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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended SEPTEMBER 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 35,927,587 Listed Shares, no par value outstanding at
November 5, 2002.
W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 2
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2002 and 2001 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 5-6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-25
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. - Controls and Procedures 26
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 27
Item 6. - Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29-30
*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)
September 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 $39,547 and $32,401 at
September 30, 2002 and December 31, 2001 $439,621 $426,842
Net investment in direct financing leases 201,502 258,041
-------- --------
Real estate leased to others 641,123 684,883
Operating real estate, net of accumulated depreciation of $1,583 and
$2,076 at September 30, 2002 and December 31, 2001 4,130 5,990
Real estate under construction and redevelopment 3,541 2,797
Equity investments 59,850 50,629
Assets held for sale 21,542 23,693
Cash and cash equivalents 11,998 8,870
Due from affiliates 26,955 18,789
Goodwill 40,964 40,964
Intangible assets, net of accumulated amortization 46,367 51,846
Other assets 14,293 27,422
-------- --------
Total assets $870,763 $915,883
======== ========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $176,434 $200,515
Notes payable 49,000 95,000
Accrued interest 1,440 1,312
Dividends payable 15,426 14,836
Due to affiliates 4,289 16,790
Accrued and deferred income taxes 18,367 9,628
Prepaid rental income and security deposits 3,602 3,198
Other liabilities 14,049 14,145
-------- --------
Total liabilities 282,607 355,424
-------- --------
Minority interest 917 794
-------- --------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 35,871,482 and 34,742,436 shares issued
and outstanding at September 30, 2002 and December 31, 2001 689,026 664,751
Dividends in excess of accumulated earnings (92,774) (97,200)
Unearned compensation (6,366) (4,454)
Accumulated other comprehensive loss (2,647) (3,432)
-------- --------
Total members' equity 587,239 559,665
-------- --------
Total liabilities, minority interest and members' equity $870,763 $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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
------- ------- -------- -------
Revenues:
Management income from affiliates $18,669 $11,141 $ 50,752 $32,189
Rental income 12,095 11,110 36,176 34,334
Interest income from direct financing leases 5,641 6,926 17,327 20,091
Other income 406 255 914 3,468
Other interest income 390 262 1,326 797
Revenue from other business operations 996 938 2,556 2,508
------- ------- -------- -------
38,197 30,632 109,051 93,387
------- ------- -------- -------
Expenses:
Interest 4,054 4,694 12,594 15,037
Depreciation 2,747 2,478 8,083 7,527
Amortization 2,310 3,465 6,930 10,394
General and administrative 10,066 6,873 26,736 19,756
Property expenses 2,214 951 5,070 4,946
Impairment loss on real estate - 763 - 763
Operating expenses from other business
operations 662 603 1,755 1,757
------- ------- -------- -------
22,053 19,827 61,168 60,180
------- ------- -------- -------
Income from continuing operations before
minority interest, equity investments, gain
on sale and income taxes 16,144 10,805 47,883 33,207
Minority interest in loss 3 36 47 98
Income from equity investments 454 1,005 1,083 3,235
------- ------- -------- -------
Income from continuing operations before gain
on sale and income taxes 16,601 11,846 49,013 36,540
Gain on sales of real estate and investments (7) 786 12,416 1,227
------- ------- -------- -------
Income from continuing operations before
income taxes 16,594 12,632 61,429 37,767
Provision for income taxes (4,052) (2,874) (11,358) (5,926)
------- ------- -------- -------
Income from continuing operations 12,542 9,758 50,071 31,841
------- ------- -------- -------
Discontinued operations:
Income from operations of discontinued
properties 703 1,479 4,851 3,787
Gain on sale of real estate 2,443 - 2,409 -
Impairment loss on properties held for sale (2,703) - (7,024) -
------- ------- -------- -------
Income from discontinued operations 443 1,479 236 3,787
------- ------- -------- -------
Net income $12,985 $11,237 $ 50,307 $35,628
======= ======= ======== =======
--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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings per share:
Income from continuing operations $ .35 $ .29 $ 1.40 $ .93
Discontinued operations .01 .04 .01 .11
----------- ----------- ----------- -----------
Net income $ .36 $ .33 $ 1.41 $ 1.04
=========== =========== =========== ===========
Diluted earnings per share:
Income from continuing operations $ .35 $ .28 $ 1.38 $ .92
Discontinued operations .01 .04 .01 .11
----------- ----------- ----------- -----------
Net income $ .36 $ .32 $ 1.39 $ 1.03
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 35,829,687 34,535,728 35,573,981 34,403,331
=========== =========== =========== ===========
Diluted 36,423,026 34,855,481 36,173,636 34,720,700
=========== =========== =========== ===========
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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
------- ------- ------- -------
Net income: $12,985 $11,237 $50,307 $35,628
------- ------- ------- -------
Other comprehensive (loss) income:
Change in unrealized gain on marketable
securities (20) (9) (35) 126
Foreign currency translation (loss) income (68) 587 820 (123)
------- ------- ------- -------
Other comprehensive (loss) income (88) 578 785 3
------- ------- ------- -------
Comprehensive income $12,897 $11,815 $51,092 $35,631
======= ======= ======= =======
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)
Nine Months Ended September 30,
-------------------------------
2002 2001
--------- --------
Cash flows from operating activities:
Net income $ 50,307 $ 35,628
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Income from discontinued operations, including gain on sale (7,260) (3,787)
Depreciation and amortization 15,578 18,048
Noncash settlement income (2,097) -
Gain on sale of real estate and equity investments, net (12,416) (1,227)
Minority interest in loss (47) (98)
