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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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
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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
----------
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |.
As of May 9, 2003, there are 36,462,010 Listed Shares of Registrant
outstanding.
W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Income for the
three months ended March 31, 2003 and 2002 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three ended March 31, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002 6-7
Notes to Condensed Consolidated Financial Statements 8-16
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-25
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. - Controls and Procedures 26
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 27
Item 6. - Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29-30
*The summarized condensed financial statements contained herein is unaudited;
however, in the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included.
- 1 -
W. P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Real estate leased to others:
Real estate leased to others under the operating method, net of
accumulated depreciation of $44,447 and $41,716 at March
31, 2003 and December 31, 2002 $ 431,894 $ 432,556
Net investment in direct financing leases 189,036 189,339
--------- ---------
Real estate leased to others 620,930 621,895
Operating real estate, net of accumulated depreciation of $1,750 and
$1,665 at March 31, 2003 and December 31, 2002 3,990 4,056
Real estate under construction and redevelopment 3,583 3,581
Equity investments 67,951 67,742
Assets held for sale 11,470 22,158
Cash and cash equivalents 16,570 21,304
Due from affiliates 44,557 40,241
Goodwill 49,874 49,874
Intangible assets, net of accumulated amortization of $20,215 and
$18,543 at March 31, 2003 and December 31, 2002 42,895 44,567
Other assets 17,754 18,106
--------- ---------
Total assets $ 879,574 $ 893,524
========= =========
LIABILITIES, MINORITY INTEREST AND
MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 185,198 $ 186,049
Notes payable 36,000 49,000
Dividends payable 15,738 15,486
Accounts payable and accrued expenses 8,700 17,931
Due to affiliates 2,592 12,874
Accrued taxes 7,546 5,285
Deferred taxes, net 22,414 19,763
Other liabilities 14,460 14,764
--------- ---------
Total liabilities 292,648 321,152
--------- ---------
Minority interest 1,631 1,484
--------- ---------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 36,431,342 and 35,944,110 shares issued
and outstanding at March 31, 2003 and December 31, 2002 702,937 690,594
Dividends in excess of accumulated earnings (110,438) (111,970)
Unearned compensation (4,969) (5,671)
Accumulated other comprehensive loss (2,235) (2,065)
--------- ---------
Total members' equity 585,295 570,888
--------- ---------
Total liabilities, minority interest and members' equity $ 879,574 $ 893,524
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited consolidated financial statements at that date.
- 2 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
Three Months Ended March 31,
----------------------------
2003 2002
-------- -------
Revenues:
Management income from affiliates $ 25,793 $13,485
Rental income 11,934 11,938
Interest income from direct financing leases 5,272 5,988
Other income 2,732 316
Other interest income 560 535
Revenue from other business operations 870 688
-------- -------
47,161 32,950
-------- -------
Expenses:
Interest 3,923 4,284
Depreciation 2,821 2,575
Amortization 2,155 2,310
General and administrative 12,061 7,343
Property expenses 2,668 1,801
Impairment loss on investments 272 --
Operating expenses from other business operations 563 512
-------- -------
24,463 18,825
-------- -------
Income from continuing operations before minority interest,
equity investments, gain on sale and income taxes 22,698 14,125
Minority interest in (income) loss (33) 15
Income from equity investments 918 187
-------- -------
Income from continuing operations before gain on sale and
income taxes 23,583 14,327
Gain on sale of securities -- 94
-------- -------
Income from continuing operations before income taxes and
gain on sale of real estate 23,583 14,421
Provision for income taxes 7,024 2,890
-------- -------
Income from continuing operations before gain on sale of
real estate 16,559 11,531
-------- -------
Discontinued operations:
Income from operations of discontinued properties 550 1,049
Gain on sale of real estate 164 --
-------- -------
Income from discontinued operations 714 1,049
-------- -------
Gain on sale of real estate -- 1,149
-------- -------
Net income $ 17,273 $13,729
======== =======
--Continued--
- 3 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
(continued)
Three Months Ended
March 31,
---------
2003 2002
----------- -----------
Basic earnings per share:
Income from continuing operations $ .46 $ .36
Discontinued operations .02 .03
----------- -----------
Net income $ .48 $ .39
=========== ===========
Diluted earnings per share:
Income from continuing operations $ .44 $ .35
Discontinued operations .02 .03
----------- -----------
Net income $ .46 $ .38
=========== ===========
Weighted average shares outstanding:
Basic 36,389,289 35,289,369
=========== ===========
Diluted 37,211,485 35,939,985
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 4 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Net income: $ 17,273 $ 13,729
-------- --------
Other comprehensive loss:
Change in unrealized loss of marketable securities (663) (3)
Foreign currency translation gain (loss) 493 (167)
-------- --------
Other comprehensive loss (170) (170)
-------- --------
Comprehensive income $ 17,103 $ 13,559
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 5 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 17,273 $ 13,729
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Income from discontinued operations, including gain on sale (714) (1,049)
Depreciation and amortization 5,190 5,092
