ====== ======= ========
WPC from time to time may offer to sell its Listed Shares, Future Shares and
Warrants pursuant to a registration statement declared effective by the
Securities and Exchange Commission on February 25, 2002. The total amount of
these securities will have an initial aggregate offering price of up to $100,000
although WPC may increase this amount in the future. The shares and/or warrants
may be offered and sold to or through one or more underwriters, dealers and
agents, or directly to purchasers, on a continuous or delayed basis. The
prospectus included as part of the registration statement describes some of the
general terms that may apply to these securities and the general manner in which
they may be offered. The specific terms of any securities to be offered, the
specific manner in which they may be offered and the specific use of proceeds,
will be described in a supplement to this prospectus.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and No. 142 "Goodwill and Other Intangibles," which
establish accounting and reporting standards for business combinations, certain
assets and liabilities acquired in business combinations and asset acquisitions.
SFAS No. 141 requires that all business combinations and asset acquisitions
initiated after June 30, 2001 be accounted for under the purchase method,
establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires that unallocated negative goodwill be
written off immediately as an extraordinary gain. Use of the
pooling-of-interests method for business combinations is no longer permitted.
The adoption of SFAS No. 141 did not have a material effect on WPC's financial
statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets will no longer be amortized but will be
tested for impairment at least annually. Intangible assets acquired and
liabilities assumed in business combinations will only be amortized if such
assets or liabilities are capable of being separated or divided and sold,
transferred, licensed, rented or exchanged or arise from contractual or legal
rights (including leases), and will be amortized over
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
their useful lives. In connection with the adoption of SFAS No. 142 on January
1, 2002, WPC performed its annual test for impairment of its management services
segment, the reportable unit for measurement, and concluded that the carrying
value of goodwill is not impaired.
With the acquisition of real estate management operations in 2000, WPC allocated
a portion of the purchase price to goodwill and other identifiable intangible
assets. In adopting SFAS No. 142, WPC discontinued amortization of existing
goodwill and certain intangible assets. During the year ended December 31, 2001,
WPC recorded annual amortization charges of $4,597 which beginning January 1,
2002 were no longer expensed under SFAS No. 142.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on WPC's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold are presented as a discontinued operation for all periods
presented. The provisions of SFAS No.144 are effective for disposal activities
initiated by WPC's commitment to a plan of disposition after the date of
adoption (January 1, 2002). As of June 30, 2002, the operations of nine
properties have been classified as discontinued operations. Eight of the
properties are classified as held for sale in the accompanying condensed
consolidated balance sheet for the six-month period ended June 30, 2002, seven
of which were subsequently sold in July 2002.
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, WPC will no longer classify gains and losses for the extinguishment of
debt as extraordinary items and will adjust comparative periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of FAS 146
also includes (1) costs related to terminating a contract that is not a capital
lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
WPC does not expect SFAS No. 146 to have a material effect on its financial
statements.
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W. P. CAREY & CO. LLC
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary risks to which WPC is exposed are interest rate risk and
foreign currency exchange risk.
The value of WPC's real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees and which may affect WPC's ability to refinance
property-level mortgage debt when balloon payments are scheduled.
$144,765 of WPC'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 June 30, 2002 ranged from 3.025% to 6.44%.
The interest on the fixed rate debt as of June 30, 2002 ranged from 6.85% to
9.55%.
Advances from the line of credit bear interest at an annual rate of either (i)
the one, two, three or six-month LIBOR, plus a spread which ranges from 0.6% to
1.45% depending on leverage or corporate credit rating or (ii) the greater of
the bank's Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a
spread of up to .125% depending on WPC's leverage.
(In thousands)
2002 (1) 2003 2004 2005 2006 Thereafter Total Fair Value
-------- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $14,171 $9,687 $23,478 $6,296 $23,627 $67,506 $144,765 $145,317
Weighted average
interest rate 8.23% 7.8% 8.05% 7.53% 7.37% 7.44%
Variable rate debt $ 645 $1,280 $70,563 $1,600 $ 1,804 $32,064 $107,956 $107,956
(1) Includes $10,751 in fixed rate debt with an 8.42% interest
rate from the operations of discontinued properties having a
fair value of $11,178.
WPC conducts business in France. Accordingly, WPC is subject to foreign currency
exchange rate risk from the effects that exchange rate movements of foreign
currencies and this may affect our future costs and cash flows; however,
exchange rate movements to date have not had a significant effect on WPC's
financial position or results of operations. To date, we have not entered into
any foreign currency forward exchange contracts or other derivative financial
instruments to hedge the effects of adverse fluctuations in foreign currency
exchange rates.
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W. P. CAREY & CO. LLC
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders meeting was held on June 11, 2002, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a three-year term:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No
---------------- ------------------- ----------------- ----------------
Francis J. Carey 29,911,349 29,441,786 469,563
Francis X. Diebold 29,911,349 29,591,802 319,547
William Ruder 29,911,349 29,341,844 569,505
A vote was also taken on a proposal to approve an amendment to the 1997 Listed
Share Incentive Plan to increase the number of shares eligible for issuance from
2,600,000 to 6,200,000. The proposal was approved as follows:
Total Shares Voting Shares Voting Yes Shares Voting No
------------------- ----------------- ----------------
20,962,356 18,750,195 2,212,161
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Chief Executive Officer's Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended June 30, 2002, the Company was not required to
file any reports on Form 8-K.
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W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements 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.
W. P. CAREY & CO. LLC
8/13/02 By: /s/ John J. Park
--------- -------------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
8/13/02 By: /s/ Claude Fernandez
--------- -------------------------------------
Date Claude Fernandez
Executive Vice President -
Financial Operations
(Principal Accounting Officer)
-27-