Straight-line rent adjustments and other noncash rent adjustments (476) (669)
Equity income in excess of distributions (62) (454)
Management income received in shares of affiliates (9,933) (9,061)
Costs paid by issuance of shares 181 209
Writeoff of cumulative straight-line rent adjustment - 1,321
Impairment losses on real estate and properties held for sale 7,024 763
Amortization of unearned compensation 2,174 1,454
Increase in deferred income taxes payable 7,920 4,797
Increase (decrease) in accrued taxes payable 820 (271)
Increase in structuring fees receivable (9,527) (4,089)
Deferred acquisition fees received 916 -
Net change in other operating assets and liabilities 4,950 (6,692)
--------- --------
Net cash provided by continuing operations 48,052 35,872
Net cash provided by discontinued operations 5,261 4,098
--------- --------
Net cash provided by operating activities 53,313 39,970
--------- --------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 2,473 1,097
Capital distributions received from equity investments 1,255 -
Proceeds from sale of property and investments 48,514 8,509
Purchase of securities (286) -
Release of funds from escrow in connection with the sale of a property 9,366 -
Purchases of real estate and equity investments (1,268) (18,500)
Additional capital expenditures (783) (2,169)
Payment of deferred acquisition fees (524) (520)
--------- --------
Net cash provided by (used in) investing activities 58,747 (11,583)
--------- --------
Cash flows from financing activities:
Dividends paid (45,290) (43,328)
Payment of accrued preferred distributions (1,423) -
Contributions from minority interest - 202
Proceeds from issuance of shares, net 8,471 2,715
Payments of mortgage principal (6,233) (8,432)
Prepayments of mortgage principal and notes payable (118,316) (63,542)
Proceeds from mortgages payable and note payable 54,000 88,459
Payment of financing costs (165) (1,957)
--------- --------
Net cash used in financing activities (108,956) (25,883)
--------- --------
Effect of exchange rate changes on cash 24 (9)
--------- --------
Net increase in cash and cash equivalents 3,128 2,495
Cash and cash equivalents, beginning of period 8,870 10,165
--------- --------
Cash and cash equivalents, end of period $ 11,998 $ 12,660
========= ========
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)
CONDENSED
(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 nine-month periods ended September 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 nine-month periods ended September 30, 2002 and
2001, the Company issued restricted shares of $101 to affiliated
parties, including directors, in consideration of services rendered.
Restricted shares valued at $3,870 and $1,225, respectively, were
issued to employees and recorded as unearned compensation, a component
of members' equity, during the nine-month periods ended September 30,
2002 and 2001. Unvested restricted shares and options of $39 and $116,
respectively, were forfeited during the nine-month periods ended
September 30, 2002 and 2001. Included in compensation expense for the
nine-month periods ended September 30, 2002 and 2001 was $2,175 and
$1,454, respectively, relating to equity awards from the Company's
share incentive plans.
C. In connection with the sale of a property during the nine-month period
ended September 30, 2001, the Company received a note receivable of
$700 in partial consideration for the sale.
D. In connection with contributing its tenancy-in-common interest
in properties leased to Childtime Childcare, Inc. to a limited
partnership, assets and liabilities were reclassified as follows:
Land $ 1,674
Net investment in direct financing lease 2,413
Other assets 1
Mortgage payable (1,134)
-------
Equity investment $ 2,954
=======
E. In connection with the sale of properties in 2002, $15,714 was placed
in an escrow account of which $14,738 was subsequently released in
connection with the purchase of properties. In 2002, $9,366 was
released from an escrow account that related to the sale of a property
in 2001.
F. During the nine-month period ended September 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 promissory note was satisfied in October 2002.
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 11, 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 nine-month periods ended September 30, 2002 and 2001 were calculated as
follows:
Three Months Ended September 30,
--------------------------------
2002 2001
----------- -----------
Net income $ 12,985 $ 11,237
=========== ===========
Weighted average shares - basic 35,829,687 34,535,728
Effect of dilutive securities: Stock options and warrants 593,339 319,753
----------- -----------
Weighted average shares - diluted 36,423,026 34,855,481
========== ==========
Basic earnings per share:
Income from continuing operations $ .35 $ .29
Discontinued operations .01 .04
----------- -----------
Net income $ .36 $ .33
=========== ===========
Diluted earnings per share:
Income from continuing operations $ .35 $ .28
Discontinued operations .01 .04
----------- -----------
Net income $ .36 $ .32
=========== ===========
Nine Months Ended September 30,
--------------------------------
2002 2001
----------- -----------
Net income $ 50,307 $ 35,628
=========== ===========
Weighted average shares - basic 35,573,981 34,403,331
Effect of dilutive securities: Stock options and warrants 599,655 317,369
----------- -----------
Weighted average shares - diluted 36,173,636 34,720,700
=========== ===========
Basic earnings per share:
Income from continuing operations $ 1.40 $ .93
Discontinued operations .01 .11
----------- -----------
Net income $ 1.41 $ 1.04
=========== ===========
-7-
W.P. CAREY & CO. LLC
2002 2001
---- ----
Diluted earnings per share:
Income from continuing operations $1.38 $ .92
Discontinued operations .01 .11
----- -----
Net income $1.39 $1.03
===== =====
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 connection with structuring and
negotiating real estate acquisitions and mortgage financing. In addition, the
Company's broker-dealer subsidiary earns fees in connection with the "best
efforts" public offering of CPA(R) REITs (currently CPA(R): 15). The Company
earns an asset management fee at a per annum rate of 1/2 of 1% of Average
Invested Assets, as defined in the Advisory Agreement, for each CPA(R) REIT
and, based upon specific performance criteria for each CPA(R) REIT, may be
entitled to receive a performance fee of 1/2 of 1% of Average Invested Assets.
