SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended MARCH 31, 2002
of
W. P. CAREY & CO. LLC
("WPC")
A DELAWARE Limited Liability Company
IRS Employer Identification No. 13-3912578
SEC File Number 001-13779
50 Rockefeller Plaza,
New York, New York 10020
(212) 492-1100
WPC has LISTED SHARES registered pursuant to Section 12(b) of the Act.
WPC is registered on the NEW YORK STOCK EXCHANGE and the PACIFIC STOCK EXCHANGE.
WPC does not have any Securities registered pursuant to Section 12(g) of the
Act.
WPC (1) has filed all reports required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
W. P. Carey & Co. LLC has 35,579,253 Listed Shares, no par value outstanding at
May 10, 2002.
W. P. CAREY & CO. LLC
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 2
Condensed Consolidated Statements of Income for the
three months ended March 31, 2002 and 2001 3
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001 5-6
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-20
PART II - Other Information
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. - Submission of Matters to a Vote of Security Holders 21
Item 6. - Exhibits and Reports on Form 8-K 21
Signatures 22
*The summarized financial information contained herein is unaudited; however, in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
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W. P. CAREY & CO. LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Real estate leased to others:
Real estate leased to others under the operating method, net of
accumulated depreciation of $35,044 and $32,401
at March 31, 2002 and December 31, 2001 $ 442,551 $ 426,842
Net investment in direct financing leases 241,065 258,041
--------- ---------
Real estate leased to others 683,616 684,883
Operating real estate, net of accumulated depreciation of $2,207
and $2,076 at March 31, 2002 and December 31, 2001 5,913 5,990
Real estate under construction and redevelopment 2,822 2,797
Equity investments 52,407 50,629
Assets held for sale 15,436 23,693
Cash and cash equivalents 12,913 8,870
Due from affiliates 18,520 18,789
Goodwill 40,964 40,964
Intangible assets, net of accumulated amortization 50,020 51,846
Other assets 15,468 27,422
--------- ---------
Total assets $ 898,079 $ 915,883
========= =========
LIABILITIES, MINORITY INTEREST AND
MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 195,981 $ 200,515
Notes payable 81,000 95,000
Accrued interest 1,715 1,312
Dividends payable 15,127 14,836
Due to affiliates 4,589 16,790
Accrued taxes 3,624 3,020
Deferred taxes 8,717 6,608
Other liabilities 14,986 17,343
--------- ---------
Total liabilities 325,739 355,424
--------- ---------
Minority interest 788 794
--------- ---------
Commitments and contingencies
Members' equity:
Listed shares, no par value; 35,342,084 and 34,742,436 shares issued
and outstanding at March 31, 2002 and December 31, 2001 677,712 664,751
Dividends in excess of accumulated earnings (98,592) (97,200)
Unearned compensation (3,966) (4,454)
Accumulated other comprehensive loss (3,602) (3,432)
--------- ---------
Total members' equity 571,552 559,665
--------- ---------
Total liabilities, minority interest and members' equity $ 898,079 $ 915,883
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited consolidated financial statements at that date.
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W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share and share amounts)
Three Months Ended March 31,
----------------------------------
2002 2001
------------ ------------
Revenues:
Rental income $ 12,833 $ 11,826
Interest income from direct financing leases 7,046 8,189
Management income from affiliates 13,485 7,543
Other income 316 2,711
Other interest income 535 243
Revenue from other business operations 1,291 1,385
------------ ------------
35,506 31,897
------------ ------------
Expenses:
Interest 4,654 5,790
Depreciation 2,732 2,612
Amortization 2,310 3,652
General and administrative 7,375 6,241
Property expenses 2,089 1,302
Operating expenses from other business operations 1,169 1,194
------------ ------------
20,329 20,791
------------ ------------
Income before minority interest and income from
equity investments, gain on sale and income taxes 15,177 11,106
Minority interest in loss 15 44
Income from equity investments 187 1,452
------------ ------------
Income before gain on sale and income taxes 15,379 12,602
Gain on sales of real estate and investments 1,243 217
------------ ------------
Income before income taxes 16,622 12,819
Provision for income taxes (2,893) (180)
------------ ------------
Net income $ 13,729 $ 12,639
============ ============
Basic earnings per share $ .39 $ .37
============ ============
Diluted earnings per share $ .38 $ .37
============ ============
Weighted average shares outstanding:
Basic 35,289,369 34,268,978
============ ============
Diluted 35,939,985 34,584,163
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three Months Ended March 31,
----------------------------
2002 2001
-------- --------
Net income: $ 13,729 $ 12,639
-------- --------
Other comprehensive loss:
Change in unrealized gain on marketable securities (3) 125
Foreign currency translation loss (167) (588)
-------- --------
Other comprehensive loss (170) (463)
-------- --------
Comprehensive income $ 13,559 $ 12,176
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended March 31,
----------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 13,729 $ 12,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,248 6,458
Amortization of deferred income (19) (283)
Gain on sale of real estate and equity investments, net (1,243) (217)
Minority interest in loss (15) (44)
Straight-line rent adjustments and other noncash rent adjustments (139) (242)
Equity income in excess of distributions (50) (508)
Management income received in shares of affiliates (2,623) (1,393)
Costs paid by issuance of shares 59 70
Amortization of unearned compensation 753 496
Provision for uncollected rents 662 405
Structuring fees receivable (1,425) (835)
Deferred acquisition fees received 916 --
Net change in other operating assets and liabilities 2,927 (2,823)
-------- --------
Net cash provided by operating activities 18,780 13,723
-------- --------
Cash flows from investing activities
Distributions received from equity investments in excess of
equity income 896 193
Proceeds from sale of property and investments 9,026 7,171
Release of funds from escrow in connection with the sale of a property 9,366 --
Purchases of real estate and equity investments (413) (4,081)
Additional capital expenditures (1,156) (618)
Payment of deferred acquisition fees (524) (520)
Other -- (119)
-------- --------
Net cash provided by investing activities 17,195 2,026
-------- --------
Cash flows from financing activities:
Dividends paid (14,830) (14,202)
Proceeds from issuance of shares, net 2,223 --
Payments of mortgage principal (1,920) (1,929)
Prepayments of mortgage principal and notes payable (27,986) (12,129)
Proceeds from mortgages payable and note payable 12,000 16,526
Payment of accrued preferred distributions (1,423) --
Payment of financing costs -- (1,395)
Purchases of treasury stock -- (325)
-------- --------
Net cash used in financing activities (31,936) (13,454)
-------- --------
Effect of exchange rate changes on cash 4 (29)
-------- --------
Net increase in cash and cash equivalents 4,043 2,266
Cash and cash equivalents, beginning of period 8,870 10,165
-------- --------
Cash and cash equivalents, end of period $ 12,913 $ 12,431
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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W. P. CAREY & CO. LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) -
CONTINUED
(In thousands, except share amounts)
Noncash operating, investing and financing activities:
A. In connection with the acquisition of Carey Management LLC in
June 2000, the Company has an obligation to issue up to an
additional 2,000,000 shares over four years, if specified
performance criteria are achieved. The performance criteria
for the years ended December 31, 2001 and 2000 were achieved,
and as a result 500,000 shares were issued during both of the
three-month periods ended March 31, 2002 and 2001. The cost
attributable to such shares of $10,440 in 2002 and $8,145 in
2001 was included in goodwill in the accompanying condensed
consolidated financial statements.
