EXHIBIT 99.1 ITEM 6. SELECTED FINANCIAL DATA The following sets forth selected consolidated financial data for the Company as of and for each of the years in the five-year period ended December 31, 2002. The selected consolidated financial data for the Company should be read in conjunction with the Consolidated Financial Statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. ($000's, except per share data) 2002 2001 2000 1999 1998 --------- -------- -------- -------- --------- Total revenues $ 99,393 $ 81,482 $ 78,689 $ 75,881 $ 63,954 Operating expenses, including minority interest (70,677) (63,983) (60,153) (60,180) (47,873) Transactional expenses -- -- -- -- (559) Gain (loss) on sale of properties -- -- 2,959 5,127 (388) Income from continuing operations 28,716 17,499 21,495 20,828 15,134 Income from discontinued operations 1,879 563 457 519 603 Net income 30,595 18,062 21,952 21,347 15,737 Income from continuing operations per common share-basic 1.04 0.76 1.12 1.08 0.75 Income from continuing operations per common share-diluted 1.02 0.74 1.08 1.06 0.74 Income from discontinued operations - basic 0.07 0.03 0.03 0.03 0.04 Income from discontinued operations - diluted 0.07 0.03 0.02 0.02 0.04 Net income per common share-basic 1.11 0.79 1.15 1.11 0.79 Net income per common share-diluted 1.09 0.77 1.10 1.08 0.78 Cash dividends declared per common share 1.32 1.29 1.23 1.20 1.18 Net cash provided by operating activities 57,732 41,277 41,175 39,783 32,380 Net cash used in investing activities (106,030) (64,321) (38,549) (64,942) (111,080) Net cash provided by (used in) financing activities 46,532 32,115 (6,671) 22,912 86,144 Ratio of earnings to combined fixed charges and preferred dividends 1.81 1.41 1.55 1.57 1.49 Real estate assets, net 779,150 714,047 584,198 606,592 609,717 Investments in non-consolidated entities 54,261 48,764 40,836 11,523 -- Total assets 902,471 822,153 668,377 656,481 647,007 Mortgages and notes payable 491,517 455,771 387,326 372,254 354,281 Funds from operations(1) 61,818 47,126 46,316 40,652 35,141 Rent received below straight-line rent 2,426 2,755 2,804 2,054 2,411 The Company believes that the book value of its real estate assets, which reflects the historical cost of such real estate assets less accumulated depreciation, is not indicative of the current market value of its properties. Historical operating results are not necessarily indicative of future operating results. - -------- (1) The Company believes that Funds From Operations ("FFO") enhances an investor's understanding of the Company's financial condition, results of operations and cash flows. The Company believes that FFO is an appropriate, but limited, measure of the performance of an equity REIT, and that it can be one measure of a REIT's ability to make cash distributions. FFO is defined in the October 1999 "White Paper", issued by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss), computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company included in the calculation of FFO the dilutive effect of the deemed conversion of its outstanding exchangeable notes which were redeemed by the Company in 2001. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP. 1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company, which has elected to qualify as a real estate investment trust under the Internal Revenue Code of 1986, acquires and manages net leased commercial properties. The Company has operated as a REIT since October 1993. As of December 31, 2002, the Company owned or had interests in 103 real estate properties. During 2002, the Company purchased 9 properties, including non-consolidated investments, for $148.0 million. During 2002, the Company sold 5 properties (including a 77.3% interest in a property) and one building in the Palm Beach Gardens, Florida property for $20.8 million, which resulted in an aggregate gain of approximately $1.1 million. During 2001, the Company sold one property for $4.1 million which approximated book value. CRITICAL ACCOUNTING POLICIES The Company's accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting policies which are important to the portrayal of the Company's financial condition and results of operations and which require some of management's most difficult, subjective and complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which could change in a manner that would materially affect management's future estimate with respect to such matters. Accordingly, future reported financial conditions and results could differ materially from financial conditions and results reported based on management's current estimates. Revenue Recognition. The Company recognizes revenue in accordance with Statement of Financial Accounting Standards No. 13 "Accounting for Leases" (SFAS No.13). SFAS No.13 requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66 "Accounting for Sales of Real Estate." The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. Accounts Receivable. The Company continuously monitors collections from its tenants and would make a provision for estimated losses based upon historical experience and any specific tenant collection issues that the Company has identified. Real Estate. The Company evaluates the carrying value of all real estate held to determine if an impairment has occurred which would require the recognition of a loss. The evaluation includes reviewing anticipated cash flows of the property, based on current leases in place, coupled with an estimate of proceeds to be realized upon sale. However, estimating future sale proceeds is highly subjective and such estimates could differ materially from actual results. LIQUIDITY AND CAPITAL RESOURCES Since becoming a public company, the Company's principal source of capital for growth has been the public and private equity markets, selective secured indebtedness, its unsecured credit facility, issuance of OP Units and undistributed funds from operations. The Company's current $60.0 million variable rate unsecured revolving credit facility, which is scheduled to expire in March 2004, has made available funds to finance acquisitions and meet any short-term working capital requirements. As of December 31, 2002, $31.0 million was outstanding at an interest 2 rate of 3.20%. The Company pays an unused facility fee equal to 25 basis points if 50% or less of the facility is utilized and 15 basis points if greater than 50% of the facility is utilized. Since its formation in 1993, the Company has raised, through the issuance of common shares, preferred shares and OP Units, aggregate capital of approximately $234.5 million for the purposes of making acquisitions and retiring indebtedness. In addition, the Company has purchased $109.8 million in real estate through the direct issuance of its common shares and OP Units. During 2002, the Company completed a 2.7 million common share offering at $15.85 per share raising $40.5 million of net proceeds. The proceeds were used to repay debt and fund acquisitions. Dividends. In connection with its intention to continue to qualify as a REIT for Federal income tax purposes, the Company expects to continue paying regular dividends to its shareholders. These dividends are expected to be paid from operating cash flows and/or from other sources. Since cash used to pay dividends reduces amounts available for capital investments, the Company generally intends to maintain a conservative dividend payout ratio as a percentage of FFO, reserving such amounts as it considers necessary for the maintenance or expansion of properties in its portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Board of Trustees considers appropriate. Dividends paid to common shareholders increased to $35.8 million in 2002, compared to $25.0 million in 2001 and $20.8 million in 2000. The Company's dividend and distribution FFO payout ratio, on a per share basis, for 2002, 2001, and 2000 was 71.0%, 76.0% and 69.3% respectively. Although the Company receives the majority of its rental payments on a monthly basis, it intends to continue paying dividends quarterly. The Company's two largest tenants, as a percentage of revenue, pay their rent semi-annually (Kmart Corporation) and quarterly (Northwest Pipeline Corp.). Amounts accumulated in advance of each quarterly distribution are invested by the Company in short-term money market or other suitable instruments. Kmart, the Company's largest tenant based upon rental revenues, filed for Chapter 11 bankruptcy protection on January 22, 2002. Kmart leases a 1.7 million square foot distribution facility in Warren, Ohio. The Company acquired the property in 1998 by assuming a non-recourse mortgage of $42.2 million, issuing operating partnership units valued at $18.9 million and paying $2.8 million in cash. The Company has no retail properties leased to Kmart. The