Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 001-13779
W. P. CAREY & CO. LLC
("WPC")
(FORMERLY CAREY DIVERSIFIED LLC)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3912578
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) oF THE ACT
LISTED SHARES, NO PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes|X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |.
As of June 28, 2002, the aggregate market value of the Registrants' Listed
Shares held by non-affiliates was $571,556,700.
As of March 25, 2003, there are 36,031,022 Listed Shares of Registrant
outstanding.
WPC incorporates by reference its definitive Proxy Statement with respect
to its 2003 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission within 120 days following the end of its fiscal year, into
Part III of this Report.
PART I
Item 1. Business.
W. P. Carey & Co. LLC (the "Company" or "WPC") is a real estate investment and
advisory company that acquires and owns commercial properties leased to
companies nationwide, primarily on a triple net basis and earns fees as the
advisor to four affiliated CPA(R) REITs that each make similar investments.
Under the advisory agreements with the CPA(R) REITs, the Company performs
services related to the day-to-day management of the CPA(R) REITs and
transaction-related services. In addition, the Company's broker-dealer
subsidiary earns fees in connection with the public offerings of CPA(R) REIT
shares. W. P. Carey & Co. LLC both owns and manages commercial and industrial
properties located in 43 states and Europe, net leased to more than 250 tenants.
As of December 31, 2002, WPC's portfolio consisted of 164 properties in the
United States and 6 properties in Europe and totaled more than 19 million square
feet. In addition, W. P. Carey & Co. LLC manages over 300 additional net leased
properties on behalf the CPA(R) REITs: Carey Institutional Properties
Incorporated, Corporate Property Associates 12 Incorporated, Corporate Property
Associates 14 Incorporated and Corporate Property Associates 15 Incorporated
("CPA(R):15"). In April 2002, Carey Institutional Properties acquired the
business operations of Corporate Property Associates 10 Incorporated
("CPA(R):10"), a REIT that was also managed by WPC, in a stock-for-stock merger.
WPC's core real estate investment strategy for itself and on behalf of the
CPA(R) REITs is to purchase properties leased to a variety of companies on a
single tenant net lease basis that are either owned outright or owned by an
entity managed by WPC.
These leases generally place the economic burden of ownership on the tenant by
requiring them to pay the costs of maintenance, insurance, taxes, structural
repairs and other operating expenses. WPC also generally seeks to include in its
leases:
- clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index or other
indices or, when appropriate, increases tied to the volume of sales
at the property;
- covenants restricting the activity of the tenant to reduce the risk
of a change in credit quality;
- indemnification of WPC for environmental and other liabilities; and
- guarantees from parent companies or other entities.
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 the CPA(R) REITs. 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
Agreements of the 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.
The Company was formed as a limited liability company under the laws of Delaware
on July 15, 1996. Since January 1, 1998, the Company has been consolidated with
nine Corporate Property Associates limited partnerships and their successors and
is the General Partner and owner of all of the limited partnership interests in
each partnership. The Company's shares began trading on the New York Stock
Exchange on January 21, 1998. As a limited liability company, WPC is not subject
to federal income taxation as long as it satisfies certain requirements relating
to its operations.
WPC's principal executive offices are located at 50 Rockefeller Plaza, New York,
NY 10020 and its telephone number is (212) 492-1100. WPC's website address is
http://www.wpcarey.com. As of December 31, 2002, WPC employed no employees
directly, however a wholly-owned subsidiary of WPC employs over 120 individuals
who perform services for WPC.
BUSINESS OBJECTIVES AND STRATEGY
WPC's objective is to increase shareholder value and its funds from operations
through prudent management of its real estate assets and opportunistic
investments and through the expansion of its asset and private equity management
business. WPC expects to evaluate a number of different opportunities in a
variety of property types and geographic locations and to pursue the most
attractive based upon its analysis of the risk/return tradeoffs. WPC will
continue to own properties as long as it believes ownership helps attain its
objectives.
-1-
WPC presently intends to:
- seek additional investment and other opportunities that leverage
core management skills (which include in-depth credit analysis,
asset valuation and sophisticated structuring techniques)
- increase revenues from the management business by increasing assets
under management as the CPA(R) REITs acquire additional property and
organize new investment entities;
- optimize the current portfolio of properties through expansion of
existing properties, timely dispositions and favorable lease
modifications;
- utilize its size and access to capital to refinance existing debt;
and
- increase its access to capital.
DEVELOPMENTS DURING 2002
During 2002, WPC and affiliates structured more than $981,000,000 of
acquisitions on behalf of the CPA(R) REITs as compared with $395,000,000 in
2001, which resulted in structuring fees earned by WPC's management business
increasing by approximately $29,845,000.
CPA(R):15 completed a "best efforts" public offering of $400,000,000 of its
common stock, and will attempt to raise up to an additional $690,000,000 in 2003
pursuant to a registration statement currently on file with the Securities and
Exchange Commission. In 2002, CPA(R):15 entered into sales agreements with two
additional major broker-dealers, UBS Paine Webber and A. G. Edwards. WPC's
broker-dealer subsidiary earned fees of approximately $1,918,000, net of amounts
re-allowed to broker-dealers.
During September 2002, WPC completed a commercial mortgage-backed securitization
which obtained $172,335,000 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 $148,206,000 as collateralized mortgage obligations in
a private placement to institutional investors. A subordinated interest of
$24,129,000 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
limited recourse mortgage financing on favorable terms for properties that are
difficult to finance and to find a potential new source of future mortgage
financing.
Pursuant to its merger agreement for the management services operations and in
connection with meeting specified performance criteria as of December 31, 2001,
500,000 shares were issued during the first quarter of 2002. For the year ended
December 31, 2002, WPC met one of the targets and, as a result, 400,000 shares
will be issued in 2003.
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 $1,423,000 subordinated
preferred return was paid in January 2002.
In January 2002, The Gap, Inc. a lessee of two properties located in Erlanger,
Kentucky, notified WPC that it would not renew its leases which expired in
February 2003 and contributed annual rent of $2,205,000. In October 2002, WPC
reached an agreement with the Gap for a lease termination settlement pursuant to
a make-whole provision in the Gap lease. Under the make-whole provision, WPC
received a payment from the Gap of $2,250,000 in February 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 $497,000. In
February 2003, WPC entered into an agreement for the sale of the Wozniak
property for approximately $2,400,000, subject to due diligence by the buyer,
and the sale was completed in March 2003.
In December 2001, Thermadyne Holdings Corp. filed a petition of bankruptcy and
subsequently vacated WPC's City of Industry, California property in February
2002. Annual rents from Thermadyne were $2,525,000. In December 2002, WPC
entered into an agreement, to re-lease a portion of the space for $873,000 to
the tenant that was occupying the space on a month-to-month basis, and is
re-marketing the remaining space. In April 2002, Pillowtex Corporation
terminated its lease under its plan of reorganization, and vacated WPC's
property in Salisbury, North Carolina in April. Pillowtex's annual rent was
$691,000. WPC is continuing to seek a new tenant for the Pillowtex property.
Two leases with Federal Express Corporation on properties located in Corpus
Cristi, and College Station, Texas were extended for five years, a lease with
Verizon Communications, Inc. on WPC's Milton, Vermont property was extended for
ten years, and leases with Honeywell, Inc. for a portion of two properties in
Houston, Texas was extended for three years.
-2-
Annual rental income under the Federal Express, Verizon and Honeywell leases is
$804,000. New leases, each with ten-year terms, were entered into with Petrocon
Engineering, Inc. and Tooling Systems, LLC, for a portion of a property in
Beaumont, Texas and Frankenmuth, Michigan, respectively. Annual rental income
from the two leases is $580,000. Both had been tenants under short-term leases.
Two leases with Lockheed Martin Corporation for a portion of properties located
in Oxnard, California and Houston, Texas have been extended through December
2003 and December 2007, respectively, with an additional extension on the Oxnard
property if Lockheed Martin has certain government contracts renewed. Annual
rents under the two Lockheed leases are $891,000. Lockheed also leases a
property in King of Prussia, Pennsylvania which term expires in July 2003 and
provides annual rent of $974,000. Lockheed Martin is in the process of extending
the King of Prussia lease for five years at an annual rent of $797,000. Pre
Finish Metals Incorporated renewed its lease, which had been scheduled to expire
in June 2003, for five years at an annual rent of $892,000.
In July 2002, WPC sold six properties leased to Saint-Gobain Corporation located
in New Haven, Connecticut; Mickelton, NJ; Aurora, Ohio; Mantua, Ohio and
Bristol, Rhode Island for $26,000,000. WPC used a portion of the sales proceeds
to pay off a limited recourse mortgage of $10,751,000 on the properties. WPC
placed the remaining proceeds of the sale in an escrow account for the purpose
of entering into a Section 1031 noncash exchange which, under the Internal
Revenue Code, the Company acquired like-kind property, and deferred a taxable
gain until the new property is sold.
In September 2002, WPC used $14,379,000 from the escrow account funded from the
Saint-Gobain sale to purchase properties in Lenexa, Kansas, Winston-Salem, North
Carolina and Dallas, Texas and entered into a master net lease with BE
Aerospace, Inc. The lease has an initial term of fifteen years with two ten-year
renewal options and initial annual rent is approximately $1,421,000 with stated
annual increases of 1.5%.
In December 2002, WPC purchased a 36% interest in two properties leased to
Hologic, Inc. from CPA(R):15 for $11,714,000. The properties, land and buildings
located in Danbury, Connecticut and Bedford, Massachusetts, were purchased by
CPA(R):15 in August 2002. The lease has an initial term of 20 years with four
five-year renewal terms. Annual rent is $3,155,940 with the first rent increase
on the fifth anniversary of the lease and every five years thereafter.
During 2002, WPC sold twelve additional properties for approximately $40,579,000
including the sale of a property located in Los Angeles, California for
$24,000,000. The other properties sold were in Fredericksburg, Virginia;
Petoskey, Michigan; Urbana, Illinois; Maumelle, Arkansas; Burnsville, Minnesota;
Colville, Washington; McMinnville, Tennessee; Frankenmuth, Michigan; College
Station, Texas and Casa Grande and Glendale, Arizona
In September 2002, WPC purchased 1.5 acres of land in Broomfield, Colorado for
$640,000. The land is adjacent to WPC's existing properties. WPC intends to
redevelop the property, with various alternatives currently being evaluated.
In 1999, subsequent to the termination of a lease, WPC commenced redeveloping
its property in Los Angeles, California. In June 2002, WPC sold the property to
the Los Angeles Unified School District ("LAUSD"). Subsequent to the sale of the
property in Los Angeles to LAUSD in June 2002, a subsidiary of WPC entered into
a build-to-suit development management agreement with LAUSD 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. 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 LAUSD. WPC's maximum liability under the build-to-suit
agreement is the amount of build-to-suit management fees paid to WPC, up to
$3,500,000. Upon delivery of the school, WPC 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
WPC expressly have no liability. Under the construction agreement with the
general contractor, a subsidiary is acting as a conduit for the payments made by
LAUSD and is only obligated to make payments to the general contractor based on
payments received, except for a maximum guarantee of up to $2,000,000 for
nonpayment. The build-to-suit development agreement provides for fees of up to
$4,700,000 and an early completion incentive fee of $2,000,000 if the project is
completed before September 1, 2004. The subsidiary would be obligated to share
10% of the early completion fee with its joint venture partner in the project.
The joint venture partner does not participate in the other fees received from
LAUSD or any income or loss of the subsidiary.
In January 2002, WPC received proceeds of $9,366,000 from funds that were being
held in an escrow account from the July 2001 sale of its property in Arkansas
leased to Duff-Norton Company, Inc. WPC had placed the proceeds from the sale in
an escrow account for the purpose of entering into a Section 1031 noncash
exchange. The funds were transferred to WPC in January 2002 as the proposed
exchange was not completed.
-3-
In June 2002, WPC paid off $12,580,000 in mortgages notes payable on its Alpena
and Petoskey hotel properties. The Petoskey property was subsequently sold in
August 2002. The Alpena and Petoskey bonds were also collateralized by mortgages
and lease assignments on eight other properties. WPC obtained new limited
recourse mortgage financing of $7,000,000 on a property leased to Quebecor, Inc.
and $9,200,000 collateralized by the BE Aerospace properties which mature in
April 2007 and November 2012, respectively.
In December 2002, WPC entered into a series of agreements with Faurecia Exhaust
Systems, Inc., the lessee of two properties in Toledo, Ohio. In consideration
for terminating the existing lease and vacating one of the properties, WPC
received a promissory note of $4,240,000, which matured in January 2003 at which
time it was paid. The term of the original lease had been scheduled to expire in
2007. In connection with vacating this property, WPC was assigned rights, by
Faurecia, as landlord, to a sublease at the property. The sublease agreement
provides for annual rents of $357,000 through November 2005, and has been
guaranteed by Faurecia. The terminated lease provided for annual rental income
of $1,617,000. WPC will recognize the restructuring consideration over a period
equivalent to the former lease term. WPC is remarketing 750,000 square feet at
the property. Simultaneously, Faurecia entered into a separate lease agreement
for the remaining property. The new Faurecia lease has a 20-year term at an
annual rent of $336,000.
ACQUISITION STRATEGIES
WPC has a well-developed process with established procedures and systems for
acquiring net leased property for itself and in its capacity as advisor to the
CPA(R) REITs. As a result of its reputation and experience in the industry and
the contacts maintained by its professionals, WPC has a presence in the net
lease market that has provided it with the opportunity to invest in a
significant number of transactions on an ongoing basis. In evaluating
opportunities, WPC carefully examines the credit, management and other
attributes of the tenant and the importance of the property under consideration
to the tenant's operations. Careful credit analysis is a crucial aspect of every
transaction. WPC believes that it has one of the most extensive underwriting
processes in the industry and has an experienced staff of professionals involved
with underwriting transactions. WPC seeks to identify those prospective tenants
whose creditworthiness is likely to improve over time. WPC believes that its
experience in structuring sale-leaseback transactions to meet the needs of a
prospective tenant enables it to obtain a higher return for a given level of
risk than would typically be available by purchasing a property subject to an
existing lease.
WPC's strategy in structuring net lease investments is to:
- combine the stability and security of long-term lease payments,
including rent increases, with the appreciation potential inherent
in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type of
facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements from the
tenant when possible, such as warrants to purchase tenant common
stock.
FINANCING STRATEGIES
Consistent with its investment policies, WPC uses leverage when available on
favorable terms. WPC has in place a credit facility of up to $185 million (with
an option to increase the facility to $225 million), which it has used and
intends to continue to use for, but not limited to, acquiring additional
properties, funding build-to-suit projects and refinancing existing debt. As of
December 31, 2002, WPC also had approximately $186 million in property-level
debt outstanding and $49 million outstanding under the line of credit. WPC
continually seeks opportunities and considers alternative financing techniques
to refinance debt, reduce interest expense or improve its capital structure,
such as the mortgage securitization completed on behalf of the CPA(R) REITs
described above.
TRANSACTION ORIGINATION
In analyzing potential acquisitions for itself and on behalf of the CPA(R)
REITs, WPC reviews and structures many aspects of a transaction, including the
tenant, the real estate and the lease, to determine whether a potential
acquisition can be structured to satisfy its acquisition criteria. The aspects
of a transaction which are reviewed and structured by WPC include the following:
Tenant Evaluation. WPC evaluates each potential tenant for its credit,
management, position within its industry, operating history and profitability.
WPC seeks tenants it believes will have stable or improving credit. By leasing
properties to these tenants, WPC can generally charge rent that is higher than
the rent charged to tenants with recognized credit and thereby
-4-
enhance its current return from these properties as compared with properties
leased to companies whose credit potential has already been recognized by the
market. Furthermore, if a tenant's credit does improve, the value of WPC's or
the CPA(R) REIT's property will likely increase (if all other factors affecting
value remain unchanged). WPC may also seek to enhance the likelihood of a
tenant's lease obligations being satisfied, such as through a letter of credit
or a guaranty of lease obligations from the tenant's corporate parent. This
credit enhancement provides WPC and the CPA(R) REITs with additional financial
security. In evaluating a possible investment, the creditworthiness of a tenant
generally will be a more significant factor than the value of the property
absent the lease with such tenant. While WPC will select tenants it believes are
creditworthy, tenants will not be required to meet any minimum rating
established by an independent credit rating agency. WPC's and the investment
committee's standards for determining whether a particular tenant is
creditworthy vary in accordance with a variety of factors relating to specific
prospective tenants. The creditworthiness of a tenant is determined on a tenant
by tenant, case by case basis. Therefore, general standards for creditworthiness
cannot be applied.
Leases with Increasing Rent. WPC seeks to include a clause in each lease that
provides for increases in rent over the term of the lease. These increases are
generally tied to increases in indices such as the consumer price index. In the
case of retail stores, the lease may provide for participation in gross sales
above a stated level. The lease may also provide for mandated rental increases
on specific dates or other methods that may not be in existence or contemplated
by us as of the date of this report. WPC seeks to avoid entering into leases
that provide for contractual reductions in rents during their primary term.
Properties Important to Tenant Operations. WPC generally seeks to acquire
properties with operations that are essential or important to the ongoing
operations of the tenant. WPC believes that these properties provide better
protection in the event a tenant files for bankruptcy, since leases on
properties essential or important to the operations of a bankrupt tenant are
less likely to be terminated by a bankrupt tenant. WPC also seeks to assess the
income, cash flow and profitability of the business conducted at the property so
that, if the tenant is unable to operate its business, it and the CPA(R) REITs
can either continue operating the business conducted at the property or re-lease
the property to another entity in the industry which can operate the property
profitably.
Lease Provisions that Enhance and Protect Value. When appropriate, WPC attempts
to include provisions in its leases that require its consent to specified tenant
activity or require the tenant to satisfy specific operating tests. These
provisions include, for example, operational and financial covenants of the
tenant, prohibitions on a change in control of the tenant and indemnification
from the tenant against environmental and other contingent liabilities. These
provisions protect WPC's and the CPA(R) REITs' investment from changes in the
operating and financial characteristics of a tenant that may impact its ability
to satisfy its obligations to WPC and the CPA(R) REITs or could reduce the value
of their properties.
Diversification. WPC will attempt to diversify its and the CPA(R) REITs'
portfolio to avoid dependence on any one particular tenant, type of facility,
geographic location or tenant industry. By diversifying the portfolios, WPC
reduces the adverse effect of a single under-performing investment or a downturn
in any particular industry or geographic region.
WPC uses a variety of other strategies in connection with its acquisitions.
These strategies include attempting to obtain equity enhancements in connection
with transactions. Typically, these equity enhancements involve warrants to
purchase stock of the tenant or the stock of the parent of the tenant. If the
value of the stock exceeds the exercise price of the warrant, equity
enhancements help WPC and the CPA(R) REITs to achieve their goal of increasing
funds available for the payment of distributions.
As a transaction is structured, it is evaluated by the chairman of WPC's
investment committee. Before a property is acquired, the transaction is reviewed
by the investment committee to ensure that it satisfies WPC's and the CPA(R)
REIT's investment criteria. The investment committee is not directly involved in
originating or negotiating potential acquisitions, but instead functions as a
separate and final step in the acquisition process. WPC places special emphasis
on having experienced individuals serve on its investment committee and does not
invest in a transaction unless it is approved by the investment committee.
WPC believes that the investment committee review process gives it a unique
competitive advantage over other net lease companies because of the substantial
experience and perspective that the investment committee has in evaluating the
blend of corporate credit, real estate and lease terms that combine to make an
acceptable risk.
The following people serve on the investment committee:
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance Society
of the United States and has been involved with the CPA(R) programs
for over 20 years.
-5-
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer was
responsible for all of Prudential's investments, including stocks,
bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice President --
Head of Bond & Corporate Finance Department of the John Hancock
Mutual Life Insurance Company. His responsibility included
overseeing fixed income investments for Hancock, its affiliates and
outside clients.
- Lawrence R. Klein is the Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton School.
Dr. Klein has been awarded the Alfred Nobel Memorial Prize in
Economic Sciences and currently advises various governments and
government agencies.
ASSET MANAGEMENT
WPC believes that effective management of net lease assets is essential to
maintain and enhance property values. Important aspects of asset management
include restructuring transactions to meet the evolving needs of current
tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process. WPC monitors, on an ongoing basis,
compliance by tenants with their lease obligations and other factors that could
affect the financial performance of any of its properties. Monitoring involves
receiving assurances that each tenant has paid real estate taxes, assessments
and other expenses relating to the properties it occupies and confirming that
appropriate insurance coverage is being maintained by the tenant. WPC reviews
financial statements of its tenants and undertakes regular physical inspections
of the condition and maintenance of its properties. Additionally, WPC
periodically analyzes each tenant's financial condition, the industry in which
each tenant operates and each tenant's relative strength in its industry.
COMPETITION
WPC faces competition for the acquisition of office and industrial properties in
general, and such properties net leased to major corporations in particular,
from insurance companies, credit companies, pension funds, private individuals,
investment companies and CPA(R) REITs. WPC also faces competition from
institutions that provide or arrange for other types of commercial financing
through private or public offerings of equity or debt or traditional bank
financings. WPC believes its management's experience in real estate, credit
underwriting and transaction structuring will allow it to compete effectively
for office and industrial properties.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. WPC's leases often provide
that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.
WPC typically undertakes an investigation of potential environmental risks when
evaluating an acquisition. Phase I environmental assessments are performed by
independent environmental consulting and engineering firms for all properties
acquired by WPC and the CPA(R) REITs. Where warranted, Phase II environmental
assessments are performed. Phase I assessments do not involve subsurface
testing, whereas Phase II assessments involve some degree of soil and/or
groundwater testing. WPC or the CPA(R) REITs may acquire a property which is
known to have had a release of hazardous materials in the past, subject to a
determination of the level of risk and potential cost of remediation. WPC and
the CPA(R) REITs normally require property sellers to indemnify them fully
against any environmental problem existing as of the date of purchase.
Additionally, WPC often structures leases to require the tenant to assume most
or all responsibility for compliance with the environmental provisions of the
lease or environmental remediation relating to the tenant's operations and to
provide that non-compliance with environmental laws is a lease default. In some
cases, WPC may also require a cash reserve, a letter of credit or a guarantee
from the tenant, the tenant's parent company or a third party to assure lease
compliance and funding of remediation. The value of any of these protections
depends on the amount of the collateral and/or financial strength of the entity
providing the protection. Such a contractual arrangement does not eliminate
statutory liability or preclude claims against WPC and the CPA(R) REITs by
governmental authorities or persons who are not a party to the arrangement.
Contractual arrangements in leases may provide a basis for WPC and the CPA(R)
REITs to recover from the tenant damages or costs for which it has been found
liable.
-6-
Some of the properties are located in urban and industrial areas where fill or
current or historic industrial uses of the areas may have caused site
contamination at the properties. In addition, WPC is aware of environmental
conditions at certain of the properties that require some degree of remediation.
All such environmental conditions are primarily the responsibility of the
respective tenants under their leases. WPC and its consultants estimate that the
majority of the aggregate cost of addressing environmental conditions known to
require remediation at the properties is covered by existing letters of credit
and corporate guarantees. WPC believes that the tenants are taking or will soon
be taking all required remedial action with respect to any material
environmental conditions at the properties. However, WPC and the CPA(R) REITs
could be responsible for some or all of these costs if one or more of the
tenants fails to perform its obligations or to indemnify WPC and the CPA(R)
REITs, as applicable. Furthermore, no assurance can be given that the
environmental assessments that have been conducted at the properties disclosed
all environmental liabilities, that any prior owner did not create a material
environmental condition not known to the Company, or that a material condition
does not otherwise exist as to any of the properties.
OPERATING SEGMENTS
WPC operates in two operating segments, real estate operations, with investments
in the United States and Europe, and management services operations. For the
year ended December 31, 2002, no lessee represented 10% or more of the total
operating revenue of WPC. Substantially all of the revenue from the management
services operations is for services performed on behalf of the CPA(R) REITs.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") became effective in December 1995. The Act provides a "safe harbor" for
companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
WPC wishes to take advantage of the "safe harbor" provisions of the Act and is
therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
Future results may be affected by certain risks and uncertainties including the
following:
The revenue streams from the investment advisory agreements with the CPA(R)
REITs are subject to limitation or cancellation.
The agreements under which we provide investment advisory services may generally
be terminated by each CPA(R) REIT upon 60 days notice, with or without cause. In
addition, the fees payable under each agreement are subject to a variable annual
cap based on a formula tied to the assets and income of that CPA(R) REIT. This
cap may limit the growth of the management fees. There can be no assurance that
these agreements will not be terminated or that our income will not be limited
by the cap on fees payable under the agreements. The elimination of or any cap
on fees could have a material adverse effect on our business, results of
operations and financial condition.
Our advisory business exposes us to more volatility in earnings than our real
estate investment business.
The growth in revenue from the management business is dependent in large part on
future capital raising in existing or future managed entities, which is subject
to uncertainty and is subject to capital market and real estate market
conditions. This uncertainty can create more volatility in our earnings because
of the resulting increased volatility in revenue from the real estate advisory
and management business as compared to historic revenue from ownership of real
estate subject to triple net leases, which historically has been less volatile.
The inability of a tenant in a single tenant property to pay rent will reduce
our revenues.