Effective January 1, 2001, the CPA(R) Partnerships became
wholly-owned subsidiaries of the Company when 151,964 shares
($2,811) were issued in consideration for acquiring the
remaining special partner interests.
B. During the three-month periods ended March 31, 2002 and 2001,
the Company issued restricted shares of $34 and $33,
respectively, to affiliated parties, including directors, in
consideration of services rendered. Restricted shares valued
at $271 and $529, respectively, were issued to employees and
recorded as unearned compensation during the three-month
periods ended March 31, 2002 and 2001. Issued unvested
restricted shares and options of $6 and $76, respectively,
issued in prior periods were forfeited during the three-months
periods ended March 31, 2002 and 2001. Included in
compensation expense for the three-month periods ended March
31, 2002 and 2001, were $753 and $496, respectively, relating
to restricted shares and options held by employees.
C. In connection with the sale of a property during the
three-month period ended March 31, 2001, the Company received
a note receivable of $700 in partial consideration for the
sale.
D. During the three-month period ended March 31, 2001, the
Company purchased an equity interest in an affiliate, W. P.
Carey International, LLC, in consideration for issuing a
promissory note of $1,000.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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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/Accounting Policies:
The accompanying unaudited condensed consolidated financial statements of W. P.
Carey & Co. LLC ("the Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant inter-entity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
As more fully described in Note 8, effective January 1, 2002, the Company no
longer amortizes goodwill and indefinite-lived assets.
Certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Note 2. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
periods ended March 31, 2002 and 2001 were calculated as follows:
Three Months Ended March 31,
-------------------------------
2002 2001
----------- -----------
Net income $ 13,729 $ 12,639
=========== ===========
Weighted average shares - basic 35,289,369 34,268,978
Effect of dilutive securities: Stock options and warrants 650,616 315,185
----------- -----------
Weighted average shares - diluted 35,939,985 34,584,163
=========== ===========
Basic earnings per share $ .39 $ .37
=========== ===========
Diluted earnings per share $ .38 $ .37
=========== ===========
Note 3. Transactions with Related Parties:
The Company earns fees as the Advisor to the five real estate investment trusts
("REITs"), Corporate Property Associates 10 Incorporated ("CPA(R):10"), 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"). CPA(R):10 was merged into CIP(R) as of May
1, 2002. Under the advisory agreements with the CPA(R) REITs, the Company
performs services related to the day-to-day management of the CPA(R) REITs and
transaction-related services. In addition, the Company's broker-dealer
subsidiary earns fees in connection with the "best efforts" public offering of
CPA(R):15. The Company earns an asset management fee of 1/2 of 1% per annum of
Average Invested Assets, as defined in the Agreements, for each CPA(R) REIT and,
based upon certain performance criteria for each CPA(R) REIT, may be entitled to
receive a performance fee of 1/2 of 1% of Average Invested Assets. The Company
is reimbursed for the cost of personnel provided for the administration of the
CPA(R) REITs. For the three-month periods ended March 31, 2002 and 2001, asset
based fees and reimbursements earned were $7,734 and $5,354, respectively, and
transaction fees earned were $5,751 and $2,189, respectively, in connection with
structuring and negotiating real estate acquisitions and mortgage financing for
the CPA(R) REITs.
In connection with the acquisition of the majority interests in the CPA(R)
partnerships on January 1, 1998, a CPA(R) partnership had not achieved the
specified cumulative return as of the acquisition date. The subordinated
preferred return was payable to the former corporate general partner if the
Company achieved a closing price equal to or in excess of $23.11 for five
consecutive trading days. On December 31, 2001, the closing price criterion was
met, and in January 2002 the $1,423 subordinated preferred return was paid. The
subordinated preferred return was included in due to affiliates as of December
31, 2001 in the accompanying condensed consolidated financial statements.