Kmart lease expires on September 30, 2007. Annual net rents are presently $9.4 million. Rents are paid semi-annually in arrears. The property is encumbered by a non-recourse first mortgage, bearing imputed interest at 7% per annum with an outstanding balance of $25.6 million at December 31, 2002. Annual debt service on this non-recourse mortgage, which fully amortizes by maturity on October 1, 2007, is $6.2 million. Accordingly, this property currently provides after debt service cash flow to the Company of $3.2 million. The property is a warehouse distribution facility utilized in Kmart's logistical operation. As of December 31, 2002 the Company had $7.3 million in accounts receivable from Kmart (including $2.0 million in straight-line rents and $2.6 million in pre-petition rent). Kmart is current in its rental obligation to the Company since filing for bankruptcy and the next rental payment is due April 1, 2003. The Company believes that cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, the Company anticipates that cash on hand, borrowings under its unsecured credit facility, issuance of equity and debt, as well as other alternatives, will provide the necessary capital required by the Company. Cash flows from operations as reported in the Consolidated Statements of Cash Flows increased to $57.7 million for 2002 from $41.3 million for 2001 and $41.2 million for 2000. Net cash used in investing activities totaled $106.0 million in 2002, $64.3 million in 2001 and $38.5 million in 2000. Cash used in investing activities related primarily to investments in real estate properties and joint ventures. Therefore, the fluctuation in investing activities relates primarily to the timing of investments and dispositions. In connection with the acquisition of the Net Partnerships, the Company acquired $3.8 million of cash in 2001. Net cash provided by (used in) financing activities totaled $46.5 million in 2002, $32.1 million in 2001 and $(6.7) million in 2000. Cash provided by (used in) financing activities during each year was 3 primarily attributable to proceeds from equity offerings, non-recourse mortgages and advances/repayments under the Company's credit facility coupled with dividend and distribution payments, debt service payments and the repurchase of the Company's common shares/operating partnership units. UPREIT Structure. The Company's UPREIT structure permits the Company to effect acquisitions by issuing to a seller of real estate, as a form of consideration, interests in partnerships controlled by the Company. All of such interests are redeemable at certain times for common shares on a one-for-one basis and all of such interests require the Company to pay certain distributions to the holders of such interests. The Company accounts for these interests in a manner similar to a minority interest holder. The number of common shares that will be outstanding in the future should be expected to increase, and minority interest expense should be expected to decrease as such partnership interests are redeemed for common shares. The following table provides certain information with respect to such partnership interests as of December 31, 2002 (assuming the Company's annual dividend rate remains at the current $1.34 per share). Total Current Redeemable Total Number Current Annualized Annualized for common shares: of Units Affiliate Units Per Unit Distribution Distribution ($000) - ------------------ ------------ --------------- --------------------- ------------------- At any time 3,499,108 1,401,159 $ 1.34 $ 4,689 At any time 1,254,152 120,374 1.08 1,354 At any time 114,059 52,144 1.12 128 January 2003 17,901 -- -- -- December 2003 1,341 -- 1.34 2 March 2004 43,734 -- 0.27 12 March 2004 19,510 -- -- -- November 2004 24,552 2,856 -- -- March 2005 29,384 -- -- -- January 2006 171,168 416 -- -- February 2006 28,230 1,743 -- -- May 2006 9,368 -- 0.29 3 November 2006 44,858 44,858 1.34 60 --------- --------- ------ ------- 5,257,365 1,623,550 $ 1.19 $ 6,248 ========= ========= ====== ======= Affiliate units, which are included in total units, represent OP Units held by two executive officers (including their affiliates) of the Company. FINANCING Revolving Credit Facility. The Company's $60.0 million unsecured credit facility, which expires March 2004, bears interest at 150-250 basis points over LIBOR depending on the amount of properties the Company owns free and clear of mortgage debt, and has an interest rate period of one, three, or six months, at the option of the Company. The credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants. As of December 31, 2002, $31.0 million was outstanding and $24.8 million was available to be drawn. The Company had six outstanding letters of credit aggregating $4.2 million which expire in 2003 ($0.3 million), 2004 ($0.6 million), 2005 ($2.5 million), 2007 ($0.4 million) and 2010 ($0.4 million). Debt Service Requirements. The Company's principal liquidity needs are the payment of interest and principal on outstanding indebtedness. As of December 31, 2002, a total of 66 of the Company's 87 consolidated properties were subject to outstanding mortgages which had an aggregate principal amount of $448.0 million. As of December 31, 2002 the weighted average interest rate on the Company's outstanding mortgages, including line of credit borrowings and other corporate debt, was approximately 6.95%. The scheduled principal amortization payments for the next five years are as follows: $17.4 million in 2003; $17.7 million in 2004; $16.1 million in 2005, $14.5 million in 2006 and $15.3 million in 2007. Approximate balloon payment amounts, having a weighted average interest rate of 6.74%, excluding line of credit borrowings and other corporate debt, due the next five years are as follows: $0 million in 2003; $14.4 million in 2004; $76.6 million in 2005, $0 in 2006 and $0 in 2007. The ability of 4 the Company to make such balloon payments will depend upon its ability to refinance the mortgage related thereto, sell the related property, have available amounts under its unsecured credit facility or access other capital. The ability of the Company to accomplish such goals will be affected by numerous economic factors affecting the real estate industry, including the availability and cost of mortgage debt at the time, the Company's equity in the mortgaged properties, the financial condition of the Company, the operating history of the mortgaged properties, the then current tax laws and the general national, regional and local economic conditions. Lease Obligations. Since the Company's tenants bear all or substantially all of the cost of property operations, maintenance and repairs, the Company does not anticipate significant needs for cash for these costs. For five of the properties, the Company has a level of property operating expense responsibility and a sixth obligates the Company to pay real estate taxes in 2003 and for the tenant to be responsible thereafter. The Company generally funds property expansions with additional secured borrowings, the repayment of which is funded out of rental increases under the leases covering the expanded properties. To the extent there is a vacancy in a property, the Company would be obligated for all operating expenses, including real estate taxes and insurance. The Company's tenants pay the rental obligations on ground leases either directly to the fee holder or to the Company as increased rent. The annual ground lease rental payment obligations for each of the next five years is $0.9 million. Origination Fees Payable. In connection with certain acquisitions, the Company assumed obligations ($2.2 million in principal plus accrued interest) which bear interest on the outstanding principal balances only at rates ranging from 12.3% to 19.0%. The scheduled annual payments for the next five years are as follows: $0.4 million in 2003; $0.4 million in 2004; $0.4 million in 2005; $0.7 million in 2006 and $0.9 million in 2007. As of December 31, 2002, $6.6 million is outstanding of which $3.4 million is due to two executive officers of the Company. Shares Repurchase. The Company's Board of Trustees has authorized the Company to repurchase, from time to time, up to 2.0 million common shares and operating partnership units depending on market conditions and other factors. As of December 31, 2002, the Company had repurchased approximately 1.4 million common shares and operating partnership units, at an average price of approximately $10.55 per common share/unit. No common shares or units were repurchased in 2002. RESULTS OF OPERATIONS ($000) Increase (Decrease) Selected Income Statement Data 2002 2001 2000 2002-2001 2001-2000 -------- -------- -------- ---------- ---------- Total revenues $ 99,393 $ 81,482 $ 78,689 $ 17,911 $ 2,793 Total expenses 65,112 59,522 54,315 