We expect that most of our properties and those of the CPA(R) REITs will each be
occupied by a single tenant and, therefore, the success of the investments is
materially dependent on the financial stability of such tenants. Lease payment
defaults by tenants could cause us to reduce the amount of distributions to
shareholders, either from a direct loss of revenue or reduced fees payable by
the CPA(R) REITs. A default of a tenant on its lease payments to would cause us
or a CPA(R) REITs to lose the
-7-
revenue from the property and require the locating of an alternative source of
revenue to meet any mortgage payment and prevent a foreclosure if the property
is subject to a mortgage. In the event of a default, we and the CPA(R) REITs may
experience delays in enforcing their rights as landlord and may incur
substantial costs in protecting the investment and reletting the property. If a
lease is terminated, there is no assurance that we or the CPA(R) REITs will be
able to lease the property for the rent previously received or sell the property
without incurring a loss.
We depend on major tenants.
Revenues from several of our tenants and/or their guarantors constitute a
significant percentage of our consolidated rental revenues. Our five largest
tenants/guarantors, which occupy 10 properties, represent 24% of lease revenues.
The default, financial distress or bankruptcy of any of the tenants of these
properties could cause interruptions in the receipt of lease revenues from these
tenants and/or result in vacancies in the respective properties, which would
reduce our revenues until the affected property is re-let, and could decrease
the ultimate sale value of each such property.
If our tenants are highly leveraged, they may have a higher possibility of
filing for bankruptcy.
Of tenants that experience downturns in their operating results due to adverse
changes to their business or economic conditions, those that are highly
leveraged may have a higher possibility of filing for bankruptcy. In bankruptcy,
a tenant has the option of vacating a property instead of paying rent. Until
such a property is released from bankruptcy, our revenues would be reduced and
could cause us to reduce distributions to shareholders. We have highly leveraged
tenants at this time, and we may have additional highly leveraged tenants in the
future.
The bankruptcy of tenants may cause a reduction in revenue.
Bankruptcy of a tenant could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms providing for the repurchase of a property by the
tenant, a bankruptcy court could recharacterize a net lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor.
We and the CPA(R) REITs have had tenants file for bankruptcy protection and are
involved in litigation. Four of the prior thirteen CPA(R) REITs reduced the rate
of distributions to their investors as a result of adverse developments
involving tenants.
Our tenants generally do not have a recognized credit rating, which may create a
higher risk of lease defaults and therefore lower revenues than if our tenants
had a recognized credit rating.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose a higher risk of default than would long term leases with tenants
whose credit potential has already been recognized by the market.
We can borrow a significant amount of funds. The CPA(R) REITs may also borrow a
significant amount of funds.
We have incurred, and may continue to incur, indebtedness (secured and
unsecured) in furtherance of our activities. Neither our operating agreement nor
any policy statement formally adopted by our board of directors limits either
the total amount of indebtedness or the specified percentage of indebtedness
(based upon our total market capitalization) which may be incurred. Accordingly,
we could become more highly leveraged, resulting in increased risk of default on
our obligations and in an increase in debt service requirements which could
adversely affect our financial condition and results of operations and our
ability to pay distributions. Our current unsecured revolving credit facility
with Chase Manhattan Bank, as agent, contains various covenants which limit the
amount of secured and unsecured indebtedness we may incur.
-8-
Each of the CPA(R) REITs we advise and manage may also incur significant debt.
This significant debt load could restrict their ability to pay fees owed to us
when due, due to either liquidity problems or restrictive covenants contained in
their borrowing agreements.
We may not be able to refinance balloon payments on our mortgage debts.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity, including mortgages on properties and the outstanding balance on WPC's
credit facility which expires in March 2004. Our ability to make any balloon
payment is uncertain and may depend upon our ability to obtain additional
financing or our ability to sell the property encumbered by the mortgage
obligation. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or sell
the property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets. Scheduled balloon payments, including our pro rata
share of mortgages on equity investments and the outstanding balance on WPC's
credit facility, for the next five years are as follows:
2003 - $4.0 million; 2004 - $65.7 million; 2005 - $0 million; 2006 - $22.3
million and 2007 - $6.0 million.
Our ability to make such balloon payments will depend upon our ability either to
refinance the obligation when due, increase the borrowings on our line of
credit, invest additional equity in the property or to sell the related
property. Our ability to accomplish these goals will be affected by various
factors existing at the relevant time, such as the state of the national and
regional economies, local real estate conditions, available mortgage rates, our
equity in the mortgaged properties, our financial condition, the operating
history of the mortgaged properties and tax laws.
International investments involve additional risks.
We and the CPA(R) REITs may purchase property located outside the United States.
These investments may be affected by factors peculiar to the laws of the
jurisdiction in which the property is located. These laws may expose us to risks
that are different from and in addition to those commonly found in the United
States. Foreign investments could be subject to the following risks:
- changing governmental rules and policies;
- enactment of laws relating to the foreign ownership of property and
laws relating to the ability of foreign persons or corporations to
remove profits earned from activities within the country to the
person's or corporation's country of origin;
- variations in the currency exchange rates;
- adverse market conditions caused by changes in national or local
economic conditions;
- changes in relative interest rates;
- change in the availability, cost and terms of mortgage funds
resulting from varying national-economic policies;
- changes in real estate and other tax rates and other operating
expenses in particular countries;
- changes in land use and zoning laws; and
- more stringent environmental laws or changes in such laws.
We may incur costs to finish build-to-suit properties.
We and the CPA(R) REITs may sometimes acquire undeveloped or partially developed
land parcels for the purpose of owning to-be-built facilities for a prospective
tenant. Oftentimes, completion risk, cost overruns and on-time delivery are the
obligations of the prospective tenant. To the extent that the tenant or the
third-party developer experiences financial difficulty or other complications
during the construction process we or the CPA(R) REIT may be required to incur
project costs to complete all or part of the project within a specified time
frame. The incurrence of these costs or the non-occupancy by the tenant may
reduce the project's and our portfolio returns.
We may have difficulty selling or re-leasing our properties.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. The net leases
we or the CPA(R) REITs may enter into or acquire may be for properties that are
specially suited to the particular needs of the tenant. With these properties,
if the current lease is terminated or not renewed, we or the CPA(R) REITs may be
required to renovate the property or to make rent concessions in order to lease
the property to another tenant. In addition, in the event we or the CPA(R) REITs
are forced to sell the property, it may be difficult to sell to a party other
than the tenant due to the special purpose for which the property may have been
designed. These and other limitations may affect the ability to sell properties
-9-
without adversely affecting returns to shareholders. WPC's lease expirations, as
a percentage of annualized revenues for the next five years, are as follows:
2003 - 6.4%; 2004 - 4.4%; 2005 - 4.8%; 2006 - 4.8%; 2007 - 2.9%
Our participation in joint ventures creates additional risk.
We may participate in joint ventures or purchase properties jointly with other
entities, some of which may be unaffiliated with us. There are additional risks
involved in these types of transactions. These risks include the potential of
our joint venture partner becoming bankrupt and the possibility of diverging or
inconsistent economic or business interests of us and our partner. These
diverging interests could result in, among other things, exposing us to
liabilities of the joint venture in excess of our proportionate share of these
liabilities. The partition rights of each owner in a jointly owned property
could reduce the value of each portion of the divided property. In addition, the
fiduciary obligation that we or our board may owe to our partner in an
affiliated transaction may make it more difficult for us to enforce our rights.
We do not control the management of our properties.
The tenants or managers are responsible for maintenance and other day-to-day
management of the properties. Because our revenues are largely derived from
rents and advisory fees, which in turn, are derived from rents collected by the
CPA(R) REITs, our financial condition is dependent on the ability of third-party
tenants or managers that we do not control to operate the properties
successfully. If tenants or managers are unable to operate the properties
successfully, the tenants may not be able to pay their rent, which could
adversely affect our financial condition.
We are subject to possible liabilities relating to environmental matters.
We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. Some of these
laws could impose the following on us:
- Responsibility and liability for the cost of investigation and
removal or remediation of hazardous substances released on our
property, generally without regard to our knowledge or
responsibility of the presence of the contaminants;
- Liability for the costs of investigation and removal or remediation
of hazardous substances at disposal facilities for persons who
arrange for the disposal or treatment of such substances; and
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
- These responsibilities and liabilities also exist for properties
owned by the CPA(R) REITs and in the event they become liable for
these costs, their ability to pay our fees could be materially
affected.
We may be unable to make acquisitions on an advantageous basis.
A significant element of our business strategy is the enhancement of our
portfolio and the CPA(R) REIT portfolios through acquisitions of additional
properties. The consummation of any future acquisition will be subject to
satisfactory completion of our extensive analysis and due diligence review and
to the negotiation of definitive documentation. There can be no assurance that
we will be able to identify and acquire additional properties or that we will be
able to finance acquisitions in the future. In addition, there can be no
assurance that any such acquisition, if consummated, will be profitable for us
or the CPA(R) REITs. If we are unable to consummate the acquisition of
additional properties in the future, there can be no assurance that we will be
able to increase the cash available for distribution to our shareholders, either
through net income on properties we own or through net income generated by the
advisory business.
We may suffer uninsured losses.
There are certain types of losses (such as due to wars or some natural
disasters) that generally are not insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of the
limits of our insurance occur, we could lose capital invested in a property, as
well as the anticipated future revenues from a property, while remaining
obligated for any mortgage indebtedness or other financial obligations related
to the property. Any such loss would adversely affect our financial condition.
Changes in market interest rates could cause our stock price to go down.
The trading prices of equity securities issued by real estate companies have
historically been affected by changes in broader market interest rates, with
increases in interest rates resulting in decreases in trading prices, and
decreases in interest rates
-10-
resulting in increases in such trading prices. An increase in market interest
rates could therefore adversely affect the trading prices of any equity
securities issued by us.
We face intense competition.
We face competition for the acquisition of office and industrial properties in
general, and such properties not leased to major corporations in particular,
from insurance companies, credit companies, pension funds, private individuals,
investment companies and other REITs. We also face competition from institutions
that provide or arrange for other types of commercial financing through private
or public offerings of equity or debt or traditional bank financings.
The value of our real estate is subject to fluctuation.
We are subject to all of the general risks associated with the ownership of real
estate. In particular, we face the risk that rental revenue from the properties
will be insufficient to cover all corporate operating expenses and debt service
payments on indebtedness we incur. Additional real estate ownership risks
include:
- Adverse changes in general or local economic conditions,
- Changes in supply of or demand for similar or competing properties,
- Changes in interest rates and operating expenses,
- Competition for tenants,
- Changes in market rental rates,
- Inability to lease properties upon termination of existing leases,
- Renewal of leases at lower rental rates,
- Inability to collect rents from tenants due to financial hardship,
including bankruptcy,
- Changes in tax, real estate, zoning and environmental laws that may
have an adverse impact upon the value of real estate,
- Uninsured property liability, property damage or casualty losses,
- Unexpected expenditures for capital improvements or to bring
properties into compliance with applicable federal, state and local
laws, and
- Acts of God and other factors beyond the control of our management.
We depend on key personnel for our future success.
We depend on the efforts of the executive officers and key employees. The loss
of the services of these executive officers and key employees could have a
material adverse effect on our operations.
WPC's business, results of operations or financial condition could be materially
adversely affected by the above conditions.
The risk factors may have affected, and in the future could affect, WPC's actual
operating and financial results and could cause such results to differ
materially from those in any forward-looking statements. You should not consider
this list exhaustive. New risk factors emerge periodically, and the Company
cannot completely assure you that the factors described above list all material
risks to WPC at any specific point in time. The Company has disclosed many of
the important risk factors discussed above in its previous filings with the
Securities and Exchange Commission.
-11-
Item 2. Properties.
Set forth below is certain information relating to the Company's properties
owned as of December 31, 2002:
RENT SHARE OF
PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION FOOTAGE FOOT RENTS(a) FACTOR TERM TERM
- --------------------- --------- ------- --------- -------- --------- ---------
DR PEPPER BOTTLING COMPANY OF TEXAS
Irving and Houston, Texas 721,947 6.08 4,420,937 CPI Jun. 2014 Jun. 2029
DETROIT DIESEL CORPORATION(b)
Detroit, MI 2,730,750 1.52 4,157,524 PPI Jun. 2020 Jun. 2040
GIBSON GREETINGS, INC.
BEREA, KY AND CINCINNATI, OH 1,194,840 3.11 3,720,000 Stated Nov. 2013 Nov. 2023
BOUYGUES TELECOM SA(b)
Tours, France 105,055 10.59 1,056,442(h) INSEE(i) Sep. 2009 Sep. 2012
Illkirch, France 107,180 22.27 2,148,523(t) INSEE(i) Jul. 2013 Jul. 2013
--------- ---------
Total: 212,235 3,204,965
FEDERAL EXPRESS CORPORATION
College Station, TX 12,080 5.51 66,600 Stated Apr. 2007 Apr. 2009
Colliersville, TN (b) (e) 390,380 16.83 2,628,933 CPI Aug. 2019 Aug. 2029
Corpus Christi, TX 30,212 6.29 189,986 Stated May 2007 May 2017
--------- ---------
Total: 432,672 2,885,519
ORBITAL SCIENCES CORPORATION(b)
Chandler, AZ 335,307 7.92 2,655,320 CPI Sep. 2009 Sep. 2029
AMERICA WEST HOLDINGS CORPORATION(b) (d)
Tempe, AZ 218,000 15.61 2,538,805 CPI Apr. 2014 Apr. 2024
QUEBECOR PRINTING INC.
Doraville, GA (b) 432,559 3.52 1,522,498 CPI Dec. 2009 Dec. 2034
Olive Branch, MS (b) 285,500 3.41 973,255 CPI Jun. 2008 Jun. 2033
--------- ---------
Total: 718,059 2,495,753
AUTOZONE, INC.(b) (g)
31 Locations :
NC, TX, AL, GA, IL, LA, MO 175,730 7.52 1,321,567 % Sales Jan. 2011 Jan. 2026
11 Locations:
FL, GA, NM, SC, TX 54,000 9.71 524,388 % Sales Aug. 2013 Aug. 2038
12 Locations :
FL, LA, MO, NC, TN 72,500 5.11 370,636 % Sales Aug. 2012 Aug. 2037
--------- ---------
Total: 302,230 2,216,591
THE GAP, INC.(b) (p)
Erlanger, KY (2) 753,750 2.93 2,205,385 CPI Feb. 2003 N/A
SYBRON INTERNATIONAL CORPORATION
Dubuque, IA; Portsmouth, NH and
Rochester, NY 494,100 4.38 2,163,816 CPI Dec. 2013 Dec. 2038
CHECKFREE HOLDINGS, INC.(o) (b)
Norcross, GA 220,675 18.92 2,128,372 CPI Dec. 2015 Dec. 2015
LIVHO, INC.
Livonia, MI 158,000 11.39 1,800,000 Stated Dec. 2003 Dec. 2003
-12-
RENT SHARE OF
PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION FOOTAGE FOOT RENTS(a) FACTOR TERM TERM
- --------------- ------- ------ -------- -------- ------ --------
UNISOURCE WORLDWIDE, INC.
Anchorage, AK 44,712 7.34 328,360 Stated Dec. 2009 Dec. 2029
Commerce, CA(b) 411,561 3.46 1,422,080 Stated Apr. 2010 Apr. 2030
--------- ---------
Total: 456,273 1,750,440
CSS INDUSTRIES, INC.
Memphis, TN 1,006,566 1.72 1,735,352 CPI Dec. 2005 Dec. 2015
PEERLESS CHAIN COMPANY (q)
Winona, MN 357,760 4.63 1,657,790 CPI N/A N/A
INFORMATION RESOURCES, INC.(b) (f)
Chicago, IL 252,000 19.58 1,643,604 CPI Oct. 2010 Oct. 2035
COMARK, INC. 36,967 8.32 307,541 Stated May 2003 May 2003
GENERAL SERVICES ADMINISTRATION 3,949 16.70 65,948 Stated Apr. 2006 Apr. 2006
UNITED STATES POSTAL SERVICE 60,320 20.44 1,233,000 Stated Apr. 2006 Apr. 2006
--------- ---------
Total for property in Bloomingdale, IL: 101,236 1,606,489
BRODART CO.(b)
Williamsport, PA (2) 521,240 2.91 1,519,253 CPI Jun. 2008 Jun. 2028
SYBRON DENTAL SPECIALTIES, INC.
Glendora, CA and Romulus, MI 245,000 5.97 1,463,096 CPI Dec. 2018 Dec. 2043
SPRINT SPECTRUM L.P. (b)
Albuquerque, NM 94,731 15.04 1,424,561 CPI May 2011 Sep. 2021
BE AEROSPACE, INC. (b)
Lenexa, KS 130,094 4.54 590,812 Stated Sep. 2017 Sep. 2037
Winston-Salem, NC 274,216 2.62 717,557 Stated Sep. 2017 Sep. 2037
Dallas, TX 22,680 4.96 112,536 Stated Sep. 2017 Sep. 2037
--------- ---------
Total: 426,990 1,420,905
EAGLE HARDWARE & Garden, Inc.(b) (g)
Bellevue, WA 127,360 9.94 1,265,900 CPI & Aug. 2017 Aug. 2017
% Sales
AT&T CORPORATION
Bridgeton, MO 85,510 13.60 1,162,546 Stated Jun. 2011 Jun. 2021
HOLOGIC, INC. (s)
Danbury, CT 62,042 9.42 210,526 CPI Aug. 2022 Aug. 2042
Bedford, MA 207,000 12.42 925,612 CPI Aug. 2022 Aug. 2042
--------- ---------
Total: 269,042 1,136,138
BELLSOUTH TELECOMMUNICATIONS, INC.(b)
Lafayette Parish, LA 64,803 16.92 1,096,170 Stated Dec. 2009 Dec. 2039
CENDANT OPERATION, INC.(b)
Moorestown, NJ 65,567 16.69 1,094,432 Stated Jun. 2004 Jun. 2004
-13-
RENT SHARE OF
PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION FOOTAGE FOOT RENTS(A) FACTOR TERM TERM
-------------- --------- ------ ---------- -------- --------- ---------
JOHNSON ENGINEERING CORPORATION 31,114 9.89 307,800 Stated Dec. 2007 Dec. 2012
LOCKHEED MARTIN CORPORATION 39,464 9.30 366,936 Stated Jul. 2007 Jul. 2007
UNITED SPACE ALLIANCE LLC 38,000 10.00 380,004 Stated Apr. 2006 Apr. 2011
------- ---------
Total for property in
Houston, TX: (b) 108,578 1,054,740
ANTHONY'S MANUFACTURING COMPANY, INC.
San Fernando, CA 182,845 5.57 1,019,047 CPI May 2007 May 2012
LOCKHEED MARTIN CORPORATION
King of Prussia, PA 84,926 11.47 974,358 Market Jul. 2003 Jul. 2008
WAL-MART STORES, INC.(b)
West Mifflin, PA 118,125 8.05 950,905 CPI Jan. 2007 Jan. 2037
UNITED STATIONERS SUPPLY COMPANY
New Orleans, LA; Memphis, TN and San
Antonio, TX 197,098 4.64 915,834 CPI Mar. 2010 Mar. 2030
PRE FINISH METALS INCORPORATED
Walbridge, OH 313,704 2.84 892,091 CPI Jun. 2008 Jun. 2028
SWAT-FAME, INC.
City of Industry, CA 220,401 3.95 872,786 CPI Dec. 2010 Dec. 2020
ALPENA HOLIDAY INN
Alpena, MI 96,333 870,410(c) Dec. 2009 Dec. 2029
LOCKHEED MARTIN CORPORATION 66,000 7.94 523,908 Stated Feb. 2003 Feb. 2003
MERCHANTS HOME DELIVERY, INC. 22,716 12.06 274,044 Stated Jun. 2004 Jun. 2014
------- ---------
Total for property in
Oxnard, CA: 88,716 797,952
NVR L.P.
Thurmont, MD and
Farmington, NY 179,741 4.30 773,370 CPI Mar. 2014 Mar. 2039
WINN-DIXIE STORES, INC.(g)
Bay Minette, AL 34,887 3.68 128,470 % Sales Jun. 2007 Jun. 2032
Brewton, AL 30,625 4.39 134,500 % Sales Oct. 2010 Oct. 2030
Leeds, AL 26,470 5.47 144,713 % Sales Feb. 2004 Feb. 2034
Montgomery, AL 32,690 5.86 191,534 % Sales Mar. 2008 Mar. 2038
Panama City, FL 33,837 5.04 170,399 % Sales Mar. 2008 Mar. 2038
--------- ---------
Total: 158,509 769,616
AMS HOLDING GROUP
College Station, TX 52,552 14.56 765,101 None Dec. 2004 Dec. 2009
FAURECIA EXHAUST SYSTEMS, INC. (b)
Toledo, OH 56,192 5.68 336,000 CPI Nov. 2022 Nov. 2042
Toledo, OH (n) 350,000 1.02 357,500 Stated Nov. 2005 Nov. 2007
--------- ---------
Total: 406,192 693,500
DATCON INSTRUMENT COMPANY
Lancaster, PA 70,724 9.60 679,083 CPI Nov. 2013 Nov. 2038
-14-
RENT SHARE OF
PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION FOOTAGE FOOT RENTS(a) FACTOR TERM TERM
-------------- --------- ------ ---------- -------- --------- --------
EXIDE ELECTRONICS CORPORATION
Raleigh, NC 27,770 23.22 644,937 CPI Jul. 2006 Jul. 2031
PANTIN, FRANCE - MULTI-TENANT (b) 68,951 11.46 592,456(j) INSEE(i) Various
EXCEL COMMUNICATIONS, INC.
Reno, NV 53,158 10.93 580,800 Stated Dec. 2006 Dec. 2016
WESTERN UNION FINANCIAL SERVICES, INC.
Bridgeton, MO 78,080 7.34 573,221 Stated Nov. 2006 Nov. 2016
UNITED SPACE ALLIANCE LLC 88,200 5.73 505,020 Stated Sep. 2006 Sep. 2016
FACILITY MANAGEMENT SOLUTIONS, LLC 3,600 8.40 30,240 Stated Dec. 2005 Dec. 2005
--------- ---------
Webster, TX 91,800 535,260
TITAN CORPORATION(b) (k)
San Diego, CA 166,403 16.43 506,783 CPI Jul. 2007 Jul. 2027
DS GROUP LIMITED
Goshen, IN 54,270 9.22 500,212 CPI Feb. 2010 Feb. 2035
WOZNIAK INDUSTRIES, INC.
Schiller Park, IL 84,197 5.91 497,400 Stated Dec. 2003 Dec. 2023
TELLIT ASSURANCES(b)
Rouen, France 36,791 17.92 494,164(j) INSEE(i) Aug. 2004 Aug. 2009
CHILDTIME CHILDCARE, INC.(b) (l)
12 Locations: AZ, CA, MI, TX 83,912 15.45 472,307 CPI Jan. 2016 Jan. 2041
YALE SECURITY, INC.
Lemont, IL 130,000 3.53 459,000 Stated Mar. 2011 Mar. 2011
SOCIETE DE TRAITEMENTS 69,470 4.42 245,379(m) INSEE(i) Jun. 2005 Jun. 2008
DSM FOOD SPECIALITIES 37,337 7.15 213,508(m) INSEE(i) Jun. 2005 Jun. 2008
-------- ---------
Total for property in Indre
et Loire, France: (b) 106,807 458,887(m)
BELLSOUTH ENTERTAINMENT, INC.
Ft. Lauderdale, FL 80,450 5.14 413,748 CPI Jun. 2009 Jun. 2019
HONEYWELL, INC. 119,320 2.03 242,400 Stated Sep. 2005 Sep. 2005
CONTINENTAL AIRLINES, INC. 25,125 5.67 142,560 Stated Jul. 2003 Jul. 2008
-------- ---------
Total for property in
Houston, TX: 144,445 384,960
PENN CRUSHER CORPORATION
Cuyahoga Falls, OH and Broomall, PA 103,255 3.65 377,234 Market Jan. 2005 Jan. 2020
VARIOUS TENANTS (b)
Broomfield, CO 64,609 5.47 353,260 Various Various Various
OLMSTEAD KIRK PAPER COMPANy 5,760 6.56 37,800 Stated Dec. 2007 Dec. 2007
INDUSTRIAL DATA SYSTEMS CORPORATION
(PETROCON ENGINEERING, INC.) 34,300 8.16 279,888 Stated Dec. 2011 Dec. 2011
-15-
RENT SHARE OF
PER CURRENT
LEASE OBLIGOR/ SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM
LOCATION FOOTAGE FOOT RENTS(a) FACTOR TERM TERM
-------------- --------- ------ --------- -------- --------- --------
Total for property in
Beaumont, TX: 40,060 317,688
R & S DISTRIBUTION, INC. (v) 588,235 .51 300,000 None May. 2003 May. 2003
Cincinnati, OH
BIKE BARN HOLDING COMPANY, INC. 6,216 10.42 64,800 Stated Aug. 2005 Aug. 2015
Sears Roebuck and Co. 21,069 10.60 223,331 Stated Sep. 2005 Sep. 2015
------- ---------
Total for property in
Houston, TX(b): 27,285 288,131
THE ROOF CENTERS, INC.
Manassas, VA 60,446 4.44 268,631 Stated Jul. 2009 Jul. 2009
TOOLING SYSTEMS, LLC
Frankenmuth, MI 128,400 2.06 264,400 Stated Aug. 2012 Aug. 2017
GAMES WORKSHOP, INC.
Glen Burnie, MD 45,300 5.83 264,178 Stated Apr. 2006 Apr. 2016
DIRECTION REGIONAL DES AFFAIRES
SANITAIRES ET SOCIALES
Rouen, France (b) 25,228 12.78 241,733(j) INSEE(i) Oct. 2004 Oct. 2004
PENBERTHY PRODUCTS, INC.