Gain on sale of real estate and securities, net -- (1,243)
Minority interest in income (loss) 33 (15)
Straight-line rent adjustments and amortization of deferred income (91) (158)
Equity income in excess of distributions (12) (50)
Management income received in shares of affiliates (4,334) (2,623)
Costs paid by issuance of shares 52 59
Amortization of unearned compensation 712 753
Provision for uncollected rents 488 662
Impairment loss on securities 272 --
Deferred income taxes payable 2,651 2,109
Tax benefit - share incentive plans 1,636 --
Increase in structuring fees receivable (5,449) (1,425)
Deferred acquisition fees received 1,495 916
Net change in other operating assets and liabilities (4,364) 818
-------- --------
Net cash provided by continuing operations 14,838 17,575
Net cash provided by discontinued operations 550 1,205
-------- --------
Net cash provided by operating activities 15,388 18,780
-------- --------
Cash flows from investing activities
Distributions received from equity investments in excess of equity income 784 896
Proceeds from sale of property and investments 8,602 9,026
Release of funds from escrow in connection with the sale of a property -- 9,366
Purchases of real estate -- (413)
Additional capital expenditures (463) (1,156)
Payment of deferred acquisition fees (524) (524)
-------- --------
Net cash provided by investing activities 8,399 17,195
-------- --------
Cash flows from financing activities:
Dividends paid (15,489) (14,830)
Payment of accrued preferred distributions -- (1,423)
Proceeds from issuance of shares, net 1,780 2,223
Payments of mortgage principal (1,965) (1,920)
Prepayments of mortgage principal and note payable (34,000) (27,986)
Proceeds from mortgages payable and note payable 21,000 12,000
-------- --------
Net cash used in financing activities (28,674) (31,936)
-------- --------
Effect of exchange rate changes on cash 153 4
-------- --------
Net (decrease) increase in cash and cash equivalents (4,734) 4,043
Cash and cash equivalents, beginning of period 21,304 8,870
-------- --------
Cash and cash equivalents, end of period $ 16,570 $ 12,913
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 6 -
W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) - (Continued)
(in thousands, except share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC in June
2000, the Company has an obligation to issue up to an additional
2,000,000 shares over four years if specified performance criteria
are achieved. As of March 31, 2003, 1,400,000 shares have been
issued. For the year ended December 31, 2002, one of the criteria
was achieved, and 400,000 shares were issued during the three-month
period ended March 31, 2003. For the year ended December 31, 2001,
all of the criteria were achieved, and 500,000 shares were issued
during the three-month period ended March 31, 2002. The cost
attributable to such shares of $8,910 and $10,440, for 2002 and
2001, respectively, was included in due to affiliates and goodwill
in the year achieved. During the periods ended March 31, 2003 and
2002, the amounts that were initially recorded in due to affiliates
were recorded to members' equity upon issuance of the shares.
B. As partial consideration for the sale of a property in 2003, the
Company received notes receivable with a fair value of $2,250.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 7 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share and per share amounts)
Note 1: Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of W. P.
Carey & Co. LLC (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant inter-entity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. These condensed financial statements should be
read in conjunction with the audited financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Note 2. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
periods ended March 31, 2003 and 2002 were calculated as follows:
Three Months Ended March 31,
----------------------------
2003 2002
----------- -----------
Income from continuing operations before gain on sale
of real estate $ 16,559 $ 11,531
Gain on sale of real estate -- 1,149
----------- -----------
Income from continuing operations 16,559 12,680
Discontinued operations 714 1,049
----------- -----------
Net income $ 17,273 $ 13,729
=========== ===========
Weighted average shares - basic 36,389,289 35,289,369
Effect of dilutive securities: Stock options and warrants 822,196 650,616
----------- -----------
Weighted average shares - diluted 37,211,485 35,939,985
=========== ===========
Basic earnings per share:
Income from continuing operations $ .46 $ .36
Discontinued operations .02 .03
----------- -----------
Net income $ .48 $ .39
=========== ===========
Diluted earnings per share:
Income from continuing operations $ .44 $ .35
Discontinued operations .02 .03
----------- -----------
Net income $ .46 $ .38
=========== ===========
Note 3. Transactions with Related Parties:
The Company earns fees as the Advisor to four 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"). 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).
- 8 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
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 in connection with structuring and
negotiating real estate acquisitions and mortgage financing. In addition, the
Company's broker-dealer subsidiary earns fees in connection with the "best
efforts" public offering of CPA(R): 15. The Company earns its asset management
fee at a per annum rate of 1/2 of 1% of Average Invested Assets, as defined in
the Advisory Agreements, for each CPA(R) REIT and, based upon specific
performance criteria earns a performance fee of 1/2 of 1% of Average Invested
Assets. Fees for transaction-related services are only earned for completed
transactions. The Company is reimbursed for the cost of personnel provided for
the administration of the CPA(R) REITs. For the three-month periods ended March
31, 2003 and 2002, the Company earned asset-based fees and reimbursements of
$12,330 and $7,734, respectively, and transaction fees of $13,463 and $5,751,
respectively.