5,590 5,207 Interest 33,523 29,623 29,266 3,900 357 Depreciation and amortization of real estate 21,211 17,722 17,160 3,489 562 General & administrative 5,733 4,932 4,891 801 41 Property operating 2,355 1,624 1,504 731 120 Debt satisfaction charges 397 3,983 -- (3,586) 3,983 Total income from discontinued operations 1,879 563 457 1,316 106 Net income 30,595 18,062 21,952 12,533 (3,890) Comparison of 2002 to 2001 Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. Of the increase in total revenues in 2002 of $17.9 million, $15.6 million is primarily attributable to rental revenue from properties purchased in 2001 (primarily the purchase of properties from Net 1 L.P. and Net 2 L.P. in November 2001) and owned in 2002 ($14.3 million) and properties purchased in 2002 ($2.9 million) offset by a reduction in rental revenue from a decrease in overall portfolio occupancy from 99.7% to 99.2% ($0.3 million) and the joint venturing of a single property in 2002 ($1.5 million). Of the remaining $2.3 million in revenue growth in 2002, $1.8 million was attributable to an increase in earnings from non-consolidated entities and $0.5 million was 5 attributable primarily to higher interest earned due to greater cash balances carried. The $3.9 million increase in interest expense due to the growth of the Company's portfolio has been partially offset by a reduction in the weighted average interest rate from 7.28% for the year ended December 31, 2001 to 6.95% for the year ended December 31, 2002 due to debt refinancings, scheduled principal amortization payments, lower variable interest rates and lower interest rates on new debt incurred by the Company. The Company's general and administrative expenses, which increased in absolute dollars due to the acquisition of properties from Net 1 L.P. and Net 2 L.P., decreased to 5.8% of revenue in 2002 compared with 6.1% in 2001. Property operating expenses increased due to the vacancy of one property in the third quarter of 2001, which resulted in the Company incurring property level operating expenses which normally are the responsibility of the tenant, two properties in which the Company has a level of operating expense responsibility and an estimate of expenses for the Kmart property. Debt satisfaction charges decreased $3.6 million due to the timing of debt retirements. Net income increased in 2002 due to the impact of items discussed above plus an increase of $1.3 million in income from discontinued operations, primarily gains on sale of properties. The Company's non-consolidated entities had aggregate net income of $14.1 million in 2002 compared with $10.2 million in 2001. The increase in net income is primarily attributable to an increase in rental revenue of $7.7 million in 2002 attributable to the acquisition of properties, the expansion of an existing property and the joint venturing of a single property in 2002. Advisory fee income increased by $0.3 million in 2002 due to the timing of transactions which generate acquisition fees. These revenue sources were partly offset by an increase in (i) interest expense of $2.5 million in 2002 due to partially funding third quarter 2002 and fourth quarter 2001 acquisitions with the use of non-recourse mortgage debt and the joint venturing of a single property in 2002, and (ii) depreciation expense of $1.5 million in 2002 due to more depreciable assets owned. The increase in net income in future periods will be closely tied to the level of acquisitions made by the Company. Without acquisitions, which in addition to generating rental revenue, generate acquisition, debt placement and asset management fees when such properties are acquired by joint venture or advisory programs, growth in net income is dependent on index adjusted rents (6 leases), percentage rents (2 leases), reduced interest expense on amortizing mortgages and by controlling variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, increased interest rates of variable debt ($78.4 million as of December 31, 2002 at a weighted average interest rate of 3.88%) and tenant monetary defaults. Effective January 1, 2003, the Company converted its non-voting interest in LRA to a 99% voting interest and accordingly LRA will be consolidated for financial reporting purposes instead of being treated under the equity method as it currently is. Had LRA been consolidated historically, general and administrative expenses as a percentage of revenue, excluding revenues related to discontinued operations, would have been 7.0%, 7.5%, and 7.7% for the years ended December 31, 2002, 2001, and 2000, respectively. Comparison of 2001 to 2000 Of the increase in total revenues in 2001 of $2.8 million, $1.5 million is attributable to increased earnings from non-consolidated entities established in 1999. The remaining revenue growth in 2001 was primarily attributable to increased rental revenues from the purchase of Net 1 L.P. and Net 2 L.P. in November 2001 ($1.3 million). The increase in interest expense due to the growth of the Company's portfolio has been partially offset by a reduction in the weighted average interest rate from 7.79% at December 31, 1999 to 7.28% at December 31, 2001 due to debt refinancings, repayments, lower variable interest rates and lower interest rates on new debt incurred by the Company. The Company's general and administrative expenses have remained constant in 2001 in absolute dollars and decreased to 6.1% of revenue in 2001 compared to 6.2% of revenue in 2000 due to the growth of the Company's portfolio relative to these expenses. The increase in property operating expenses in 2001 relates to costs incurred relating to two properties that became vacant in 2001, which resulted in the Company incurring property level operating expenses which normally are the responsibility of the tenant, and a third property in which the Company has a level of expense responsibility. Debt satisfaction charges increased $4.0 million due to the timing of debt retirements. Net income decreased in 2001 due to the impact of items discussed above offset by a $3.0 million reduction in gains on sales of properties. The Company's non-consolidated entities had aggregate net income of $10.2 million in 2001 and $4.8 million in 2000. The increase in net income is primarily attributable to an increase in rental income of $21.1 million in 2001 attributable to acquisition of properties and expansion of an existing property. Advisory fee income, which includes acquisition and asset management fees, decreased by $0.5 million 6 in 2001 due to the reduction in the amount of acquisitions made by LAC in 2001 compared to 2000 which was partially offset by acquisitions made by the private investment fund client in 2001. These revenue sources were partly offset by an increase in (i) interest expense of $9.0 million in 2001 due to increased acquisition leverage, (ii) depreciation expense of $4.0 million in 2001 due to more depreciable assets owned and (iii) property operating/general and administrative expenses of $2.2 million in 2001 due to an increase in the asset base and advisory accounts. FUNDS FROM OPERATIONS The Company believes that Funds From Operations ("FFO") enhances an investor's understanding of the Company's financial condition, results of operations and cash flows. The Company believes that FFO is an appropriate, but limited, measure of the performance of an equity REIT, and that it can be one measure of a REIT's ability to make cash distributions. FFO is defined in the October 1999 "White Paper", issued by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss), computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company included in the calculation of FFO the dilutive effect of the deemed conversion of its outstanding exchangeable notes, which were fully satisfied in 2001. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP. The following table reflects the calculation of the Company's FFO and cash flow activities for each of the years in the three year period ended December 31, 2002 ($000): 2002 2001 2000 ---------- ---------- ---------- Net income $ 30,595 $ 18,062 $ 21,952 Depreciation and amortization of real estate 21,480 18,312 17,513 Minority interests' share of net income 5,627 5,215 5,772 Gain on sale of properties (1,172) -- (2,959) Amortization of leasing commissions 677 769 503 Deemed conversion of notes payable -- 1,000 1,582 Joint venture adjustment-depreciation 4,611 3,768 1,953 --------- --------- --------- Funds From Operations $ 61,818 $ 47,126 $ 46,316 ========= ========= ========= Cash flows from operating activities $ 57,732 $ 41,277 $ 41,175 Cash flows used in investing activities (106,030) (64,321) (38,549) Cash flows from (used in) financing activities 46,532 32,115 (6,671) Previously reported Funds From Operations included an add back for extraordinary items of $345 in 2002 and $3,144 in 2001. The Company's dividend and distribution FFO payout ratio, on a per share basis, was 71.0%, 76.0% and 69.3% for the years ended December 31, 2002, 2001 and 2000 respectively. RECENTLY ISSUED ACCOUNTING STANDARDS The Company's adoption of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," required the Company to reclassify to discontinued operations for all periods presented the results of the property held for sale and all properties sold subsequent to January 1, 2002. In April 2002, the FASB issued SFAS No. 145 which rescinds SFAS No. 4 which required all gains and losses on extinguishment of debt to be classified as an extraordinary item. Accordingly, the extraordinary items previously recorded in 2002 and 2001 have been eliminated and the charges have been reflected in continuing operations. In July 2002, the FASB issued SFAS No. 146 which requires that exit or disposal costs be recorded when incurred and be measured at fair value. SFAS No. 146 is effective for an exit or disposal activity initiated after December 31, 2002. The Company does not expect that this statement will have any effect on the Company's consolidated results of operations or financial position. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that absorb the majority of another entity's expected losses, receive a majority of its expected residual returns, or both, as a result of holding variable interests, which are ownership, contractual, or other economic interests in an 7 entity, consolidate the variable interest entity. The consolidation requirements apply to all variable interest entities created after January 31, 2003 and all other existing entities beginning July 1, 2003. The Company has not determined the impact the adoption of FIN 46 will have on its consolidated results of operations or financial position. However, it is possible that the adoption of FIN 46 will require the Company to consolidate its Florence joint venture. Financial information for this joint venture is included in footnote 5 of the Company's 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," which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company believes that the adoption of this interpretation will not have a material effect to the Company's financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's exposure to market risk relates to its variable rate debt. As of December 31, 2002 and 2001 the Company's variable rate indebtedness represented 15.9% and 12.7%, respectively, of total mortgages and notes payable. During 2002 and 2001, this variable rate indebtedness had a weighted average interest rate of 4.12% and 6.56%, respectively. Had the weighted average interest rate been 100 basis points higher the Company's net income would have been reduced by $0.8 million and $0.3 million in 2002 and 2001, respectively. 8 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES INDEX Page ---- Independent Auditors' Report 10 Consolidated Balance Sheets as of December 31, 2002 and 2001 11 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 12 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 13 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 14 Notes to Consolidated Financial Statements 15-38 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation 39-41 9 INDEPENDENT AUDITORS' REPORT The Shareholders Lexington Corporate Properties Trust: We have audited the consolidated financial statements of Lexington Corporate Properties Trust and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lexington Corporate Properties Trust and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Notes 2 and 5 Lexington Corporate Properties Trust and subsidiaries adopted the provisions of Statement of Financial Accounting Standards No. 145 relating to all gains and losses on extinguishment of debt and effective January 1, 2002, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". /s/ KPMG LLP ------------------ New York, New York January 28, 2003, except as to note 19 which is as of March 15, 2003 and except as to notes 2 and 5 which are as of September 26, 2003. 10 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets ($000 except per share amounts) December 31, 2002 2001 --------- --------- ASSETS Real estate, at cost Buildings and building improvements $ 770,375 $ 702,494 Land and land estates 131,496 116,795 Land improvements 3,154 3,154 Fixtures and equipment 8,345 8,345 --------- --------- 913,370 830,788 Less: accumulated depreciation 134,220 116,741 --------- --------- 779,150 714,047 Investment in and advances to non-consolidated entities 54,261 48,764 Cash and cash equivalents 12,097 13,863 Deferred expenses (net of accumulated amortization of $6,269 in 2002 and $4,411 in 2001) 8,168 8,875 Rent receivable 23,650 19,026 Other assets, net 25,145 17,578 --------- --------- $ 902,471 $ 822,153 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Mortgages and notes payable $ 460,517 $ 445,771 Credit facility borrowings 31,000 10,000 Origination fees payable, including accrued interest 6,565 6,636 Accounts payable and other liabilities 8,003 5,489 Accrued interest payable 2,755 1,507 --------- --------- 508,840 469,403 Minority interests 56,846 57,859 --------- --------- 565,686 527,262 --------- --------- Commitments and contingencies (notes 7, 9 and 13) Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares. Class A Senior Cumulative Convertible Preferred, liquidation preference $25,000, 2,000,000 shares issued and outstanding in 2001 -- 24,369 --------- --------- Common shares, par value $0.0001 per share; 287,888 shares issued and outstanding, liquidation preference $3,886 3,809 3,809 --------- --------- Shareholders' equity: Common shares, par value $0.0001 per share, authorized 80,000,000 shares, 29,742,160 and 24,219,409 shares issued and outstanding in 2002 and 2001, respectively 3 2 Additional paid-in-capital 414,989 342,161 Deferred compensation, net (1,766) (1,641) Accumulated distributions in excess of net income (77,777) (71,836) --------- --------- 335,449 268,686 Less: notes receivable from officers/shareholders (2,473) (1,973) --------- --------- Total shareholders' equity 332,976 266,713 --------- --------- $ 902,471 $ 822,153 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 11 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Income ($000 except per share amounts) Years ended December 31, 2002 2001 2000 ----------- ----------- ----------- Revenues: Rental $ 92,666 $ 77,022 $ 75,508 Equity in earnings of non-consolidated entities 5,079 3,328 1,851 Interest and other 1,648 1,132 1,330 ----------- ----------- ----------- 99,393 81,482 78,689 ----------- ----------- ----------- Expenses: Interest expense 33,523 29,623 29,266 Debt satisfaction charges 397 3,983 -- Depreciation and amortization of real estate 21,211 17,722 17,160 Amortization of deferred expenses 1,893 1,638 1,494 General and administrative expenses 5,733 4,932 4,891 Property operating expenses 2,355 1,624 1,504 ----------- ----------- ----------- 65,112 59,522 54,315 ----------- ----------- ----------- Income from continuing operations before gain on sale of properties and minority interests 34,281 21,960 24,374 Gain on sale of properties -- -- 2,959 ----------- ----------- ----------- Income from continuing operations before minority interests 34,281 21,960 27,333 Minority interests 5,565 4,461 5,838 ----------- ----------- ----------- Income from continuing operations 28,716 17,499 21,495 ----------- ----------- ----------- Discontinued operations: Income from discontinued operations 823 563 457 Gains on sales of properties 1,056 -- -- ----------- ----------- ----------- Total income from discontinued operations 1,879 563 457 ----------- ----------- ----------- Net income $ 30,595 $ 18,062 $ 21,952 =========== =========== =========== Income per common share - basic: Income from continuing operations $ 1.04 $ 0.76 $ 1.12 Income from discontinued operations 0.07 0.03 0.03 ----------- ----------- ----------- Net income $ 1.11 $ 0.79 $ 1.15 =========== =========== =========== Weighted average common shares outstanding 27,026,789 19,522,323 16,900,039 =========== =========== =========== Income per common share - diluted: Income from continuing operations $ 1.02 $ 0.74 $ 1.08 Income from discontinued operations 0.07 0.03 0.02 ----------- ----------- ----------- Net income $ 1.09 $ 0.77 $ 1.10 =========== =========== =========== Weighted average diluted common shares outstanding 27,326,891 19,862,880 24,714,219 =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 12 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity ($000 except per share amounts) Years ended December 31, Accumulated Notes Additional Deferred Distributions Receivable Total Number of Paid-in Compensation, In Excess of Officers / Shareholders' Shares