Prophetstown, IL 161,878 1.47 237,486 CPI Apr. 2006 Apr. 2026
HARCOURT GENERAL, INC.(g)
Canton, MI 29,818 7.84 233,750 % Sales Jul. 2005 Jul. 2030
ADR BOOKPRINT INC. 3,330 7.56 25,176 Stated May 2003 May 2003
TRANS AMERICAN AUTOMATION INC. 5,632 7.92 44,604 Stated Feb. 2007 Feb. 2012
CUSTOM TRAINING GROUP, INC. 11,740 8.23 96,600 Stated Aug. 2006 Aug. 2006
WORK READY, INC. 7,306 9.20 67,200 Stated Aug. 2006 Aug. 2006
------- ---------
Total for property in
Houston, TX: 28,008 233,580
VERIZON COMMUNICATIONS, INC.
Milton, VT 30,624 7.54 231,000 Stated Feb. 2013 Feb. 2023
NORTHERN TUBE, INC.
Pinconning, MI 220,588 1.02 225,000 CPI Dec. 2007 Dec. 2022
ROCHESTER BUTTON COMPANY, INC.
South Boston and Kenbridge, VA 81,387 2.21 180,000 None Dec. 2016 Dec. 2036
PEPSICO, INC.
Houston, TX 17,725 6.29 111,557 Stated Oct. 2004 Oct. 2004
PENN VIRGINIA COAL COMPANY
Duffield, VA 12,804 5.78 73,999 CPI Nov. 2004 Nov. 2019
RECLAMATION FOODS, INC. 11,780 2.25 26,505 CPI Jun. 2006 Jun. 2016
J & D CARDS & GIFTS, INC. 3,220 7.94 25,551 Stated Jan. 2012 Jan. 2012
------- ---------
Total for property in
Apache Junction, AZ 15,000 52,056
SHINN SYSTEMS, INC. (u)
Salisbury, NC 13,284 2.00 26,568 CPI Nov. 2003 Nov. 2006
VACANT PROPERTIES
McMinnville, TN 276,991
Garland, TX 150,203
Webster, TX 10,960
Travelers Rest, SC 85,959
Broomfield, CO (r) 12.5 acres
Land
Only
-16-
(a) Share of Current Annual Rents is the product of the Square Footage,
the Rent per Square Foot, and any ownership interest percentage as
noted below.
(b) These properties are encumbered by mortgage notes payable.
(c) The Company operates a hotel business at this property. Amount
represents net operating income of the business.
(d) Current annual rent represents the 74.583% ownership interest as a
tenancy in common in this property.
(e) Current annual rent for the Colliersville, TN property represents
the 40% ownership interest in a limited liability company owning
land and building.
(f) Current annual rent represents the 33.33% ownership interest in a
limited partnership owning land and building.
(g) Current annual rent does not include percentage of sales rent,
payable under the lease contract.
(h) Current annual rent represents the 95% ownership interest in a
foreign partnership owning land and building. Rents are collected in
French Francs, conversion rate at December 31, 2002 used.
(i) INSEE construction index, an index published quarterly by the French
Government.
(j) Current annual rent represents the 75% ownership interest in a
foreign partnership owning land and building. Rents are collected in
French Francs, conversion rate at December 31, 2002 used.
(k) Current annual rent represents the 18.54% ownership interest in a
limited partnership owning land and building.
(l) Current annual rent represents the 33.93% ownership interest in a
limited partnership owning land and building.
(m) Current annual rent represents the 80% ownership interest in a
foreign partnership owning land and building. Rents are collected in
French Francs, conversion rate at December 31, 2002 used.
(n) The property is mostly vacant, except for one tenant who is
occupying approximately 33% of the property under a sublease that
was assigned to WPC.
(o) Current annual rent represents the 50% ownership interest in a
limited liability company owning land and building.
(p) Tenant vacated property at end of lease term in February 2003.
(q) Property subsequently sold in 2003.
(r) Property is currently under development.
(s) Current annual rent represents the 36% ownership interest as a
tenancy in common in this property.
(t) Current annual rent represents the 90% ownership interest in a
foreign partnership owning a building. Rents are collected in French
Francs, conversion rate at December 31, 2002 used.
(u) The property is mostly vacant, except for one tenant occupying
approximately 4% of the property.
(v) Tenant is occupying the property under a license agreement.
Item 3. Legal Proceedings.
As of the date hereof, the Company is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2002 to a vote of security holders, through the solicitation of proxies or
otherwise.
-17-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to Registrant's common equity is hereby incorporated by
reference to page 50 of the Company's Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of the
Company's Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 2 to 15 of the Company's Annual Report contained in Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
$145,515 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 December 31, 2002 ranged from 2.59% to
6.44%. The interest on the fixed rate debt as of December 31, 2002 ranged from
6.11% to 9.55%.
Advances from the line of credit bear interest at an annual rate of either (i)
the one, two, three or six-month LIBOR, plus a spread which ranges from 0.6% to
1.45% depending on leverage or corporate credit rating or (ii) the greater of
the bank's Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a
spread of up to .125% depending on WPC's leverage.
(in thousands)
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 9,827 $ 23,738 $ 6,572 $ 22,986 $ 12,481 $ 69,911 $145,515 $148,390
Weighted average
interest rate 7.75% 8.03% 7.47% 7.27% 7.17% 7.27%
Variable rate debt $ 1,353 $ 50,653 $ 1,692 $ 1,908 $ 2,119 $ 31,809 $ 89,534 $ 89,534
WPC conducts business in France. The foreign operations were not material to
WPC's consolidated financial position, results of operations or cash flows
during the three-year period ended December 31, 2002. Additionally, foreign
currency translation gains and losses were not material to our results of
operations for the three-year period ended December 31, 2002. Accordingly, we
were not subject to material foreign currency exchange rate risk from the
effects that exchange rate movements of foreign currencies would have on our
future costs or on future cash flows we would receive from our foreign
subsidiaries. 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. Scheduled
future minimum rents, exclusive of renewals, under non-cancelable operating
leases resulting from WPC's foreign operations are as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Minimum Rents (1) $ 5,966 $ 5,256 $ 4,440 $ 4,186 $ 4,149 $ 16,419 $ 40,416
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2002 and thereafter are as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Mortgage notes
Payable(1) $ 1,353 $ 1,653 $ 1,692 $ 1,908 $ 2,119 $ 31,809 $ 40,534
(1) Based on December 31, 2002 exchange rate for the Euro.
-18-
Item 8. Consolidated Financial Statements and Supplementary Data:
The following consolidated financial statements and supplementary data of the
Company are hereby incorporated by reference to pages 16 to 49 of the Company's
Annual Report contained in Appendix A:
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 2002 and 2001
(iii) Consolidated Statements of Operations for the years ended December
31, 2002, 2001 and 2000
(iv) Consolidated Statements of Members' Equity for the years ended
December 31, 2000, 2001 and 2002
(v) Consolidated Statements of Cash Flows for the years ended December
31, 2002, 2001 and 2000
(vi) Notes to Consolidated Financial Statements
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2003 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2003 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2003 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in Company's definitive Proxy Statement with
respect to the Company's 2003 Annual Meeting of Shareholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year, and is hereby incorporated by reference.
Item 14. 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
December 31, 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.
-19-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following financial statements are filed as a part of this
Report:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 31, 2002 and
2001.
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Members' Equity for the years
ended December 31, 2000, 2001, and 2002.
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001, and 2000.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by reference to
pages 16 to 49 of the Company's Annual Report contained in Appendix A.
(a). 2. Financial Statement Schedule:
The following schedule is filed as a part of this Report:
Report of Independent Accountants.
Schedule III - Real Estate and Accumulated Depreciation
as of December 31, 2002.
Notes to Schedule III.
Schedule III and notes thereto are contained herein on
pages 26 to 33 of this Form 10-K.
Financial statement schedules other than those listed above
are omitted because the required information is given in the
financial statements, including the notes thereto, or because
the conditions requiring their filing do not exist.
-20-
(a)3 Exhibits:
The following exhibits are filed as part of this Report. Documents other than
those designated as being filed herewith are incorporated herein by reference.
Exhibit Method of
No. Description Filing
- ------- ----------- ---------------------
3.1 Amended and Restated Limited Liability Company Exhibit 3.1 to Registration
Agreement of Carey Diversified LLC. Statement on Form S-4 (No.
333-37901) dated October
15, 1997
3.2 Bylaws of Carey Diversified LLC. Exhibit 3.2 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
4.1 Form of Listed Share Stock Certificate. Exhibit 4.1 to Registration
Statement on Form S-4
(No. 333-37901) dated
October 15, 1997
10.1 Management Agreement Between Carey Management LLC Exhibit 10.1 to Registration
and the Company. Statement on Form S-4
(No. 333-37901) dated
October 15, 1997
10.2 Non-Employee Directors' Incentive Plan. Exhibit 10.2 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.3 1997 Share Incentive Plan. Exhibit 10.3 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.4 Investment Banking Engagement Letter between Exhibit 10.4 to Registration
W. P. Carey & Co. and the Company. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.5 Non-Statutory Listed Share Option Agreement. Exhibit 10.5 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
10.6 Second Amended and Restated Credit Agreement Exhibit 10.6 to Form 10-K,
dated as of March 23, 2001 dated March 18, 2002
21.1 List of Registrant Subsidiaries Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
99.1 Chief Executive Officer's Certification Pursuant to Section 906 Filed herewith
of the Sarbanes-Oxley Act of 2002.
-21-
Exhibit Method of
No. Description Filing
- ------- ----------- ---------------------
99.2 Chief Financial Officer's Certification Pursuant to Section 906 Filed herewith
of the Sarbanes-Oxley Act of 2002.
99.13 Amended and Restated Agreement of Limited Partnership Exhibit 99.13 to Registration
of CPA(R):1. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.16 Amended and Restated Agreement of Limited Partnership Exhibit 99.16 to Registration
of CPA(R):4. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.18 Amended and Restated Agreement of Limited Partnership Exhibit 99.18 to Registration
of CPA(R):6. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.21 Amended and Restated Agreement of Limited Partnership Exhibit 99.21 to Registration
of CPA(R):9. Statement on Form S-4
(No. 333-37901) dated October
15, 1997
99.22 Listed Share Purchase Warrant. Exhibit 99.22 to Registration
Statement on Form S-4
(No. 333-37901) dated October
15, 1997
(b). Report on Form 8-K:
During the quarter ended December 31, 2002, the Company was not required to
file any reports on Form 8-K.
-22-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. W. P. CAREY & CO. LLC
3/25/2003 BY: /s/ John J. Park
--------- --------------------------------------
Date John J. Park
Managing Director and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
BY: W. P. CAREY & CO. LLC
3/25/2003 BY: /s/ William P. Carey
--------- --------------------------------------------
Date William P. Carey
Chairman of the Board, Co-Chief Executive
Officer and Director
3/25/2003 BY: /s/ Francis J. Carey
--------- --------------------------------------------
Date Francis J. Carey
Vice Chairman of the Board, Chairman of the
Executive Committee and Director
3/25/2003 BY: /s/ Gordon F. DuGan
--------- --------------------------------------------
Date Gordon F. DuGan
President, Co-Chief Executive Officer,
Chief Acquisitions Officer and Director
3/25/2003 BY: /s/ George E. Stoddard
--------- --------------------------------------------
Date George E. Stoddard
Senior Executive Vice President, Chairman
of the Investment Committee, and Director
3/25/2003 BY: /s/ Nathaniel S. Coolidge
--------- --------------------------------------------
Date Nathaniel S. Coolidge
Chairman of the Audit Committee and Director
3/25/2003 BY: /s/ Eberhard Faber IV
--------- --------------------------------------------
Date Eberhard Faber IV
Chairman of Nomination & Corporate Governance
Committee and Director
3/25/2003 BY: /s/ Dr. Lawrence R. Klein
--------- --------------------------------------------
Date Dr. Lawrence R. Klein
Chairman of the Economic Policy Committee
and Director
3/25/2003 BY: /s/ Charles C. Townsend, Jr.
--------- --------------------------------------------
Date Charles C. Townsend, Jr.
Chairman of the Compensation Committee and
Director
3/25/2003 BY: /s/ Reginald Winssinger
--------- --------------------------------------------
Date Reginald Winssinger
Director
3/25/2003 BY: /s/ John J. Park
--------- --------------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
3/25/2003 BY: /s/ Claude Fernandez
--------- --------------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting Officer
-23-
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this annual report on Form 10-K of W. P. Carey & Co. LLC
(the "Registrant");
2. Based on our knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and we have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date 3/25/2003 Date 3/25/2003
/s/ William Polk Carey /s/ Gordon F. DuGan
----------------------------- ----------------------------
William Polk Carey Gordon F. DuGan
Chairman President
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
-24-
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this annual report on Form 10-K of W. P. Carey & Co.LLC
(the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date 3/25/2003
/s/ John J. Park
-----------------------------
John J. Park
Chief Financial Officer
-25-
REPORT of INDEPENDENT ACCOUNTANTS
on FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
W. P. CAREY & CO. LLC:
Our audits of the consolidated financial statements referred to in our report
dated March 19, 2003 appearing in the 2002 Annual Report to Shareholders of W.
P. CAREY & CO. LLC (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 19, 2003
-26-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition(a) Investments (b)
----------- ------------ ---- --------- -------- -------------- ---------------
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various
tenants in Broomfield,
Colorado $1,668,104 $ 247,993 $ 2,538,263 $1,200,000
Distribution facilities
and warehouses leased
to The Gap, Inc. 12,091,275 1,525,593 21,427,148 141,235
Supermarkets leased to
Winn-Dixie Stores, Inc. 855,196 6,762,374 (2,535,810)
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 324,046 8,408,833
Land leased to Unisource
Worldwide, Inc. 4,573,360
Centralized telephone
bureau leased to Excel
Communications, Inc. 925,162 4,023,627 101,983
Office building in
Beaumont, Texas leased
to Industrial Data
Systems Corporation and
Olmstead Kirk Paper
Company 164,113 2,343,849 35,549
Computer center leased to
AT&T Corporation 269,700 5,099,964 4,165,742 (2,612)
Office, manufacturing and
warehouse buildings
leased to AMS Holding
Group 1,389,951 5,337,002 92,326 (1,039,757)
Warehouse and
distribution leased to
Shinn Systems, Inc. in
Salisbury, NC 246,949 5,034,911 1,363,829
Manufacturing and office
buildings leased to
Penn Virginia Coal
Company 240,072 609,267
Land leased to Exide
Electronics Corporation 1,638,012 (809,735)
Motion picture theaters
leased to Harcourt
General, Inc. 1,527,425 5,709,495 (4,752,521)
Warehouse/ office
research facilities
leased to
Gross Amount at which Carried at Close of Period (d)
----------------------------------------------------
Life on
which
Depreciation
in Latest
Accumulated Statement
Personal Depreciation Date of Income
Description Land Buildings Property Total (d) Acquired is Computed
----------- ---- --------- -------- ----- ------------ -------- ------------
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various
tenants in Broomfield,
Colorado $ 247,993 $ 3,738,263 $ 3,986,256 $ 418,534 1/1/1998 40 yrs.
Distribution facilities
and warehouses leased
to The Gap, Inc. 1,525,593 21,568,383 23,093,976 2,685,455 1/1/1998 40 yrs.
Supermarkets leased to
Winn-Dixie Stores, Inc. 855,196 4,226,564 5,081,760 654,955 1/1/1998 40 yrs.
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 324,046 8,408,833 8,732,879 1,051,105 1/1/1998 40 yrs.
Land leased to Unisource
Worldwide, Inc. 4,573,360 4,573,360 1/1/1998 N/A
Centralized telephone
bureau leased to Excel
Communications, Inc. 925,162 4,125,610 5,050,772 509,020 1/1/1998 40 yrs.
Office building in
Beaumont, Texas leased
to Industrial Data
Systems Corporation and
Olmstead Kirk Paper
Company 164,113 2,379,398 2,543,511 293,832 1/1/1998 40 yrs.
Computer center leased to
AT&T Corporation 269,700 9,263,094 9,532,794 276,814 1/1/1998 40 yrs.
Office, manufacturing and
warehouse buildings
leased to AMS Holding
Group 1,107,855 4,671,667 5,779,522 556,518 1/1/1998 40 yrs.
Warehouse and
distribution leased to
Shinn Systems, Inc. in
Salisbury, NC 246,949 6,398,740 6,645,689 769,811 1/1/1998 40 yrs.
Manufacturing and office
buildings leased to
Penn Virginia Coal
Company 240,072 609,267 849,339 76,158 1/1/1998 40 yrs.
Land leased to Exide
Electronics Corporation 828,277 828,277 1/1/1998 N/A
Motion picture theaters
leased to Harcourt
General, Inc. 274,985 2,209,414 2,484,399 276,176 1/1/1998 40 yrs.
Warehouse/ office
research facilities
leased to
-27-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition(a) Investments (b)
----------- ------------ ---- --------- -------- -------------- ---------------
Lockheed Martin
Corporation 1,218,860 6,283,475 539,706
Warehouse/office research
facilities leased to
Lockheed Martin
Corporation and
Merchant Home Delivery,
Inc. 1,104,669 6,556,607 49,732
Warehouse/distribution
facilities leased to
Games Workshop, Inc. 293,801 1,912,271 12,470
Warehouse and office
facility leased to
BellSouth
Entertainment, Inc. 1,173,108 3,368,141 242,885 98,916
Manufacturing and office
facility leased to Yale
Security, Inc. 345,323 3,913,657 60,394
Technology Center leased
to Faurecia Exhaust
Systems, Inc. 2,956,668 223,585 9,652,682 203,626
Manufacturing facilities
leased to Northern
Tube, Inc. 31,725 1,691,580
Manufacturing facilities
leased to Anthony's
Manufacturing Company,
Inc. 2,051,769 5,321,776 152,368
Manufacturing facilities
in Traveler's Rest, SC 263,618 4,046,406 (2,506,543)
Land leased to AutoZone,
Inc. 13,754,995 9,382,198 (147,949)
Office facility leased to
Verizon Communications,
Inc 219,548 1,578,592
Land leased to Sybron
Dental Specialities,
Inc. 1,135,003 17,286
Office facility leased to
United States Postal
Service, General
Services Administration
and Comark, Inc. 1,074,640 11,452,967 154,728
Manufacturing facilities
leased to Tooling
Systems LLC 284,314 2,483,597 (25,114)
Gross Amount at which Carried at Close of Period (d)
----------------------------------------------------
Life on
which
Depreciation
in Latest
Accumulated Statement
Personal Depreciation Date of Income
Description Land Buildings Property Total (d) Acquired is Computed
--------- --------- -------- --------- ------------ -------- ------------
Lockheed Martin
Corporation 1,218,860 6,823,181 8,042,041 843,545 1/1/1998 40 yrs.
Warehouse/office research
facilities leased to
Lockheed Martin
Corporation and
Merchant Home Delivery,
Inc. 1,104,669 6,606,339 7,711,008 826,856 1/1/1998 40 yrs.
Warehouse/distribution
facilities leased to
Games Workshop, Inc. 293,801 1,924,741 2,218,542 239,151 1/1/1998 40 yrs.
Warehouse and office
facility leased to
BellSouth
Entertainment, Inc. 1,173,108 3,709,942 4,883,050 441,266 1/1/1998 40 yrs.
Manufacturing and office
facility leased to Yale
Security, Inc. 345,323 3,974,051 4,319,374 493,053 1/1/1998 40 yrs.
Technology Center leased
to Faurecia Exhaust
Systems, Inc. 223,585 9,856,308 10,079,893 1,218,699 1/1/1998 40 yrs.
Manufacturing facilities
leased to Northern
Tube, Inc. 31,725 1,691,580 1,723,305 211,448 1/1/1998 40 yrs.
Manufacturing facilities
leased to Anthony's
Manufacturing Company,
Inc. 2,051,769 5,474,144 7,525,913 674,293 1/1/1998 40 yrs.
Manufacturing facilities
in Traveler's Rest, SC 263,618 1,539,863 1,803,481 380,474 1/1/1998 40 yrs.
Land leased to AutoZone,
Inc. 9,234,249 9,234,249 1/1/1998 N/A
Office facility leased to
Verizon Communications,
Inc. 219,548 1,578,592 1,798,140 197,324 1/1/1998 40 yrs.
Land leased to Sybron
Dental Specialities,
Inc. 1,152,289 1,152,289 1/1/1998 N/A
Office facility leased to
United States Postal
Service, General
Services Administration
and Comark, Inc. 1,074,640 11,607,695 12,682,335 1,443,428 1/1/1998 40 yrs.
Manufacturing facilities
leased to Tooling
Systems LLC 259,200 2,483,597 2,742,797 124,180 1/1/1998 40 yrs.
-28-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition(a) Investments (b)
----------- ------------ ---- --------- -------- -------------- ----------------
Manufacturing and office
buildings leased to
Penn Crusher Corporation 412,596 3,471,346 62,214
Manufacturing facilities
in McMinnville, TN 177,981 4,660,047 (3,664,223)
Manufacturing and office
facility leased to The
Roof Centers, Inc. 459,593 1,351,737
Manufacturing facilities
leased to Quebecor
Printing Inc. 11,775,534 4,458,047 18,695,004 477,347
Land leased to Datcon
Instrument Company 1,954,882 40,000
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331
Land leased to Dr Pepper
Bottling Company of
Texas 9,795,193
Manufacturing facility
leased to Detroit
Diesel Corporation 15,986,976 5,967,620 31,730,547 775,099
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 14,166,987 5,034,749 18,956,971 2,185,077 541,325
Distribution facility
leased to PepsiCo, Inc. 166,745 884,772
Hotel leased to Livho,
Inc. 2,765,094 11,086,650 3,290,990 4,954,754
Retail store leased to
Eagle Hardware and
Garden, Inc. 10,268,160 4,125,000 11,811,641 393,206
Office building in
Pantin, France leased
to five lessees 6,666,708 2,674,914 8,113,120 (637,075)
Office facility in Mont
Saint Argany, France
leased to Tellit
Assurances 3,448,118 542,968 5,286,915 (529,793)
Portfolio of seven
properties in Houston,
Texas leased to 12
lessees 6,919,983 3,260,000 22,574,073 111,107
Office facility leased to
America West Holdings
Corp. 17,645,437 2,274,782 26,701,663
Gross Amount at which Carried at Close of Period (d)
----------------------------------------------------
Life on
which
Depreciation
in Latest
Accumulated Statement
Personal Depreciation Date of Income
Description Land Buildings Property Total (d) Acquired is Computed
----------- --------- --------- -------- --------- ------------ -------- ------------
Manufacturing and office
buildings leased to
Penn Crusher Corporation 412,596 3,533,560 3,946,156 435,660 1/1/1998 40 yrs.
Manufacturing facilities
in McMinnville, TN 177,981 995,824 1,173,805 79,521 1/1/1998 40 yrs.
Manufacturing and office
facility leased to The
Roof Centers, Inc. 459,593 1,351,737 1,811,330 168,967 1/1/1998 40 yrs.
Manufacturing facilities
leased to Quebecor
Printing Inc. 4,458,047 19,172,351 23,630,398 2,365,271 1/1/1998 40 yrs.
Land leased to Datcon
Instrument Company 1,994,882 1,994,882 1/1/1998 N/A
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331 2,174,520 229,916 1/1/1998 40 yrs.
Land leased to Dr Pepper
Bottling Company of
Texas 9,795,193 9,795,193 1/1/1998 N/A
Manufacturing facility
leased to Detroit
Diesel Corporation 5,967,620 32,505,646 38,473,266 4,012,428 1/1/1998 40 yrs.
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 5,034,749 21,683,373 26,718,122 2,599,836 1/1/1998 40 yrs.
Distribution facility
leased to PepsiCo, Inc. 166,745 884,772 1,051,517 110,597 1/1/1998 40 yrs.
Hotel leased to Livho, 7-40
Inc 2,765,094 13,266,579 6,065,815 22,097,488 4,673,900 1/1/1998 yrs.
Retail store leased to
Eagle Hardware and
Garden, Inc. 4,493,534 11,836,313 16,329,847 1,392,324 4/23/1998 40 yrs.
Office building in
Pantin, France leased
to five lessees 1,227,166 8,923,793 10,150,959 1,009,522 5/27/1998 40 yrs.
Office facility in Mont
Saint Argany, France
leased to Tellit
Assurances 509,420 4,790,670 5,300,090 510,781 6/10/1998 40 yrs.
Portfolio of seven
properties in Houston,
Texas leased to 12
lessees 3,260,000 22,685,180 25,945,180 2,583,478 6/15/1998 40 yrs.
Office facility leased to
America West Holdings
Corp 2,274,782 26,701,663 28,976,445 2,445,745 6/30/1998 40 yrs.