As of March 31, 2003, 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, and WPCI becoming a
majority-owned subsidiary of the Company. 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. Under the agreement, the
Company's right to fees derived from the acquisition, management and disposition
of properties outside of the United States will be transferred to WPCI. In
consideration, WPCI will absorb certain costs, including certain personnel
costs, that had been paid by the Company. The Company will receive 10,000,000
shares of WPCI, and under employment agreements with WPCI, two officers of WPCI
are being granted restricted minority ownership interests of 1,500,000 shares or
share equivalents in WPCI which will vest ratably over five years. The officers
are also being granted 1,500,000 options for WPCI common stock at a per share
exercise price of $1 which will vest ratably over five years. The options will
be exercisable for a period of ten years following the date of their first
vesting. The transfer of interests in WPCI is expected to be completed during
the second quarter of 2003.
- 9 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 4. Lease Revenues:
The Company's real estate operations consist of the investment in and the
leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the three-month periods ended March 31, 2003
and 2002 are as follows:
2003 2002
-------- --------
Per Statements of Income:
Rental income $ 11,934 $ 11,938
Interest income from direct financing leases 5,272 5,988
Adjustment:
Share of leasing revenues applicable to minority interests (303) (181)
Share of leasing revenues from equity investments 2,045 1,715
-------- --------
$ 18,948 $ 19,460
======== ========
For the three months ended March 31, 2003 and 2002, the Company earned its
net leasing revenues (i.e., rental income and interest income from direct
financing leases) from more than 90 lessees. A summary of net leasing
revenues is as follows:
2003 % 2002 %
------- --- ------- ---
Dr Pepper Bottling Company of Texas $ 1,067 6% $ 1,097 6%
Detroit Diesel Corporation 1,039 5 1,039 5
Gibson Greetings, Inc., a wholly-owned subsidiary of American
Greetings, Inc. 899 5 1,033 5
Bouygues Telecom, S.A. (b) 753 4 677 3
Federal Express Corporation (a) 723 4 714 4
Orbital Sciences Corporation 664 4 664 3
Quebecor Printing, Inc. 643 3 640 3
America West Holdings Corp. 635 3 635 3
AutoZone, Inc. 558 3 554 3
Checkfree Holdings Corporation Inc. (a) 532 3 527 3
Sybron International Corporation 522 3 541 3
Livho, Inc. 450 2 642 3
Lockheed Martin Corporation 445 2 486 3
BE Aerospace, Inc. 435 2 -- --
Unisource Worldwide, Inc. 428 2 433 2
CSS Industries, Inc. 413 2 415 2
Faurecia Exhaust Systems, Inc. 412 2 425 2
Information Resources, Inc. (a) 411 2 411 2
Sybron Dental Specialties Inc. 403 2 403 2
The Gap, Inc. (lease expired in 2003) 368 2 551 3
Sprint Spectrum, L.P. 356 2 356 2
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of
Lowe's Companies Inc. 328 2 317 2
AT&T Corporation 315 2 315 2
United States Postal Service 308 2 308 2
BellSouth Telecommunications, Inc. 306 2 306 2
Brodart, Co. 288 2 380 2
Hologic, Inc. (a) 284 2 -- --
Cendant Operations, Inc. 268 2 268 1
Anthony's Manufacturing Company, Inc. 255 1 255 1
Other (b) 4,440 22 5,068 26
------- --- ------- ---
$18,948 100% $19,460 100%
======= === ======= ===
(a) Represents the Company's proportionate share of lease revenue from its
equity investment.
(b) Includes proportionate share of lease revenues from the Company's equity
investments and net of proportionate share applicable to minority interest
owners.
- 10 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
For the three-month period ended March 31, 2003, lessees were responsible for
approximately $1,790 of real estate taxes on behalf of the Company.
Note 5. Equity Investments:
The Company owns interests in the CPA(R) REITs. The Company's interests in the
CPA(R) REITs are accounted for under the equity method due to the Company's
ability to exercise significant influence as the Advisor to the CPA(R) REITs.
The Company also exercises significant influence over WPCI in which its owns a
10% interest (also see Note 3). The CPA(R) REITs are publicly registered and
file financial statements with the United States Securities and Exchange
Commission. 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 March 31, 2003, the Company's
ownership in the CPA(R) REITs is as follows:
Shares % of outstanding Shares
------ -----------------------
CIP(R) 743,937 2.57%
CPA(R):12 771,043 2.49%
CPA(R):14 1,338,387 2.00%
CPA(R):15 178,526 0.31%
The Company also owns equity interests in (i) three limited partnerships as a
limited partner, (ii) two limited liability companies and (iii) a
jointly-controlled 36% tenancy-in-common interest in two properties subject to a
master lease with the remaining interests owned by affiliates and all of which
net lease real estate on a single-tenant basis.