Amount Capital net Net Income Shareholders Equity ---------- ------ --------- ------------ ------------- ------------ ------------ Balance at December 31, 1999 16,905,285 $ 2 $ 240,339 $ (701) $ (60,852) $ (1,991) $ 176,797 Net income -- -- -- -- 21,952 -- 21,952 Dividends paid to common share- holders ($1.22 per share) -- -- -- -- (20,765) -- (20,765) Dividends paid to preferred share- holders ($1.281 per share) -- -- -- -- (2,562) -- (2,562) Common shares issued, net 353,494 -- 3,866 (664) -- -- 3,202 Amortization of deferred compensation -- 346 -- -- 346 Common shares repurchased and retired (395,385) -- (4,093) -- -- -- (4,093) Repayments on notes -- -- -- -- -- 8 8 ---------- ------ --------- ---------- --------- ---------- ---------- Balance at December 31, 2000 16,863,394 2 240,112 (1,019) (62,227) (1,983) 174,885 Net income -- -- -- 18,062 -- 18,062 Dividends paid to common share- holders ($1.27 per share) -- -- -- -- (25,004) -- (25,004) Dividends paid to preferred share- holders ($1.3335 per share) -- -- -- -- (2,667) -- (2,667) Common shares issued, net 7,368,015 -- 102,206 (1,181) -- -- 101,025 Amortization of deferred compensation -- -- -- 559 -- -- 559 Common shares repurchased and retired (12,000) -- (157) -- -- -- (157) Repayments on notes -- -- -- -- -- 10 10 ---------- ------ --------- ---------- --------- ---------- ---------- Balance at December 31, 2001 24,219,409 2 342,161 (1,641) (71,836) (1,973) 266,713 Net income -- -- -- -- 30,595 -- 30,595 Dividends paid to common share- holders ($1.32 per share) -- -- -- -- (35,843) -- (35,843) Dividends paid to preferred share- holders ($0.3465 per share) -- -- -- -- (693) -- (693) Conversion of preferred shares 2,000,000 -- 24,369 -- -- -- 24,369 Common shares issued, net 3,522,751 1 48,459 (860) -- (500) 47,100 Amortization of deferred compensation -- -- -- 735 -- -- 735 ---------- ------ --------- ---------- --------- ---------- ---------- Balance at December 31, 2002 29,742,160 $ 3 $ 414,989 $ (1,766) $ (77,777) $ (2,473) $ 332,976 ========== ====== ========= ========== ========= ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 13 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows ($000) Years ended December 31, 2002 2001 2000 ------------ ----------- ----------- Cash flows from operating activities: Net income $ 30,595 $ 18,062 $ 21,952 Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquisitions: Depreciation and amortization 23,375 19,952 19,010 Minority interests 5,708 4,534 6,015 Gain on sale of properties (1,056) -- (2,959) Straight-line rents (2,426) (2,755) (2,804) Other non-cash charges 1,016 1,508 714 Equity in earnings of non-consolidated entities (5,079) (3,328) (1,851) Distributions from non-consolidated entities 5,704 4,593 1,092 Increase (decrease) in accounts payable and other liabilities 539 (2,140) 310 Other adjustments, net (644) 851 (304) ------------ ----------- ----------- Net cash provided by operating activities 57,732 41,277 41,175 ------------ ----------- ----------- Cash flows from investing activities: Net proceeds from sale of properties 20,756 4,107 19,402 Acquisition of the Net Partnerships, net of debt assumed and $3,777 in cash -- (27,835) -- Investments in real estate (114,272) (19,363) (27,116) Investments in non-consolidated entities (5,539) (5,620) (26,247) Advances to non-consolidated entities (2,158) (4,195) (4,588) Investment in and advances to the Net Partnerships -- (10,979) -- Real estate deposits (4,817) (436) -- ------------ ----------- ----------- Net cash used in investing activities (106,030) (64,321) (38,549) ------------ ----------- ----------- Cash flows from financing activities: Proceeds of mortgages and notes payable 49,165 100,194 84,340 Change in credit facility borrowing, net 21,000 (31,821) (29,100) Dividends to common and preferred shareholders (36,536) (27,671) (23,327) Dividend reinvestment plan proceeds 4,870 2,507 1,391 Principal payments on debt, excluding normal amortization (10,049) (48,611) (15,066) Principal amortization payments (14,091) (12,354) (11,646) Origination fee amortization payments (372) (372) (372) Common shares issued, net of offering costs 41,595 61,021 11 Cash distributions to minority interests (6,304) (6,236) (6,323) Change in escrow deposits (1,396) (1,002) 1,596 Increase in deferred expenses (1,350) (3,203) (4,090) Common shares/partnership units repurchased -- (348) (4,093) Other -- 11 8 ------------ ----------- ----------- Net cash provided by (used in) financing activities 46,532 32,115 (6,671) ------------ ----------- ----------- Change in cash and cash equivalents (1,766) 9,071 (4,045) Cash and cash equivalents, beginning of year 13,863 4,792 8,837 ------------ ----------- ----------- Cash and cash equivalents, end of year $ 12,097 $ 13,863 $ 4,792 ============ =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 14 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (1) THE COMPANY Lexington Corporate Properties Trust (the "Company") is a self-managed and self-administered Maryland statutory real estate investment trust ("REIT") that acquires, owns, and manages a geographically diversified portfolio of net leased office, industrial and retail properties and provides investment advisory and asset management services to institutional investors in the net lease area. As of December 31, 2002 the Company owned or had interests in 103 properties in 30 states and Canada. The real properties owned by the Company are generally subject to triple net leases to corporate tenants, however four provide for operating expense stops, one is subject to a modified gross lease and one requires the Company to be responsible for real estate taxes in 2003 and for the tenant to be responsible thereafter. The Company's Board of Trustees authorized the Company to repurchase, from time to time, up to 2.0 million common shares and/or operating partnership units, depending on market conditions and other factors. As of December 31, 2002, the Company repurchased approximately 1.4 million common shares/partnership units at an average price of approximately $10.55 per common share/ partnership unit. No shares or units were repurchased in 2002. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation. The Company's consolidated financial statements are prepared on the accrual basis of accounting. The financial statements reflect the accounts of the Company and its controlled subsidiaries, including Lepercq Corporate Income Fund L.P. ("LCIF"), Lepercq Corporate Income Fund II L.P. ("LCIF II") and Net 3 Acquisition L.P. ("Net 3"). The Company is the sole general partner and majority limited partner of LCIF, LCIF II and Net 3. Real Estate. Real estate assets are stated at cost, less accumulated depreciation and amortization. If there is an event or change in circumstance that indicates that an impairment in the value of a property has occurred, the Company's policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of each such property over its remaining useful life, on an undiscounted basis, to the carrying amount of the property. If such carrying amounts are in excess of the estimated projected operating cash flows of the property, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. For acquisitions that are consummated subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards No. 141, ("SFAS No. 141") "Business Combinations," the fair value of the real estate acquired must be allocated among building, land, tenant improvements, the origination value of leases and the fair value (or negative value) of above or below market leases. The Company adopted the provisions of SFAS No.141 and determined that the purchase price to be allocated to origination value of leases and the fair value of above or below market leases were immaterial. Depreciation is determined by the straight-line method over the remaining estimated economic useful lives of the properties. The Company generally depreciates buildings and building improvements over periods not exceeding 40 years, land improvements over a 20-year period, and fixtures and equipment over a 12-year period. Only costs incurred to third parties in acquiring properties are capitalized. No internal costs (rents, salaries, overhead) are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations which extend the useful life of the properties are capitalized. Investments in non-consolidated entities. The Company accounts for its investments in less than 50% owned entities and Lexington Realty Advisors, Inc. ("LRA") under the equity method since it has influence over, but does not control such entities. Effective January 1, 2003 the Company 15 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) converted its non-voting interest in LRA to a 99% voting interest and accordingly, effective this date, LRA will be consolidated. Revenue. The Company recognizes revenue in accordance with SFAS No. 13. SFAS No. 13 requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rationale basis is more representative of the time pattern in which the use benefit is derived from the leased property. The Company's rent receivable primarily represents the amount of the excess of rental revenues recognized over the annual rents collectible under the leases. The Company recognizes percentage rent revenue when the cash is received from the tenant unless it is a fixed amount in which case the Company recognizes it ratably over the accounting period. Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66 "Accounting for Sales of Real Estate." The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. Deferred Expenses. Deferred expenses consist primarily of debt placement, mortgage loan and other loan fees, and are amortized using the straight-line method, which approximates the interest method, over the terms of the debt instruments. Tax Status. The Company has made an election to qualify, and believes it is operating so as to qualify, as a real estate investment trust under the Internal Revenue Code. A real estate investment trust is generally not subject to Federal income tax on that portion of its real estate investment trust taxable income which is distributed to its shareholders, provided that at least 90% of taxable income is distributed. As distributions have equaled or exceeded taxable income, no provision for Federal income taxes has been made. State and local income taxes, which are not significant, have been provided for those states and localities in which the Company operates and is subject to an income tax. LRA has elected to be treated as a taxable reit subsidiary. A summary of the average taxable nature of the Company's dividends for each of the years in the three year period ended December 31, 2002 is as follows: 2002 2001 2000 -------- -------- -------- Total dividends per share $ 1.32 $ 1.27 $ 1.22 ======== ======== ======== Ordinary income 77.89% 95.46% 87.78% Short-term capital gain 2.27 -- -- 20% rate gain 4.12 -- 8.48 25% rate gain 5.65 -- 3.74 Percent non-taxable as return of capital 10.07 4.54 -- -------- -------- -------- 100.00% 100.00% 100.00% ======== ======== ======== Earnings Per Share. Basic net income per share is computed by dividing net income reduced by preferred dividends by the weighted average number of common shares outstanding during the period. Diluted net income per share amounts are similarly computed but include the effect, when dilutive, of in-the-money common share options, preferred shares, operating partnership units and exchangeable redeemable secured notes. The Company's preferred shares are excluded from the December 31, 2002 and 2000 computations since they are anti-dilutive. The Company's preferred shares, operating partnership units and exchangeable redeemable secured notes are excluded from the 2001 computations since they are anti-dilutive. The Company's preferred shares were converted into common shares in April 2002 and the exchangeable redeemable secured notes were redeemed in July 2001. 16 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Cash and Cash Equivalents. The Company considers all highly liquid instruments with maturities of three months or less from the date of purchase to be cash equivalents. Use of Estimates. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these consolidated financial statements in conformity with generally accepted accounting principles. The most significant estimates made include the recoverability of accounts receivable (primarily related to straight-line rents), the useful lives of real estate and the allocation of purchase price to individual properties purchased in a portfolio. Actual results could differ from those estimates. Recently Issued Accounting Standards. SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" establishes a single accounting model for long-lived assets to be disposed of by sale and provides implementation guidance with respect to accounting for impairment of long-lived assets. Also, SFAS No. 144 requires that discontinued operations be measured at the lower of carrying amount or fair value less cost to sell, similar to the basis used for other long-lived assets. Additionally, future operating losses of discontinued operations are no longer recognized before they occur. Under SFAS No. 144, the properties sold by the Company to third parties are considered to be discontinued operations. However, properties contributed to entities in which the Company maintains an ownership interest are not considered to be discontinued operations under SFAS No. 144 due to the Company's continuing involvement with the property (See Note 5). In April 2002, the FASB issued SFAS No. 145 which rescinds SFAS No. 4 which required all gains and losses on extinguishment of debt to be classified as an extraordinary item. Accordingly, the extraordinary items previously recorded in 2002 and 2001 have been eliminated and the charges have been reflected in continuing operations. In July 2002, the FASB issued SFAS No. 146 which requires that exit or disposal costs be recorded when incurred and be measured at fair value. SFAS No. 146 is effective for an exit or disposal activity initiated after December 31, 2002. The Company does not expect that this statement will have any effect on the Company's consolidated results of operations or financial position. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that absorb the majority of another entity's expected losses, receive a majority of its expected residual returns, or both, as a result of holding variable interests, which are ownership, contractual, or other economic interests in an entity, consolidate the variable interest entity. The consolidation requirements apply to all variable interest entities created after January 31, 2003 and all other existing entities beginning July 1, 2003. The Company has not determined the impact the adoption of FIN 46 will have on its consolidated results of operations or financial position. However, it is possible that the adoption of FIN 46 will require the Company to consolidate its Florence joint venture. Financial information for this joint venture is included in Footnote 5. In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company believes that the adoption of this interpretation will not have a material effect to the Company's financial statements. 17 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Common Share Options. The Company has elected to adopt the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation," and accounts for its option plan under the recognition provisions of Accounting Principles Board Opinion No.25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized with regard to options granted in the consolidated statements of income. The per share weighted average fair value of options granted during 2002, 2001 and, 2000 were estimated to be $2.42, $2.00 and $2.02, respectively, using a Black-Scholes option pricing formula. The more significant assumptions underlying the determination of such fair values include: (i) a risk free interest rate of 3.32% in 2002 and 3.35% in 2001 and 5% in 2000; (ii) an expected life of five years; (iii) volatility factors of 15.11%, 15.79% and 19.20% for 2002, 2001 and 2000, respectively; and (iv) actual dividends paid. If stock based compensation cost had been recognized based upon the fair value at the date of grant for options awarded in 2002, 2001 and 2000 the Company's pro forma net income and pro forma net income per share would have been: 2002 2001 2000 ---- ---- ---- Net income, as reported $ 30,595 $ 18,062 $ 21,952 Pro forma net income $ 29,620 $ 16,653 $ 20,001 Net income per share, as reported Basic $ 1.11 $ 0.79 $ 1.15 Diluted $ 1.09 $ 0.77 $ 1.10 Pro forma net income per share Basic $ 1.07 $ 0.72 $ 1.03 Diluted $ 1.06 $ 0.70 $ 1.02 Reclassifications. Certain amounts included in prior years' financial statements have been reclassified to conform with the current year presentation. 