-29-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized Increase
Personal Subsequent to (decrease) in Net
Description Encumbrances Land Buildings Property Acquisition(a) Investments (b)
----------- ------------ ---- --------- -------- -------------- -----------------
Operating Method:
Office facility leased to
Sprint Spectrum L.P. 8,660,554 1,190,000 9,352,965 1,315,694
Office facility leased
to Direction Regional
des Affaires Sanitaires
et Sociales 1,310,221 303,061 2,109,731 (329,735)
Office facility leased to
Cendant Operations, Inc. 5,898,410 351,445 5,980,736 527,368 42,917
Office facility leased to
BellSouth
Telecommunications, Inc. 5,351,334 720,000 7,708,458 119,092
Office building in Lille
and Indre et Loire,
France leased to DSM
Food Specialties and
Societe de Traitements 3,261,492 451,168 4,478,891 (240,386)
Office facility in Tours,
France leased to
Bouygues Telecom SA 8,467,224 1,033,532 9,737,359 1,169,057
Office facility in
Illkirch, France leased
to Bouygues Telecom SA 17,380,702 18,520,178 3,393,368
Manufacturing facility
leased to Swat Fame,
Inc. 3,789,019 13,163,763 317,639
Manufacturing facilities
leased to BE Aerospace,
Inc. 9,200,000 1,860,000 12,538,600
------------ ----------- ------------ ---------- ----------- -----------
$176,878,882 $86,833,311 $376,310,982 $3,290,990 $17,500,365 $(9,663,579)
============ =========== ============ ========== =========== ===========
Gross Amount at which Carried at Close of Period (d)
----------------------------------------------------
Life on
which
Depreciation
in Latest
Accumulated Statement
Personal Depreciation Date of Income
Description Land Buildings Property Total (d) Acquired is Computed
----------- --------- --------- -------- --------- ------------ -------- ------------
Operating Method:
Office facility leased to
Sprint Spectrum L.P. 1,466,884 10,391,775 11,858,659 994,518 7/1/1998 40 yrs.
Office facility leased
to Direction Regional
des Affaires Sanitaires
et Sociales 198,131 1,884,926 2,083,057 188,707 11/16/1998 40 yrs.
Office facility leased to
Cendant Operations, Inc. 351,445 6,551,021 6,902,466 700,825 2/19/1999 40 yrs.
Office facility leased to
BellSouth
Telecommunications, Inc. 720,000 7,827,550 8,547,550 593,965 12/22/1999 40 yrs.
Office building in Lille
and Indre et Loire,
France Leased to DSM
Food Specialties and
Societe de Traitements 446,778 4,242,895 4,689,673 394,933 5/5/1999 40 yrs.
Office facility in Tours,
France leased to
Bouygues Telecom SA 1,150,438 10,789,510 11,939,948 605,095 9/1/2000 40 yrs.
Office facility in
Illkirch, France leased
to Bouygues Telecom SA 21,913,546 21,913,546 570,665 12/3/2001 40 yrs.
Manufacturing facility
leased to Swat Fame,
Inc. 3,789,019 13,481,402 17,270,421 293,565 1/1/1998 40 yrs.
Manufacturing facilities
leased to BE Aerospace,
Inc. 1,860,000 12,538,600 14,398,600 93,772 9/12/2002 40 yrs.
----------- ------------ ---------- ------------ -----------
$83,544,971 $384,661,283 $6,065,815 $474,272,069 $41,716,086
=========== ============ ========== ============ ===========
-30-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized
Subsequent to
Acquisition
Description Encumbrances Land Buildings (a)
----------- ------------ ---- --------- -------------
Direct Financing Method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $4,527,143 $ 331,910 $12,281,102
Centralized Telephone
Bureau leased to Western
Union Financial
Services, Inc. 842,233 4,762,302
Warehouse and
manufacturing buildings
leased to Gibson
Greetings, Inc. 3,495,507 34,016,822
Warehouse and
manufacturing buildings
leased to CSS
Industries, Inc. 1,051,005 14,036,912
Manufacturing,
distribution and office
buildings leased to
Brodart Co. 2,020,233 445,383 11,323,899
Manufacturing facilities
leased to Faurecia
Exhaust Systems, Inc. 223,585 2,684,424
Manufacturing facilities
leased to Rochester
Button Company, Inc. 20,428 576,781
Office and research
facility leased to Exide
Electronics Corporation 2,844,120
Manufacturing facility
leased to Penberthy
Products, Inc. 70,317 1,476,657
Manufacturing facility and
warehouse leased to DS
Group Limited 238,532 3,339,449
Retail stores leased to
AutoZone, Inc. 16,416,402
Retail store leased to
Wal-Mart Stores, Inc. 2,622,962 1,839,303 6,535,144
Manufacturing and office
facilities leased to
Sybron International
Corporation 2,273,857 18,078,975 12,728
Manufacturing and office
facilities leased to
Sybron Dental
Specialties, Inc. 454,101 13,250,980 9,315
Manufacturing and office
facilities leased to NVR
L.P. 728,683 6,092,840
Manufacturing and
generating facilities
leased to Datcon 4,409,856
Gross Amount at which
Carried
at Close of Period
---------------------
Increase
(Decrease)
in Net
Investment Date
Description (b) Total Acquired
----------- ----------- ----- --------
Direct Financing Method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $ 123,974 $12,736,986 1/1/1998
Centralized Telephone
Bureau leased to Western
Union Financial
Services, Inc. (336,883) 5,267,652 1/1/1998
Warehouse and
manufacturing buildings
leased to Gibson
Greetings, Inc. (2,514,665) 34,997,664 1/1/1998
Warehouse and
manufacturing buildings
leased to CSS
Industries, Inc. 295,267 15,383,184 1/1/1998
Manufacturing,
distribution and office
buildings leased to
Brodart Co. (3,336,256) 8,433,026 1/1/1998
Manufacturing facilities
leased to Faurecia
Exhaust Systems, Inc. (276,580) 2,631,429 1/1/1998
Manufacturing facilities
leased to Rochester
Button Company, Inc. (76,334) 520,875 1/1/1998
Office and research
facility leased to Exide
Electronics Corporation (784,799) 2,059,321 1/1/1998
Manufacturing facility
leased to Penberthy
Products, Inc. (284,972) 1,262,002 1/1/1998
Manufacturing facility and
warehouse leased to DS
Group Limited (847,701) 2,730,280 1/1/1998
Retail stores leased to
AutoZone, Inc. (384,609) 16,031,793 1/1/1998
Retail store leased to
Wal-Mart Stores, Inc. 8,374,447 1/1/1998
Manufacturing and office
facilities leased to
Sybron International
Corporation (466,678) 19,898,882 1/1/1998
Manufacturing and office
facilities leased to
Sybron Dental
Specialties, Inc. 174,479 13,888,875 1/1/1998
Manufacturing and office
facilities leased to NVR
L.P. 41,501 6,863,024 1/1/1998
Manufacturing and
generating facilities
leased to Datcon 4,409,856 1/1/1998
-31-
W. P. CAREY & CO. LLC
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs
Capitalized
Subsequent to
Acquisition
Description Encumbrances Land Buildings (a)
----------- ------------ ---- --------- -------------
Direct Financing Method:
Instrument Company
Office/warehouse
facilities leased to
United Stationers Supply
Company 1,882,372 5,846,214 26,581
Bottling and Distribution
facilities lease to Dr
Pepper Bottling Company
of Texas 27,598,638
---------- ----------- ------------ -------
$9,170,338 $13,897,216 $185,571,517 $48,624
========== =========== ============ =======
Gross Amount at which
Carried
at Close of Period
---------------------
Increase
(Decrease)
in Net
Investment Date
Description (b) Total Acquired
----------- ------------ ----- --------
Direct Financing Method:
Instrument Company
Office/warehouse
facilities leased to
United Stationers Supply
Company (552,608) 7,202,559 1/1/1998
Bottling and Distribution
facilities lease to Dr
Pepper Bottling Company
of Texas (951,455) 26,647,183 1/1/1998
------------ ------------
$(10,178,319) $189,339,038
============ ============
Initial Cost to Company
-----------------------
Costs
Capitalized
Subsequent to
Personal Acquisition
Description Encumbrances Land Buildings Property (a)
----------- ------------ ---- --------- -------- -------------
Operating real estate:
Hotel located in:
Alpena, Michigan $114,241 $4,256,356 $ 618,066 $ 732,097
-------- ---------- --------- ----------
$114,241 $4,256,356 $ 618,066 $ 732,097
======== ========== ========= ==========
Gross Amount at which Carried at Close of Period (d)
----------------------------------------------------
Life on
which
Depreciation
in Latest
Accumulated Statement of
Personal Depreciation Date Income
Description Land Buildings Property Total (d) Acquired is Computed
---------------- --------- ---------- ---------- ---------- ------------ --------- ------------
Operating real estate:
Hotel located in:
Alpena, Michigan $ 114,241 $4,370,052 $1,236,467 $5,720,760 $1,664,817 1/1/1998 7-40 yrs.
--------- ---------- ---------- ---------- ----------
$ 114,241 $4,370,052 $1,236,467 $5,720,760 $1,664,817
========= ========== ========== ========== ==========
-32-
W. P. CAREY & CO. LLC
NOTES to Schedule III - Real Estate and ACCUMULATED DEPRECIATION
(a) Consists of the cost of improvements and acquisition costs
subsequent to acquisition, including legal fees, appraisal fees,
title costs, other related professional fees and purchases of
furniture, fixtures, equipment and improvements at the hotel
properties.
(b) The increase (decrease) in net investment is primarily due to (i)
the amortization of unearned income from net investment in direct
financing leases producing a periodic rate of return which at times
may be greater or less than lease payments received, (ii) sales of
properties (iii) impairment charges, (iv) changes in foreign
currency exchange rates, and (v) an adjustment in connection with
purchasing certain minority interests.
(c) At December 31, 2002, the aggregate cost of real estate owned by the
Company and its subsidiaries for Federal income tax purposes is
$650,790,000.
(d)
Reconciliation of Real Estate Accounted for Under the
Operating Method
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $ 459,243,153 $ 438,164,796
Additions 15,232,049 19,406,917
Purchase accounting adjustments in connection with
acquisition of minority interests -- 920,041
Dispositions (2,582,356) (2,164,984)
Foreign currency translation adjustment 8,424,122 (1,729,439)
Reclassification from/to assets held for sale, net
investment in direct financing lease and equity
investments (1,692,544) 8,408,498
Impairment charge (4,352,355) (3,762,676)
------------- -------------
Balance at end of year $ 474,272,069 $ 459,243,153
============= =============
Reconciliation of Accumulated Depreciation
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $ 32,401,204 $ 24,159,250
Depreciation expense 10,169,739 9,290,409
Depreciation expense from discontinued operations 312,176 270,973
Foreign currency translation adjustment 417,239 (68,530)
Reclassification from/to assets held for sale and net
investment in direct financing lease (1,362,047) (1,163,444)
Dispositions (222,228) (87,454)
------------- -------------
Balance at end of year $ 41,716,083 $ 32,401,204
============= =============
Reconciliation for Operating Real Estate
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $ 8,066,244 $ 7,943,711
Additions 384,974 122,533
Dispositions (2,730,458) --
------------- -------------
Balance at close of year $ 5,720,760 $ 8,066,244
============= =============
Reconciliation of Accumulated Depreciation for
Operating Real Estate
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $ 2,076,314 $ 1,441,587
Depreciation expense 328,297 396,377
Depreciation expense from discontinued operations 154,491 238,350
Dispositions (889,848) --
Reclassification to other assets (4,437) --
------------- -------------
Balance at end of year $ 1,664,817 $ 2,076,314
============= =============
-33-
APPENDIX A TO FORM 10-K
W. P. CAREY & CO. LLC
2002 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
Operating Data (4) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues $ 161,604 $ 129,268 $ 110,064 $ 78,670 $ 76,547
Income (loss) from continuing operations (1) 46,674 33,614 (12,060) 29,147 34,583
Basic earnings (loss) from continuing 1.31 .98 (.40) 1.14 1.37
operations per share
Diluted earnings (loss) from continuing 1.28 .96 (.40) 1.14 1.37
operations per share
Net income (loss) 46,588 35,761 (9,278) 34,039 38,464
Basic earnings (loss) per share 1.31 1.04 (.31) 1.33 1.55
Diluted earnings (loss) per share 1.28 1.02 (.31) 1.33 1.55
Cash dividends paid 60,708 58,048 49,957 42,525 30,820
Cash provided by operating activities 75,896 58,877 58,222 48,186 51,944
Cash (used in) provided by investing activities 51,921 (13,368) 41,138 (55,173) (71,525)
Cash (used in) provided by financing activities (115,261) (46,815) (91,452) 3,392 6,668
Cash dividends declared per share 1.72 1.70 1.69 1.67 1.65
Balance Sheet Data:
Real estate, net (2) $ 440,193 $ 435,629 $ 433,867 $ 501,350 $ 453,181
Net investment in direct financing leases 189,339 258,041 287,876 295,556 295,826
Total assets 893,524 915,883 904,242 856,259 813,264
Long-term obligations (3) 226,102 287,903 176,657 310,562 254,827
(1) Includes gain (loss) on sale of real estate.
(2) Includes real estate accounted for under the operating method, operating
real estate and real estate under construction, net of accumulated
depreciation.
(3) Represents mortgage and note obligations and deferred acquisition fees due
after more than one year.
(4) Certain prior year amounts have been reflected as discontinued operations
in accordance with Statement of Financial Accounting Standards No. 144
"Accounting for Impairment or Disposal of Long-Lived Assets".
-1-
MANAGEMENT'S DISCUSSION AND ANALYSIS
(dollar amounts in thousands)
Overview
The following discussion and analysis of financial condition and results of
operations of W. P. Carey & Co. LLC ("WPC") should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 2002. The following discussion includes forward-looking statements.
Forward-looking statements, which are based on certain assumptions, describe
future plans, strategies and expectations of WPC. 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 plan expressed or implied by such forward looking
statements. The risk factors are fully described in Item I of this Annual Report
on Form 10-K. Accordingly, such information should not be regarded as
representations by WPC that the results or conditions described in such
statements or objectives and plans of WPC will be achieved.
WPC was formed in 1998 through the acquisition of nine affiliated real estate
limited partnerships that had been managed by an affiliate of WPC as general
partner and, at that time, became listed on the New York Stock Exchange. In June
2000, WPC acquired the net lease real estate management operations of its former
manager, Carey Management, LLC. As a result of the June 2000 acquisition, WPC is
currently the Advisor to four publicly-owned real estate investment trusts:
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").
Critical Accounting Policies
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 allowance for
uncollected amounts. Because fewer than 30 lessees represent more than 75% of
annual rents, WPC believes that it is necessary to evaluate specific situations
rather than solely use statistical methods. WPC generally recognizes a provision
for uncollected rents and other tenant receivables which typically ranges
between 0.5% and 2% of lease revenues (rental income and interest income from
direct financings leases) and will measure its allowance against actual rent
arrearages and adjust the percentage applied. Based on actual experience during
2002, WPC recorded a provision equal to approximately 2% of lease revenues. As
of December 31, 2002, WPC had rent arrearages from two tenants of approximately
$2,225 that is at risk of default.
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, WPC 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 WPC 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 in most cases, each of WPC's properties
is 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 from 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 performs a review of its estimate of
residual value of its direct financing leases at least annually to determine
whether there has been an other than temporary decline in WPC's current estimate
of residual value of the underlying real estate assets (i.e., the estimate of
what WPC could realize upon sale of the property at the end of the lease term).
If the review indicates a decline in residual
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
value that is other than temporary, a loss is recognized and the accounting for
the direct financing lease will be revised to reflect the decrease in the
expected yield using the changed estimate, that is, a portion of the future cash
flow from the lessee will be recognized as a return of principal rather than as
revenue.
Real estate accounted for under the operating method is stated at cost less
accumulated depreciation. Costs directly related to the development of rental
properties are capitalized. Capitalized development and construction costs
include costs essential to the development of the property, development and
construction costs, interest, property taxes, insurance, salaries and other
projects costs incurred during the period of development. Interest capitalized
for the years ended December 31, 2002, 2001 and 2000 was $216, $443 and $81,
respectively.
When assets are identified by Management as held for sale, WPC discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in Management's opinion, the net sales price of the assets which
have been identified for sale is less than the net book value of the assets, an
impairment charge is recognized and a valuation allowance is established. If
circumstances arise that previously were considered unlikely and, as a result,
WPC decides not to sell a property previously classified as held for sale, the
property is reclassified as held and used. A property that is reclassified is
measured and recorded individually at the lower of (a) its carrying amount
before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been
continuously classified as held and used, or (b) the fair value at the date of
the subsequent decision not to sell. The results of operations and gain or loss
on sales of real estate for properties sold or classified as held for sale after
January 1, 2002 are reflected in the consolidated statements of operations as
"Discontinued Operations" for all periods presented.
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 whether each CPA(R) REIT has met specific
performance criteria on a quarterly basis. 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.
WPC accounted for its acquisition of business operations of Carey Management in
2000 as a purchase. The excess of the purchase price over the fair value of the
net assets acquired was recorded as goodwill. WPC evaluates goodwill for
possible impairment at least annually using a two-step process. To identify any
impairment, 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 and no further analysis is required. 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 the impairment charge.
For the second step, WPC would determine the impairment charge by comparing the
implied fair value of the goodwill with its carrying amount and record an
impairment charge equal to 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. WPC has performed its annual test for impairment of
its management services segment, the reportable unit of measurement, and
concluded that the goodwill is not impaired.
Costs incurred in connection with leases are capitalized and amortized on a
straight-line basis over the terms of the related leases and included in
property expense. Unamortized leasing costs are also charged to property expense
upon early termination of the lease. Costs incurred in connection with obtaining
mortgages and debt financing are capitalized and
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
amortized over the term of the related debt and included in interest expense.
Unamortized financing costs are included in charges for early extinguishment of
debt if a loan is retired and the costs have not been fully amortized.
Stated rental revenue is recognized on a straight-line basis and interest income
from direct financing leases is recognized such that WPC earns a constant rate
of return on its net investment, over the terms of the respective leases.
Unbilled rents receivable represent the amount by which straight-line rental
revenue exceeds rents currently billed in accordance with the lease agreements.
Most of WPC's leases provide for periodic rent increases based on formula
indexed to increases in the Consumer Price Index ("CPI"). CPI-based and other
contingent-type rents are recognized currently. WPC recognizes rental income
from sales overrides when reported by lessees, that is, after the level of sales
requiring a rental payment is reached.
WPC accounts for its investments in unconsolidated joint ventures under the
equity method of accounting as it may exercise significant influence, but does
not control these entities. These investments are recorded initially at cost, as
Equity Investments and subsequently adjusted for its proportionate share of
earnings and cash contributions and distributions. On a periodic basis,
Management assesses whether there are any indicators that the value of equity
investments may be impaired and whether or not that impairment is other than
temporary. An investment's value is impaired only if Management's estimate of
the net realizable value of the investment is less than the carrying value of
the investment. To the extent impairment has occurred, the charge shall be
measured as the excess of the carrying amount of the investment over the fair
value of the investment.
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:
Year-Ended December 31, 2002 Compared to Year-Ended December 31, 2001
WPC reported net income of $46,588 and $35,761 and income from continuing
operations of $46,674 and $33,614 for the years ended December 31, 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 intangibles assets and is not retroactively applicable to 2001.
If the accounting change for amortization had been retroactively applied, the
overall increase in net income and income from continuing operations would have
been $6,204 and $8,437, respectively (also see Note 20 to the accompanying
consolidated financial statements). The results for 2002 reflect a change in the
composition of revenue and earnings from WPC's business segments with
substantial growth in the revenues and net operating income of its management
services operations and a decline in the revenues and net operating income of
its real estate operations. The results from continuing operations for 2002 and
2001 include asset impairment charges of $21,186 and $9,997, respectively,
representing the writedown of assets to estimated fair value. In addition, the
results from 2002 include a gain of $11,160 on the sale of a property in Los
Angeles, California. SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets" requires that for disposal activities initiated after January 1, 2002,
including the sale of properties, the revenues and expenses relating to the
assets held for sale or sold be presented as a discontinued operation for all
periods presented in the financial statements. Because WPC sells properties in
the ordinary course of business, and may reinvest the proceeds of sale to
purchase new properties, WPC evaluates its ability to fund distributions to
shareholders by considering the combined effect of income from continuing
operations and discontinued operations.
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
Excluding the effect of the change in the amortization of goodwill and
indefinite-lived intangible assets, the gain on the sale of the Los Angeles
property and the noncash asset impairment charges, the increase in income from
continuing operations, as adjusted, of $8,466 for the comparable years was
primarily due to increases in management income and a decrease in interest
expense. These were partially offset by increases in general and administrative
expenses and the provision for income taxes, and, to a lesser extent, decreases
in income from equity investments and lease revenues. The increase in impairment
charges was the result of a comprehensive, independent review of the estimated
residual values on its properties classified as net investments in direct
financing leases. WPC determined that an other than temporary decline in
estimated residual value had occurred at several properties, primarily the
properties leased to Gibson Greeting, Inc. and Brodart Co. and the net
investment in direct financing leases was revised using the changed estimates.
The resulting changes in estimated residual value resulted in the recognition of
impairment charges on direct financing leases of $14,880 in 2002. WPC also
incurred an impairment charge of $4,596 on its investment in the operating
partnership units of MerisStar Hospitality Corporation due to the deterioration
in the operating results of MeriStar. The per share price of MeriStar's common
stock has continued to decline since December 31, 2002 when it was $6.60, and
was $3.32 as of March 19, 2003. Management will continue to evaluate whether
further impairment charges will be necessary.
Net operating income from real estate operations (income before gains and
losses, income taxes, minority interest, and discontinued operations) was
$13,116 and $31,140 in 2002 and 2001, respectively (also see Note 17 to the
accompanying consolidated financial statements). Excluding impairment charges,
operating income from real estate operations would have reflected a decrease of
$6,835 for the comparable years ($5,854 when discontinued operations are
considered). The decrease in real estate operating income was primarily due to
decreases in other income, income from equity investments and lease revenues.
These were partially offset by a decrease in interest expense.
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 2001 included settlements totaling
$4,665 from (a) 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, and (b) Harcourt General Corporation, the guarantor of a lease with
General Cinema Corporation for a property in Burnsville, Minnesota. The
settlement with Harcourt General resulted from the termination of the General
Cinema lease in connection with General Cinema's plan of reorganization. The
Burnsville property was sold in January 2002. WPC is continuing to seek
settlements with other former lessees; however, the timing of such settlements
and the amounts that may ultimately be received cannot be estimated.
The decrease in income from equity investments was due to MeriStar's poor
performance, high leverage and limited liquidity. MeriStar, a real estate
investment trust that owns hotel properties, has been affected by a decline in
travel, including business travel. WPC recorded a loss of $3,019 on the MeriStar
equity investment in 2002, compared with income of $436 for 2001. Management
does not expect an improvement in MeriStar's results in 2003. In February 2003,
MeriStar's credit rating was downgraded by two major ratings agencies. WPC's
income from equity investments will benefit from the acquisition, in December
2002, of a 36% equity interest in two properties leased to Hologic, Inc. from an
affiliate, CPA(R):15, advised by WPC. The lease has an initial term of 20 years
with four five-year renewal terms with current annual rents of $3,156 of which
WPC's share is $1,136. It is likely that mortgage financing will be placed on
the Hologic properties in 2003.
Lease revenues decreased by $1,245 for the comparable years primarily as a
result of the sale of properties during 2001, including the property leased to
Duff-Norton, Inc. 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
included in discontinued operations), the termination of WPC's lease with
Thermadyne Holdings Corp. during 2002, and to a lesser extent, the
reclassification of WPC's investment in the properties leased to Childtime
Childcare, Inc., as an equity investment during 2002 subsequent to its
contribution of its 33.93% interest to a limited partnership. 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 the
acquisition of three properties leased to BE Aerospace Inc. in 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 (contractual rent less mortgage debt service)
from the BE Aerospace properties will be approximately $750. Lease revenues are
expected to decline for
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
2003 as a result of several large terminations and sales including the leases
with The Gap, Inc. that ended in January 2003. Future lease revenues are also
affected by the change in estimates for direct financing leases and interest
income from direct financing leases will be reduced by approximately $1,100 in
2003, $1,300 in 2004 and $1,500 in 2005. This change in estimate has no effect
on the contractual obligations of lessees and will not have any effect on cash
flow.
The decrease in interest expense for the comparable years 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 declined in 2001 and 2002. The average outstanding
balance on the credit facility decreased by approximately $34,000 and the
average interest rate decreased to 3.24% from 5.40% for the comparable years. 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 has resulted 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. The decrease in
interest expense from the credit facility and the payoff of the Alpena and
Petoskey mortgage bonds were partially offset by an increase in interest from
mortgages placed on the Sprint Spectrum L.P. and Bouyges Telecom properties in
2001. During 2002, WPC obtained new financing of $7,000 on a property leased to
Quebecor, Inc. and $9,200 on the newly-purchased BE Aerospace properties. A
mortgage on the Quebecor property had been paid off in May 2001. Annual debt
service on the Quebecor and BE Aerospace loans is $1,313.
Property expenses decreased by $347 for the comparable years. Property expenses
for 2002 and 2001 include noncash charges of $142 and $1,321, respectively, in
connection with the writeoff of accumulated straight-line rents as uncollectible
in connection with the restructuring of the lease with Livho, Inc. Excluding the
writeoffs, property expenses for the comparable years increased by $832. The
increases in property expenses were due to increases in real estate taxes,
property insurance, property management and maintenance expenses. This was the
result of the termination of the Thermadyne Holdings Corp. lease as well as an
increase in costs related to properties that are either vacant or not subject to
net leases, and charges of approximately $200 to write off unamortized leasing
costs in connection with a lease termination and the sale of a property. As of
December 31, 2002, approximately 10% of WPC's annual lease revenues are from
non-net leased properties. WPC has the primary obligation for all property
expenses that are not net leased properties. Whenever a property becomes vacant,
it is WPC's objective to either re-lease the vacant space or to market the
property for sale. WPC attempts to remarket the property as a single-tenant net
lease property; however, there is often a greater likelihood of re-leasing the
property as a multi-tenant property. While WPC considers single-tenant net
leasing to be its core business, WPC has developed sufficient expertise to
manage multi-tenant corporate properties. Therefore, remarketing strategies are
based on what Management considers the best opportunity based on specific market
conditions.