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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 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, 2002 and 2001 are as
follows:
2002 2001
-------- --------
Per Statements of Income:
Rental income $ 12,833 $ 11,826
Interest income from direct financing leases 7,046 8,189
Adjustment:
Share of leasing revenues applicable to minority interests (181) (113)
Share of leasing revenues from equity investments 1,715 1,703
-------- --------
$ 21,413 $ 21,605
======== ========
For the three months ended March 31, 2002 and 2001, the Company earned its net
leasing revenues (i.e., rental income and interest income from direct financing
leases) from more than 90 lessees. A summary of net leasing revenues is as
follows:
2002 % 2001 %
------- ------- ------- -------
Dr Pepper Bottling Company of Texas $ 1,097 5% $ 1,080 5%
Detroit Diesel Corporation 1,039 5 991 5
Gibson Greetings, Inc., a wholly-owned subsidiary of American
Greetings, Inc. 1,033 5 1,023 5
Federal Express Corporation (a) 714 3 643 3
Bouygues Telecom, S.A 677 3 235 1
Orbital Sciences Corporation 664 3 664 3
Livho, Inc. 642 3 717 3
Quebecor Printing, Inc. 640 3 640 3
America West Holdings Corp. 635 3 635 3
Furon Company 620 3 604 3
AutoZone, Inc. 554 3 584 3
The Gap, Inc. 551 3 551 3
Sybron International Corporation 541 3 541 3
Checkfree Holdings Corporation Inc. (a) 527 2 522 2
Lockheed Martin Corporation 489 2 537 2
Unisource Worldwide, Inc. 433 2 434 2
AP Parts International, Inc. 425 2 404 2
Red Bank Distribution, Inc. 417 2 395 2
CSS Industries, Inc. 415 2 401 2
Peerless Chain Company 414 2 366 2
Information Resources, Inc. (a) 411 2 411 2
Sybron Dental Specialties Inc. 403 2 403 2
Brodart, Co. 380 2 380 2
Sprint Spectrum, L.P. 356 2 311 1
Thermadyne Holdings Corporation 353 2 631 3
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of
Lowe's Companies Inc. 317 2 272 1
AT&T Corporation 315 1 190 --
United States Postal Service 308 1 272 1
BellSouth Telecommunications, Inc. 306 1 306 1
Cendant Operations, Inc. 268 1 268 1
Anthony's Manufacturing Company, Inc. 255 1 236 1
Wal-Mart Stores, Inc. 238 1 223 1
United Stationers Supply Company 229 1 229 1
Pre Finish Metals Incorporated 223 1 223 1
United Space Alliance 221 1 126 --
Other (b) 4,303 20 5,157 25
------- ------- ------- -------
$21,413 100% $21,605 100%
======= ======= ======= =======
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W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(Dollars in thousands, except share and per share amounts)
(a) Represents the Company's proportionate share of lease revenue from its
equity investment.
(b) Includes proportionate share of lease revenues from the Company's
equity investments and net of proportionate share applicable to
minority interest owners.
Note 5. Equity Investments:
The Company owns 780,269 units of the operating partnership of MeriStar
Hospitality Corporation ("MeriStar"), a publicly-traded real estate investment
trust which primarily owns hotels, and which is being accounted for under the
equity method. As of March 31, 2002, the Company's carrying value was $10,642.
The Company has the right to convert its units in the operating partnership to
shares of common stock in MeriStar at any time on a one-for-one basis.
MeriStar's financial statements for the year ended December 31, 2001 reported
total assets of $3,009,860 and shareholders' equity of $1,002,563. For the
quarter ended March 31, 2002, MeriStar reported revenues of $256,664 and a net
loss of $9,943.
The Company owns equity interests in two limited partnerships and two limited
liability companies that each own real estate net leased to a single tenant,
with the remaining interests owned by affiliates. The Company also owns
interests in the five CPA(R) REITs and a 10% interest in W. P. Carey
International LLC, an investment banking firm which structures net lease
transactions outside of the United States. The Company's interests in the CPA(R)
REITs are accounted for under the equity method due to the Company's ability to
exercise significant influence as the Advisor to the CPA(R) REITs. The CPA(R)
REITs are publicly registered and file financial statements with the United
States Securities and Exchange Commission. As of March 31, 2002, the Company
owns 20,000 CPA(R):10 and CPA(R):15 shares, 337,519 CIP(R) shares, 417,034
CPA(R):12 shares and 615,260 CPA(R):14 shares. In May 2002, CPA(R):10 and CIP(R)
merged, and in connection with the merger the Company's 20,000 shares of
CPA(R):10 were exchanged for 16,890 shares of CIP(R).
Combined financial information of the affiliated equity investees is summarized
as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Assets (primarily real estate) $2,355,239 $1,794,229
Liabilities (primarily mortgage notes payable) 1,127,215 804,383
Partners' capital/Shareholders' equity 1,228,024 989,846
Three Months Ended March 31,
---------------------------------
2002 2001
------- -------
Revenues (primarily rental revenue) $57,457 $47,853
Expenses (primarily interest and depreciation) 39,215 30,050
------- -------
Net income $18,242 $17,803
======= =======
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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 - real estate and the net lease
management operations of affiliates. The two segments are summarized as follows:
Three Months ended March 31, Management Real Estate Other(1) Total Company
- ---------------------------- ---------- ----------- -------- -------------
Revenues:
2002 $ 13,513 $ 20,702 $ 1,291 $ 35,506
2001 7,642 22,870 1,385 31,897
Operating, interest, depreciation and amortization expenses
(excluding provision for income taxes):
2002 $ 8,731 $ 10,368 $ 1,230 $ 20,329
2001 8,299 11,298 1,194 20,791
Income from equity investments:
2002 $ 23 $ 164 -- $ 187
2001 38 1,414 -- 1,452
Net operating income(2)(3):
2002 $ 4,805 $ 10,498 $ 61 $ 15,364
2001 (619) 12,986 191 12,558
Long-lived assets:
March 31, 2002 $ 64,875 $ 720,015 $ 5,913 $ 790,803
December 31, 2001 64,286 721,895 5,990 792,171
Total assets:
March 31, 2002 $ 139,176 $ 751,156 $ 7,747 $ 898,079
December 31, 2001 132,596 775,290 7,997 915,883
(1) Primarily consists of the Company's other business operations.
(2) Management net operating income includes charges for
amortization of intangibles of $1,826 for the three-month
period ended March 31, 2002 and amortization of intangibles
and goodwill of $3,163 for the three-month period ended March
31, 2001.
(3) Net operating income excludes gains and losses on sales,
provision for income taxes, minority interest and
extraordinary items.
Note 7. Gain on Sale of Real Estate Interests:
During the three-month period ended March 31, 2002, the Company sold three
properties in Urbana, Illinois; Maumelle, Arkansas and Burnsville, Minnesota for
$8,932 and recognized a net gain on sales of $1,149. The Urbana and Burnsville
properties were vacant prior to their sale. The properties were classified as
held for sale in the accompanying consolidated balance sheet as of December 31,
2001.
During the three-month period ended March 31, 2001, the Company sold seven
properties and an equity investment in a real estate partnership for cash of
$7,871 and a note receivable of $700, and recognized a net gain on sales of
$217.