Combined financial information of the affiliated equity investees is summarized
as follows:
March 31, 2003 December 31, 2002
-------------- -----------------
Assets (primarily real estate) $3,435,056 $3,225,167
Liabilities (primarily mortgage notes payable) 1,712,291 1,680,372
Partners' capital and shareholders' equity 1,722,765 1,544,795
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Revenue (primarily rental revenue) $ 79,468 $ 50,951
Expenses (primarily interest on mortgages
and depreciation) (58,708) (38,362)
Minority interest in income (2,371) (1,120)
Income from equity investments 10,746 5,865
Gain (loss) on sales 1,176 23
-------- --------
Income from continuing operations 30,311 17,357
Income from discontinued operations 156 27
-------- --------
Net income $ 30,467 $ 17,384
======== ========
During 2003, the Company converted its 780,269 units of the operating
partnership of MeriStar Hospitality Corporation ("MeriStar"), a publicly-traded
real estate investment trust which primarily owns hotels, to 780,269 shares of
common stock. As a result of the conversion, the Company is accounting for its
investment in common stock of MeriStar as an available-for-sale marketable
security. As a result, the Company no longer recognizes its share pro rata of
MeriStar's net income and is recognizing income from dividends earned from the
MeriStar investment. The Company accounted for its investment in MeriStar
operating partnership units under the equity method of accounting.
- 11 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Note 6. Segment Reporting:
The Company operates in two business segments - management of affiliates and
real estate operations. The two segments are summarized as follows:
Three Months ended March 31, Management Real Estate Other(1) Total Company
---------------------------- ---------- ----------- -------- -------------
Revenues:
2003 $ 25,793 $ 20,498 $ 870 $ 47,161
2002 13,485 18,777 688 32,950
Operating, interest, depreciation and
amortization expenses (excluding
provision for income taxes):
2003 $ 13,163 $ 10,737 $ 563 $ 24,463
2002 8,731 9,582 512 18,825
Income from equity investments:
2003 $ 94 $ 824 -- $ 918
2002 23 164 -- 187
Net operating income(2)(3)(4):
2003 $ 12,724 $ 10,585 $ 307 $ 23,616
2002 4,777 9,359 176 14,312
Long-lived assets:
March 31, 2003 $ 72,362 $659,022 $3,990 $735,374
December 31, 2002 70,089 663,721 4,056 737,866
Total assets:
March 31, 2003 $181,895 $693,591 $4,088 $879,574
December 31, 2002 167,415 721,919 4,190 893,524
(1) Primarily consists of the Company's other business operations.
(2) Management net operating income includes charges for amortization of
intangibles of $1,671 and $1,826 for the three-month periods ended
March 31, 2003 and 2002, respectively.
(3) Net operating income excludes gains and losses on sales, provision
for income taxes and minority interest.
(4) Real estate net operating income excludes income from discontinued
operations of $714 and $1,049 for the three-month periods ended
March 31, 2003 and 2002, respectively.
Certain prior year amounts have been reclassified to discontinued operations.
Note 7. Discontinued Operations:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the results of
operations for properties sold or held for sale and the related gain or loss on
sale of the property are reflected in the consolidated statements of operations
as "Discontinued Operations," except for any properties where the commitment to
a plan of disposition was initiated prior to January 1, 2002.
The operations of seven properties which were sold in 2003 or are classified as
held for sale as of March 31, 2003 and the operations of 18 properties which
were sold during 2002 or classified as held for sale as of December 31, 2002 are
included as "Discontinued Operations" for all periods presented in the condensed
consolidated financial statements. A summary of discontinued operations is as
follows:
- 12 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
Three Months Ended March 31,
----------------------------
2003 2002
------ ------
REVENUES:
Rental income $ 123 $ 895
Interest income from direct financing leases 192 1,059
Revenues of other business operations -- 603
Other income 401 --
------ ------
716 2,557
------ ------
EXPENSES:
Interest expense -- 371
Depreciation -- 156
Property expenses 166 288
General and administrative -- 36
Operating expenses of other business operations -- 657
------ ------
166 1,508
------ ------
Income before gain on sales 550 1,049
Gain on sales of real estate 164 --
------ ------
Income from discontinued operations $ 714 $1,049
====== ======
Depreciation expense is not recorded on properties held for sale. The effect of
suspending depreciation was $74 and $35 for the three-month periods ended March
31, 2003 and 2002, respectively.
On May 7, 2003, the Company sold a property in Apache Junction, Arizona for
$425.
Note 8. Gain on Sale of Real Estate:
2003
On February 6, 2003, the Company sold its property in Winona, Minnesota to the
lessee, Peerless Chain Company ("Peerless") for $8,550, consisting of cash of
$6,300 and notes receivable with a fair value of $2,250, which mature between
2006 and 2008. The Company also received a note receivable from Peerless of
approximately $1,700 for unpaid rents which was previously included in the
allowance for uncollected rents. The Company recognized a gain on sale of
approximately $46. The Company recognized an impairment charge of $4,000 on the
Peerless property in 2002.
On March 17, 2003, the Company sold its Schiller Park, Illinois property leased
to Wozniak Industries, Inc. ("Wozniak") for $2,390 and recognized a gain on sale
of approximately $118. The gain from the sales of the Peerless and Wozniak
properties are included in "Discontinued Operations" for the three-months ended
March 31, 2003 and 2002 (see Note 7).