18 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (3) EARNINGS PER SHARE The following is a reconciliation of numerators and denominators of the basic and diluted earnings per share computations for each of the years in the three year period ended December 31, 2002: 2002 2001 2000 ------------ ------------ ------------ BASIC Income from continuing operations $ 28,716 $ 17,499 $ 21,495 Less dividends attributable to preferred shares (693) (2,709) (2,562) ------------ ------------ ------------ Income attributed to common shareholders from continuing operations 28,023 14,790 18,933 Total income from discontinued operations 1,879 563 457 ------------ ------------ ------------ Net income attributed to common shareholders $ 29,902 $ 15,353 $ 19,390 ============ ============ ============ Weighted average number of common shares outstanding 27,026,789 19,522,323 16,900,039 ============ ============ ============ Income per common share - basic: Income from continuing operations $ 1.04 $ 0.76 $ 1.12 Income from discontinued operations 0.07 0.03 0.03 ------------ ------------ ------------ Net income $ 1.11 $ 0.79 $ 1.15 ============ ============ ============ DILUTED Income attributed to common shareholders from continuing operations $ 28,023 $ 14,790 $ 18,933 Add incremental income attributed to assumed conversion of dilutive securities -- -- 7,709 ------------ ------------ ------------ Income attributed to common shareholders from continuing operations 28,023 14,790 26,642 Income from discontinued operations 1,879 563 520 ------------ ------------ ------------ Net income attributed to common shareholders $ 29,902 $ 15,353 $ 27,162 ============ ============ ============ Weighted average number of shares used in calculation of basic earnings per share 27,026,789 19,522,323 16,900,039 Add incremental shares representing: Shares issuable upon exercise of employee stock options 300,102 340,557 166,806 Shares issuable upon conversion of dilutive securities -- -- 7,647,374 ------------ ------------ ------------ Weighted average number of shares used in calculation of diluted earnings per common share 27,326,891 19,862,880 24,714,219 ============ ============ ============ Income per common share - diluted: Income from continuing operations $ 1.02 $ 0.74 $ 1.08 Income from discontinued operations 0.07 0.03 0.02 ------------ ------------ ------------ Net income $ 1.09 $ 0.77 $ 1.10 ============ ============ ============ 19 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (4) INVESTMENTS IN REAL ESTATE During 2002 and 2001 the Company made the following acquisitions, excluding acquisitions made by non-consolidated entities: Net Rentable Date of Acquisition Base Rent Lease Square Acquisition Tenant Location Cost December 31, Expires Feet - ------------- ----------------------- ---------------- ------------ ------------ ------- --------- 2002 March 15 Apria Healthcare Group, Inc. Lake Forest, CA $ 16,970 $ 1,791 01-12 100,012 August 27 Quest Diagnostics, Inc. Valley Forge, PA 19,500 2,161 04-11 109,281 August 30 AdvancePCS, Inc. Knoxville, TN 8,100 822 05-13 59,748 September 26 Anda Pharmaceuticals, Inc. Groveport, OH 11,800 1,206 03-12 354,676 December 27 North American Van Lines Westmont, IL 24,825 2,516 11-15 269,715 December 30 Wells Fargo Home Mortgage Fort Mill, SC 17,933 1,868 01-13 169,083 -------- --------- --------- $ 99,128 $ 10,364 1,062,515 ======== ========= ========= 2001 March 30 Kraft Foods North, America, Inc. Winchester, VA $ 14,400 $ 1,515 06-11 344,700 November 28 Bull HN Information Phoenix, AZ 11,436 1,086 10-05 137,058 Systems, Inc. November 28 Hollywood Entertainment Wilsonville, OR 13,328 1,531 11-08 122,853 Corp. November 28 Nextel Communications of Hampton, VA 11,667 1,302 12-09 100,632 the Mid-Atlantic, Inc. November 28 The Tranzonic Companies Highland Heights, OH 6,318 762 02-09 119,641 November 28 Hewlett Packard Company San Diego, CA 8,700 888 01-10 65,755 November 28 Cox Communication, Inc. Tuscon, AZ 3,284 401 09-10 28,591 November 28 IKON Office Solutions Milford, CT 2,832 337 12-04 27,360 November 28 Associated Grocers of Ocala, FL 19,013 2,238 12-18 668,034 Florida, Inc. November 28 Corporate Express Office Henderson, NC 7,442 810 01-14 196,946 Products, Inc. November 28 Stone Container Corp- Columbia, SC 4,638 571 08-12 185,961 oration November 28 Johnson Controls, Inc. Plymouth, MI 7,663 809 12-06 134,160 November 28 The Tranzonic Companies Tempe, AZ 1,892 202 02-09 49,951 November 28 Ameritech Services, Inc. Columbus, OH 1,594 255 05-05 20,000 November 28 Sam's Real Estate Business Westland, MI 7,221 753 01-09 102,826 Trust November 28 Wal-Mart Stores, Inc. Gainesville, GA 2,631 328 01-09 89,199 November 28 Kohl's Department Stores, Eau Claire, WI 4,302 462 01-15 76,164 Inc. November 28 Wal-Mart Real Estate Jacksonville, AL 1,959 146 01-09 56,132 Business Trust November 28 Best Buy Co, Inc. Canton, OH 4,417 465 02-18 46,350 November 28 Best Buy Co, Inc. Spartanburg, SC 4,167 395 02-18 45,800 November 28 Bally's Health & Fitness Phoenix, AZ 5,627 808 06-08 36,556 Corp. November 28 Greyhound Lines Inc. Stockton, CA 1,296 193 12-09 17,000 November 28 Circuit City Stores, Inc. Lynchburg, VA 797 101 11-06 9,300 20 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Net Rentable Date of Acquisition Base Rent Lease Square Acquisition Tenant Location Cost December 31, Expires Feet - -------------- --------------------- ---------- ----------- ------------ -------- -------- 2001 November 28 Wal-Mart Stores, Inc. Sumter, SC 4,107 328 01-08 103,377 December 11 Owens Corning Hebron, OH 8,447 989 05-09 400,522 December 11 Owens Corning Hebron, OH 5,340 648 02-10 250,410 -------- --------- --------- $164,518 $ 18,323 3,435,278 ======== ========= ========= The Company sold four properties and one building in the Palm Beach Gardens, Florida property in 2002, one property in 2001 and three properties in 2000 for aggregate selling prices of $16,342, $4,107 and $19,600, respectively, which resulted in gains in 2002, 2001 and 2000 of $ 1,172, $0 and $2,959, respectively. In addition, the Company sold a 77.3% interest in a property (along with the related non-recourse mortgage) in Florence, South Carolina for net proceeds of $4,414 and deferred a $671 gain on sale since the purchasers can put their interests in the property to the Company for a six month period commencing January 2004 for $4,581. In addition, in 2001 and 2000 the Company contributed the Winchester, Virginia and Herndon, Virginia properties (along with non-recourse mortgage notes), respectively to Lexington Acquiport Company, LLC for capital contributions of $1,168 and $2,393, respectively. During 2002, the Company expanded its property in Lancaster, California net leased to Michaels Stores, Inc. The expansion, which cost $15,200, is leased to the tenant through September 2019 at annual rent of $1,808. In connection with the expansion, the initial lease term was also extended to September 2019. The Company has not presented pro forma information for 2002 because the acquisitions and dispositions are not significant individually or in the aggregate. The following unaudited pro forma operating information for the year ended December 31, 2001 has been prepared as if all Company acquisitions and dispositions (including non-consolidated entities) in 2001 had been consummated as of January 1, 2001. The information does not purport to be indicative of what the operating results of the Company would have been had the acquisitions and dispositions been consummated on January 1, 2001. Unaudited pro forma amounts are as follows: December 31, 2001 ----------------- Revenues $ 95,710 Net income $ 22,563 Net income per common share: Basic $ 0.92 Diluted $ 0.91 21 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (5) DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 established criteria beyond that previously specified in Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"), to determine when a long-lived assets is classified as held for sale, and it provides a single accounting model for the disposal of long-lived assets. SFAS 144 was effective beginning January 1, 2002. In accordance with SFAS 144, the Company now reports as discontinued operations assets held for sale (as defined by SFAS 144) as of the end of the current period and assets sold subsequent to January 1, 2002. All results of these discontinued operations, are included in a separate component of income on the Consolidated Statements of Income under discontinued operations. This change has resulted in certain reclassifications of 2002, 2001 and 2000 financial statement amounts. The following represents the operating results for the properties sold in 2002 (see Note 4) and 2003 (Bakersfield, California; Tempe, Arizona and Jacksonville, Alabama - held for sale) for the applicable periods: Year ended December 31, 2002 2001 2000 ---- ---- ---- Revenues $ 1,226 $ 1,380 $ 1,316 Pre-tax income, including gains on sales $ 1,879 $ 563 $ 457 (6) INVESTMENT IN NON-CONSOLIDATED ENTITIES The Company has investments in various real estate joint ventures. The business of each joint venture is to acquire, finance, hold for investment or sell single tenant net leased real estate. 