Note 8. Goodwill and Intangible Assets:
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangibles," which was adopted by the Company as of January 1, 2002.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition and the accounting for asset
acquisitions. SFAS No. 142 provides that goodwill and indefinite-lived
intangible assets no longer be amortized and must be tested for impairment at
least annually. Intangible assets acquired and liabilities
- 10 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(Dollars in thousands, except share and per share amounts)
assumed in business combinations are only amortized if such assets and
liabilities are capable of being separated or divided and sold, transferred,
licensed, rented or exchanged or arise from contractual or legal rights
(including leases), and are amortized over their useful lives.
The Company tests goodwill for impairment at least annually using a two-step
process. To identify any impairments, the Company first compares the estimated
fair value of the reporting unit (management services segment) with its carrying
amount, including goodwill. The Company calculates the estimated fair value of
the management services segment by applying a multiple, based on comparable
companies, to earnings. If the fair value of the management services segment
exceeds its carrying amount, goodwill is considered not impaired. If the
carrying amount of the management services unit exceeds its estimated fair
value, then the second step is performed to measure the amount of impairment
loss.
For the second step, the Company would compare the implied fair value of the
goodwill with its carrying amount and record an impairment charge for the excess
of the carrying amount over the fair value. The implied fair value of the
goodwill is determined by allocating the estimated fair value of the management
services segment to its assets and liabilities. The excess of the estimated fair
value of the management services segment over the amounts assigned to its assets
and liabilities is the implied fair value of the goodwill. In connection with
the adoption of SFAS No. 142 on January 1, 2002, the Company performed its
annual test for impairment of its management services segment, the reportable
unit of measurement, and concluded that the goodwill is not impaired.
With the acquisition of real estate management operations in 2000, the Company
allocated a portion of the purchase price to goodwill and other identifiable
intangible assets. In adopting SFAS No. 142, the Company discontinued its
amortization of existing goodwill and indefinite-lived assets.
Goodwill and other intangible assets as of March 31, 2002 are summarized as
follows:
Gross Carrying Amount Accumulated Amortization
--------------------- ------------------------
Amortized intangible assets:
Management contracts $59,135 $(13,090)
======= ========
Unamortized goodwill and indefinite-lived intangible assets:
Goodwill $40,964
Trade name 3,975
-------
Total $44,939
=======
Included in goodwill is $3,389 which prior to January 1, 2002 was recorded as
workforce. Trade name had previously been amortized using a ten-year life;
however, upon adoption of SFAS No. 142, trade name was determined to have an
indefinite useful life because it is expected to generate cash flows
indefinitely.
A summary of the effect of amortization of goodwill and intangible assets on
reported earnings for the periods ended March 31, 2002 and 2001 is as follows:
Three Months Ended March 31,
----------------------------
2002 2001
------- -------
Goodwill amortization -- $ 1,219
Trade name amortization -- 118
Management contracts amortization $ 1,826 1,826
Net income 13,729 12,639
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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,
----------------------------
2002 2001
---------- ----------
Reported net income $ 13,729 $ 12,639
Add back: Goodwill amortization -- 1,219
Trade name amortization -- 118
---------- ----------
Adjusted net income $ 13,729 $ 13,976
========== ==========
Basic earnings per share:
Reported net income $ .39 $ .37
Add back: Goodwill amortization -- .04
Trade name amortization -- --
---------- ----------
Adjusted basic earnings per share $ .39 $ .41
========== ==========
Diluted earnings per share:
Reported net income $ .38 $ .37
Add back: Goodwill amortization -- .04
Trade name amortization -- --
---------- ----------
Adjusted diluted earnings per share $ .38 $ .41
========== ==========
Amortization of intangibles for the next five years is estimated to be $7,280 in
2002; $6,686 in 2003 and 2004; $6,596 in 2005 and $4,519 in 2006.
Note 9. Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations be accounted for under the
purchase method, establishes specific criteria for the recognition of intangible
assets separately from goodwill and requires that unallocated negative goodwill
be written off immediately as an extraordinary gain. Use of the
pooling-of-interests method for business combinations is no longer permitted.
The adoption of SFAS No. 141 did not have a material effect on the Company's
financial statements. The effect of SFAS No. 142 is described in Note 8.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on the Company's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the Company's commitment to a plan of disposition after
the date it is initially applied (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, the Company will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
- 12 -
W. P. CAREY & CO. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(Dollars in thousands, except share and per share amounts)
Note 10. Property in Los Angeles, California:
In 1999, subsequent to the termination of a lease, the Company began to consider
alternatives for redeveloping and redirecting the use of its property in Los
Angeles, California for use by a different type of lessee that would allow the
Company to create additional value with respect to the property. While
considering various alternatives, the Company was approached by the Los Angeles
Unified School District ("LAUSD"), which was interested in acquiring the
property, on which it would construct a complete working public high school. In
January 2002, the Company entered into a purchase and sales agreement with the
LAUSD for $24,000. The sale is subject to completion of LAUSD's conducting
certain due diligence, environmental approvals and the approval of the LAUSD
Board of Education. If the sale has not been completed by June 30, 2002, the
LAUSD has the right to extend the commitment by paying monthly extension fees.
LAUSD may also exercise a legal right to acquire the property through
condemnation proceedings.
To expedite the LAUSD's pre-development process, the Company and the LAUSD
entered into various agreements for the Company to provide and monitor
professional, environmental and management services in connection with the
anticipated development of the property. Under the agreements, which
collectively run through May 31, 2002 the Company is receiving monthly
management and administrative fees. In addition, under the agreements, the LAUSD
has agreed to reimburse the Company for costs that were incurred in the
redevelopment of the property prior to entering into the purchase and sales
agreement. Such reimbursements are being applied to the carrying value of the
property. In April 2002, the Company received $2,245 in fees and reimbursements.
Fees for services performed to date have not been recorded as revenue as the
fees associated with the services are subject to certain contingencies and will
only be recorded as fees after the contingencies are resolved. The carrying
value of the property of $14,124 is included in assets held for sale in the
accompanying condensed consolidated financial statements as of March 31, 2002.
The Company and the LAUSD are currently negotiating a development agreement
under which the Company would be engaged to oversee the construction of the high
school. The Company would receive certain fees in accordance with the agreement.
Under the proposed agreement, the Company would receive a stated development fee
and be eligible for incentive fees if certain cost savings and target dates for
completion are met. There is no assurance that the Company and the LAUSD will
enter into the development agreement even if the sale of the property is
completed.