2002
During the three-month period ended March 31, 2002, the Company sold properties
in Urbana, Illinois; Maumelle, Arkansas; and Burnsville, Minnesota for $8,932
and recognized a net gain of $1,149.
Note 9. Stock Options and Restricted Stock:
The Company has elected to adopt the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." 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 Company's share incentive plans and amortized
to expense over their
- 13 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
respective vesting periods in accordance with the provisions of SFAS No. 123,
pro forma net income would have been as follows:
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Net income as reported $ 17,273 $ 13,729
Add: Stock based compensation included in net
income as reported, net of related tax effects 397 331
Less: Stock based compensation determined under fair value
based methods for all awards, net of related tax effects (778) (602)
-------- --------
Pro forma net income $ 16,892 $ 13,458
======== ========
Net income per common share as reported
Basic $ .48 $ .39
Diluted $ .46 $ .38
Pro forma net income per common share
Basic $ .46 $ .38
Diluted $ .45 $ .37
For the three-months period ended March 31, 2003 and 2002, the changes in
unearned compensation were as follows:
2003 2002
-------- --------
Beginning of period $ 5,671 $ 4,454
Issuance of shares 46 271
Forfeitures (36) (6)
Compensation expense (amortization of unearned compensation) (712) (753)
-------- --------
End of period $ 4,969 $ 3,966
======== ========
For the three-months periods ended March 31, 2003 and 2002, restricted shares of
$40 and $36, respectively, were issued to directors in consideration of services
rendered.
Note 10. Accounting Pronouncements:
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. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
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 Company adopted this Statement effective January
1, 2003, and the adoption did not have a material effect on the Company's
financial statements. The Company will no longer classify gains and losses for
the extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with
- 14 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
early application encouraged. SFAS No. 146 was adopted on January 1, 2003, and
did not 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. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
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
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on the Company's 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 have been adopted. 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 make additional disclosures. 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.
- 15 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except share and per share amounts)
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively.
- 16 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto as of March 31, 2003 of W.
P. Carey & Co. LLC and its subsidiaries ("WPC") included in this quarterly
report and WPC's Annual Report on Form 10-K for the year ended December 31,
2002. This quarterly report contains forward looking statements. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievement of WPC to be materially different
from the results of operations or plans expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by WPC that the results or conditions described in such
statements or the objectives and plans of WPC will be achieved. Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2002 provides a
description of WPC's business objectives, strategies and risk factors which
could affect future operating results.
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
WPC's accounting policies.
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 assesses as 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 measures its allowance against actual rent
arrearages and adjusts the percentage applied. Based on actual experience for
the three-month period ended March 31, 2003, WPC recorded a provision equal to
approximately 2.8% of lease revenues.
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 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
project costs incurred during the period of development.
- 17 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
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. 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 the business operations of its former
manager, Carey Management, LLC, 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 (as
of December 31st of each year) 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 amortized over the term of the
related debt and included in interest expense. Unamortized financing costs are
written off and are included in charges for early extinguishment of debt if a
loan is retired.
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
- 18 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
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 each investment 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.
WPC accounts for stock-based compensation using the intrinsic value method.
Under the intrinsic method, compensation cost is measured as (i) the quoted
market price of WPC's shares at the date of grant for restricted shares, and
(ii) the excess of, if any, the quoted market price at date of grant over the
exercise price of the options granted.
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 because it believes
operating income of the taxable subsidiaries will be sufficient to realize the
benefit of these assets over time. For interim periods, income tax expense for
taxable subsidiaries is determined, in part, by applying an effective tax rate
which takes into account statutory federal, state and local tax rates.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. WPC's management
evaluates the performance of its owned and managed real estate portfolio as a
whole, but allocates its resources between two operating segments: real estate
operations with domestic and international investments and management services.
RESULTS OF OPERATIONS:
WPC is engaged in two reportable operating segments, real estate operations and
management services, primarily as the Advisor to four affiliated real estate
investment trusts (the "CPA(R) REITs"). WPC reported net income of $17,273 and
$13,729 and income from continuing operations before gain on the sale of real
estate of $16,559 and $11,531 for the three-month periods ended March 31, 2003
and 2002, respectively. The increase in income from continuing operations before
gains for the comparable three-month periods was primarily due to an increase in
management income, and, to a lesser extent, an increase in other income and
income from equity investments. These were partially offset by increases in
general and administrative expenses and, to a lesser extent, an increase in
property expenses and a decrease in lease revenues. The increase in the
provision for income taxes was due to the growth of the management services
operations and related increase in its net operating income. Other income
includes a non-recurring termination settlement of $2,250 from the Gap, Inc. The
results for 2003 reflect a continued trend of the change in the composition of
revenue and earnings from WPC's business segments with substantial growth in the
revenues and net operating income of management services operations.
Net operating income from real estate operations (income before gains and
losses, income taxes, minority interest, and discontinued operations) increased
by $1,226 to $10,585; however, this increase includes the $2,250 non-recurring
settlement. Excluding the lease settlement, real estate net operating income
would have reflected a decrease of $1,024. The decrease in income for the
comparable three-month periods was due to a decrease in lease revenues and an
increase in property expenses offset in part by an increase in income from
equity investments ("equity income").