Fees for transaction-related services are only earned for completed
transactions. The Company is reimbursed for the cost of personnel provided for
the administration of the CPA(R) REITs.
For the three-month periods ended September 30, 2002 and 2001, asset-based fees
(including reimbursements) earned were $8,914 and $6,806, respectively, and
transaction fees earned were $9,755 and $4,336, respectively. For the
nine-month periods ended September 30, 2002 and 2001, asset-based fees earned
were $26,815 and $22,103, respectively, and transaction fees earned were
$23,937 and $10,087, 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 month period ended June 30, 2001, resulting in the
Company's recognition of $3,112 for the period December 1997 through March 2001.
On August 28, 2002, the Company as Advisor to CIP(R), CPA(R):12 and CPA(R):14
structured a securitization of mortgage loans. The three CPA(R) REITs obtained
an aggregate of $172,335 of limited recourse mortgage financing collateralized
by 62 properties and lease assignments. The loans were pooled into a trust,
Carey Commercial Mortgage Trust, a non-affiliate, whose sole asset consists of
the loans and sold interests in the trust as collateralized mortgages in a
private placement to institutional investors. The Company and the three CPA(R)
REITs agreed to acquire a separate class of subordinated interests in the trust
in proportion to the new mortgage financings completed in connection with the
securitization, including the pro rata share from equity investments. In
connection with the transaction, the Company acquired a $241 subordinated
interest and an interest in an institutional class of the investment of $45.
In connection with the securitization, on August 1, 2002, the Company
contributed its 33.93% tenancy-in-common interest in properties leased to
Childtime Childcare, Inc. ("Childtime") into a limited partnership, with CIP(R)
as the general partner, in order to facilitate the refinancing of the mortgage
loan on the Childtime properties in connection with the securitization. As a
result of contributing the Childtime interest into the limited partnership, the
investment in Childtime is now being accounted for as an equity investment.
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
-8-
W. P. CAREY & CO. LLC
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 nine-month periods ended September 30, 2002 and 2001 are
as follows:
2002 2001
------- -------
Per Statements of Income:
Rental income $36,176 $34,334
Interest income from direct financing leases 17,327 20,091
Adjustment:
Share of leasing revenues applicable to minority interests (581) (373)
Share of leasing revenues from equity investments 5,220 5,110
------- -------
$58,142 $59,162
======= =======
For the nine months ended September 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 $ 3,300 6% $ 3,257 6%
Detroit Diesel Corporation 3,118 5 3,078 5
Gibson Greetings, Inc., a wholly-owned subsidiary of American
Greetings, Inc. 3,107 5 3,077 5
Bouygues Telecom, S.A. (b) 2,175 4 690 1
Federal Express Corporation (a) 2,147 4 2,123 4
Orbital Sciences Corporation 1,991 3 1,991 3
Quebecor Printing, Inc. 1,921 3 1,920 3
America West Holdings Corp. 1,904 3 1,904 3
Livho, Inc. 1,890 3 1,926 3
AutoZone, Inc. 1,769 3 1,793 3
The Gap, Inc. (see Note 13) 1,654 3 1,654 3
Sybron International Corporation 1,623 3 1,623 3
Checkfree Holdings Corporation Inc. (a) 1,581 3 1,566 3
Lockheed Martin Corporation 1,447 3 1,622 3
Unisource Worldwide, Inc. 1,299 2 1,300 2
AP Parts International, Inc. 1,275 2 1,213 2
CSS Industries, Inc. 1,243 2 1,206 2
Information Resources, Inc. (a) 1,233 2 1,233 2
Sybron Dental Specialties Inc. 1,210 2 1,210 2
Brodart, Co. 1,139 2 1,139 2
Sprint Spectrum, L.P. 1,068 2 1,023 2
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of
Lowe's Companies Inc. 968 2 876 2
AT&T Corporation 945 2 571 1
United States Postal Service 925 2 853 1
BellSouth Telecommunications, Inc. 918 2 918 2
Cendant Operations, Inc. 807 1 807 1
Anthony's Manufacturing Company, Inc. 764 1 734 1
Other (b) 14,721 25 17,855 30
------- --- ------- ---
$58,142 100% $59,162 100%
======= === ======= ===
(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.
-9-
W. P. CAREY & CO. LLC
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 September 30, 2002, the Company's carrying value was
$10,517. 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 six-month period ended June 30, 2002
reported total assets of $2,989,953 and shareholders' equity of $1,027,872. For
the nine-month period ended September 30, 2002, MeriStar reported revenues of
$767,474 and a net loss of $36,372.