- 13 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except share and per share amounts)
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto as of March 31, 2002 of W.
P. Carey & Co. LLC and its subsidiaries ("WPC") included in this quarterly
report and WPC's Annual Report on Form 10-K for the year ended December 31,
2001. This quarterly report contains forward looking statements. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievement of WPC to be materially different
from the results of operations or plans expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by WPC that the results or conditions described in such
statements or the objectives and plans of WPC will be achieved. Item 1 of the
Annual Report on Form 10K for the year ended December 31, 2001 provides a
description of WPC's business objectives, strategies and risk factors which
could affect future operating results.
Certain accounting policies are critical to the understanding of WPC's financial
condition and results of operations. Management believes that an understanding
of financial condition and results of operations requires an understanding of
accounting policies relating to the use of estimates and revenue recognition.
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, WPC must assess its ability to collect rent and
other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because WPC's real estate operations have a limited number
of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods.
WPC also uses estimates and judgments when evaluating whether long-lived assets
are impaired. When events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, Management performs projections of
undiscounted cash flows, and if such cash flows are insufficient, the assets are
adjusted (i.e., written down) to their estimated fair value. An analysis of
whether a real estate asset has been impaired requires Management to make its
best estimate of market rents and residual values. In its evaluations, WPC
obtains market information from outside sources; however, such information
requires Management to determine whether the information received is appropriate
to the circumstances. Because most of WPC's properties are leased to one tenant,
WPC is more likely to incur significant writedowns when circumstances change
because of the possibility that a property will be vacated in its entirety and,
therefore, it is different than the risks related to leasing and managing
multi-tenant properties. Events or changes in circumstances can result in
further noncash writedowns and impact the gain or loss ultimately realized upon
sale of the assets.
In connection with the net lease real estate asset management business, WPC
earns transaction and asset-based fees. Transaction fees are primarily earned in
connection with investment banking services provided in connection with
structuring acquisitions, refinancing and dispositions on behalf of the
affiliated real estate investment trusts. Transaction fees are earned upon
consummation of a transaction, that is, when a purchase has been completed by
the affiliate. Completion of a transaction includes determining that the
purchaser and seller are bound by a contract and all substantive conditions of
closing have been performed. When these conditions are met, acquisition-based
services have been completed and the fees are recognized.
Asset-based management services are earned when performed. A portion of the fees
are subject to subordination provisions pursuant to the Advisory Agreements and
are based on specific performance criteria. In connection with determining
whether management and performance fees are recorded as revenue, Management
performs analyses on a quarterly basis to measure whether subordination
provisions have been met. Revenue is only recognized when the specific
performance criteria are achieved.
WPC acquired the business operations of Carey Management in 2000, and accounted
for the acquisition as a purchase. The excess of the purchase price over the
fair value of the net assets acquired was recorded as goodwill. Commencing in
2002,WPC tests goodwill for impairment at least annually using a two-step
process. To identify any impairments, WPC first compares the estimated fair
value of the reporting unit (management services segment) with
- 14 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
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 he management services segment
exceeds its carrying amount, goodwill is considered not impaired. If the
carrying amount of the management services unit exceeds its estimated fair
value, then the second step is performed to measure the amount of impairment
loss.
For the second step, WPC would compare the implied fair value of the goodwill
with its carrying amount and record an impairment charge for the excess of the
carrying amount over the fair value. The implied fair value of the goodwill is
determined by allocating the estimated fair value of the management services
segment to its assets and liabilities. The excess of the estimated fair value of
the management services segment over the amounts assigned to its assets and
liabilities is the implied fair value of the goodwill. In connection with the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangibles" on January 1, 2002, WPC performed its annual
test for impairment of its management services segment, the reportable unit of
measurement, and concluded that the goodwill is not impaired.
WPC recognizes rental income from sales overrides when reported by lessees, that
is, after the level of sales requiring a rental payment is reached.
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 $13,729 and
$12,639 for the three-month periods ended March 31, 2002 and 2001, respectively.
The results are not fully comparable due to the adoption of Statement of
Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other Intangibles"
in 2002. SFAS No. 142 discontinued the amortization of goodwill and
indefinite-lived intangible assets and is not retroactively applicable to 2001.
Note 8 in the accompanying condensed consolidated financial statements shows the
impact of the adoption of SFAS No. 142 on net income for the comparable periods.
The increase in net income for the comparable three-month period was primarily
due to an increase in management income received from affiliates and, to a
lesser extent, a decrease in interest and amortization expenses and an increase
in gain on sale of real estate and equity investments. These were partially
offset by an increase in the provision for income taxes, decreases in other
income and income from equity investments and increases in property and general
and administrative expenses.
Net operating income for real estate operations (income before gains and losses,
income taxes, minority interest, and extraordinary items) decreased to $10,498
from $12,986 for the three-month periods ended March 31, 2002 and 2001,
respectively. The decrease in income for the comparable three-month period was
primarily due to a decrease in other income. Operating income also decreased due
to a decrease in income from equity investments and property expenses. This was
partially offset by a decrease in interest expense.
Other income primarily consists of non-rent related revenues from real estate
operations including, but not limited to, settlements of claims against former
lessees and lease termination payments. WPC receives settlements in the ordinary
course of business; however, the timing and amount of such settlements cannot
always be estimated. During the three-month period ended March 31, 2001, WPC
received a settlement of approximately $2,500 from New Valley Corporation in the
final settlement of a claim relating to termination of a lease in 1993 for WPC's
property in Moorestown, New Jersey.
The decrease in income from equity investments is primarily due to WPC's equity
investment in the operating partnership of MeriStar Hospitality Corporation as a
result of a decrease in MeriStar's earnings. MeriStar is a real
- 15 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
estate investment trust that owns 112 hotel properties throughout the United
States and Canada. MeriStar has been affected by the decline in travel,
including business travel, as a result of the after effects of September 11,
2001 and the current economic downturn. MeriStar's management anticipates that
its results will gradually improve in 2002. WPC recognized a loss of $327 on the
MeriStar equity investment in the three-month period ended March 31, 2002 as
compared with income of $866 from its investment in MeriStar in the three-month
period ended March 31, 2001.