Lease revenues decreased by $720 for the comparable three-month periods, as a
result of several lease terminations and expirations, including leases with
Thermadyne and Pillowtex, Inc. in 2002, and The Gap in 2003. Livho, Inc.
- 19 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
operates a Holiday Inn in Livonia, Michigan and its ability to pay rent has been
negatively affected by current economic conditions in its market. As a result,
its annual rent for 2003 has been reduced by $720. Lease revenues benefited from
a new lease with BE Aerospace on a property purchased during the third quarter
of 2002 as well as several rent increases on existing leases. Annual rent from
the BE Aerospace lease is $1,421. The Gap lease which expired in January 2003,
provided annual rents of $2,205. In connection with its annual evaluation of
direct financing leases in 2002, the rates of return on several direct financing
leases were revised so that interest income from direct financing leases for
financial reporting purposes in 2003 will decrease by approximately $1,100;
however this change will not have any effect on operating cash flow, as
contractual rent from the underlying lessees is not affected by the change in
accounting estimate.
Property expenses increased by $867 for the comparable three-month periods. The
increase in property expenses was due primarily to increases in operating and
maintenance expenses. The increases are the result of the termination of the
Thermadyne Holdings, Inc. lease, the restructuring of the Faurecia Exhaust
Systems, Inc. lease in 2002 and the expiration of The Gap lease as WPC now
incurs such costs at these properties. 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 several net leases have
expired and the number of multi-tenant and operating properties in its portfolio
has increased.
The increase in income from equity investments ("equity income") was due to the
conversion of WPC's ownership interest in the operating partnership of MeriStar
Hospitality Corporation from operating partnership units to shares of MeriStar's
publicly-traded common stock in 2003 and the acquisition, in December 2002, of
an interest in the Hologic, Inc. properties. As a result of the conversion, WPC
is accounting for its investment in common stock of MeriStar as an
available-for-sale security and, therefore, is no longer recognizing it pro rata
share of MeriStar's reported net income or loss. For the period ended March 31,
2002, WPC recorded a $327 loss from the MeriStar investment. For the three-month
period ended March 31, 2003 the Hologic investment contributed $216 of equity
income. In April 2003, mortgage financing was placed on the Hologic properties,
which will decrease WPC's future equity income and cash distributions from the
Hologic investment by $429 and $591, respectively. As a result of the Hologic
financing, $6,582 was distributed to WPC.
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. In January 2002, The Gap notified WPC that it would
not renew its lease which expired in February 2003. The Gap vacated the property
in February 2003 and WPC and The Gap negotiated a lease termination settlement
of $2,250 which was received in March 2003.
Statement of Financial Accounting Standard ("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. Income from
discontinued operations was $714 and $1,049 in 2003 and 2002, respectively.
In addition to the impact of the expiration of the Gap lease and the change in
Livho rents, future operating cash flow will be affected by lease terminations
as well as the sales of properties. In February 2003, WPC sold its property
leased to Peerless Chain Company. Annual rental income under the Peerless lease
was $1,561; however, due to its financial difficulties, Peerless was only able
to pay a portion of its rent. In connection with the sale of the property,
Peerless has agreed to pay $1,700 of its rent arrearage in installments over
several years. In March 2003 WPC sold its property leased to Wozniak, Inc. The
Wozniak lease which provided annual rent of $497 was scheduled to expire in
December 2003. In consideration for agreeing to the early termination of Wozniak
lease, WPC received a settlement payment of $290.
Based on current market rentals, WPC does not expect the rents for any new
leases on the Gap property to reach the level that was paid by the Gap.
Management believes that the prospects for leasing the Gap property on a
long-term
- 20 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
basis are good; however, it may take up to two years to remarket the entire
property. WPC has entered into a 10-year lease with Alstorn Power, Inc.,
effective June 1, 2003 for 118,000 square feet at the former Gap facility
(approximately 16% of the leasable space) at an annual rent of $287 plus an
approximate 16% share of property expenses.
WPC continues to closely monitor the financial condition of several lessees
which it believes have been affected by current economic conditions and other
trends. Such lessees include America West Holding Corp. and Livho, Inc., which
represent 3% and 2%, respectively, of lease revenues. America West, an air
carrier, has obtained a government guarantee of its financing and its financial
prospects remain uncertain. Livho is affected by the cyclical nature of the
automotive industry as well as local market conditions in the hospitality
industry.
Net operating income from WPC's management services operations for the
three-month periods ended March 31, 2003 and 2002, were $12,724 and $4,777,
respectively. The increase is the result of an increase in both transaction and
asset-based fees earned, partially offset by an increase in the provision for
income taxes and general and administrative expenses. Transaction fees
represented 52% of management revenues for the three-month period ended March
31, 2003 as compared with 43% for the three-month period ended March 31, 2002.