The increase in the gains in 2002 was due primarily to the $11,160 gain
recognized from the sale of the Los Angeles, California property. The property
had not been leased since December 1999 at which time WPC commenced a
redevelopment of the property. The property was sold to the Los Angeles Unified
School District in June 2002, and WPC was engaged to manage the build-to-suit
development of the property. Due to WPC's continuing involvement with the
development of the property, the recognition of gain on sale and the subsequent
build-to-suit development income on the project are being recognized using a
blended profit margin under the percentage of completion method of accounting.
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. The subsidiary is obligated to share 10% of the early
completion incentive fee, if achieved, with a joint venture partner. This joint
venture partner has no other participation in the subsidiary's fees or its
profit or loss. Because the early completion incentive is contingent, it is not
included in the percentage of completion calculation and will only be recognized
to earnings when the early completion deadline is met. For the year ended
December 31, 2002, WPC recorded $289 of build-to-suit development fee management
income even though cash consideration received as of December 31, 2002 for
services provided under the contract was approximately $1,208.
For tax purposes, the sale of the Los Angeles property was structured as a
Section 1033 noncash exchange which, under the Internal Revenue Code, would
allow WPC to acquire like-kind real properties within a specified period in
order to defer a taxable gain to shareholders of approximately $20,000. If a
like-kind exchange is completed, the taxable gain will not be recognized until
the replacement properties acquired are subsequently sold. As of December 31,
2002, no replacement property has been identified.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
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 WPC's City of Industry, California property in February
2002. Annual rents were $2,525. In December 2002, WPC entered into an agreement
to re-lease a portion of the space for $873 to a tenant which was occupying the
space on a month-to-month basis, and is seeking to re-market 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. WPC is continuing to seek a new tenant
for the Pillowtex property.
In January 2002, The Gap, Inc. notified WPC that it would not renew its lease
which expired in February 2003. The lease provided annual rent of $2,205. Based
on current market rentals, WPC does not expect the rent for new leases on the
Gap property to reach a level equal to the rents received from The Gap.
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 negotiated a lease termination settlement and WPC
received a payment of $2,250 in March 2003.
In June 2002, Wozniak Industries, Inc. notified WPC that it would not renew its
lease, which expires in December 2003 and Varo, Inc. did not renew its lease for
a property in Garland, Texas and vacated in October 2002. A lessee at the
multi-tenant property in Pantin, France, did not renew its lease in September
2002. Annual rents under the leases were approximately $1,770. WPC is actively
remarketing the Pantin property, and is in the process of negotiating with a new
tenant and intends to sell the Varo property in "as-is" condition. The sale of
the Wozniak property was completed in March 2003. In addition, various leases
with annual rental income totaling approximately $2,693 are due to expire in
2003, and WPC is either negotiating a renewal of the leases, negotiating with
the tenants to sell the property or actively re-marketing the properties for
lease or sale.
In November 2001, WPC evicted the lessee, Red Bank Distribution, Inc. from its
property in Cincinnati, Ohio and entered into an agreement-in-principle that
effectively terminated the net lease because of Red Bank's inability to meet its
annual rental lease obligation of $1,579. At that time, WPC assumed control of
the property and was managing a public warehousing operation that occupies a
portion of the building. Management evaluated several alternatives, and in May
2002 signed a license agreement with a tenant to take over the operations of the
property. The short-term agreement provides annual rent of $300.
In February 2003, WPC sold its property in Winona, Minnesota to the lessee,
Peerless Chain Company for $10,800, comprised of cash of $6,300 and two notes
receivable with a fair value totaling $2,250 and which mature in 2006 and 2008.
WPC also received a note receivable of approximately $1,700 for unpaid rents
which is payable in equal monthly installments over 5 years. Annual rental
income under the Peerless lease was $1,561.
WPC has classified the Varo, Wozniak, Red Bank and Peerless properties as held
for sale as of December 31, 2002 and included the revenue and expense from those
properties in discontinued operations.
As of December 31, 2002, WPC has classified three additional properties as held
for sale. Annual lease revenues from these properties approximate $284. Over the
past several years, WPC has pursued a strategy of selling its smaller properties
as they do not generate significant cash flow and require more intensive asset
management services. These properties include small retail properties that were
originally leased under a master lease.
In December 2002, WPC entered into a series of agreements with Faurecia Exhaust
Systems, Inc., the lessee of two properties in Toledo, Ohio. In consideration
for terminating the existing lease and vacating one of the properties, WPC
received a promissory note of $4,240, which matured in January 2003 at which
time it was paid. The term of the original lease had been scheduled to expire in
2007. In connection with vacating this property, WPC was assigned rights, by
Faurecia, as landlord, to a sublease at the property. The sublease agreement
provides for annual rents of $357, through November 2005, and has been
guaranteed by Faurecia. The terminated lease provided for annual rental income
of $1,617. WPC will recognize the restructuring consideration over a period
equivalent to the former lease term. WPC is remarketing 750,000 square feet at
the property. Concurrently, Faurecia entered into a separate lease agreement for
the remaining property. The new Faurecia lease has a 20-year term at an annual
rent of $336.
Two leases with Federal Express Corporation were extended for five years, a
lease with Verizon Communications, Inc. was extended for ten years, and leases
with Honeywell, Inc. for a portion of two properties in Houston, Texas were
extended for
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
three years. Annual rental income under the Federal Express, Verizon and
Honeywell leases is $804. New leases, each with ten-year terms, were entered
into with Petrocon Engineering, Inc. and Tooling Systems, LLC, for a portion of
a property in Beaumont, Texas and Frankenmuth, Michigan, respectively. Annual
rental income from the two leases is $580. Both had been tenants under
short-term leases. Two leases with Lockheed Martin Corporation for a portion of
properties located in Oxnard, California and Houston, Texas have been extended
through December 2003 and December 2007, respectively, with an additional
extension on the Oxnard property if Lockheed Martin has certain government
contracts renewed. Annual rents under the two Lockheed leases are $891. Lockheed
also leases a property in King of Prussia, Pennsylvania which term expires in
July 2003 and provides annual rent of $974. Lockheed Martin is in the process of
extending the King of Prussia lease for five years at an annual rent of $797.
Pre Finish Metals Incorporated renewed its lease, which had been scheduled to
expire in June 2003, for five years at an annual rent of $892.
WPC continues to monitor closely 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
a government guarantee for financing subsequent to September 11, 2001 and its
financial prospects remain uncertain. Livho, the lessee of a Holiday Inn in
Livonia, Michigan, is affected by the cyclical nature of the automotive
industry. Due to Livho's declining operating results, WPC has agreed to amend
its lease with Livho, with annual rent 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 CPI and other similar indices and may have caps
on such increases, or sales overrides, which should increase operating revenues
in the future. Over the past several years, the CPI has had annual increases
that range from 1.5% to 3%.
Net operating income from WPC's management services operations for the years
ended December 31, 2002 and 2001 was $37,732 and $8,047, respectively (also see
Note 17 to the accompanying consolidated financial statements). Results for 2002
include noncash charges for amortization of intangible assets of $7,280 and
results for 2001 include amortization of goodwill and intangible assets of
$11,903. Excluding the charges for amortization, operating income from
management services would have been $45,012 and $19,950, respectively, for the
years ended December 31, 2002 and 2001. As described below, the management
revenues are comprised of transaction and asset-based fees. Transaction fees
represented 56% of management revenues in 2002 as compared with 36% in 2001. The
ability to generate transaction fees is, to a large extent, dependent on the
ability of the CPA(R) REITs to raise capital and invest the capital raised in
real estate. There can be no assurance that the factors for raising capital will
continue to be favorable. WPC believes, therefore, that the increase or annual
level of transaction fees should not be seen as a sustainable trend. While
asset-based fees represented a lower proportion of management revenues in 2002,
these revenues increased by 23%. The increase benefited from an increase in the
asset base of the CPA(R) REITs and that growth is also related to the ability of
the CPA(R) REITs to raise capital.
Total revenues earned by the management services operations for the years ended
December 31, 2002 and 2001 were $84,255 and $46,911, respectively. Management
fee revenues were comprised of transaction fees of $47,005 and $17,160,
respectively, and asset-based fees and reimbursements of $37,250 and $29,751,
respectively, for the years ended December 31, 2002 and 2001. Transaction fees
included fees from structuring acquisitions and financings on behalf of the
CPA(R) REITs. WPC and affiliates structured more than $981,000 of acquisitions
on behalf of the CPA(R) REITs in 2002 as compared with $395,000 in 2001.
Management believes that acquisition volume in 2003 may meet or exceed 2002.
Since December 31, 2002, WPC and affiliates have structured more than $200,000
of acquisitions on behalf of the CPA(R) REITs.
The asset-based management income includes fees based on the value of CPA(R)
REIT real estate assets under management. Total asset based management fees for
the years ended December 31, 2002 and 2001 were $26,453 and $21,511,
respectively. A portion of the CPA(R) REIT management fees is based on each
CPA(R) REIT meeting specific performance criteria (the "performance fee") and is
earned only if the criteria are achieved. The performance criterion for
Corporate Property Associates 10 Incorporated ("CPA(R):10") was satisfied during
the second quarter of 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 second
quarter of 2001, resulting in WPC's recognition of $3,112 for the period
December 1997 through March 2001. Based on assets under management of the CPA(R)
REITs as of December 31 2002, annualized management and performance fees under
the advisory agreements are approximately $32,005. As the real estate asset
bases of CPA(R):14 and CPA(R):15 continue to increase, management and
performance fees are expected to
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
increase. CPA(R):14 completed a public offering in 2001 and still has cash that
it raised from its offering that is available for investment.
As of March 12, 2003, the CPA(R) REITs had approximately $105,000 available for
investment. CPA(R):15 fully subscribed its initial $400,000 "best efforts"
public offering in November 2002. CPA(R): 15 has filed a registration statement
with the United States Securities and Exchange Commission to commence a second
"best efforts" public offering of up to $690,000. 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. WPC
cannot predict how long either trend will be sustained because much of it is
determined by factors which are beyond the control of the company. During 2002,
CPA(R):15 entered into a sales agreement with UBS PaineWebber and A.G. Edwards
which commenced selling of CPA(R): 15 during the second and fourth quarter,
respectively.
In April 2002, the shareholders of CPA(R):10 and CIP(R), 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 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 of 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.
The provision for income tax expense for the year ended December 31, 2002
increased by $9,723 over the comparable year ended December 31, 2001 and
resulted from the growth of the management services operations. Income tax
expense increased because approximately 90% 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 expenses was attributable to the
growth of the management services operations. A significant portion of the
increase represents costs that vary with acquisition and asset management
activity. The overall percentage increase in general and administrative expenses
was significantly lower than the percentage increase in management revenues. 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 years ended
December 31, 2002 and 2001 were $6,565 and $5,255, respectively. Of the increase
in personnel costs for the comparable years, $927 reflected an increase in the
non-cash charges relating to WPC's share incentive plans. Equity awards are
generally amortized over a four-year vesting period.
Year-Ended December 31, 2001 Compared to Year-Ended December 31, 2000
WPC reported net income of $35,761 and a net loss of $9,278, and income from
continuing operations of $33,614 and loss from continuing operations of $12,060,
for the years ended December 31, 2001 and 2000, respectively. The results for
2001 and 2000 are not fully comparable, primarily due to the acquisition of the
management operations in June 2000 and the related charge in 2000 of $38,000 in
connection with terminating its management contract. Excluding the charge on the
termination of the management contract in 2000, net income and income from
continuing operations for the comparable periods would have increased by $7,039
and $7,674, respectively.
Net operating income from real estate operations (real estate segment income
before gains and losses, income taxes, minority interest and the charge on the
contract termination) was $31,140 and $24,116 in 2001 and 2000, respectively
(also see Note 17 to the accompanying consolidated financials statements). The
results for 2001 and 2000 include asset impairment charges of $9,997 and $8,809,
respectively, representing noncash impairment writedowns of assets to estimated
fair value. Excluding the effect of the writedowns, operating income from real
estate operations for 2001 would have reflected an increase of $8,620 over 2000.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
The increase in real estate operating income was primarily due to decreases in
interest expense and depreciation. The decrease in interest expense was
attributable to lower average outstanding balances on WPC's $185,000 credit
facility and a decrease in interest rates during 2001. Interest expense on the
credit facility decreased by $6,292 over 2000. The average balance outstanding
on the credit line was $104,000 in 2001 and $146,000 in 2000 and the average
LIBOR-based interest rate declined from 7.77% to 5.29%. As of December 31, 2001,
advances outstanding on the credit facility were $95,000. The decrease in
interest expense from the credit facility was partially offset by an increase in
mortgage interest due to placement of mortgages on the Cendant Operations, Inc.
and Sprint Spectrum properties in December 2000 and July 2001, respectively,
resulting in higher interest charges from mortgages. The decrease in
depreciation of $2,980 to $10,023 in 2001 was primarily due to the disposition
of the majority interest in the Federal Express Corporation property in
Colliersville, Tennessee in December 2000 to an affiliate and the
reclassification of a property located in Los Angeles, California to real estate
under development in December 1999 at which time depreciation was no longer
incurred.
Other income primarily consists of nonrecurring items including, but not limited
to, consideration from lease termination and settlements. In 2001, WPC received
a $2,500 final settlement of a claim against New Valley and $2,165 from a
settlement with the guarantor of a lease with General Cinema for a property in
Burnsville, Minnesota.
The increase in property expenses in 2001 of $1,385 to $6,877 was primarily due
to an increase in real estate taxes and utilities on vacant and partially vacant
properties of $691 and an increase in the provision for uncollected rents of
$2,098 and was partially offset by decreases in management fees of $1,908.
Effective with the cancellation of its Management Agreement in June 2000, WPC no
longer incurred management fees. The provision for uncollected rents included a
writeoff of accumulated straight-line rents of $1,321 that was recorded in
connection with amending a lease.
The decrease in lease revenues of $6,193 to $72,111 in 2001 was primarily as a
result of the sale of a 60% majority interest in the Federal Express property to
an affiliate in December 2000 and the restructuring of a lease with Livho, Inc.,
the lessee of the Holiday Inn in Livonia, Michigan, and was partially offset by
rent increases on various leases and increased rents from the completion of
expansions at existing properties. The lease restructuring with Livho, Inc.
resulted in a decrease in rental income of $658. During the year ended December
31, 2000, revenues from the Federal Express lease were $5,404. The remaining 40%
interest in the property is accounted for under the equity method of accounting.
WPC incurred impairment charges of $12,643 in 2001 including a writedown of
$6,749 in its equity investment in MeriStar as a result of a decrease in
MeriStar's earnings and the uncertainty regarding its distribution rate which
was reduced in the fourth quarter of 2001. WPC incurred a $2,000 impairment loss
on the Red Bank property as a result of the eviction (i.e., a change in
circumstances which required an evaluation for possible impairment). The
remaining impairment losses primarily related to the writedowns of several
under-performing properties which WPC entered into commitments to sell.
Net operating income from WPC's management services operations for the years
ended December 31, 2001 and 2000 was $8,047 and $9,361, respectively, and is not
fully comparable as the acquisition of the management services operations
occurred June 29, 2000. Results for the years ended December 31, 2001 and 2000
include noncash charges for amortization of goodwill and intangible assets of
$11,903 and $5,958, respectively. Excluding amortization charges, operating
income from management services would have been $19,950 and $15,319 for the
years ended December 31, 2001 and 2000, respectively. The provision for income
taxes for the year ended December 31, 2001 increased by $4,332 over the year
ended December 31, 2000. The increase is a result of 80% of management revenues
being earned by a taxable, wholly-owned subsidiary.
Total revenues earned by the management services operations for the years ended
December 31, 2001 and 2000 were $46,911 and $25,271, respectively. Management
fee revenues were comprised of transaction fees of $17,160 and $14,894 and
asset-based management fees and reimbursements of $29,751 and $10,377 for the
years ended December 31, 2001 and 2000, respectively. Transaction fees included
fees from structuring acquisition and refinancing transactions on behalf of the
CPA(R) REITs. WPC and affiliates structured approximately $395,000 of
acquisitions in 2001. Total asset based fees for the years ended December 31,
2001 and 2000 were $21,511 and $6,809, respectively.
The increase in general and administrative expenses was primarily due to the
acquisition of the management services operations in 2000. Approximately 89% of
the increase in general and administrative costs resulted from personnel-related
costs.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
Financial Condition
WPC's cash balances increased to $21,304 from $8,870 and overall debt decreased
from $296,000 to $235,000. 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 obtain debt financing on an ongoing basis.
Cash flows from operating activities and distributions received from equity
investments for the year ended December 31, 2002 of $81,456 were sufficient to
fund dividends to shareholders of $60,708. Annual cash flow from operations is
projected to fully fund distributions; however, the coverage of distributions
may fluctuate on a quarterly basis due to the timing of certain compensation
costs that are paid in the first 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 in 2000 on
behalf of the CPA(R) REITs. Based on the high volume of property acquisitions
WPC has structured on behalf of the CPA(R) REITs in 2002 and 2001, and
Management's estimate of future acquisitions volume, the annual installment will
increase to $1,495 in 2003, subject to the subordination provisions of the
CPA(R) REITs. The payments of the deferred acquisition fees by the CPA(R) REITs
is subordinated to each CPA(R) REIT meeting specified certain performance
criteria.
Investing activities included using $13,983 for purchases of real estate, equity
investments, securities and additional capital expenditures. The expenditures
included using $11,714 for the purchase of a 36% jointly-controlled
tenancy-in-common interest in two properties leased to Hologic, $640 for the
purchase of a vacant parcel of land adjacent to existing properties in
Broomfield, Colorado, $413 for the final funding of the expansion at the AT&T
property, $975 to fund other improvements and $241 to purchase a 1% interest in
the commercial mortgage-backed securitization structured by WPC on behalf of the
CPA(R) REITs. In connection with the securitization, WPC received a capital
distribution of $1,255 from an equity investee which refinanced its mortgage
debt.
WPC received $50,247 in connection with the sales of properties and investments
including the sale of the property in Los Angeles, California for $24,000. The
proceeds from the sale of the Los Angeles property were used to pay down a
portion of WPC's balance on its credit facility. WPC used $10,751 of cash
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 cash
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, allowed WPC to acquire like-kind real properties
within a stated period in order to defer a taxable gain. WPC used $14,378 of the
Saint-Gobain escrow to acquire three properties leased to BE Aerospace, Inc, and
the remaining funds were utilized in the acquisition of the interest in the
Hologic properties. Funds of $9,366 from a property sale in 2001 which had been
placed in an escrow account for the purpose of structuring a Section 1031
exchange were released in 2002 when an exchange was not completed. 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 as of December 31, 2002 is $2,758. An installment of
$524 was paid in January 2003.
In addition to paying dividends to shareholders, WPC's financing activities for
2002 included reducing the outstanding balance of its credit facility by $46,000
to $49,000, paying off in full $12,580 mortgage debt on the Alpena and Petoskey
hotel properties, and obtaining new mortgages of $16,200. WPC also made
scheduled principal payment installments of $8,428 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.
As of December 31, 2002, approximately 55% of the properties owned by WPC are
unencumbered with mortgage debt.
WPC's raised $10,086 from the issuance of shares primarily through WPC's
dividend reinvestment and 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 2002 based on meeting performance criteria as of December 31, 2001). For
the year ended December 31, 2002, WPC met the FFO Target, and an additional
400,000 shares ($8,910) will be issued during 2003. 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 a specified cumulative return
for its limited partners. The subordinated preferred return would only be
payable currently if WPC achieved a closing price equal
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
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 to the former general partner in January 2002. WPC has no
remaining obligations relating to January 1998 transactions.
In 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 allows WPC to meet its liquidity needs on
a short-term basis, if necessary, and that renewing the facility after the
current term is likely. As of December 31, 2002, WPC has $136,000 of unused
capacity under the credit facility. Over the past twelve months, WPC has
substantially deleveraged as its overall debt has decreased from $295,515 to
$235,049, or 20%. 78% of WPC's outstanding mortgage debt has fixed rates of
interest that will partially protect WPC from increases in market rates from
near-historical lows.
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 and scheduled debt maturities through
long-term limited recourse mortgages, unsecured indebtedness and the possible
issuance of additional equity securities. WPC is expected to incur capital
expenditures on various properties during 2003 of approximately $2,000,
primarily related to tenant leasehold improvements, and for property
improvements and upgrades to enhance a property's marketability for re-leasing.
Commitments for capital expenditures on the Livonia hotel are currently
estimated to be $3,500 relating to a property improvement plan requirement
necessary to renew the franchise license with Holiday Inn. The funds are
expected to be paid out over a three-year period beginning in the second half of
2004. WPC is evaluating redevelopment plans for the Broomfield property but has
not determined the cost of such redevelopment. In the case of limited recourse
mortgage financing that does not fully amortize over its term or is currently
due, WPC is responsible for the balloon payment only to the extent of its
interest in the encumbered property because the holder has recourse only to the
collateral. In the event that balloon payments come due, WPC may seek to
refinance the loans, restructure the debt with the existing lenders or evaluate
its ability to satisfy the obligation from its existing resources including its
revolving line of credit, to satisfy the mortgage debt. To the extent the
remaining initial lease term on any property remains in place for a number of
years beyond the balloon payment date, WPC believes that the ability to
refinance balloon payment obligations is enhanced. WPC also evaluates all its
outstanding loans for opportunities to refinance debt at lower interest rates
that may occur as a result of decreasing interest rates or improvements in the
credit rating of tenants. There are $2,500 and $16,700 in scheduled balloon
payments on limited recourse mortgage notes due in 2003 and 2004, respectively.
WPC believes it has sufficient resources to pay off the loans in the event they
are not refinanced.
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 in February 2001. 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 the prospectus.
Off-Balance Sheet and Aggregate Contractual Agreements
WPC has guaranteed loans of $4,528 made to officers which are collateralized by
shares of WPC owned by the officers and held by WPC and has provided a guarantee
of $2,000 related to the development project in Los Angeles (see discussion of
the development project in the results of operations for the year ended December
31, 2002). These shares to officers were issued in connection with equity
incentive plans and the acquisition of the management operations. WPC will not
renew the guarantee on the officers' loans in 2003.
A summary of WPC's obligations, commitments and guarantees under contractual
arrangements are as follows:
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable $186,049 $ 11,180 $ 25,391 $ 8,264 $ 24,894 $14,600 $ 101,720
Unsecured note payable 49,000 49,000
Deferred acquisition fees 2,757 524 524 524 524 524 137
Commitments and Guarantees:
Guarantee of officer loans 4,528 4,528
Capital improvements 3,500 500 1,500 1,500
Development project 2,000 2,000
Share of minimum rents payable
under office cost-sharing
agreement 1,748 466 466 466 350
-------- -------- -------- -------- -------- ------- ---------
$249,582 $ 16,698 $ 77,881 $ 10,754 $ 27,268 $15,124 $ 101,857
======== ======== ======== ======== ======== ======= =========
In connection with the purchase of many of its properties, WPC required the
sellers to perform environmental reviews. Management believes, based on the
results of such reviews, that WPC's properties were in substantial compliance
with Federal and state environmental statutes at the time the properties were
acquired. However, portions of certain properties have been subject to some
degree of contamination, principally in connection with leakage from underground
storage tanks, surface spills or historical on-site activities. In most
instances where contamination has been identified, tenants are actively engaged
in the remediation process and addressing identified conditions. Tenants are
generally subject to environmental statutes and regulations regarding the
discharge of hazardous materials and any related remediation obligations. In
addition, WPC's leases generally require tenants to indemnify WPC from all
liabilities and losses related to the leased properties with provisions of such
indemnification specifically addressing environmental matters. The leases
generally include provisions that allow for periodic environmental assessments,
paid for by the tenant, and allow WPC to extend leases until such time as a
tenant has satisfied its environmental obligations. Certain of the leases allow
WPC to require financial assurances from tenants such as performance bonds or
letters of credit if the costs of remediating environmental conditions are, in
the estimation of WPC, in excess of specified amounts. Accordingly, Management
believes that the ultimate resolution of environmental matters will not have a
material adverse effect on WPC's financial condition, liquidity or results of
operations.
Accounting Pronouncements
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
accordance with the requirements of SFAS No. 142, WPC performed its annual tests
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.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. WPC does not expect SFAS No. 143 to have a material effect on its
financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on 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 December 31, 2002, the operations of eighteen
properties have been classified as discontinued operations. Seven of the
properties are classified as held for sale in the accompanying consolidated
balance sheet as of December 31, 2002, one of which was subsequently sold.
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. WPC did not elect early adoption.
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. WPC does not expect SFAS No.
147 to have a material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. The new interim disclosure provisions are effective for the
first interim period beginning after December 15, 2002. WPC is evaluating
whether it will change to the fair value based method.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
(dollar amounts in thousands)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require WPC
to make payments to a guaranteed third-party based on changes in an underlying
asset, liability, or an equity security of the guaranteed party. The accounting
provisions only apply for certain new transactions entered into or existing
guarantee contracts modified after December 31, 2002. The adoption of the
accounting provisions of FIN 45 is not expected to have a material effect on
WPC's financial statements. WPC has complied with the disclosure provisions.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE to make additional disclosures. The transitional disclosure
requirements will take effect immediately and are required for all financial
statements initially issued after January 31, 2003. WPC is assessing the impact
of this interpretation on its accounting for its investments in unconsolidated
joint ventures and other entities. WPC is evaluating whether upon adoption in
the third quarter of 2003 if it will consolidate certain equity investments and
other entities. WPC's maximum loss exposure is the carrying value of its equity
investments. WPC does not expect the adoption of the provisions of FIN 46 to
have a material effect on its financial statements.