The decrease in interest expense was primarily attributable to lower average
outstanding balances on WPC's $185,000 credit facility and a decrease in
interest rates during the comparable three-month periods. WPC's credit facility
is indexed to the London Inter-Bank Offered Rate ("LIBOR") and the LIBOR
benchmark rate has declined substantially since March 31, 2001. The average
outstanding balance on the credit facility decreased by $17,000 for the
comparable periods and the average interest rate decreased to 3.14% from 6.99%.
The increase in property expenses was due to an increase in real estate taxes
and an increase in the provision for uncollected rents. The increase in real
estate taxes was due to absorbing the property costs at properties that had been
leased to Red Bank Distribution, Inc. and Thermadyne Holdings Corp.
Lease revenues (rental income and interest income from direct financing leases)
decreased by $136 for the comparable three-month periods ending March 31, 2002
and 2001, and are expected to remain relatively stable for the remainder of
2002.
In December 2001, Thermadyne filed a petition of bankruptcy and subsequently
vacated the property in February 2002. Annual rents from Thermadyne were $2,525.
WPC has entered into an agreement-in-principle to re-lease a portion of the
space for approximately $817 to a tenant that currently occupies the space on a
month-to-month basis. WPC is also actively remarketing the remaining space.
In November 2001, WPC evicted Red Bank and entered into an
agreement-in-principle that effectively terminated the net lease because of Red
Bank's inability to meet its annual rent lease obligation of $1,579. WPC has
assumed control of the property and is managing a public warehousing operation
that occupies a portion of the building. The property has approximately 46
short-term tenants who collectively generate approximately $130 in monthly rents
and expense reimbursements. Management is evaluating several alternatives
including continuing to manage the operation, engaging a manager to operate the
property, seeking a single-tenant net lease or selling the property.
WPC is closely monitoring 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 together
represent 6% of lease revenues. America West, an air carrier, has obtained
government financing subsequent to September 11, 2001 and its financial
prospects are uncertain. Livho, the lessee of a Holiday Inn in Livonia,
Michigan, is affected by the cyclical nature of the automotive industry. The
financial condition of another lessee, Peerless Chain Company, has been
adversely affected by foreign competition, and it has not kept current on its
annual rent of $1,561. Peerless is currently paying only a portion of its rents
and has entered into discussions with WPC to restructure the lease, but WPC has
made no commitment. WPC has fully reserved for Peerless' unpaid rents.
In January 2002, The Gap, Inc. notified WPC that it would not renew its leases
which expire in February 2003 and contribute annual rent of $2,205. In addition,
Pillowtex, Inc. notified WPC in February 2002 that under its plan of
reorganization it would terminate its lease with annual rents of $691, and
vacated WPC's property in Salisbury, North Carolina in April. Both the Gap and
Pillowtex properties are warehouse/distribution properties and are being
actively remarketed. In February 2002, Lockheed Martin Corporation notified WPC
that they were requesting a six-month extension of their lease term, through
February 2003. The lease expiration date was originally scheduled for September
1, 2002. Lease revenues for the six-month extension period will total $262.
Annual rents have decreased by $458 as a result of selling three properties
during the three-month period ended March 31, 2002. In addition, as of March 31,
2002, three properties with annual lease revenues of $184 are classified as held
for sale in the accompanying condensed consolidated financial statements, based
on either a
- 16 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
contractual commitment to sell the properties or the expectation that the
properties will be sold within the next year. In April 2002, one of the
properties was sold.
Because of the long-term nature of WPC's net leases, inflation and changing
prices should not unfavorably affect revenues and net income or have an impact
on the continuing operations of WPC's properties. WPC's leases usually have rent
increase provisions based on the consumer price index and other similar indexes
and may have caps on such increases, or sales overrides, which should increase
operating revenues in the future. The moderate increases in the consumer price
index over the past several years will affect the rate of such future rent
increases.
In January 2002, WPC entered into a purchase and sales agreement with the Los
Angeles Unified School District ("LAUSD") for $24,000. The LAUSD wishes to
acquire the property for the purpose of constructing a complete working public
high school on the property. The sale is subject to completion of LAUSD's
conducting certain due diligence, environmental approvals and the approval of
the LAUSD Board of Education. If the sale has not been completed by June 30,
2002, the LAUSD will be required to pay monthly extension fees at an increasing
rate. The LAUSD may also elect to exercise its right of condemnation to acquire
the property.
Net operating income from WPC's management services operations for the
three-month period ended March 31, 2002 was $4,805 as compared with a loss of
$619 for the comparable three-month period ended March 31, 2001, an increase of
$5,424. Results include noncash charges for amortization of intangible assets of
$1,826 in 2002 and amortization of goodwill and intangible assets of $3,163 in
2001, respectively. Effective January 1, 2002, WPC no longer amortizes goodwill
as the result of applying a new accounting pronouncement. Excluding the charges
for amortization, operating income from management services would have been
$6,631 and $2,544, respectively, for the three-month periods ended March 31,
2002 and 2001.
Total revenues earned by the management services operations for the three-month
periods ended March 31, 2002 and 2001 were $13,513 and $7,642, respectively.
Management fee revenues were comprised of transaction fees of $5,751 and $2,189,
respectively, and asset-based fees and reimbursements of $7,734 and $5,354,
respectively, for the three-month periods ended March 31, 2002 and 2001.
Transaction fees included fees from structuring acquisition and refinancing
transactions on behalf of the CPA(R) REIT's. WPC and affiliates structured
approximately $117,000 of acquisitions for the three-month period ended March
31, 2002, which included one acquisition for a CPA(R) REIT of more than $75,000.
WPC structured total acquisitions of $41,000 for the three-month period ended
March 31, 2001.
As of April 30, 2002, Corporate Property Associates 14 Incorporated
("CPA(R):14"), which concluded a public offering in November 2001, had
approximately $95,182 of cash available for investment in real estate.
Additionally, a new CPA(R) REIT, Corporate Property Associates 15 Incorporated
("CPA(R):15"), is conducting a "best efforts" public offering and as of April
30, 2002 had raised more than $100,000 which it will use along with limited
recourse mortgage financing to invest in real estate. Management believes that
the CPA(R) REITs will benefit from several trends including the increasing use
of sale-leaseback transactions by corporations as an alternative source of
financing and individual investors seeking dividend-paying investments.