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 level of transaction
fees should not be seen as a sustainable trend. While asset-based fees
represented a lower proportion of management revenues for the three-month period
ended March 31, 2003, these revenues increased by 59%. The increase resulted
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 and continue to
acquire properties.
Total revenues earned by the management services operations for the three-month
periods ended March 31, 2003 and 2002 were $25,793 and $13,485, respectively.
Management fee revenues were comprised of transaction fees of $13,463 and
$5,751, respectively, and asset-based fees and reimbursements of $12,330 and
$7,734, respectively, for the three-month periods ended March 31, 2003 and 2002.
Transaction fees included fees from structuring acquisitions and financing on
behalf of the CPA(R) REITs. WPC structured $272,000 of transactions for the
three-month period ended March 31, 2003 as compared with $117,000 for the
three-month period ended March 31, 2002.
The asset-based management income includes fees based on the appraised value of
three of the CPA(R) REIT's real estate assets under management and the
historical cost of Corporate Property Associates 15 Incorporated ("CPA(R):15").
Based on assets under management of the CPA(R) REITs as of March 31, 2003,
annualized management and performance fees under the advisory agreements are
approximately $35,588. As the real estate asset bases of Corporate Property
Associates 14 Incorporated ("CPA(R):14") and CPA(R):15 continue to increase,
management and performance fees are expected to continue to 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. During the three-months ended March
31, 2003, WPC earned combined asset management and performance fees of $3,598
and $1,698 from CPA(R):14 and CPA(R):15. respectively, as compared with $2,417
and $22, respectively, for the three-months period ended March 31, 2002.
CPA(R):15 fully subscribed its initial $400,000 "best efforts" public offering
in November 2002. CPA(R): 15 commenced a second "best efforts" public offering
of up to $690,000 in 2003 and has already raised in excess of $250,000.
Accordingly, WPC projects increases in the asset bases of CPA(R):14 and
CPA(R):15. 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 continue because much of it is determined by factors which are beyond the
control of the company. WPC anticipates that CPA(R):15's second offering will be
fully subscribed and it will form a new REIT and commence an initial "best
efforts" offering before the end of 2003.
The provision for current and deferred income tax expense for the three-month
period ended March 31, 2003 increased by $4,134 over the comparable three-month
period ended March 31, 2002 and resulted from the growth of the management
services operations. Income tax expense increased because approximately 92% of
management revenues are earned by a taxable, wholly-owned subsidiary, which
reflected a substantial increase in earnings for the comparable periods.
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
The increase in general and administrative costs was due primarily to an
increase in personnel-related costs attributable to the growth of the management
services operations. A portion of personnel charges is directly related to
CPA(R) REIT capital raising and transactions activities and the increase in
these activities has directly contributed to the increase in personnel-related
costs. 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 three-month periods
ended March 31, 2003 and 2002 was $2,072 and $1,392, respectively.
For the three-month period ended March 31, 2003, WPC earned $171 of development
fee management income, in connection with managing the construction of a public
high school in Los Angeles, California, which is accounted for under the
percentage completion method of accounting. Cash fees received for the current
three-month period were approximately $530. In April 2003, WPC terminated its
arrangement with its joint venture partner and will have no obligation to share
any contingent consideration that may be earned for early completion of the
project or cost savings.
FINANCIAL CONDITION:
There has been no material change in WPC's financial condition since December
31, 2002. Management believes that WPC will generate sufficient cash from
operations and, if necessary, from the proceeds of limited recourse mortgage
loans, unsecured indebtedness and the issuance of additional equity securities
to meet its short-term and long-term liquidity needs. WPC assesses its ability
to access capital on an ongoing basis.
Cash flows from operating activities and distributions received from equity
investments for the three-month period ended March 31, 2003 of $16,172 were
sufficient to fund dividends to shareholders of $15,489. Cash flows from
operations are projected to increase as a result of the expected growth of the
management business segment. Annual cash flow from operations is projected to
fund distributions; however, operating cash flow may fluctuate on a quarterly
basis due to the timing of certain compensation costs that are paid in the first
quarter and the timing of transaction-related activity. In January 2003, WPC
received its annual installment of deferred acquisition fees of $1,495 in
connection with structuring transactions on behalf of CPA(R):12 and CPA(R):14.
The installment which will be payable in January 2004 is $5,715, and will
include an initial installment from CPA(R):15. Installments are applied to
amounts due from affiliates when received.
Investing activities included using $463 for capital expenditures at existing
properties. WPC also received $8,602 in connection with the sale of two
properties. A portion of the proceeds from the sales was used to pay down a
portion of WPC's credit facility balance. In January 2003, WPC paid an
installment of deferred acquisition fees of $524 to WPC's former management
company relating to 1998 and 1999 property acquisitions.
In addition to paying dividends to shareholders, WPC's financing activities for
the three-month period ended March 31, 2003 included reducing its outstanding
balance of its credit facility by $13,000, and making scheduled principal
payment installments of $1,965 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 March 31,
2003, approximately 55% of the number of properties owned by WPC are
unencumbered with mortgage debt. WPC also raised $1,780 from the issuance of
shares primarily through WPC's dividend reinvestment and stock purchase plan.