-15-
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
W. P. Carey & Co. LLC:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, members' equity and cash flows present
fairly, in all material respects, the financial position of W. P. Carey & Co.
LLC and its subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 20 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standard
No. 142 "Goodwill and Other Intangibles", which requires that goodwill and
indefinite-lived intangible assets are no longer amortized and are assessed for
impairment annually. In addition, as discussed in Note 15 to the consolidated
financial statements, effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standard No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", which requires that the results of operations,
including any gain or loss on sale, relating to real estate that has been
disposed of or is classified as held for sale after the initial adoption be
reported in discontinued operations for all periods presented.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 19, 2003
-16-
W. P. CAREY & CO. LLC
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts) December 31,
------------
2002 2001
---- ----
ASSETS:
Real estate leased to others:
Accounted for under the operating method, net of accumulated
depreciation of $41,716 and $32,401 at December 31, 2002
and 2001 $ 432,556 $ 426,842
Net investment in direct financing leases 189,339 258,041
--------- ---------
Real estate leased to others 621,895 684,883
Operating real estate, net of accumulated depreciation of $1,665 and
$2,076 at December 31, 2002 and 2001 4,056 5,990
Real estate under construction and redevelopment 3,581 2,797
Equity investments 67,742 50,629
Assets held for sale 22,158 23,693
Cash and cash equivalents 21,304 8,870
Due from affiliates 40,241 18,789
Goodwill, net of accumulated amortization of $4,363 at
December 31, 2001 49,874 37,574
Intangible assets, net of accumulated amortization of $18,543 and
$13,499 at December 31, 2002 and 2001 44,567 55,236
Other assets, net of accumulated amortization of $1,927 and $1,095 at
December 31, 2002 and 2001 and reserve for uncollected rent of
$3,492 and $3,278 at December 31, 2002 and 2001 18,106 27,422
--------- ---------
Total assets $ 893,524 $ 915,883
========= =========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities :
Mortgage notes payable $ 186,049 $ 200,515
Notes payable 49,000 95,000
Accrued interest 1,319 1,312
Dividends payable 15,486 14,836
Due to affiliates 12,874 16,790
Accrued taxes 5,285 3,020
Prepaid rental income and security deposits 3,951 3,198
Accounts payable and accrued expenses 17,931 11,022
Deferred taxes, net 19,763 6,608
Other liabilities 9,494 3,123
--------- ---------
Total liabilities 321,152 355,424
--------- ---------
Minority interest 1,484 794
--------- ---------
Commitments and contingencies
Members' Equity:
Listed shares, no par value, 35,944,110 and 34,742,436 shares issued
and outstanding at December 31, 2002 and 2001 690,594 664,751
Dividends in excess of accumulated earnings (111,970) (97,200)
Unearned compensation (5,671) (4,454)
Accumulated other comprehensive loss (2,065) (3,432)
--------- ---------
Total members' equity 570,888 559,665
--------- ---------
Total liabilities, minority interest and members' equity $ 893,524 $ 915,883
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
-17-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of OPERATIONS
(In thousands except share and per share amounts) For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Revenues:
Management income from affiliates $ 84,255 $ 46,911 $ 25,271
Rental income 47,865 45,756 50,281
Interest income from direct financing leases 23,001 26,355 28,023
Other interest income 1,727 1,023 452
Other income 1,258 5,960 2,626
Revenues of other business operations 3,498 3,263 3,411
--------- --------- ---------
161,604 129,268 110,064
--------- --------- ---------
Expenses:
Interest 16,457 19,560 25,346
Depreciation 10,834 10,023 13,003
Amortization 9,214 13,857 6,934
General and administrative 42,594 29,331 16,474
Property expenses 6,530 6,877 5,492
Impairment charge on real estate and investments 21,186 9,997 8,809
Operating expenses of other business operations 2,338 2,376 2,535
Termination of management contract -- -- 38,000
--------- --------- ---------
109,153 92,021 116,593
--------- --------- ---------
Income (loss) from continuing operations before income (loss) from equity
investments, gain (loss) on sale, minority interest and
income taxes 52,451 37,247 (6,529)
Income (loss) from equity investments (443) 2,827 2,882
--------- --------- ---------
Income (loss) from continuing operations before gain (loss) on
sale, minority interest and income taxes 52,008 40,074 (3,647)
Gain on sale of securities 94 44 281
--------- --------- ---------
Income (loss) from continuing operations before minority interest,
income taxes and gain (loss) on sale of real estate 52,102 40,118 (3,366)
Minority interest in (income) loss 120 68 (1,517)
--------- --------- ---------
Income (loss) from continuing operations before income taxes
and gain (loss) on sale of real estate 52,222 40,186 (4,883)
Provision for income taxes (18,199) (8,476) (4,144)
------- ------- -------
Income (loss) from continuing operations before gain on loss on
sale of real estate 34,023 31,710 (9,027)
------- ------- -------
Discontinued operations:
Income from operations of discontinued properties 5,774 4,793 5,020
Gain on sale of real estate 2,364 -- --
Impairment charges on properties held for sale (8,224) (2,646) (2,238)
--------- --------- ---------
Income (loss) from discontinued operations (86) 2,147 2,782
--------- --------- ---------
Gain (loss) on sale of real estate 12,651 1,904 (3,033)
--------- --------- ---------
Net income (loss) $ 46,588 $ 35,761 $ (9,278)
========= ========= =========
-Continued-
-18-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of OPERATIONS, Continued
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 1.31 $ .98 $ (.40)
Discontinued operations -- .06 .09
---------- ---------- ----------
Net income (loss) $ 1.31 $ 1.04 $ (.31)
========== ========== ==========
Diluted earnings (loss) per share
Income (loss) from continuing operations $ 1.28 $ .96 $ (.40)
Discontinued operations -- .06 .09
---------- ---------- ----------
Net income (loss) $ 1.28 $ 1.02 $ (.31)
========== ========== ==========
Weighted average shares outstanding:
Basic 35,530,334 34,465,217 29,652,698
========== ========== ==========
Diluted 36,265,230 34,952,560 29,652,698
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-19-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of MEMBERS' EQUITY
For the years ended December 31, 2000, 2001 and 2002
Accumulated
Dividends Other
in Excess Compre- Compre-
of hensive hensive
Paid-in Accumulated Unearned Income Income Treasury
Shares Capital Earnings Compensation (Loss) (Loss) Shares Total
------- ------- ----------- ------------ ------ ------ ------ -----
Balance at January 1, 2000 25,771,303 $526,130 $(11,560) $ (910) $(1,060) $512,600
Shares issued in connection
with services rendered and
properties acquired 226,290 3,169 3,169
Shares issued in connection
with acquisition 8,104,673 124,630 124,630
Shares and options issued
under share incentive plans 347,100 6,311 $(6,311) --
Forfeitures (8,050) (160) 160 --
Dividends declared (53,422) (53,422)
Amortization of unearned
compensation 860 860
Repurchase of shares (836,600) (14,271) (14,271)
Cancellation of treasury
shares (15,331) 15,331 --
Net loss (9,278) $ (9,278) (9,278)
--------
Other comprehensive income:
Change in unrealized
depreciation of marketable
securities (1,155) 0
Foreign currency translation
adjustment (1,060) 0
-------- --
(2,215) (2,215) (2,215)
--------
Comprehensive loss: $(11,493)
========
---------- ------- ------- ------ ------ ------ -------
Balance at December 31, 2000 33,604,716 644,749 (74,260) (5,291) (3,125) -- 562,073
Cash proceeds on issuance of
shares, net 422,032 6,496 6,496
Shares issued in connection
with services rendered and
properties acquired 6,825 134 134
Shares issued in connection
with acquisition 651,964 10,956 10,956
Shares and options issued
under share incentive plans 63,749 1,235 (1,235)
Forfeitures (6,850) (117) 117
Dividends declared (58,701) (58,701)
Tax benefit - share
incentive plans 1,298 1,298
Amortization of unearned
compensation 1,955 1,955
Net income 35,761 $ 35,761 35,761
--------
Other comprehensive income:
Change in unrealized
depreciation of marketable
securities 130
Foreign currency translation0
adjustment (437)
--------
(307) (307) (307)
--------
Comprehensive income: $ 35,454
========== ======= ======= ====== ======== ====== ====== =======
Balance at December 31, 2001 34,742,436 664,751 (97,200) (4,454) (3,432) -- 559,665
- Continued -
-20-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of MEMBERS' EQUITY, Continued
For the years ended December 31, 2000, 2001 and 2002
Dividends in Compre- Accumulated
Excess of hensive Other
Paid-in Accumulated Unearned Income Comprehensive Treasury
Shares Capital Earnings Compensation (Loss) Income (Loss) Shares Total
------ ------- -------- ------------ ------ ------------- ------ -----
Balance at December 31, 2001 34,742,436 664,751 (97,200) (4,454) (3,432) -- 559,665
Cash proceeds on issuance of
shares, net 528,479 10,086 10,086
Shares issued in connection
with services rendered 5,755 390 390
Shares issued in connection
with acquisition 500,000 10,440 10,440
Shares and options issued
under share incentive plans 170,768 3,913 (3,913)
Forfeitures (3,328) (70) 70
Dividends declared (61,358) (61,358)
Tax benefit - share
incentive plans 1,084 1,084
Amortization of unearned
compensation 2,626 2,626
Net income 46,588 $46,588 46,588
Other comprehensive income:
Change in unrealized
depreciation of marketable
securities 12
Foreign currency translation
adjustment 1,355
-------
1,367 1,367 1,367
-------
Comprehensive income: $47,955
=======
---------- -------- --------- ------- ------- --------
Balance at December 31, 2002 35,944,110 $690,594 $(111,970) $(5,671) $(2,065) -- $570,888
========== ======== ========= ======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
-21-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands) For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 46,588 $ 35,761 $ (9,278)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Income from discontinued operations, including gain on sale (8,138) (4,793) (5,020)
Depreciation and amortization 20,884 24,681 20,803
Equity income (loss) in excess of distributions (54) (232) (180)
(Gain) loss on sales of real estate and securities, net (12,745) (1,948) 2,752
Minority interest in income (loss) (120) (68) 1,517
Straight-line rent adjustments and amortization of deferred income (719) (1,372) (2,397)
Management income received in shares of affiliates (13,439) (11,489) (2,747)
Impairment charges on real estate assets held for sale and investments 29,410 12,643 11,047
Increase in structuring fees receivable (19,445) (6,915) (6,351)
Increase in deferred income taxes payable 13,155 5,272 1,336
Deferred acquisition fees received 916 -- --
Provision for uncollected rents 1,402 1,300 476
Costs paid by issuance of shares 500 278 1,482
Tax benefit - share incentive plans 1,084 1,298 --
Amortization of unearned compensation 2,626 1,955 860
Termination of management contract -- -- 38,000
Net changes in operating assets and liabilities, net of assets and
liabilities acquired on acquisition 9,831 (2,797) 396
---------- ---------- ----------
Net cash provided by continuing operations 71,736 53,574 52,696
Net cash provided by discontinued operations 4,160 5,303 5,526
---------- ---------- ----------
Net cash provided by operating activities 75,896 58,877 58,222
---------- ---------- ----------
Cash flows from investing activities:
Distributions received from equity investments in excess of
equity income (loss) 5,560 2,768 1,732
Capital distribution from equity investment 1,255 -- 17,544
Purchases of real estate, equity investments and securities (13,172) (23,290) (21,497)
Additional capital expenditures (811) (3,953) (2,078)
Payment of deferred acquisition fees (524) (520) (392)
Release of funds from escrow from sale of real estate 9,366
Proceeds from sales of real estate, equity investments and securities 50,247 11,627 45,617
Cash acquired on acquisition of business operations -- -- 212
---------- ---------- ----------
Net cash provided by (used in) investing activities 51,921 (13,368) 41,138
---------- ---------- ----------
Cash flows from financing activities:
Dividends paid (60,708) (58,048) (49,957)
Payment of accrued preferred distributions (1,423) -- --
Contributions from (distributions to) minority interest 636 204 (1,321)
Payments of mortgage principal (8,428) (8,230) (7,590)
Proceeds from mortgages and notes payable 79,200 97,627 64,397
Prepayments of mortgage principal and notes payable (134,316) (82,665) (83,037)
Payment of financing costs (308) (1,874) --
Proceeds from issuance of shares, net 10,086 6,496 --
Repurchase of shares -- (325) (13,944)
---------- ---------- ----------
Net cash (used in) financing activities (115,261) (46,815) (91,452)
---------- ---------- ----------
Effect of exchange rate changes on cash (122) 11 (40)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 12,434 (1,295) 7,868
Cash and cash equivalents, beginning of year 8,870 10,165 2,297
---------- ---------- ----------
Cash and cash equivalents, end of year $ 21,304 $ 8,870 $ 10,165
========== ========== ==========
-Continued-
-22-
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS of CASH FLOWS, Continued
Noncash operating, investing and financing activities:
A. The purchase of Carey Management LLC in June of 2000 consisted of
the acquisition of certain assets and liabilities at fair value in
exchange for the issuance of listed shares as follows:
Intangible assets and goodwill:
Management contracts $ 97,135
Trade name 4,700 (indefinite-lived intangible asset at January 1, 2002)
Workforce 4,900 (reclassified as goodwill on January 1, 2002)
Goodwill 22,356
--------
129,091
Other assets and liabilities, net (4,673)
Issuance of shares (124,630)
--------
Net cash acquired $ 212
========
If specified performance criteria are achieved, the Company has an
obligation to issue up to an additional 2,000,000 shares over four
years. The performance criteria for the years ended December 31,
2001 and 2000 were achieved, and as a result 500,000 shares ($10,440
and $8,145) were issued for the years ended December 31, 2001 and
2000, respectively. For the year ended December 31, 2002, the
Company met the FFO Target, and as a result 400,000 shares will be
issued during 2003. At December 31, 2002, the cost of such issuable
shares ($8,910) has been included in goodwill and accounts payable
to affiliates.
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. The Company issued 5,755, 6,825 and 181,644 restricted shares valued
at $134 in 2002 and 2001 and $2,424 in 2000, respectively, to
certain directors, officers and affiliates in consideration of
service rendered. Restricted shares and stock options valued at
$3,913, $1,235 and $6,295 in 2002, 2001 and 2000, respectively, were
issued to employees and recorded as unearned compensation of which
$70, $117 and $160, respectively, was forfeited in 2002, 2001 and
2000. Included in compensation expense for the years ended December
31, 2002, 2001 and 2000 were $2,626, $1,955 and $860, respectively,
relating to equity awards from the Company's share incentive plans.
C. In 2002, the Company contributed its tenancy-in-common interest in
properties leased to Childtime Childcare, Inc. to a limited
partnership. Assets and liabilities were contributed as follows:
Land $1,674
Net investment in direct financing lease 2,413
Other assets, net 1
Mortgage payable (1,134)
------
Equity investment $2,954
======
D. In 2002, $15,714 was placed in an escrow account from the sale of
properties and was subsequently used for the purchase of properties.
During 2002, $9,366 was released from an escrow account from the
sale of a property in 2001.
The Company received a note receivable in 2001 of $700 in partial
consideration for a sale of property.
In 2000, the Company issued shares valued at $778 to acquire real
estate.
E. During 2001 the Company purchased an equity interest in an
affiliate, W. P. Carey International LLC ("WPCI"), in consideration
for issuing a promissory note of $1,000. The promissory note was
satisfied in 2002 through the issuance of 54,765 shares to WPCI.
Supplemental Cash Flows Information:
2002 2001 2000
---- ---- ----
Interest paid, net of amounts capitalized $ 16,400 $ 22,144 $ 24,790
======== ======== ========
Income taxes paid $ 1,695 $ 1,615 $ 1,437
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-23-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
1. Organization:
W. P. Carey & Co. LLC (the "Company") commenced operations on January 1,
1998, pursuant to a consolidation transaction, when the Company acquired
the majority ownership interests in the nine Corporate Property Associates
("CPA(R)") Partnerships. The former General Partner interests in the
CPA(R) Partnerships were retained by two special limited partners, William
Polk Carey, formerly the Individual General Partner of the nine CPA(R)
Partnerships, and Carey Management LLC ("Carey Management").
On June 28, 2000 the Company acquired the net lease real estate management
operations of Carey Management subsequent to receiving shareholder
approval. The assets acquired included the Advisory Agreements with four
affiliated publicly owned real estate investment trusts (the "CPA(R)
REITs"), the Company's Management Agreement, the stock of an affiliated
broker-dealer, investments in the common stock of the CPA(R) REITs, and
certain office furniture, fixtures, equipment and employees required to
carry on the business operations of Carey Management. The purchase price
consisted of the initial issuance of 8,000,000 shares with an additional
2,000,000 shares issuable over four years if specified performance
criteria are achieved (of which 500,000 shares valued at $8,145 and
$10,440 were issued during 2001 and 2002, respectively, and 400,000 shares
valued at $8,910 will be issued in 2003 based on meeting performance
criteria as of December 31, 2000, 2001 and 2002, respectively). The
initial 8,000,000 shares issued are restricted from resale for a period of
up to three years and the additional shares are subject to Section 144
regulations. The acquisition of the interests in Carey Management was
accounted for as a purchase and was recorded at the fair value of the
initial 8,000,000 shares issued. The total initial purchase price was
approximately $131,300 including the issuance of 8,000,000 shares,
transaction costs of $2,605, the acquisition of Carey Management's special
limited partnership minority interests in the CPA(R) Partnerships and the
value of restricted shares and options issued in respect of the interests
of certain officers in a non-qualified deferred compensation plan of Carey
Management. The Company has guaranteed loans of $4,528 to these officers
in connection with their acquisition of equity interests in the Company.
The term of the guarantees expire in June 2003 and will not be renewed.
The loans are collateralized by shares of WPC, owned by the officers and
held by WPC.
The purchase price has been allocated to the assets and liabilities
acquired based upon their fair market values. Intangible assets acquired,
including the Advisory Agreements with the CPA(R) REITs, the Company's
Management Agreement, the trade name, and workforce (reclassified to
goodwill on January 1, 2002), were determined pursuant to an independent
valuation. The value of the Advisory Agreements and the Management
Agreement were based on a discounted cash flow analysis of the projected
fees. The excess of the purchase price over the fair values of the
identified tangible and intangible assets has been recorded as goodwill.
The acquisition of the Company's Management Agreement was accounted for as
a contract termination and the fair value of the Management Agreement of
$38,000 was expensed as of the date of the merger. For financial reporting
purposes, the value of any additional shares issued under the acquisition
agreement is recognized as additional purchase price and recorded as
goodwill. Issuances based on performance criteria are valued based on the
market price of the shares on the date when the performance criteria are
achieved.
Effective January 1, 2001, the Company acquired all remaining minority
interests in the CPA(R) Partnerships by issuing 151,964 shares at $18.50
per share ($2,811) to the remaining special limited partner of the CPA(R)
Partnerships, William Polk Carey. The acquisition price was determined
pursuant to an independent valuation of the CPA(R) Partnerships as of
December 31, 2000.
2. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the Company and its
wholly-owned and controlling majority-owned subsidiaries. All
material inter-entity transactions have been eliminated.
-24-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The most
significant estimates relate to the assessment of recoverability of real
estate, intangible assets and goodwill. Actual results could differ from
those estimates.
Real Estate Leased to Others:
Certain of the Company's real estate is leased to others on a net lease
basis, whereby the tenant is generally responsible for all operating
expenses relating to the property, including property taxes, insurance,
maintenance, repairs, renewals and improvements. Expenditures for
maintenance and repairs including routine betterments are charged to
operations as incurred. Significant renovations which increase the useful
life of the properties are capitalized. For the year ended December 31,
2002, lessees were responsible for the direct payment of real estate taxes
of approximately $6,627.
The Company diversifies its real estate investments among various
corporate tenants engaged in different industries, by property type and
geographically. No lessee currently represents 10% or more of total
leasing revenues.
The leases are accounted for under either the direct financing or
operating methods. Such methods are described below (also see Notes 4 and
5):
Direct financing method - Leases accounted for under the direct
financing method are recorded at their net investment (Note 5).
Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Company's net investment in the lease.
Operating method - Real estate is recorded at cost less accumulated
depreciation, minimum rental revenue is recognized on a
straight-line basis over the term of the related leases and expenses
(including depreciation) are charged to operations as incurred.
Substantially all of the Company's leases provide for either scheduled
rent increases, periodic rent increases based on formulas indexed to
increases in the Consumer Price Index ("CPI") or sales overrides. Rents
from sales overrides (percentage rents) are recognized as reported by the
lessees, that is, after the level of sales requiring a rental payment to
the Company is reached.
Operating Real Estate:
Land and buildings and personal property are carried at cost less
accumulated depreciation. Renewals and improvements are capitalized, while
replacements, maintenance and repairs that do not improve or extend the
lives of the respective assets are expensed as incurred.
Real Estate Under Construction and Redevelopment:
For properties under construction, operating expenses including interest
charges and other property expenses, including real estate taxes, are
capitalized rather than expensed and rentals received are recorded as a
reduction of capitalized project (i.e., construction) costs.
The amount of interest capitalized is determined by applying the interest
rate applicable to outstanding borrowings to the average amount of
accumulated expenditures for properties under construction during the
period.
-25-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity Investments:
The Company's interests in entities in which the Company's ownership is
50% or less and has the ability to exercise significant influence are
accounted for under the equity method, i.e. at cost, increased or
decreased by the Company's share of earnings or losses, less
distributions.
Assets Held for Sale:
Assets held for sale are accounted for at the lower of carrying value or
fair value less costs to dispose. Assets are classified as held for sale
when the Company has committed to a plan to actively market a property for
sale and expects that a sale will be completed within one year. The
results of operations and the related gain or loss on sale of properties
classified as held for sale by the Company after December 31, 2001, are
included in discontinued operations (see Note 15).
The Company recognizes gains and losses on the sale of properties when
among other criteria, the parties are bound by the terms of the contract,
all consideration has been exchanged and all conditions precedent to
closing have been performed. At the time the sale is consummated, a gain
or loss is recognized as the difference between the sale price less any
closing costs and the carrying value of the property.
Goodwill and Intangible Assets:
Goodwill represents the excess of the purchase price of the net lease real
estate management operations over the fair value of net assets acquired.
Other intangible assets represent cost allocated to trade names, advisory
contracts with the CPA(R) REITs and the acquired workforce. Effective
January 1, 2002, goodwill and indefinite-lived intangible assets are no
longer amortized and workforce has been reclassified as goodwill.
Intangible assets are being amortized over their estimated useful lives
which range from 2 1/2 to 16 1/2 years (See Note 20).
Goodwill and intangible assets are as follows:
December 31,
------------
2002 2001
---- ----
Management contracts $ 59,135 $ 59,135
Workforce -- 4,700
Trade name 3,975 4,900
Goodwill 49,874 41,937
-------- --------
112,984 110,672
Less: accumulated amortization 18,543 17,862
-------- --------
$ 94,441 $ 92,810
======== ========
Impairment of Long-lived Assets:
When events or changes in circumstances indicate that the carrying amount
may not be recoverable, the Company assesses the recoverability of its
long-lived assets and certain intangible assets based on projections of
undiscounted cash flows, without interest charges, over the life of such
assets. In the event that such cash flows are insufficient, the assets are
adjusted to their estimated fair value. The Company performs a review of
its estimate of residual value of its direct financing leases at least
annually to determine whether there has been an other than temporary
decline in the Company's current estimate of residual value of the
underlying real estate assets (i.e., the estimate of what the Company
could realize upon sale of the property at the end of the lease term). If
the review indicates a decline in residual value that is other than
temporary, a loss is recognized and the accounting for the direct
financing lease will be revised to reflect the decrease in the expected
yield using the changed estimate, that is, a portion of the future cash
flow from the lessee will be recognized as a return of principal rather
than as revenue.
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
-26-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 accordance with the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangibles," the Company performed its annual tests for impairment of its
management services segment, the reportable unit of measurement, and
concluded that the goodwill is not impaired.
Depreciation:
Depreciation is computed using the straight-line method over the estimated
useful lives of the properties (generally forty years) and for furniture,
fixtures and equipment (generally up to seven years).
Foreign Currency Translation:
The Company consolidates its real estate investments in France. The
functional currency for these investments is the Euro. The translation
from the Euro to U. S. Dollars is performed for assets and liabilities
using current exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during
the period. The gains and losses resulting from such translation are
reported as a component of other comprehensive income as part of members'
equity. The cumulative translation loss as of December 31, 2002 was
$1,315.
Cash Equivalents:
The Company considers all short-term, highly liquid investments that are
both readily convertible to cash and have a maturity of generally three
months or less at the time of purchase to be cash equivalents. Items
classified as cash equivalents include commercial paper and money market
funds. Substantially all of the Company's cash and cash equivalents at
December 31, 2002 and 2001 were held in the custody of three financial
institutions and which balances, at times, exceed federally insurable
limits. The Company mitigates this risk by depositing funds with major
financial institutions.
Other Assets and Liabilities:
Included in other assets are accrued rents and interest receivable,
deferred rent receivable, notes receivable, deferred charges and
marketable securities. Included in other liabilities are accrued interest,
accounts payable and accrued expenses, deferred rent and deferred income
taxes. Deferred charges include costs incurred in connection with debt
financing and refinancing and are amortized and included in interest
expense over the terms of the related debt obligations. Deferred rent
receivable is primarily the aggregate difference for operating method
leases between scheduled rents which vary during the lease term and rent
recognized on a straight-line basis.