The Company owns equity interests in three 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. As of August 1, 2002, the
Company accounts for its investment in the newly-formed Childtime properties
limited partnership using the equity method of accounting (see Note 3).
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 majority-owned
by the Company's Chairman, which structures net lease transactions outside of
the United States. The Company's interests in the CPA(R) REITs are 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 September 30, 2002, the Company owns 547,092 CIP(R)
shares, 556,536 CPA(R):12 shares, 871,632 CPA(R):14 shares and 26,957 CPA(R):15
shares.
Combined financial information of the affiliated equity investees is summarized
as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Assets (primarily real estate) $2,926,922 $1,794,229
Liabilities (primarily mortgage notes payable) 1,463,194 804,383
Partners' capital/Shareholders' equity 1,463,728 989,846
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Revenues (primarily rental revenue) $ 179,458 $ 164,051
Expenses (primarily interest and depreciation) (125,148) (100,713)
--------- ---------
Net income $ 54,310 $ 63,338
========= =========
-10-
W. P. CAREY & CO. LLC
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:
Nine Months ended Sept 30, Management Real Estate Other(1) Total Company
- -------------------------- ---------- ----------- ---------- -------------
Revenues:
2002 $50,752 $ 55,743 $2,556 $109,051
2001 32,189 58,690 2,508 93,387
Operating, interest, depreciation and
amortization expenses (excluding
provision for income taxes):
2002 $29,291 $ 30,121 $1,756 $ 61,168
2001 25,067 33,356 1,757 60,180
Income from equity investments:
2002 $ 354 $ 729 - $ 1,083
2001 281 2,954 - 3,235
Net operating income(2)(3)(4):
2002 $21,815 $ 26,351 $ 800 $ 48,966
2001 7,403 28,288 751 36,442
Long-lived assets:
September 30, 2002 $ 68,321 $678,585 $4,130 $751,036
December 31, 2001 64,286 721,895 5,990 792,171
Total assets:
September 30, 2002 $147,930 $718,456 $4,377 $870,763
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 $5,479 for the nine-month period ended September 30,
2002 and amortization of intangibles and goodwill of $8,929 for the
nine-month period ended September 30, 2001.
(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 $7,260 and impairment on properties held for sale of
$7,024 for the nine-month period ended September 30, 2002 and income
from discontinued operations of $3,787 for the nine-month period
ended September 30, 2001.
Note 7. Gain on Sale of Real Estate:
During the nine-month period ended September 30, 2002, the Company sold
properties in Fredericksburg, Virginia; Petoskey, Michigan; Urbana, Illinois;
Maumelle, Arkansas; Burnsville, Minnesota; Colville, Washington; McMinnville,
Tennessee and Casa Grande, Arizona for an aggregate of $13,604 and recognized a
net gain on sales of $1,766. In July 2002, the Company also 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 $26,000 and recognized a gain on sale of $1,796.
At December 31, 2001, the Company's 18.3 acre property in Los Angeles,
California was classified as held for sale. In January 2002, the Company
entered into a purchase and sales agreement with the Los Angeles Unified School
District (the "School District") to sell the property for $24,000, less costs,
and in June 2002 the sale was completed. 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 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, engaged a general
contractor to undertake the construction project.
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W. P. CAREY & CO. LLC
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 are 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, $200 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,
approximately $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 nine months ended September 30, 2002, the Company
recognized $115 of build-to-suit development fee management income.
During the nine months ended September 30, 2001, the Company sold nine
properties and an equity investment in a real estate partnership for $18,557
(including a note for $700) and recognized net gain on sales of $1,227.
Note 8. Acquisition of Real Estate:
On September 12, 2002, the Company used $14,379 from an escrow account which
had been funded with proceeds from the sale of properties to purchase
properties in Lenexa, Kansas; Winston-Salem, North Carolina and Dallas, Texas
and entered into a master net lease with BE Aerospace, Inc. ("BE Aerospace").
The lease has an initial term of fifteen years with two ten-year renewal
options. Initial annual rent is $1,421 with stated annual increases of 1.5%. On
October 29, 2002, the Company obtained limited recourse mortgage financing of
$9,200 collateralized by the BE Aerospace properties. The loan provides for
monthly payments of interest and principal of $56 at an annual interest rate of
6.11% and based on a thirty-year amortization schedule. The loan matures in
November 2012 at which time a balloon payment is scheduled.
On September 30, 2002, the Company purchased 1.5 acres of land in Broomfield,
Colorado for $744. The land is adjacent to an existing property and an
additional 11 acres of land. The Company intends to redevelop the property,
with various alternatives currently being evaluated.
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 results of operations and gain or loss
on sales of real estate for properties sold or held for sale are to be
reflected in the consolidated statements of operations as "Discontinued
Operations" for all periods presented. The provisions of SFAS No. 144 are
effective for disposal activities initiated by the Company's commitment to a
plan of disposition after the date it is initially applied (January 1, 2002).
Properties held for sale as of December 31, 2001 are not included in
discontinued operations. Properties sold in 2002 that were held for sale as of
December 31, 2001 include properties in Los Angeles, California; Urbana,
Illinois; Maumelle, Arkansas; Burnsville, Minnesota and Casa Grande, Arizona
and, accordingly, the results of operations and the related gain or loss on
sale for these properties are not included in "Discontinued Operations."