Management believes that CPA(R):15 has the potential to fully subscribe its
$400,000 "best efforts" offering. CPA(R):15 has entered into sales agreements
with two additional major broker-dealers. One of the broker-dealers, UBS Paine
Webber, is scheduled to start selling CPA(R):15 shares in May 2002.
The asset-based management income includes fees based on the value of CPA(R)
REIT real estate assets under management. A portion of the CPA(R) REIT
management fees is based on each CPA(R) REIT meeting specific performance
criteria (the "performance fee") and WPC earns this performance fee income only
when the performance criteria of each CPA(R) REIT are being achieved. Total
asset based fees for the three-month periods ended March 31, 2002 and 2001 were
$5,458 and $3,642, respectively. CPA(R):14 achieved its performance criterion in
2001 subsequent to the first quarter. The CPA(R):14 performance fee earned
during the three-month period ended March 31, 2002 was $1,208. The CPA(R):14
portfolio has grown substantially over the past twelve months. Had CPA(R):14's
performance criterion been achieved in the prior-year's three-month period, WPC
would have recognized
- 17 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
performance fees of $653. As the real estate asset base of CPA(R):14 continues
to increase and CPA(R):15 builds a diversified portfolio, the management and
performance fees are expected to continue to increase.
In April 2002, the shareholders of Corporate Property Associates 10 Incorporated
("CPA(R):10") and Carey Institutional Properties Incorporated ("CIP(R)") both
CPA(R) REITs, approved a merger agreement providing for the merger of CPA(R):10
into CIP(R). The merger, which was effective on May 1, 2002, will not result in
a change in assets under management, so that the asset-based fees earned by WPC
should be unchanged. As a result of the merger, WPC will receive fees which had
been deferred subject to subordination provisions in the CPA(R):10 Advisory
Agreement.
The increase in general and administrative costs was primarily a result of an
increase from personnel-related costs. The portion of personnel costs necessary
to administer the CPA(R) REITs is billed back to the REITs and is included in
management income. Such income increased by $564 from $1,711 to $2,275 for the
comparative three-month periods. The increase in personnel-related costs
included an increase of $257 from noncash charges relating to restricted shares
and options from WPC's share incentive plans.
Income tax expense for management services for the three-month period ended
March 31, 2002 increased by $2,662 over the three-month period ended March 31,
2001. Income tax expense increased because approximately 75% of management
revenues are earned by a taxable, wholly-owned subsidiary.
WPC is negotiating with the LAUSD to enter into a development agreement. If an
agreement is reached, WPC would oversee the construction of a school building at
the property. Although there is no assurance that an agreement will be reached,
it would provide WPC with the opportunity to expand its sources of management
services revenues and leverage its asset management expertise.
FINANCIAL CONDITION:
There has been no material change in WPC's financial condition since December
31, 2001. Management believes that WPC will generate sufficient cash from
operations and, if necessary, from the proceeds of limited recourse mortgage
loans, unsecured indebtedness and the issuance of additional equity securities
to meet its short-term and long-term liquidity needs. WPC assesses its ability
to obtain debt financing on an ongoing basis.
Cash flows from operations and distributions from equity investments for the
three-month period ended March 31, 2002 of $19,676 were sufficient to fund
dividends to shareholders of $14,830. Cash flows from operations are expected to
increase as a result of the expected growth of the management business segment.
Annual cash flow from operations should continue to fully fund distributions;
however, the coverage of distributions will fluctuate on a quarterly basis due
to the timing of certain compensation costs that are paid in the second quarter
and the timing of transaction-related activity. In January 2002, WPC received
its first installment of deferred acquisition fees of $916 in connection with
structuring transactions on behalf of the CPA(R) REITs.
Investing activities included using $1,569 for purchases of real estate and
additional capital expenditures, including $1,101 related to the redevelopments
of the former Copeland Beverage Group property in Los Angeles and a property in
Broomfield, Colorado, $413 for the final funding of the commitment at the AT&T
property, which was completed in November 2001 and $55 to fund other
improvements. WPC also received $9,026 in connection with the sales of
properties and investments. WPC received proceeds of $9,366 from funds that were
being held in an escrow account from the July 2001 sale of its property in
Arkansas leased to Duff-Norton Company, Inc. WPC had placed the proceeds from
the sale in an escrow account for the purpose of entering into a Section 1031
noncash exchange, which, under the Internal Revenue Code, would allow WPC to
acquire like-kind property, and defer a taxable gain until the new property is
sold, if certain conditions were met. The funds were transferred to WPC in
January 2002 as the proposed exchange was not completed. Management continues to
evaluate the real estate portfolio and is actively evaluating opportunities to
sell smaller properties, as such properties require more intensive
asset-management services than larger single-tenant net lease properties. In
January 2002, WPC paid an installment of deferred acquisition fees for $524
relating to 1998 and 1999 property acquisitions to WPC's former management
- 18 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
company. Deferred acquisition fees are payable over a period of no less than
eight years. The remaining obligation is $2,758.
In addition to meeting its commitment to pay dividends to shareholders, WPC's
financing activities for the three-month period ended March 31, 2002 included
paying down its outstanding balance of its credit facility by $14,000, and
making scheduled principal payment installments of $1,920 on existing mortgages.
WPC uses limited recourse mortgages as a substantial portion of its long-term
financing because the cost of this financing is attractive and the exposure of
its assets is limited to the collateral designated for each loan.
WPC received proceeds of $2,223 from the issuance of shares primarily through
WPC's dividend reinvestment plan, stock purchase plan, and the exercise of
options by employees. WPC issued additional shares pursuant to its merger
agreement for the management services operations (500,000 shares valued at
$10,440 were issued during the three-month period ended March 31, 2002 based on
meeting performance criteria as of December 31, 2001). In addition, in
connection with the acquisition of the majority interests in the CPA(R)
partnerships on January 1, 1998 a CPA(R) partnership had not yet achieved the
specified cumulative return as of the acquisition date. The subordinated
preferred return was payable currently only if WPC achieved a closing price
equal to or in excess of $23.11 for five consecutive trading days. On December
31, 2001, the closing price criterion was met, and the $1,423 subordinated
preferred return was paid in January of 2002.