Marketable securities are classified as available-for-sale securities and
reported at fair value with the Company's interest in unrealized gains and
losses on these securities reported as a component of other comprehensive
income until realized. Such marketable securities had a cost basis of
$1,364 as of December 31, 2002 and 2001, and reflected a fair value of
$614 and $363 at December 31, 2002 and 2001, respectively.
-27-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to Affiliates:
Included in due to affiliates are deferred acquisition fees and amounts
related to issuable shares for meeting the performance criteria in
connection with the acquisition of Carey Management. Deferred acquisition
fees are payable for services provided by Carey Management prior to the
termination of the Management Contract, relating to the identification,
evaluation, negotiation, financing and purchase of properties. The fees
are payable in eight equal annual installments each January 1 following
the first anniversary of the date a property was purchased.
Revenue Recognition:
In connection with the acquisition of Carey Management described in Note
1, the Company earns transaction and asset-based fees. Structuring and
financing fees are earned for investment banking services provided in
connection with the analysis, negotiation and structuring of transactions,
including acquisitions and dispositions and the placement of mortgage
financing obtained by the CPA(R) REITs. Asset-based fees consist of
property management, leasing and advisory fees and reimbursement of
certain expenses in accordance with the separate management agreements
with each CPA(R) REIT for administrative services provided for operation
of such CPA(R) REIT. Receipt of the incentive fee portion of the
management fee, however, is subordinated to the achievement of specified
cumulative return requirements by the shareholders of the CPA(R) REITs.
The incentive portion of management fees (the "performance fees") may be
collected in cash or shares of the CPA(R) REIT at the option of the
Company. During 2002, 2001 and 2000, the Company elected to receive its
earned performance fees in CPA(R) REIT shares.
All fees are recognized as earned. Transaction fees are earned upon the
consummation of a transaction and management fees are earned when services
are performed. Fees subject to subordination are recognized only when the
contingencies affecting the payment of such fees are resolved, that is,
when the performance criteria of the CPA(R) REIT is achieved.
The Company also receives reimbursement of certain marketing costs in
connection with the sponsorship of a CPA(R) REIT that is conducting a
"best efforts" public offering. Reimbursement income is recorded as the
expenses are incurred, subject to limitations on a CPA(R) REIT's ability
to incur offering costs.
Income Taxes:
The Company is a limited liability company and has elected partnership
status for federal income tax purposes. The Company is not liable for
federal income taxes as each member recognizes his or her proportionate
share of income or loss in his or her tax return. Certain wholly-owned
subsidiaries are not eligible for partnership status and, accordingly, all
tax liabilities incurred by these subsidiaries do not pass through to the
members. Accordingly, the provision for federal income taxes is based on
the results of those consolidated corporate subsidiaries that do not pass
through any share of income or loss to members. The Company is subject to
certain state and local taxes.
Deferred income taxes are provided for the corporate subsidiaries based on
earnings reported. The provision for income taxes differs from the amounts
currently payable because of temporary differences in the recognition of
certain income and expense items for financial reporting and tax reporting
purposes. Income taxes are computed under the asset and liability method.
The asset and liability method requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between tax bases and financial bases of assets and
liabilities (see Note 18).
Earnings Per Share:
The Company presents both basic and diluted earnings per share ("EPS").
Basic EPS excludes dilution and is computed by dividing net income
available to shareholders by the weighted average number of shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue shares were
exercised or converted into common stock, where such exercise or
conversion would result in a lower EPS amount.
-28-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basic and diluted earnings (loss) per share were calculated as
follows:
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Net income (loss) $ 46,588 $ 35,761 $ (9,278)
========== ========== ==========
Weighted average shares - basic 35,530,334 34,465,217 29,652,698
Effect of dilutive securities - stock options
and warrants 734,896 487,343 --
---------- ---------- ----------
Weighted average shares - diluted 36,265,230 34,952,560 29,652,698
Basic earnings per share:
Income (loss) from continuing operations $ 1.31 $ .98 $ (.40)
Discontinued operations -- .06 .09
---------- ---------- ----------
Net income (loss) $ 1.31 $ 1.04 $ (.31)
========== ========== ==========
Diluted earnings per share:
Income (loss) from continuing operations $ 1.28 $ .96 $ (.40)
Discontinued operations -- .06 .09
---------- ---------- ----------
Net income (loss) $ 1.28 $ 1.02 $ (.31)
========== ========== ==========
For the years ended 2001 and 2000, respectively, 725,930 and 4,143,254
share options and warrants, were not reflected because such options and
warrants were anti-dilutive, either because the exercise prices of the
options were higher than the average share price or because the Company
incurred a net loss.
The Company repurchased 836,600 of its shares outstanding during 2000 in
connection with an announcement in December 1999 that it would purchase up
to 1,000,000 shares.
Stock Based Compensation:
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
("APB No. 25"). Under APB No. 25, compensation cost is measured as the
excess, if any, of the quoted market price of the Company's shares at the
date of grant over the exercise price of the option granted.
The Company has granted restricted shares and stock options to
substantially all employees. Shares were awarded in the name of the
employee, who has all the rights of a shareholder, subject to certain
restrictions of transferability and a risk of forfeiture. The forfeiture
provisions on the awards expire annually, over periods of four and three
years for the shares and stock options, respectively. Shares and stock
options subject to forfeiture provisions have been recorded as unearned
compensation and are presented as a separate component of members' equity.
Compensation cost for stock options and restricted stock, if any, is
recognized ratably over the vesting period of three and four years,
respectively.
All transactions with non-employees in which the Company issues stock as
consideration for services received are accounted for based on the fair
value of the stock issued or services received, whichever is more reliably
determinable.
-29-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has elected to adopt the disclosure only provisions of SFAS
No. 123. If stock-based compensation cost had been recognized based upon
fair value at the date of grant for options and restricted stock awarded
under the two plans and amortized to expense over their respective vesting
periods in accordance with the provisions of SFAS No. 123, pro forma net
income (loss) would have been as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Net income (loss) as reported $46,588 $35,761 $(9,278)
Add: Stock based compensation included in net
income as reported, net of related tax effects 1,709 1,309 640
Less: Stock based compensation determined under
fair value based methods for all awards, net of
related tax effects (2,887) (2,391) (1,359)
------- ------- -------
Pro forma net income (loss) $45,410 $34,719 $(9,997)
======= ======= =======
Net income (loss) per common share as reported
Basic $ 1.31 $ 1.04 $ (.31)
Diluted $ 1.28 $ 1.02 $ (.31)
Pro forma net income (loss) per common share
Basic $ 1.28 $ 1.01 $ (.34)
Diluted $ 1.25 $ .99 $ (.34)
Reclassification:
Certain prior year amounts have been reclassified to conform to
the current year financial statement presentation.
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 various
services, including but not limited to the day-to-day management of the
CPA(R) REITs and transaction-related services. The Company earns an asset
management fee of 1/2 of 1% per annum of Average Invested Assets, as
defined in the Advisory Agreements, for each CPA(R) REIT and, based upon
specific performance criteria for each REIT, may be entitled to receive
performance fees, calculated on the same basis as the asset management
fee, and is reimbursed for certain costs, primarily the cost of personnel.
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. The
performance criteria for CPA(R):14 were initially satisfied in 2001,
resulting in the Company's recognition of $2,459 for the period December
1997 through December 31, 2000 which had been deferred. For the years
ended December 31, 2002, 2001 and 2000, asset-based fees and
reimbursements earned were $37,250, $29,751 and $10,377, respectively.
In connection with structuring and negotiating acquisitions and related
mortgage financing for the CPA(R) REITs, the Advisory Agreements provide
for transaction fees based on the cost of the properties acquired. A
portion of the fees are payable in equal annual installments over no less
than eight years (four years for CPA(R):15), subject to each CPA(R) REIT
meeting its "preferred return." Unpaid installments bear interest at
annual rates ranging from 6% to 7%. The Company's broker-dealer subsidiary
earns fees in connection with the public offerings of the CPA(R) REITs.
The Company may also earn fees related to the disposition of properties,
subject to subordination provisions and will only be recognized as such
subordination provisions are achieved. The Company earned disposition fees
of $248 from CPA(R):10, representing a percentage of the sales proceeds
from
-30-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. For the years ended
December 31, 2002, 2001 and 2000, the Company earned transaction fees of
$47,005, $17,160 and $14,894, respectively.
Prior to the termination of the Management Agreement, Carey Management
performed certain services for the Company and earned transaction fees in
connection with the purchase and disposition of properties. The Company is
obligated to pay deferred acquisition fees in equal annual installments
over a period of no less than eight years. As of December 31, 2002 and
2001, unpaid deferred acquisition fees were $2,758 and $3,282,
respectively, and bear interest at an annual rate of 6%. Installments of
$524, $520 and $392 were paid in January 2002, 2001 and 2000,
respectively.
In 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 and
the Company 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 totaling
$24,129 with each interest 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, which is accounted for as
an available for sale security.
The Company owns interests in entities which range from 33.93% to 50% and
a jointly-controlled 36% tenancy-in-common interest in two properties
subject to a net lease with the remaining interests held by affiliates.
The Company has a significant influence in these investments, which are
accounted for under the equity method of accounting.
The Company is a participant in an agreement with certain affiliates for
the purpose of leasing office space used for the administration of the
Company and other affiliated real estate entities and sharing the
associated costs. Pursuant to the terms of the agreement, the Company's
share of rental, occupancy and leasehold improvement costs is based on
gross revenues. Expenses incurred were $545, $528 and $348 in 2002, 2001
and 2000, respectively. The Company's share of minimum lease payments on
the office lease is currently $1,748 through 2006.
An independent director of the Company has an ownership interest in
companies that own the minority interest in the Company's French
majority-owned subsidiaries. The director's ownership interest is subject
to the same terms as all other ownership interests in the subsidiary
companies. A person who serves as a director and an officer of the Company
is the sole shareholder of Livho, Inc., a lessee of the Company
(see Note 8).
As of December 31, 2002, the Company owns a 10% interest in W.P. Carey
International LLC ("WPCI"), which structures net lease transactions
outside of the United States, the United Kingdom and France. The remaining
90% interest in WPCI is owned by William Polk Carey ("Carey"), Chairman of
the Company. On March 19, 2003, the Company's Board of Directors approved
a series of transactions which will result in Carey giving up his interest
in WPCI. As part of this transaction, WPCI will distribute to Carey his
capital contributions to WPCI of 492,881 shares of the Company as well as
cash contributions of $1,472. In connection with the transaction, the
Company will contribute its share of fees derived from the acquisition,
management and disposition of properties outside of the United States to
WPCI as well as related costs. Two officers of WPCI will be granted
restricted minority ownership interests which vest ratably over five years
and options in WPCI pursuant to their employment agreements. The Company
expects to complete the transfer during the second quarter of 2003,
however, the terms of agreement provide for January 1, 2003 as the
effective date.
In connection with the acquisition of the majority interests in the CPA(R)
Partnerships on January 1, 1998 described in Note 1, a CPA(R) Partnership
had not achieved the specified cumulative return as of the acquisition
date. The subordinated preferred return was payable only 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 the $1,423 subordinated preferred return was paid
in January of 2002.
As described in Note 1, the Company's Management Agreement with Carey
Management was cancelled effective with the acquisition of the business
operations of Carey Management. The Company is now internally
-31-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
managed and, as a result of the cancellation of the Management Agreement
and acquisition of Carey Management's workforce as of the date of the
acquisition, no longer incurs management and performance fees nor
reimburses a manager for the personnel costs for providing administrative
services to the Company. For the year ended 2000, the Company incurred
combined management and performance fees of $1,924, and personnel
reimbursements of $861.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Real estate leased to others, at cost, and accounted for under the
operating method is summarized as follows:
December 31,
------------
2002 2001
---- ----
Land $ 83,545 $ 84,199
Buildings and improvements 390,727 375,044
-------- --------
474,272 459,243
Less: Accumulated depreciation 41,716 32,401
-------- --------
$432,556 $426,842
======== ========
The scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases amount to $43,350 in 2003, $38,072 in
2004, $34,833 in 2005, $32,113 in 2006, $29,302 in 2007 and aggregate
$319,853 through 2022.
Contingent rentals (including percentage rents and CPI-based increases)
were $1,550, $1,253 and $1,047 in 2002, 2001 and 2000, respectively.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
------------
2002 2001
---- ----
Minimum lease payments receivable $199,309 $236,997
Unguaranteed residual value 185,487 254,520
------- -------
384,796 491,517
Less: Unearned income 195,457 233,476
-------- --------
$189,339 $258,041
======== ========
The scheduled future minimum rents, exclusive of renewals, under
noncancelable direct financing leases amount to $20,371 in 2003, $20,323
in 2004, $20,383 in 2005, $19,232 in 2006, $17,741 in 2007 and aggregate
$199,309 through 2022.
Contingent rentals (including percentage rents and CPI-based increases)
were approximately $2,710, $2,331 and $2,074 in 2002, 2001 and 2000,
respectively.
6. Mortgage Notes Payable and Notes Payable:
Mortgage notes payable, substantially all of which are limited recourse
obligations, are collateralized by the assignment of various leases and by
real property with a carrying value of approximately $311,897.
The interest rate on the variable rate debt as of December 31, 2002 ranged
from 2.59% to 6.44% and mature from 2004 to 2016. The interest rate on the
fixed rate debt as of December 31, 2002 ranged from 6.11% to 9.13% and
mature from 2003 to 2013.
-32-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Scheduled principal payments for the mortgage notes and notes payable
during each of the next five years following December 31, 2002 and
thereafter are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
------------------------ ---------- --------------- ------------------
2003 $ 11,180 $ 9,827 $ 1,353
2004 74,391 23,738 50,653
2005 8,264 6,572 1,692
2006 24,894 22,986 1,908
2007 14,600 12,481 2,119
Thereafter 101,720 69,911 31,809
-------- -------- -------
Total $235,049 $145,515 $89,534
======== ======== =======
The Company has a credit facility of $185,000 pursuant to a revolving
credit agreement with The Chase Manhattan Bank in which numerous lenders
participate. The Company has a one-time right to increase the commitment
up to $225,000. The revolving credit agreement has a remaining term
through March 2004. As of December 31, 2002, the Company had $49,000 drawn
from the credit facility. As of March 12, 2003, the outstanding balance
was $42,000.
Advances, which are prepayable at any time, bear interest at an annual
rate of either (i) the one, two, three or six-month LIBOR, as defined,
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 upon the Company's leverage. At December 31, 2002 and 2001, the
interest rate on advances on the line of credit was 2.59% and 3.22%,
respectively. In addition, the Company pays a fee (a) ranging between
0.15% and 0.20% per annum of the unused portion of the credit facility,
depending on the Company's leverage, if no minimum credit rating for the
Company is in effect or (b) equal to .15% of the total commitment amount,
if the Company has obtained a certain minimum credit rating.
The revolving credit agreement has financial covenants that require the
Company to (i) maintain minimum equity value of $400,000 plus 85% of
amounts received by the Company as proceeds from the issuance of equity
interests and (ii) meet or exceed certain operating and coverage ratios.
Such operating and coverage ratios include, but are not limited to, (a)
ratios of earnings before interest, taxes, depreciation and amortization
to fixed charges for interest and (b) ratios of net operating income, as
defined, to interest expense.
7. Dividends Payable:
The Company declared a quarterly dividend of $.431 per share on December
11, 2002 payable on January 15, 2003 to shareholders of record as of
December 31, 2002.
-33-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Lease Revenues:
The Company's operations include the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources
of the lease revenues for the years ended December 31, 2002, 2001 and
2000 are as follows:
2002 2001 2000
---- ---- ----
Per Statements of Income:
Rental income $ 47,865 $ 45,756 $ 50,281
Interest income from direct financing leases 23,001 26,355 28,023
Adjustment:
Share of leasing revenues applicable to minority interests (766) (536) (443)
Share of leasing revenues from equity investments 7,131 6,820 3,679
-------- -------- --------
$ 77,231 $ 78,395 $ 81,540
======== ======== ========
For the years ended December 31, 2002, 2001 and 2000, the Company earned
its net leasing revenues (i.e., rental income and interest income from
direct financing leases) from over 80 lessees. A summary of net leasing
revenues including all current lease obligors with more than $1,000 in
annual revenues is as follows:
Years Ended December 31,
------------------------
2002 % 2001 % 2000 %
---- - ---- - ---- -
Dr Pepper Bottling Company of Texas $4,405 6% $4,354 6% $4,283 5%
Detroit Diesel Corporation 4,158 5 4,118 5 3,795 5
Gibson Greetings, Inc., a wholly-owned
subsidiary of American Greetings, Inc. 4,149 5 4,107 5 4,046 5
Bouygues Telecom, S.A. (a) 2,952 4 1,181 2 185 --
Federal Express Corporation (b) 2,876 4 2,836 4 5,659 7
Orbital Sciences Corporation 2,655 3 2,655 3 2,655 3
Quebecor Printing Inc. 2,563 3 2,559 3 2,586 3
America West Holdings Corp. 2,539 3 2,539 3 2,539 3
Livho, Inc. 2,520 3 2,568 3 3,226 4
AutoZone, Inc. 2,411 3 2,400 3 2,378 3
The Gap, Inc. 2,205 3 2,205 3 2,205 3
Sybron International Corporation 2,164 3 2,164 3 2,164 3
CheckFree Holdings, Inc. (c) 2,108 3 2,088 3 1,681 2
Lockheed Martin Corporation 1,903 3 2,116 3 2,056 3
Unisource Worldwide, Inc. 1,732 2 1,734 2 1,725 2
Faurecia Exhaust Systems, Inc. (formerly
AP Parts Manufacturing Company) 1,657 2 1,617 2 1,617 2
CSS Industries, Inc. 1,656 2 1,609 2 1,598 2
Information Resources, Inc. (c) 1,644 2 1,644 2 1,504 2
Sybron Dental Specialties Inc. 1,613 2 1,613 2 1,463 2
Brodart Co. 1,519 2 1,519 2 1,519 2
Sprint Spectrum L.P. 1,425 2 1,380 2 1,154 1
Eagle Hardware & Garden, Inc., a
wholly-owned subsidiary of Lowe's
Companies Inc. 1,313 2 1,186 2 1,288 2
AT&T Corporation 1,259 2 886 1 760 1
United States Postal Service 1,233 2 1,165 1 1,090 1
BellSouth Telecommunications, Inc. 1,224 2 1,224 2 1,224 1
Cendant Operations, Inc. 1,075 1 1,075 1 1,075 1
Anthony's Manufacturing Company, Inc. 1,019 1 988 1 945 1
Other (d) 19,254 25 22,865 29 25,120 31
------ ------ ------ ------ ------ ------
$77,231 100% $78,395 100% $81,540 100%
====== ====== ====== ====== ====== ======
-34-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(a) Net of proportionate share applicable to its minority interest owners.
(b) Represents the Company's 40% proportionate share of lease revenues from
its equity ownership in 2001. The Company owned a 100% interest until
December 2000.
(c) Represents the Company's proportionate share of lease revenue from its
equity investment.
(d) Includes proportionate share of lease revenues from the Company's equity
investments and net of proportionate share applicable to its minority
interest owners.
9. Gains and Losses on Sale of Real Estate and Securities:
Significant sales of properties are summarized as follows:
2002
In July 2002, the Company sold six properties leased to Saint-Gobain
Corporation 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. The Company placed the proceeds of the sale 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 property, and defer a taxable gain until the new
property is sold, upon satisfaction of certain conditions (see Note 11).
At December 31, 2001, the Company's 18.3 acre property in Los Angeles,
California was classified as held for sale. In June 2002, the Company sold
the property to the Los Angeles Unified School District (the "School
District") for $24,000, less costs, and recognized a gain on sale of
$11,160 (see Note 21).
During 2002, the Company also sold properties in Fredericksburg, Virginia;
Petoskey, Michigan; Urbana, Illinois; Maumelle, Arkansas; Burnsville,
Minnesota; Colville, Washington; McMinnville, Tennessee Frankenmuth,
Michigan; College Station, Texas and Casa Grande and Glendale, Arizona for
an aggregate of $15,337 and recognized a net gain on sales of $2,049.
2001
In July 2001, the Company sold a property located in Forrest City,
Arkansas for approximately $9,400, and recognized a gain of $304. The
sales proceeds were placed in an escrow account for the purposes of
entering into a Section 1031 noncash exchange. In January 2002, the funds
in the escrow account were transferred to the Company and the proposed
noncash exchange was not completed.
During 2001, the Company sold nine other properties and an equity
investment in a real estate partnership for $12,061 (including $11,361 in
cash and a note receivable of $700) and recognized a combined net gain of
$1,600 on the sales.
2000
In 1998, the Company acquired land in Colliersville, Tennessee and entered
into a build-to-suit commitment to construct four office buildings to be
occupied by Federal Express Corporation ("Federal Express") at a cost of
up to $77,000. In February 2000, a net lease with Federal Express with an
initial lease term of 20 years commenced at an annual rent of $6,360. In
order to mitigate the concentration of risk in a single lease, the Company
agreed to sell a 60% majority interest in the subsidiary that owns the
Federal Express property to CPA(R):14 at a purchase price based on an
independent appraisal. Based on such independent appraisal, the Company
received $42,287 and recognized a loss of $2,262 in connection with the
sale.
During 2000, the Company sold ten properties for $3,372, net of costs, and
incurred combined losses on the sales of $775.
The Company recognized a gain of $257 on the sale of 18,540 shares of
common stock of Titan Corporation. The Company had previously exercised
warrants that were granted in connection with structuring its net lease
with Titan Corporation in 1991.
-35-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Impairment Charges:
Significant writedowns of properties and investments to estimated fair
value based on an assessment of each asset's recoverability are summarized
as follows:
The Company incurred impairment charges of $29,410, $12,643, and $11,047
in 2002, 2001 and 2000, respectively, in connection with the writedown of
real estate interests and other long-lived assets to estimated fair value
based on the following:
2002
In connection with the Company's annual review of the estimated residual
values on its properties classified as net investments in direct financing
leases, the Company determined that an other than temporary decline in
estimated residual value had occurred at several properties, and the
accounting for the direct financing leases was revised using the changed
estimates. The resulting changes in estimates resulted in the recognition
of impairment charges of $14,880 in 2002.
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. Because of a continued and
prolonged weakness in the hospitality industry, a substantial decrease in
MeriStar's earnings and funds from operations and the risk that the
decrease in MeriStar's distribution rate are projected to continue, the
Company concluded that the underlying value of its investment in the
operating partnership units has undergone an other than temporary decline.
Accordingly, the Company wrote down its equity investment in MeriStar by
$4,596 in 2002 to reflect the investment at its estimated fair value. The
Company recognized an impairment charge on the MeriStar investment in 2001
of $6,749.
The Company owned a property in Winona, Minnesota which it sold in
February 2003. Based on a deterioration in the financial condition of the
lessee and its inability to meet its lease obligations, during 2002 the
Company began negotiations to sell the property to the lessee. In
connection with entering into a contract for the sale of the property, the
property was written down to its estimated fair value less cost to sell
and an impairment charge of $4,000 was recognized in 2002.
The Company has recognized impairment charges of $5,934 on other
properties which were sold in 2002 or held for sale as of December 31,
2002.
The results of operations and the impairment charges on the properties
classified as assets held for sale subsequent to December 31, 2001 are
included in discontinued operations (see Note 15).
2001
The Company owned a property in Burnsville, Minnesota. During 2000, the
tenant filed a petition of voluntary bankruptcy, and in March 2001 the
lease was terminated. During 2000, the property had been written down to
its estimated fair value and an impairment charge of $1,500 was
recognized. In 2001, the Company entered into an agreement to sell the
property for $2,200. In connection with the proposed sale of the property,
the Company recognized an impairment charge of $763 in 2001 to write down
the property to the anticipated sales price, less estimated costs to sell.
The sale was completed in January 2002. In connection with termination of
the lease, the Company received $2,450 as a settlement from the lease
guarantor, of which $2,145 was included in other income in 2001.
The Company owns a property in Cincinnati, Ohio. In November 2001, the
Company evicted the tenant due to its inability to meet its lease
obligations and the Company assumed the management of public warehousing
operations at the property, at which time the Company recognized an
impairment charge of $2,000 on the writedown of the property to its
estimated fair value. In connection with the eviction, the Company was
released from a subordinated mortgage loan obligation of $2,097 in 2002.
-36-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company owns two properties located in Frankenmuth, Michigan and
McMinnville, Tennessee leased to one tenant. The tenant terminated its
master lease for the two properties in connection with its petition of
voluntary bankruptcy in 1999. The Company recognized impairment charges on
the McMinnville property of $500 and $2,677 for 2001 and 2000,
respectively.
2000
The Company owns a property in Traveler's Rest, South Carolina. Based on
the former tenant's deteriorating financial condition and its inability to
meet its lease obligations, the lease was terminated in 2000. The tenant
was subsequently liquidated. The property was written down to its
estimated fair value and an impairment charge of $2,657 was recognized
during 2000.
In 2001 and 2000, the Company also recorded impairment charges of $850 and
$1,514, respectively, on its assessments of the recoverability of a
redeemable preferred limited partnership interest that was acquired in
connection with the sale of a property in 1995 and debentures received in
connection with a bankruptcy settlement with a former lessee.
11. Acquisition of Real Estate:
In September 2002, the Company used $14,379 from an escrow account which
had been funded with proceeds from the sale of properties leased to
Saint-Gobain (see Note 9) 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.
In December 2002, the Company purchased a 36% interest in two properties
leased to Hologic, Inc. ("Hologic") from CPA(R):15 for $11,714. The
properties, land and buildings located in Danbury, Connecticut and
Bedford, Massachusetts, were purchased by CPA(R):15 in August 2002. The
lease has an initial term of 20 years with four five-year renewal terms.