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W. P. CAREY & CO. LLC
As of September 30, 2002, the operations of seventeen properties which have
been sold or are held for sale as of September 30, 2002 are included as
"Discontinued Operations." A summary of the properties for the three and
nine-month periods ended September 30, 2002 and 2001 is as follows:
Three Months Ended September 30,
--------------------------------
2002 2001
------- -------
Revenues (primarily rental income, interest income
from direct financing leases and hotel revenues) $ 1,180 $ 2,709
Expenses (primarily interest, depreciation and hotel
expenses) (477) (1,230)
Impairment loss on real estate (2,703) -
Gain on sales of real estate 2,443 -
------- -------
Income from discontinued operations $ 443 $ 1,479
======= =======
Nine Months Ended September 30,
-------------------------------
2002 2001
------- -------
Revenues (primarily rental income, interest income
from direct financing leases and hotel revenues) $ 8,162 $ 7,509
Expenses (primarily interest, depreciation and hotel
expenses) (3,311) (3,722)
Impairment loss on real estate (7,024) -
Gain on sales of real estate 2,409 -
------- -------
Income from discontinued operations $ 236 $ 3,787
======= =======
Note 10. Assets Held for Sale and Impairment Loss on Real Estate:
The Company owns a property in Garland, Texas which lease expired in October
2002 and the property is currently vacant. The Company intends to sell the
property within the next twelve months. Based on its decision to market the
property for sale, the property was written down to its estimated fair value
less cost to sell, and an impairment loss of $1,670 was recognized in 2002.
The Company owns a property in Winona, Minnesota. Based on a deterioration in
the financial condition of the lessee 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 2002. The Company is currently
negotiating a sale of the property to the lessee and expects to sell the
property before December 31, 2002.
The Company owns a property located in College Station, Texas, a portion of
which was leased to Texas Digital Systems, Inc. ("Digital"). The Company
entered into an agreement with Digital to sell its portion of the property for
$844, which sale was completed in October 2002. The property was written down
to an amount equal to the estimated net sales proceeds and an impairment loss
on properties held for sale of $521 was recognized in 2002.
In connection with the anticipated sales of three additional properties within
the next twelve months, the Company has recognized impairment losses on
properties held for sale of $1,034 in 2002 on the writedown of the properties
to their anticipated sales price, less estimated costs to sell. One of the
properties, located in Glendale, Arizona, was sold in October 2002 for $685.
The results of operations and the impairment losses on the properties
classified as assets held for sale are included in discontinued operations
(also see Note 9).
Note 11. Goodwill and Intangible Assets:
In June 2001, the Financial Accounting Standards Board ("FASB") issued 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
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W. P. CAREY & CO. LLC
capable of being separated or divided and sold, transferred, licensed, rented
or exchanged or arise from contractual or legal rights (including leases), and
are amortized over their useful lives.
The 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 September 30, 2002 are summarized as
follows:
Gross Carrying Amount Accumulated Amortization
--------------------- ------------------------
Amortized intangible assets:
Management contracts $59,135 $(16,743)
======= ========
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 nine-month periods ended September
30, 2002 and 2001 is as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Goodwill amortization - $ 1,033 - $ 3,097
Trade name amortization - 118 - 353
Management contracts amortization $ 1,826 1,826 $ 5,479 5,479
Net income 12,985 11,237 50,307 35,628
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W. P. CAREY & CO. LLC
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
------- ------- ------- -------
Reported net income $12,985 $11,237 $50,307 $35,628
Add back: Goodwill amortization - 1,033 - 3,097
Trade name amortization - 118 - 353
------- ------- ------- -------
Adjusted net income $12,985 $12,388 $50,307 $39,078
======= ======= ======= =======
Basic earnings per share:
Reported net income $ .36 $ .33 $ 1.41 $ 1.04
Add back: Goodwill amortization - .03 - .09
Trade name amortization - - - .01
------- ------- ------- -------
Adjusted basic earnings per share $ .36 $ .36 $ 1.41 $ 1.14
======= ======= ======= =======
Diluted earnings per share:
Reported net income $ .36 $ .32 $ 1.39 $ 1.03
Add back: Goodwill amortization - .03 - .09
Trade name amortization - - - .01
------- ------- ------- -------
Adjusted diluted earnings per share $ .36 $ .35 $ 1.39 $ 1.13
======= ======= ======= =======
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 12. Accounting Pronouncements:
In June 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 11.
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 10.
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
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W. P. CAREY & CO. LLC
disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company does
not expect SFAS No. 146 to have a material effect on the Company's financial
statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for
the acquisitions of certain financial institutions and includes long-term
customer relationships as intangible assets within the scope of SFAS No. 144.
The Company does not expect SFAS No. 147 to have a material effect on its
financial statements.
Note 13. Subsequent Event:
In January 2002, The Gap, Inc. ("the Gap") a lessee of two properties located
in Erlanger, Kentucky, notified the Company that it would not renew its leases
which expire in February 2003. Annual rent under the leases is $2,205. In
October 2002, the Company reached an agreement with the Gap for a lease
termination settlement pursuant to a make-whole provision in the Gap lease.
Under the settlement, the Company will receive a payment from the Gap of $2,250
by no later than March 1, 2003.
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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 September 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 fewer than 30 lessees represent more than 75% of
annual rents, 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. WPC is required
to perform a review of its estimate of residual value of its direct financing
leases at least annually. Such annual review is currently being performed.