In March 2001, WPC entered into a revolving credit agreement for a $185,000 line
of credit which renewed and extended its original revolving unsecured line of
credit. The credit agreement has a three-year term through March 2004. WPC has a
one-time right to increase the commitment to up to $225,000. Borrowings on the
credit facility were $81,000 as of March 31, 2002. As of May 10, 2002, the
borrowing had increased to $102,000. Of this increase, $12,953 is being used to
pay off $12,580 of outstanding mortgages debt on the Alpena and Petoskey
properties. Other properties were contributed as additional collateral for the
Alpena and Petoskey loans. When the loans are retired, WPC will have greater
flexibility in its ability to manage the properties. The payoff of the mortgages
will reduce annual debt service by $1,600. The revolving credit agreement has
financial covenants that require WPC to maintain a minimum equity value and to
meet or exceed certain operating and coverage ratios. As advances on the credit
facility are not restricted, WPC believes that the remaining capacity on the
credit line will allow the Company to meet all its liquidity needs on a
short-term basis and that renewing the facility after the current term is
likely.
WPC expects to meet its capital requirements to fund future property
acquisitions, construction costs on build-to-suit transactions, capital
expenditures on existing properties, scheduled debt maturities through long-term
limited recourse mortgages and unsecured indebtedness and the possible issuance
of additional equity securities. Commitments for capital expenditures on the
Livonia, Alpena and Petoskey, Michigan hotels are currently estimated to be
approximately $728. Other than its limited mortgage debt and the credit line,
WPC has no other significant commitments. WPC has guaranteed $8,355 loans made
to officers which are collateralized by shares of WPC owned by the officers and
held by WPC. These shares were issued in connection with equity incentive plans
and the acquisition of the management operations.
A summary of WPC's obligations under contractual arrangements is as follows:
(in thousands) Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable $195,981 $ 6,426 $ 11,204 $ 28,414 $ 9,428 $ 27,088 $113,421
Unsecured note payable 81,000 81,000
Deferred acquisition fees 2,758 -- 524 524 524 524 662
Commitments:
Share of minimum rents payable
under office cost-sharing
agreement 2,147 332 484 484 484 363 --
-------- -------- -------- -------- -------- -------- --------
$281,886 $ 6,758 $ 93,212 $ 29,422 $ 10,436 $ 27,975 $114,083
======== ======== ======== ======== ======== ======== ========
- 19 -
W. P. CAREY & CO. LLC
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(In thousands, except share and per share amounts)
WPC from time to time may offer to sell its Listed Shares, Future Shares and
Warrants pursuant to a registration statement declared effective by the
Securities and Exchange Commission on February 25, 2002. The total amount of
these securities will have an initial aggregate offering price of up to $100,000
although WPC may increase this amount in the future. The shares and/or warrants
may be offered and sold to or through one or more underwriters, dealers and
agents, or directly to purchasers, on a continuous or delayed basis. The
prospectus included as part of the registration statement describes some of the
general terms that may apply to these securities and the general manner in which
they may be offered. The specific terms of any securities to be offered, the
specific manner in which they may be offered and the specific use of proceeds,
will be described in a supplement to this prospectus.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and No. 142 "Goodwill and Other Intangibles," which
establish accounting and reporting standards for business combinations, certain
assets and liabilities acquired in business combinations and asset acquisitions.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method, establishes specific criteria
for the recognition of intangible assets separately from goodwill and requires
that unallocated negative goodwill be written off immediately as an
extraordinary gain. Use of the pooling-of-interests method for business
combinations is no longer permitted. The adoption of SFAS No. 141 did not have a
material effect on WPC's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition and the accounting for asset
acquisitions. SFAS No. 142 provides that goodwill and indefinite-lived
intangible assets will no longer be amortized but will be tested for impairment
at least annually. Intangible assets acquired and liabilities assumed in
business combinations will only be amortized if such assets or liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and will
be amortized over their useful lives. In connection with the adoption of SFAS
No. 142 on January 1, 2002, WPC performed its annual test for impairment of its
management services segment, the reportable unit for measurement, and concluded
that the carrying value of goodwill is not impaired.
With the acquisition of real estate management operations in 2000, WPC allocated
a portion of the purchase price to goodwill and other identifiable intangible
assets. In adopting SFAS No. 142, WPC discontinued amortization of existing
goodwill and certain intangible assets. During the year ended December 31, 2001,
WPC recorded annual amortization charges of $4,597 which beginning January 1,
2002 were no longer expensed under SFAS No. 142.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on WPC's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold must be presented as a discontinued operation for all
periods presented. The provisions of SFAS No.144 are effective for disposal
activities initiated by WPC's commitment to a plan of disposition after the date
of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, WPC will no longer classify gains and losses for the extinguishment of
debt as extraordinary items and will adjust comparative periods presented.
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W. P. CAREY & CO. LLC
PART II
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
$161,513 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, 2002 ranged from 3.025% to 6.44%.
The interest on the fixed rate debt as of March 31, 2002 ranged from 6.85% to
10%.
Advances from the line of credit bear interest at an annual rate of either (i)
the one, two, three or six-month LIBOR, plus a spread which ranges from 0.6% to
1.45% depending on leverage or corporate credit rating or (ii) the greater of
the bank's Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a
spread of up to .125% depending on WPC's leverage.
(In thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 5,612 $ 10,081 $ 27,041 $ 8,023 $ 25,504 $ 85,252 $161,513 $159,896
Weighted average
interest rate 7.83% 7.86% 8.06% 7.71% 7.44% 7.67%
Variable rate debt $ 814 $ 1,123 $ 82,373 $ 1,405 $ 1,584 $ 28,169 $115,468 $115,468
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2002, no matters were submitted to a
vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended March 31, 2002 the Company was not required to
file any reports on Form 8-K.
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W. P. CAREY & CO. LLC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. P. CAREY & CO. LLC
5/13/02 By: /s/ John J. Park
------- ----------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
5/13/02 By: /s/ Claude Fernandez
------- ----------------------------------
Date Claude Fernandez
Executive Vice President -
Financial Operations
(Principal Accounting Officer)
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