WPC issued additional shares pursuant to its merger agreement for the management
services operations (400,000 shares valued at $8,910 were issued during the
three-month period ended March 31, 2003 based on meeting one of the performance
criteria as of December 31, 2002).
WPC has a revolving credit agreement which provides for a $185,000 line of
credit and with 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. The credit agreement
matures in March 2004 and WPC believes that renewing the facility after the
current term is likely. As of March 31, 2003, WPC has $149,000 of unused
capacity under the credit facility. Amounts drawn on the credit facility bear
interest at a rate indexed to the
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
London Inter-Bank Offered Rate. As of May 8, 2003 the annual interest rate on
the outstanding balance of $35,000 is approximately 2.5%.
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 on limited
recourse mortgages and 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 under a
product improvement plan requirement necessary to renew the franchise license
with Holiday Inn. The funds are expected to be used 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. In addition, 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. Amounts outstanding under the credit facility
bear interest at a variable rate. Based on the current outstanding balance of
$39,000 each increase of 1% in the base rate would increase WPC's annual
interest obligations by $390 and would not have a material effect on the results
of operations.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
WPC has guaranteed loans of $3,145 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 a development project in Los Angeles. 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:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
-------- -------- ------- ------- ------- -------- ----------
Obligations:
Mortgage notes payable $185,198 $ 9,158 $25,441 $ 8,315 $24,950 $ 14,664 $102,670
Unsecured note payable 36,000 36,000
Deferred acquisition fees 2,233 524 524 524 524 137
Commitments and Guarantees:
Guarantee of officer loans 3,145 3,145
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 1,632 350 466 466 350
-------- -------- ------- ------- ------- -------- --------
$233,708 $ 12,653 $64,931 $10,805 $27,324 $ 15,188 $102,807
======== ======== ======= ======= ======= ======== ========
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
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
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, 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. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
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. WPC adopted this statement effective January 1, 2003,
and the adoption did not have a material affect on WPC's financial statements.
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. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on WPC'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. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the financial statements.
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
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W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollars in thousands, except share and per share amounts)
changes in an underlying asset, liability, or an equity security of the
guaranteed party. The adoption of the accounting provisions of FIN 45 on January
1, 2003 did not have a material effect on WPC's 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 have been adopted. WPC is evaluating whether it will
change to the fair value based method.
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 make additional disclosures. 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.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance is to be
applied prospectively.
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W. P. CAREY & CO. LLC
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
Market risk is the exposure to loss resulting from changes in interest and
foreign currency exchange rates, foreign currency exchange rates and equity
prices. In pursuing its business plan, the primary risks to which WPC is exposed
are interest rate risk and foreign currency exchange risk.
The value of WPC's real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees and which may affect WPC's ability to refinance
property-level mortgage debt when balloon payments are scheduled.
$143,795 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 March 31, 2003 ranged from 2.4625% to
6.44%. The interest on the fixed rate debt as of March 31, 2003 ranged from
6.11% to 9.13%.
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.
2003 2004 2005 2006 2007 Thereafter Total Fair Value
------ ------- ------ ------- ------- ---------- -------- ----------
Fixed rate debt $8,107 $23,738 $6,572 $22,986 $12,481 $69,911 $143,795 $145,406
Weighted average
interest rate 7.79% 8.03% 7.47% 7.27% 7.17% 7.27%
Variable rate debt $1,051 $37,703 $1,743 $ 1,964 $ 2,183 $32,759 $ 77,403 $ 77,403
WPC conducts business in France. The foreign operations and foreign currency
translation gains and losses have not been material. Accordingly, WPC is subject
to foreign currency exchange rate risk from the effects that exchange rate
movements of foreign currencies and this may affect our future costs and cash
flows; however, exchange rate movements to date have not had a significant
effect on WPC's financial position or results of operations. To date, WPC has
not entered into any foreign currency forward exchange contracts or other
derivative financial instruments to hedge the effects of adverse fluctuations in
foreign currency exchange rates.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
March 31, 2003.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
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W. P. CAREY & CO. LLC
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2003, no matters were submitted to a
vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Co-Chief Executive Officers Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2003, the Company filed a report on
Form 8-K dated February 28, 2003 under Item 7, "Financial Statements and
Exhibits" and Item 9, "Regulation FD Disclosure."
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W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. P. CAREY & CO. LLC
5/13/2003 By: /s/ John J. Park
--------- ------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
5/13/2003 By: /s/ Claude Fernandez
--------- ------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
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W. P. CAREY & CO. LLC
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of W. P. Carey & Co. LLC
(the "Registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer 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 officer and we have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 5/13/2003 Date 5/13/2003
/s/ William Polk Carey /s/ Gordon F. DuGan
---------------------------- -----------------------------------
William Polk Carey Gordon F. DuGan
Chairman President
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
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W. P. CAREY & CO. LLC
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of W. P. Carey & Co. LLC
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 5/13/2003
/s/ John J. Park
----------------------------
John J. Park
Chief Financial Officer
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