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 fees are earned when services are 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 for
performance based fees when the specific performance criteria are achieved.
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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 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 $12,985 and
$11,237 and income from continuing operations of $12,542 and $9,758 for the
three-month periods ended September 30, 2002 and 2001, respectively, and net
income of $50,307 and $35,628 and income from continuing operations of $50,071
and $31,841 for the nine-month periods ended September 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 change for amortization had been retroactively
applied, the overall increase in net income would have been $597 and $11,229
for the comparable three-month and nine-month periods (also see Note 11 to the
accompanying condensed consolidated financial statements). The results from
continuing operations for the nine-month period ended September 30, 2002
include a gain of $11,160 on the sale of a property in Los Angeles, California.
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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)
In addition to the effect of the change in amortizing goodwill and
indefinite-lived intangible assets and the gain of $11,160 on the sale of the
Los Angeles property, the increases in income from continuing operations for
the comparable three-month and nine-month periods were due to increases in
management income and, to a lesser extent, an increase in other interest income
and a decrease in interest expense. These were partially offset by increases in
the provision for income taxes and general and administrative expenses and, to
a lesser extent, decreases in income from equity investments. Results for the
comparable three-month periods were also affected by an increase in property
expenses, and results for the comparable nine-month periods were affected by a
decrease in other income.
Net operating income from real estate operations (income before gains and
losses, income taxes, minority interest, and discontinued operations) decreased
to $7,089 from $7,888 and to $26,351 from $28,288, respectively, for the
comparable three and nine-month periods ended September 30, 2002 and 2001. The
decrease in income for the comparable three and nine-month periods was
primarily due to decreases in income from equity investments and, to a lesser
extent, a decrease in lease revenues (rental income and interest income from
direct financing leases), partially offset by decreases in interest expense,
and the $763 impairment loss on real estate recognized in September 2001.
Results for the comparable three-month periods were also affected by an
increase in property expenses. For the comparable nine-month periods, results
were affected by a decrease in other income; however, other interest income
increased.
The decrease in income from equity investments was primarily 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. WPC recognized income of $47
and a loss of $452 on the MeriStar equity investment in the three-month and
nine-month periods ended September 30, 2002 as compared with income of $429 and
$1,483 from its investment in MeriStar in the three-month and nine-month
periods ended September 30, 2001.
Lease revenues (rental income and interest income from direct financing leases)
decreased by $300 and $922, respectively, for the comparable three-month and
nine-month periods ended September 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 four properties classified as
held for sale as of December 31, 2001 (and not reclassified as discontinued
operations) and the termination of the Thermadyne lease. This was partially
offset by a new lease in France with Bouygues Telecom, S.A. and an increase in
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 a new
lease with BE Aerospace on a property purchased during the third quarter of
2002 as well as several rent increases on existing leases. Annual rent from the
BE Aerospace lease is $1,421. After obtaining $9,200 of mortgage financing in
October 2002, annual cash flow (rent less mortgage debt service) from the BE
Aerospace properties will be $750
The decrease in interest expense for the three-month and nine-month periods
ended September 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 since September 30, 2001. The average outstanding balance on the
credit facility decreased by approximately $30,000 and the average interest
rate decreased to 3.01% from 6.01% for the comparable nine-month periods. In
June 2002, WPC paid off $12,580 in mortgage bonds on the Alpena and Petoskey
hotel properties. The Petoskey property was subsequently sold in August 2002
The payoff of the bonds on the Alpena property will result in an annual
decrease in interest expense of more than $500. 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. In July 2002
WPC obtained new financing of $7,000 on one of its properties located in
Doraville, Georgia.
Property expenses increased by $1,263 for the comparable three-month periods
ended September 30, 2002 and 2001. Property expenses for the prior year's
nine-month period included a nonrecurring, noncash charge in connection with
the writeoff of $1,321 of straight-line rents as uncollectible in connection
with restructuring the lease with Livho,
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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)
Inc. Excluding the writeoff, property expenses for the comparable nine-month
periods ended September 30 2002 and 2001 would have increased by $1,445. The
increases in property expenses, as adjusted, for the three-month and nine-month
period ended September 30, 2002 and 2001 were primarily due to increases in
real estate taxes, property insurance, property management and professional
services and property maintenance expenses as a result of the termination of
the Thermadyne Holdings Corp. lease in 2002 as well as an increase in costs
related to properties that are either vacant or non-net leased, 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.
Other income generally consists of lease termination payments and other
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. The results for the prior
year's nine-month period include 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 increase in other interest income for the three and nine-month periods
ended September 30, 2002 and 2001 is primarily related to interest earned on
deferred acquisition fees which are payable by three of the CPA(R) REITs that
it advises. The interest rates on the unpaid fees range from 6% to 7%.
Future operating cash flow will be affected by lease terminations and sales of
properties. 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 $817 to a tenant that currently occupies
the space on a month-to-month basis and is seeking to re-market the remaining
space. WPC is also actively remarketing the remaining space. In April 2002
Pillowtex, Inc. terminated its lease under its plan of reorganization, and
vacated WPC's property in Salisbury, North Carolina in April. Pillowtex's
annual rent was $691. In July, WPC sold six properties which had been leased to
Saint-Gobain Corporation and paid off an existing mortgage loan. Annual cash
flow (rentals less mortgage debt service) from the Saint-Gobain properties was
$900 and was to decrease as a result of an interests rate reset provision which
would have increased debt service. Substantially all of the funds from the
Saint-Gobain sale were used to purchase a new real estate investment.