Annual rent is $3,156 with the first rent increase on the fifth
anniversary of the lease and every five years thereafter. Rent increases
are based on a formula indexed to increases in the CPI, capped at 5.1% for
the first rent increase and 8.16% thereafter, during each five-year
period.
As a result of purchasing the BE Aerospace property and the interest in
the Hologic properties, the proposed Section 1031 noncash exchange
resulting from the sale of the Saint-Gobain properties was completed.
In September 2002, the Company purchased 1.5 acres of land in Broomfield,
Colorado for $640. The land is adjacent to the Company's existing
property. The Company intends to redevelop the property, with various
alternatives currently being evaluated.
12. 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. 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. The exchange of units for
common stock would be a taxable transaction in the year of exchange. The
Company's interest in the MeriStar operating partnership is being
accounted for under the equity method. The carrying value of the equity
interest in the MeriStar operating partnership was $3,354 as of December
31, 2002.
The Company owns equity interests as a limited partner in three limited
partnerships and in two limited liability companies, with the remaining
interests owned by affiliates, that each own real estate net leased to a
single tenant, including a newly-formed limited partnership which net
leases properties to Childtime Childcare, Inc. ("Childtime"). In August
2002, the Company and an affiliate each contributed its tenancy-in-common
interest in the Childtime properties to the limited partnership. The
Company owns a 33.93% ownership interest as a
-37-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
limited partner. The Company is also accounting for its 36%
tenancy-in-common interest in the Hologic properties under the equity
method as the agreement provides for joint control with the affiliate.
The Company owns a 10% interest in WPCI. The remaining 90% of WPCI is
owned by William Polk Carey, Chairman of the Company (also see Note 3).
The Company owns interests in four CPA(R) REITs with which it has advisory
agreements. The 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 CPA(R) REITs are
publicly registered and their audited consolidated financial statements
are filed with the SEC. In connection with earning performance fees the
Company has elected to receive restricted shares of common stock in the
CPA(R) REITs rather than cash in consideration for such fees. As of
December 31, 2002, the Company ownership in the CPA(R) REITs is as
follows:
% of outstanding
Shares Shares
------ ------
CIP(R) 612,575 2.12%
CPA(R):12 626,377 2.03%
CPA(R):14 1,014,619 1.52%
CPA(R):15 51,749 0.13%
Combined financial information of the affiliated equity investees is
summarized as follows:
December 31,
------------
2002 2001
---- ----
Assets (primarily real estate) $3,225,167 $2,081,297
Liabilities (primarily mortgage notes payable) 1,680,372 951,884
---------- ----------
Owner's Equity $1,544,795 $1,129,413
========== ==========
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Revenue (primarily rental revenue) $ 229,799 $ 175,925 $ 146,003
Expenses (primarily interest on mortgages
and depreciation) (170,463) (131,194) (92,156)
Minority interest in income (5,355) (3,556) (6,836)
Income from equity investments 22,257 16,399 18,291
Gain (loss) on sales (418) 13,944 2,183
--------- --------- ---------
Income from continuing operations 75,820 71,518 67,485
LOSS from discontinued operations (1,084) (343) (361)
Extraordinary charges (5,540) -- --
--------- --------- ---------
Net income $ 69,196 $ 71,175 $ 67,124
========= ========= =========
13. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage notes payable and
other notes payable was $237,924 and $295,843 at December 31, 2002 and
2001, respectively. The carrying value of the combined debt was $235,049
and $295,515 at December 31, 2002 and 2001, respectively. The fair value
of fixed rate debt instruments was evaluated using a discounted cash flow
model with rates that take into account the credit of the tenants and
interest rate risk. The fair value of the note payable from the line of
credit approximates the carrying value as it is a variable rate obligation
with an interest rate that resets to market rates.
-38-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Selected Quarterly Financial Data (unaudited):
Three Months Ended
------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-------------- ------------- ------------------ -----------------
Revenues $32,950 $37,904 $37,824 $52,926
Expenses 18,668 20,448 21,999 48,038
Income (loss) from continuing
operations (1) 12,698 24,830 12,223 (3,077)
Income (loss) from continuing
operations per share -
Basic .36 .70 .34 (.08)
Diluted .35 .69 .33 (.08)
Net income (loss) 13,729 23,593 12,985 (3,719)
Net income (loss) per share -
Basic .39 .66 .36 (.10)
Diluted .38 .65 .36 (.10)
Dividends declared per share .4280 .4290 .4300 .4310
Certain prior quarter amounts have been reflected as discontinued
operations in accordance with Statement of Financial Accounting Standard
No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets".
(1) Includes impairment charges on real estate and investments of
$21,186 for the three-month period ended December 31, 2002.
Three Months Ended
------------------
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
-------------- ------------- ------------------ -----------------
Revenues $29,364 $33,143 $30,508 $36,253
Expenses (1) 19,485 20,800 19,801 31,935
Income from continuing operations 11,411 10,492 9,660 2,051
Income from continuing operations
per share -
Basic .33 .31 .28 .06
Diluted .33 .30 .27 .06
Net income 12,639 11,752 11,237 133
Net income per share -
Basic .37 .34 .33 --
Diluted .37 .34 .32 --
Dividends declared per share .4225 .4250 .4260 .4270
Certain prior quarter amounts have been reflected as discontinued
operations in accordance with Statement of Financial Accounting Standard
No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets".
(1) Includes impairment charges on real estate and investments of $763
and $9,381 for the three-month periods ended September 30, 2001 and
December 31, 2001, respectively.
15. 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 (see Note 9) that were held for sale
-39-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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." The effect of suspending depreciation expense
as a result of the classification of certain properties as held for sale
was $116, $13 and $15 for the years ended December 31, 2002, 2001 and
2000, respectively.
As of December 31, 2002, the operations of eighteen properties which have
been sold or are held for sale as of December 31, 2002 are included as
"Discontinued Operations." Amounts reflected in Discontinued Operations
for the years ended December 31, 2002, 2001 and 2000 are as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
REVENUES:
Rental income $ 2,509 $ 2,008 $ 1,805
Interest income from direct financing leases 3,002 5,453 5,549
Revenues of other business operations 1,560 2,681 2,833
Other income 2,249 2 --
-------- -------- --------
9,320 10,144 10,187
-------- -------- --------
EXPENSES:
Interest expense 796 2,037 2,091
Depreciation and amortization 467 510 506
Property expenses 607 161 152
General and administrative 46 348 33
Operating expenses of other business operations 1,630 2,295 2,385
Impairment charge on real estate 8,224 2,646 2,238
-------- -------- --------
11,770 7,997 7,405
-------- -------- --------
(Loss) income before gain on sales (2,450) 2,147 2,782
-------- -------- --------
Gain on sales of real estate 2,364 -- --
-------- -------- --------
(Loss) income from discontinued operations $ (86) $ 2,147 $ 2,782
======== ======== ========
16. Stock Options and Warrants:
In January 1998, an affiliate was granted warrants to purchase 2,284,800
shares exercisable at $21 per share and 725,930 shares exercisable at $23
per share as compensation for investment banking services in connection
with structuring the consolidation of the CPA(R) Partnerships. The
warrants are exercisable until January 2009.
The Company maintains stock option incentive plans pursuant to which share
options may be issued. The 1997 Share Incentive Plan (the "Incentive
Plan"), as amended, authorizes the issuance of up to 2,600,000 shares. The
Company Non-Employee Directors' Plan (the "Directors' Plan") authorizes
the issuance of up to 300,000 shares. Both plans were approved by a vote
of the shareholders.
The Incentive Plan provides for the grant of (i) share options which may
or may not qualify as incentive stock options, (ii) performance shares,
(iii) dividend equivalent rights and (iv) restricted shares. Share options
have been granted as follows: 877,337 in 2002 at exercise prices ranging
from $22.73 to $24.01 per share, 465,000 in 2001 at exercise prices
ranging from $16.875 to $21.86 per share and 922,152 in 2000 granted at
exercise prices ranging from $7.69 to $16.50 per share. The options
granted under the Incentive Plan have a 10-year term and vest ratably on
the first, second and third anniversaries of the date of grant. The
vesting of grants is accelerated upon a change in control of the Company
and under certain other conditions.
The Directors' Plan provides for the same terms as the Incentive Plan.
Share options for 21,822 shares were granted at exercise prices ranging
from $16.38 to $20 per share in 2000. No share options were granted in
2002 and 2001.
-40-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share option and warrant activity is as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 4,320,815 $19.88 4,114,254 $19.57 3,199,280 $21.38
Granted 877,337 $23.03 465,000 $18.66 943,974 $13.24
Exercised (192,617) $12.69 (229,105) $12.21 -- --
Forfeited (25,673) $19.17 (29,334) $16.62 (29,000) $16.25
Outstanding at end of year 4,979,862 $20.26 4,320,815 $19.88 4,114,254 $19.57
========= ========= =========
Options exercisable at end of year 3,611,115 $20.31 3,403,724 $20.88 3,119,362 $20.69
========= ========= =========
Stock options outstanding as of December 31, 2002 are as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Weighted
Range of Options Outstanding Remaining Average Options Exercisable Average
Exercise Prices at December 31, 2002 Contractual Life Exercise Price at December 31, 2002 Exercise Price
--------------- -------------------- ---------------- -------------- -------------------- --------------
$7.69 129,707 7.50 $ 7.69 19,990 $ 7.69
$16.25 to $24.01 4,850,155 6.88 $20.59 3,591,125 $20.38
--------- ---------
4,979,862 6.90 $20.26 3,611,115 $20.31
========= =========
At December 31, 2001 and 2000, the range of exercise prices and
weighted-average remaining contractual life of outstanding share options
and warrants was $7.69 to $23.00 and 7.5 years, and $7.69 to $23.00 and
8.32 years, respectively.
The per share weighted average fair value of share options and warrants
granted during 2002 were estimated to be $1.26 using a Black-Scholes
option pricing formula. The more significant assumptions underlying the
determination of the weighted average fair value include a risk-free
interest rate of 1.73%, a volatility factor of 21.83%, a dividend yield of
8.59% and an expected life of 2.99 years.
The per share weighted average fair value of share options and warrants
granted during 2001 were estimated to be $1.70 using a Black-Scholes
option pricing formula. The more significant assumptions underlying the
determination of the weighted average fair value include a risk-free
interest rate of 4.87%, a volatility factor of 22.51%, a dividend yield of
8.04% and an expected life of 3.21 years.
The per share weighted average fair value of share options and warrants
granted during 2000 were estimated to be $3.80 using a Black-Scholes
option pricing formula. The more significant assumptions underlying the
determination of the weighted average fair value include a risk-free
interest rate of 6.8%, a volatility factor of 22.53%, a dividend yield of
8.44% and an expected life of 10 years.
-41-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has elected to adopt the disclosure only provisions of SFAS
No. 123. If stock-based compensation cost had been recognized based upon
fair value at the date of grant for options and restricted stock awarded
under the two plans and amortized to expense over their respective vesting
periods in accordance with the provisions of SFAS No. 123, pro forma net
income (loss) would have been as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Net income (loss) as reported $46,588 $35,761 $ (9,278)
Add: Stock based compensation included in net
income as reported, net of related tax effects 1,709 1,349 640
Less: Stock based compensation determined under
fair value based methods for all awards, net of
related tax effects (2,887) (2,391) (1,359)
------- ------- --------
Pro forma net income (loss) $45,410 $34,719 $ (9,997)
======= ======= ========
Net income (loss) per common share as reported
Basic $ 1.31 $ 1.04 $ (.31)
Diluted $ 1.28 $ 1.02 $ (.31)
Pro forma net income (loss) per common share
Basic $ 1.28 $ 1.01 $ (.34)
Diluted $ 1.25 $ .99 $ (.34)
-42-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Segment Reporting:
The Company has determined that it operates in two business segments,
management services and real estate operations with domestic and
international investments. The two segments are summarized as follows:
Management Real Estate Other(2) Total Company
---------- ----------- -------- -------------
Revenues:
2002 $84,255 $73,851 $3,498 $161,604
2001 46,911 79,094 3,263 129,268
2000 25,271 81,382 3,411 110,064
Operating, interest, depreciation and
amortization expenses(1)
(excluding income taxes):
2002 $46,975 $59,840 $2,338 $109,153
2001 39,298 50,347 2,376 92,021
2000 15,979 60,079 2,535 78,593
Income (loss) from equity investments:
2002 $452 $ (895) - $ (443)
2001 434 2,393 - 2,827
2000 69 2,813 - 2,882
Net operating income (3),(4),(5):
2002 $37,732 $13,116 $1,160 $52,008
2001 8,047 31,140 887 40,074
2000 9,361 24,116 876 34,353
Total assets:
2002 $167,415 $721,919 $4,190 $893,524
2001 124,902 782,984 7,997 915,883
Total long-lived assets:
2002 $70,089 $663,721 $4,056 $737,866
2001 64,286 721,895 5,990 792,171
(1) Excludes the writeoff of an acquired management contract of $38,000 in
2000.
(2) Primarily consists of the Company's other business operations.
(3) Management net operating income includes charges for amortization of
intangibles of $7,280 in 2002 and amortization of intangibles and goodwill
of $11,903 and $5,958 in 2001 and 2000, respectively.
(4) Net operating income excludes gains and losses on sales, provision for
income taxes and minority interest.
(5) Real estate net operating income excludes (loss) income from discontinued
operations of $(86), $2,147 and $2,782 in 2002, 2001 and 2000,
respectively.
The Company acquired its first international real estate investment in
1998. For 2002, geographic information for the real estate operations
segment is as follows:
Domestic International Total Real Estate
-------- ------------- -----------------
Revenues $ 67,826 $ 6,025 $ 73,851
Operating, interest, depreciation and amortization
expenses (excluding income taxes) 55,111 4,729 59,840
Income from equity investments (895) -- (895)
Net operating income(2) 11,820 1,296 13,116
Total assets 666,281 55,638 721,919
Total long-lived assets 610,923 52,798 663,721
-43-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For 2001, geographic information for the real estate operations segment is
as follows:
Domestic International Total Real Estate
-------- ------------- -----------------
Revenues $ 75,333 $ 3,761 $ 79,094
Operating, interest, depreciation and
amortization expenses (excluding
income taxes) 46,922 3,425 50,347
Income from equity investments 2,393 -- 2,393
Net operating income(2) 30,804 336 31,140
Total assets 733,406 49,578 782,984
Total long-lived assets 675,919 45,976 721,895
For 2000, geographic information for the real estate operations segment is
as follows:
Domestic International Total Real Estate
-------- ------------- -----------------
Revenues $ 78,957 $ 2,425 $ 81,382
Operating, interest, depreciation and
amortization expenses (excluding
income taxes)(1) 57,376 2,703 60,079
Income from equity investments 2,813 -- 2,813
Net operating income (loss)(2) 24,394 (278) 24,116
Total assets 752,126 32,502 784,628
Total long-lived assets 717,545 29,803 747,348
(1) Excludes the writeoff of an acquired management contract of $38,000
in 2000.
(2) Net operating income (loss) excludes gains and losses on sales,
provision for income taxes, minority interest and the writeoff of an
acquired management contract of $38,000 in 2000.
18. Income Taxes:
The components of the Company's provision for income taxes for the years
ended December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
---- ---- ----
Federal:
Current $ 2,548 $ (82) $ 549
Deferred 8,756 4,783 848
------- ------- ------
11,304 4,701 1,397
------- ------- ------
State and local:
Current 2,496 1,988 2,176
Deferred 4,399 1,787 571
------- ------- ------
6,895 3,775 2,747
------- ------- ------
Total provision $18,199 $ 8,476 $4,144
======= ======= ======
Deferred income taxes as of December 31, 2002 and 2001 consist of the
following:
2002 2001
---- ----
Deferred tax assets:
Net operating loss carry forward -- $1,531
Unearned compensation $ 834 544
Corporate fixed assets 2 98
Other long-term liabilities 243 115
------- ------
1,079 2,288
------- ------
Deferred tax liabilities:
Receivables from affiliates 13,533 4,975
Investments 7,309 3,921
------- ------
20,842 8,896
------- ------
Net deferred tax liability $19,763 $6,608
======= ======
-44-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The difference between the tax provision and the tax benefit recorded at
the statutory rate at December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
---- ---- ----
Income (loss) from taxable subsidiaries before
income tax $ 35,296 $3,236 $(38,172)
Federal provision (benefit) at statutory tax rate
(34%) 12,001 1,100 (12,978)
State and local taxes, net of federal benefit 3,617 1,137 557
Writeoff of management contract -- -- 12,920
Amortization of intangible assets 1,886 3,458 1,706
Other (517) 794 34
-------- ------ --------
Tax provision - taxable subsidiaries 16,987 6,489 2,239
Other state and local taxes 1,212 1,987 1,905
-------- ------ --------
Total tax provision $ 18,199 $8,476 $ 4,144
======== ====== ========
19. Employee Benefit Plans:
The Company sponsors a qualified profit-sharing plan and trust covering
substantially all of its full-time employees who have attained age
twenty-one, worked a minimum of 1,000 hours and completed one year of
service. The Company is under no obligation to contribute to the plan and
the amount of any contribution is determined by and at the discretion of
the Board of Directors. The Board of Directors can authorize contributions
to a maximum of 15% of an eligible participant's total compensation,
limited to $30 annually per participant. For the years ended December 31,
2002 and 2001, amounts expensed by the Company for contributions to the
trust were $1,677 and $1,388, respectively. Annual contributions represent
an amount equivalent to 15% of each eligible participant's total eligible
compensation for that period.
20. Goodwill and Intangible Assets:
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 and performed its annual evaluation of testing for impairment of
goodwill. Based on its evaluation, the Company concluded that its goodwill
is not impaired.
Goodwill and other intangible assets as of December 31, 2002 are
summarized as follows:
Gross Carrying Amount Accumulated Amortization
--------------------- ------------------------
Amortized intangible assets:
Management contracts $ 59,135 $(18,543)
======== ========
Unamortized goodwill and indefinite-lived
intangible assets:
Goodwill 49,874
Trade name 3,975
-------
$53,849
=======
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.
-45-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the effect of amortization of goodwill and intangible assets
on reported earnings for the years ended December 31, 2002, 2001 and 2000
are as follows:
2002 2001 2000
---- ---- ----
Goodwill amortization -- $ 4,127 $ 1,746
Trade name amortization -- 470 255
Management contracts amortization $ 7,280 7,306 3,957
Net income (loss) 46,588 35,761 (9,278)
2002 2001 2000
---- ---- ----
Reported net income (loss) $46,588 $35,761 $(9,278)
Add back: Goodwill amortization -- 4,127 1,746
Trade name amortization -- 470 255
------- ------- -------
Adjusted net income (loss) $46,588 $40,358 $(7,277)
======= ======= =======
Basic earnings per share:
Reported net income (loss) $ 1.31 $ 1.04 $ (.31)
Add back: Goodwill amortization -- .11 .05
Trade name amortization -- .01 .01
------- ------- -------
Adjusted basic earnings (loss) per share $ 1.31 $ 1.16 $ (.25)
======= ======= =======
Diluted earnings per share:
Reported net income (loss) $ 1.28 $ 1.02 $ (.31)
Add back: Goodwill amortization -- .11 .05
Trade name amortization -- .01 .01
------- ------- -------
Adjusted diluted earnings (loss) per share $ 1.28 $ 1.14 $ (.25)
======= ======= =======
Amortization of intangibles for the next five years is estimated to be
$6,686 in 2003 and 2004; $6,596 in 2005, $4,519 in 2006, and $4,444 in
2007.
21. Development Contract:
Subsequent to the sale of the property in Los Angeles to the School
District in June 2002, a 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. 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 for non-performance 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. The guarantee ends upon completion of
construction.
Due to the Company's continuing involvement with the development
management agreement of the property, the recognition of gain on sale and
the subsequent development management fee income on the build-to-suit
project are being recognized using a blended profit margin under the
percentage of completion method of accounting. The build-to-suit
development agreement
-46-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The
subsidiary is obligated to share 10% of its early incentive fee with its
joint venture partner. The joint venture partner has no participation in
the other fees or the profit or loss 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 year ended December 31, 2002, the Company recognized
$289 of build-to-suit development fee management income.
22. Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" which 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.
In June 2001, 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 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 effect of SFAS No. 142 is described in Note 20.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the
recognition and measurement of an asset retirement obligation. SFAS No.
143 requires retirement obligations associated with tangible long-lived
assets to be recognized at fair value as the liability is incurred with a
corresponding increase in the carrying amount of the related long-lived
asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not expect
SFAS No. 143 to have a material effect on its financial statements.
In 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
15.
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
-47-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with exit and disposal activities, including restructuring activities that
are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The provisions of this Statement are effective for exit
or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company does not expect SFAS No. 146 to
have a material effect on the Company's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for
the acquisitions of certain financial institutions and includes long-term
customer relationships as intangible assets within the scope of SFAS No.
144. The Company does not expect SFAS No. 147 to have a material effect on
its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS
No. 123, Accounting for Stock Based Compensation. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock based compensation (i.e., recognition
of a charge for issuance of stock options in the determination of
income.). However, SFAS No. 148 does not permit the use of the original
SFAS No. 123 prospective method of transition for changes to the fair
value based method made in fiscal years beginning after December 15, 2003.
In addition, this Statement amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock based employee
compensation, description of transition method utilized and the effect of
the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. The new interim disclosure provisions are effective for
the first interim period beginning after December 15, 2002. The Company is
evaluating whether it will change to the fair value based method.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45") which changes the
accounting for, and disclosure of certain guarantees. Beginning with
transactions entered into after December 31, 2002, certain guarantees are
required to be recorded at fair value, which is different from prior
practice, under which a liability was recorded only when a loss was
probable and reasonably estimable. In general, the change applies to
contracts or indemnification agreements that contingently require the
Company to make payments to a guaranteed third-party based on changes in
an underlying asset, liability, or an equity security of the guaranteed
party. The accounting provisions only apply for certain new transactions
entered into and existing guarantee contracts modified after December 31,
2002. The adoption of the accounting provisions of FIN 45 is not expected
to have a material effect on the Company's financial statements. The
Company has complied with the disclosure provisions.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), the primary objective of which
is to provide guidance on the identification of entities for which control
is achieved through means other than voting rights ("variable interest
entities" or "VIEs") and to determine when and which business enterprise
should consolidate the VIE (the "primary beneficiary"). This new model
applies when either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without additional
financial support. In addition, FIN 46 requires both the primary
beneficiary and all other enterprises with a significant variable interest
in a VIE to make additional disclosures. The transitional disclosures
requirements will take effect immediately and are required for all
financial statements initially issued after January 31, 2003. The Company
is assessing the impact of this interpretation on its accounting for its
investments in unconsolidated joint ventures. The Company is evaluating
upon adoption in the third quarter of 2003 if it will consolidate certain
equity investments and other entities. The Company's maximum loss exposure
is the carrying value of its equity investments. The Company does not
expect the adoptions of the provisions of FIN 46 to have a material effect
on the Company's financial statements.
-48-
W. P. CAREY & CO. LLC
NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. Subsequent Events:
On February 6, 2003, the Company sold a property located in Winona,
Minnesota to the lessee, Peerless Chain Company ("Peerless") for $10,800,
which consisted of cash of $6,300 and two notes receivable from the buyer
with a fair value of $2,250, with $500 maturing in 2006 and $4,000
maturing in 2008. The Company also received a note receivable of
approximately $1,700 for unpaid rents. The note is payable in equal
monthly installments over 5 years.
In March 2003, the Company sold its property in Schiller Park, Illinois
leased to Wozniak Industries, Inc. ("Wozniak") for $2,390. Wozniak had
previously notified the Company that it would not renew its lease which
was scheduled to expire in December 2003. In connection with selling the
property prior to the end of the lease term, the Company received a lease
termination fee from Wozniak of $290.
-49-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Listed Shares are listed on the New York Stock Exchange. Trading commenced on
January 21, 1998.
As of December 31, 2002 there were 21,801 shareholders of record.
Dividend Policy
Quarterly cash dividends are usually declared in December, March, June
and September and paid in January, April, July and October. Quarterly
cash dividends declared per share in 2002, 2001 and 2000 are as
follows:
Quarter 2002 2001 2000
------- ---- ---- ----
1 $ .4280 $ .4225 $ .4225
2 .4290 .4250 .4225
3 .4300 .4260 .4225
4 .4310 .4270 .4225
------- ------- -------
Total: $1.7180 $1.7005 $1.6900
======= ======= =======
Listed Shares
The high, low and closing prices on the New York Stock Exchange for a
Listed Share for each fiscal quarter of 2002, 2001, and 2000 were as
follows (in dollars):
2000 High Low Close
---- ---- --- -----
First Quarter $16.03 $14.39 $15.45
Second Quarter 17.02 15.51 15.60
Third Quarter 17.15 15.90 17.15
Fourth Quarter 18.10 16.11 18.10
2001 High Low Close
---- ---- --- -----
First Quarter $20.60 $18.26 $19.35
Second Quarter 21.80 18.50 18.50
Third Quarter 22.05 19.25 21.35
Fourth Quarter 23.80 20.00 23.20
2002 High Low Close
---- ---- --- -----
First Quarter $24.40 $22.78 $23.24
Second Quarter 24.15 22.30 22.50
Third Quarter 25.90 21.28 24.80
Fourth Quarter 25.40 22.95 24.75
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and without
charge, a copy of the Annual Report on Form 10-K ("10-K") for the year ended
December 31, 2002 as filed with the Securities and Exchange Commission ("SEC").
The 10-K may also be obtained through the SEC's EDGAR database at www.sec.gov.
-50-