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. 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 and the Gap have negotiated
a lease termination settlement and WPC will receive $2,250 by no later than
March 1, 2003. In June 2002, Wozniak Industries, Inc. notified WPC that it
would not renew its lease, which expires in 2003 and contributes annual rent of
$497. WPC owns a property in Garland, Texas leased to Varo, Inc. which lease
expired in October 2002. Annual rents on the Varo property were $823. WPC is
actively remarketing the Gap and Pillowtex properties, evaluating its strategy
for the Wozniak property and intends to sell the Varo property in "as-is"
condition.
Two leases with Federal Express Corporation were extended for five years and a
lease with Verizon Communications, scheduled to expire in February, was
extended for an additional ten-year term. A lease with Lockheed Martin
Corporation for a portion of a property in Oxnard, California has been extended
through February 2003 with an additional renewal depending on extension of
certain government contracts. Annual rent under the Lockheed lease is $524.
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
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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)
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.
The former Red Bank property is currently classified as held for sale.
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. Due to
declining operating results, WPC has agreed to amend its lease with Livho, with
annual rents being reduced, effective in January 2003, to $1,800 from $2,520.
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.
Net operating income from WPC's management services operations for the
three-month and nine-month periods ended September 30, 2002 was $9,077 and
$21,815 as compared with $2,159 and $7,403 for the comparable three-month and
nine-month periods ended September 30, 2001. Results include noncash charges
for amortization of intangible assets of $1,826 and $5,479 for the three-month
and nine-month periods ended September 30, 2002 and amortization of goodwill
and intangible assets of $2,977 and $8,929 for the comparable periods in 2001.
Excluding the charges for amortization, operating income from management
services would have been $10,903 and $27,294, respectively, for the three-month
and nine-month periods ended September 30, 2002 and $5,136 and $16,332,
respectively, for the comparable periods ended September 30, 2001.
Total revenues earned by the management services operations for the three-month
and nine-month periods ended September 30, 2002 were $18,669 and $50,752,
respectively, compared with $11,141 and $32,189 for the comparable periods
ended September 30, 2001. Management fee revenues were comprised of transaction
fees of $9,755 and $23,937 for the three-month and nine-month periods ended
September 30, 2002 compared with $4,336 and $10,087 for the three-month and
nine-month periods ended September 30, 2001 and asset-based fees and
reimbursements of $8,914 and $26,815 for the three-month and nine-month periods
ended September 30, 2002 and $6,806 and $22,103 for the three-month and
nine-month periods ended September 30, 2001. Transaction fees included fees
from structuring acquisitions and financing on behalf of the CPA(R) REITs. WPC
has structured $197,000 and $485,000 of acquisitions on behalf of the CPA(R)
REITs for the three-month and nine-month periods ended September 30, 2002, as
compared with $89,000 and $210,000 for the three-month and nine-month periods
ended September 30, 2001. Since September 30, 2002, WPC and affiliates have
structured an additional $41,652 of acquisitions on behalf of the CPA(R) REITs.
Transaction volume is generally highest in the fourth quarter.
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. As the real estate asset bases of CPA(R):14 and
CPA(R):15 continue to increase, management and performance fees are expected to
continue to increase.
As of November 8, 2002, the CPA(R) REITs had in excess of $350,000 of cash
available for investment. Corporate Property Associates 15 Incorporated
("CPA(R):15") will fully subscribe its initial $400,000 "best efforts" public
offering in November 2002. CPA(R): 15 has filed with the United States
Securities and Exchange Commission to increase the current offering by $100,000
and to commence a second "best efforts" public offering of up to
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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)
$600,000. 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. The cash available for investment and
additional funds that WPC expects CPA(R): 15 to raise have the potential to
increase the asset base of the CPA(R) REITs by more than $1,000,000.
Accordingly, both transaction and asset-based fees are projected to increase.
During 2002, CPA(R):15 entered into a sales agreement with UBS PaineWebber
which commenced sales of CPA(R): 15 during the second quarter. In October 2002,
A.G. Edwards commenced selling CPA(R): 15.
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, did not result in a change in assets under management, so that the
asset-based fees earned by WPC were 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.
During September 2002, WPC completed a commercial mortgage-backed
securitization which obtained $172,335 of limited recourse mortgage financing,
primarily on behalf of three CPA(R) REITs. The loans were pooled into a trust,
Carey Commercial Mortgage Trust, a non-affiliate whose assets consist solely of
the loans. The trust offered $148,206 as collateralized mortgage obligations in
a private placement to institutional investors. A subordinated interest of
$24,129 was retained by the CPA(R) REITs (of which a 1% interest is held by
WPC). Through this securitization, WPC enabled the CPA(R) REITs to obtain
mortgage financing on favorable terms and to find a potential new source of
future mortgage financing.
Income tax expense for the three-month and nine-month periods ended September
30, 2002 increased by $1,178 and $5,432 over the comparable three-month and
nine-month periods ended September 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 due primarily to 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. Reimbursement for personnel-related costs for
the comparable three-month and nine-month periods ended September 30, 2002 and
2001 was $1,376 and $1,696, respectively, and $3,891 and $4,805, respectively.
A portion of personnel charges is directly related to CPA(R) REIT capital
raising and acquisitions activities and the increase in these activities has
directly contributed to the increase in personnel-related costs. Of the
increase in personnel costs for the comparable nine-month periods, $710
reflected an increase in the non-cash charges relating to WPC's share incentive
plans.
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 operating activities and distributions received from equity
investments for the nine-month period ended September 30, 2002 of $55,786 were
sufficient to fund dividends to shareholders of $45,290. 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.
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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)
Investing activities included using $2,051 for purchases of real estate and
additional capital expenditures. The capital expenditures included using $744
for the purchase of a vacant parcel of land adjacent to existing properties in
Broomfield, Colorado, $504 for the final funding of the commitments at the AT&T
and Sprint properties and $803 to fund other improvements. WPC also received
$48,514 in connection with the sales of properties and investments including
the sale of a property located in Los Angeles, California for $24,000. The
proceeds from the sale of the Los Angeles property were primarily used to pay
down a portion of WPC's balance on its credit facility. WPC used $10,751,
representing the cash portion of the proceeds from the sale of properties
leased to Saint-Gobain Corporation, to pay off the limited recourse mortgage
loan on the properties. The remaining net proceeds from the Saint-Gobain sale
of $15,174 were placed 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. The Company used $14,378 of the Saint-Gobain
escrow to acquire three properties leased to BE Aerospace. Funds of $9,366 from
a property sale in 2001 which had been placed in an escrow account for the
purpose of structuring a tax-deferred exchange were released in 2002 and no
exchange was completed. Commitments for capital expenditures on the Livonia
and Alpena, Michigan hotels are currently estimated to be approximately $229.
WPC is evaluating redevelopment plans for the Broomfield property but has not
determined the cost of such redevelopment. 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.
In addition to paying dividends to shareholders, WPC's financing activities for
the nine-month period ended September 30, 2002 included reducing its
outstanding balance of its credit facility by $46,000, paying off $12,580 in
revenue bonds on the Alpena and Petoskey hotel properties and obtaining
mortgage financing on its Doraville, Georgia property of $7,000. Debt service
on the Alpena and Petoskey bonds was approximately $1,600. WPC's outstanding
balance on the credit facility was $49,000 as of September 30, 2002. WPC also
made scheduled principal payment installments of $6,233 on existing mortgages.
WPC uses limited recourse mortgages as a substantial portion of its long-term
financing because a lender of a limited recourse mortgage loan has recourse
only to the properties collateralizing its loan and not to any of WPC's other
assets.
WPC's financing activities included proceeds of $8,471 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 nine-month period ended September 30,
2002 based on meeting performance criteria as of December 31, 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 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 2004. WPC
has a one-time right to increase the commitment to up to $225,000. 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. As of September 30, 2002, WPC has guaranteed loans of $8,126 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
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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)
and the acquisition of the management operations. During October 2002, payments
of approximately $1,850 have been made by certain officers in partial and/or
full satisfaction of their loan balances.
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 $176,434 $2,091 $11,088 $25,168 $8,031 $24,638 $105,418
Unsecured note payable 49,000 49,000
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 1,926 111 484 484 484 363 -
-------- ------ ------- ------- ------ ------- --------
$232,118 $2,202 $14,096 $75,176 $9,039 $25,525 $106,080
======== ====== ======= ======= ====== ======= ========
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 June 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 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
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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)
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 September 30, 2002, the operations of
seventeen 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 nine-month period ended September 30, 2002,
one of which were subsequently sold in October 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 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for
the acquisitions of certain financial institutions and includes long-term
customer relationships as intangible assets within the scope of SFAS No. 144.
The Company does not expect SFAS No. 147 to have a material effect on its
financial statements.
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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.
$138,180 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 September 30, 2002
ranged from 3.025% to 6.44%. The interest on the fixed rate debt as of
September 30, 2002 ranged from 6.85% to 9.15%.
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 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $1,761 $9,821 $23,621 $6,447 $22,853 $73,677 $138,180 $140,302
Weighted average
interest rate 7.61% 7.77% 8.04% 7.50% 7.27% 7.39%
Variable rate debt $ 330 $1,267 $50,548 $1,584 $ 1,785 $31,740 $ 87,254 $ 87,254
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.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
September 30, 2002.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its co-chief executive officers and chief
financial officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and
reported, within the required time periods.
Based upon this review, the Company's co-chief executive officers and chief
financial officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
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W. P. CAREY & CO. LLC
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2002, no matters were submitted
to a vote of Security Holders.
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 September 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
11/11/2002 By: /s/ John J. Park
---------- ----------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/11/2002 By: /s/ Claude Fernandez
---------- ----------------------------------
Date Claude Fernandez
Executive Vice President -
Financial Operations
(Principal Accounting Officer)
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W. P. CAREY & CO. LLC
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of W. P. Carey & Co. LLC
(the "Registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and we have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002 Date 11/11/2002
---------------------------- ----------------------------
/s/ William Polk Carey /s/ Gordon F. Dugan
---------------------------- ----------------------------
William Polk Carey Gordon F. DuGan
Chairman President
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
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W. P. CAREY & CO. LLC
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of W. P. Carey & Co. LLC
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002
------------------
/s/ John J. Park
-----------------------
John J. Park
Chief Financial Officer
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