22 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Lexington Acquiport Company, LLC Lexington Acquiport Company, LLC ("LAC"), is a joint venture with the Comptroller of the State of New York as Trustee for the Common Retirement Fund ("CRF"). The joint venture agreement expires December 2011. The Company and CRF originally committed to contribute up to $50,000 and $100,000, respectively, to invest in high quality office and industrial net leased real estate. Through December 31, 2002 total contributions were $127,623. LRA earns annual management fees of 2% of rent collected and acquisition fees equaling 75 basis points of purchase price of each property investment. All allocations of profit, loss and cash flows are made one-third to the Company and two-thirds to CRF. During 2001, the Company and CRF announced the formation of Lexington Acquiport Company II, LLC ("LAC II"). The Company and CRF have committed an additional $50,000 and $150,000, respectively. In addition to the fees LRA currently earns on acquisitions and asset management, LRA will also earn 50 basis points on all mortgage debt directly placed. All allocations of profit, loss and cash flows from all properties acquired by this joint venture will be allocated 25% to the Company and 75% to CRF. There have been no investments made under this program. CRF can presently elect to put their equity position in LAC to the Company. The Company has the option of issuing common shares for the fair market value of CRF's equity position (as defined) or cash for 110% of the fair market value of CRF's equity position. The per common share value of shares issued for CRF's equity position will be the greater of (i) the price of the Company's common shares on the closing date (ii) the Company's funds from operations per share (as defined) multiplied by 8.5 or (iii) $13.40 for LAC properties (all properties that are currently owned) and $15.20 for LAC II properties purchased. The Company has the right not to accept any property (thereby reducing the fair market value of CRF's equity position) that does not meet certain underwriting criteria (e.g. lease term and tenant credit). In addition, the operating agreement contains a mutual buy-sell provision in which either partner can force the sale of any property. During 2002, 2001 and 2000, LAC made the following investments: Net Rentable Date of Acquisition Base Rent Lease Square Acquisition Tenant Location Cost December 31, Expires Feet - ----------------------------------------------------------------------------- ----------------------------------- 2002 August 5 TNT Logistics North America, Inc. Laurens, SC $ 27,100 $ 3,227 08-12 1,164,000 August 5 TNT Logistics North America, Inc. Temperance, MI 18,186 2,161 08-12 752,000 ---------- --------- --------- $ 45,286 $ 5,388 1,916,000 ========== ========= ========= 2001 May 6 Kraft Foods North America, Inc. Winchester, VA $ 14,400 $ 1,515 05-11 344,700 ========== ========= ========= 2000 January 20 Structural Dynamics Research Milford, OH $ 26,900 $ 2,790 04-11 212,836 Corporation March 29 Bank One Indiana, N.A. Fishers, IN 24,500 3,287 10-09 193,000 April 17 NEC America, Inc. Herndon, VA 19,087 2,025 08-09 108,000 September 6 True North Communications, Inc. Irving, TX 41,850 4,250 01-10 247,254 September 28 First USA Management Services, Lake Mary, FL 41,700 5,741 09-09 251,075 Inc. December 27 Aventis Pharmaceuticals, Inc. Parsippany, NJ 81,000 8,487 01-10 340,240 ---------- --------- --------- $ 235,037 $ 26,580 1,352,405 ========== ========= ========= 23 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) In 1999, LAC also made an $11,009 investment in a participating note receivable, which has a stated interest rate of 6.9% and a 50% interest in the property cash flows from the entity that owns the Houston, Texas property. Summarized balance sheet data as of December 31, 2002 and 2001 and income statement data for the years ended December 31, 2002, 2001 and 2000 is as follows: 2002 2001 ---------- ---------- Real estate, net $ 286,311 $ 245,537 Note receivable 11,009 11,009 Cash and cash equivalents 3,989 3,623 Other assets 6,580 5,147 ---------- ---------- $ 307,889 $ 265,316 ========== ========== Mortgages payable $ 180,223 $ 151,697 Other liabilities 1,934 1,351 Equity 125,732 112,268 ---------- ---------- $ 307,889 $ 265,316 ========== ========== 2002 2001 2000 ---------- ---------- ---------- Revenues $ 31,228 $ 28,661 $ 10,525 Interest expense (12,628) (11,910) (4,327) Depreciation of real estate (5,408) (4,932) (1,765) Other (2,925) (3,147) (1,222) --------- --------- --------- Net income $ 10,267 $ 8,672 $ 3,211 ========= ========= ========= As of December 31, 2002, the LAC properties are 100% leased and have scheduled lease expiration dates ranging from 2009 to 2012. Minimum future rental receipts under non-cancelable tenant operating leases, assuming no new or negotiated leases, for the next five years and thereafter are as follows: Year ending December 31, - ------------ 2003 $ 31,688 2004 32,010 2005 34,005 2006 34,493 2007 34,760 Thereafter 89,909 ---------- $ 256,865 ========== 24 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) The mortgages payable bear interest at rates ranging from 6.00% to 8.19% and mature at various dates ranging from 2010 to 2012. Scheduled principal amortization and balloon payments for the mortgages for the next five years and thereafter are as follows: Year ending Scheduled Balloon December 31, Amortization Payments Total - ------------ ------------ --------- --------- 2003 $ 2,218 $ -- $ 2,218 2004 2,401 -- 2,401 2005 2,643 -- 2,643 2006 2,866 -- 2,866 2007 3,123 -- 3,123 Thereafter 12,761 154,211 166,972 --------- --------- --------- $ 26,012 $ 154,211 $ 180,223 ========= ========= ========= Lexington Columbia LLC Lexington Columbia LLC ("Columbia") is a joint venture established December 30, 1999 with a private investor. Its sole purpose is to own a property in Columbia, South Carolina net leased to Blue Cross Blue Shield of South Carolina through September 2009. The purchase price of the property was approximately $42,500 and was partially funded through a 10 year, $25,300 non-recourse mortgage note bearing interest at 7.85%. In accordance with the operating agreement, net cash flows, as defined, will be allocated 40% to the Company and 60% to the partner until both parties have received a 12.5% return on capital. Thereafter cash flows will be distributed 60% to the Company and 40% to the partner. During 2001, Columbia expanded the property by 107,894 square feet bringing the total square feet of the property to 456,304. The $10,900 expansion was funded 40% by the Company and 60% by the partner. The tenant has leased the expansion through September 2009 at an average additional annual rent of $2,000. Cash flows from the expansion will be distributed 40% to the Company and 60% to the partner. LRA earns annual asset management fees of 2% of rents collected. Summarized financial information for the underlying property investment as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 is as follows: 2002 2001 -------- -------- Real estate, net $ 48,454 $ 50,442 Other assets 2,438 1,529 -------- -------- $ 50,892 $ 51,971 ======== ======== Mortgage payable $ 24,653 $ 24,863 Accrued interest 167 -- Equity 26,072 27,108 -------- -------- $ 50,892 $ 51,971 ======== ======== 25 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) 2002 2001 2000 --------- ---------- ---------- Rental income $ 6,930 $ 5,412 $ 4,906 Interest expense (1,970) (1,851) (2,009) Depreciation (1,988) (1,664) (1,624) Other (196) (133) (143) -------- --------- --------- Net income $ 2,776 $ 1,764 $ 1,130 ======== ========= ========= Minimum future rental receipts under the non-cancelable operating lease, assuming no new or renegotiated lease, for the next five years and thereafter is as follows: Year ending December 31, - ------------ 2003 $ 6,415 2004 6,655 2005 7,377 2006 7,377 2007 7,377 Thereafter 12,908 -------- $ 48,109 ======== Scheduled principal amortization and balloon payment for the mortgage for the next five years and thereafter is as follows: Year ending Scheduled Balloon December 31, Amortization Payment Total - ------------ ------------ -------- -------- 2003 $ 243 $ -- $ 243 2004 257 -- 257 2005 284 -- 284 2006 307 -- 307 2007 332 -- 332 Thereafter 644 22,586 23,230 -------- -------- -------- $ 2,067 $ 22,586 $ 24,653 ======== ======== ======== Lexington Realty Advisors, Inc. The Company has a 99% non-voting ownership interest in LRA, which provides management services to institutional investors and invests directly in real estate properties. The voting common shares are held by officers of the Company and one independent third party. (See Footnote 1) 26 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Summarized balance sheet data as of December 31, 2002 and 2001 and income statement data for the years ended December 31, 2002, 2001 and 2000 is as follows: 2002 2001 -------- -------- Real estate, net $ 41,613 $ 39,737 Cash 1,579 806 Other assets 403 785 -------- -------- $ 43,595 $ 41,328 ======== ======== Mortgages payable $ 30,028 $ 30,480 Advances from the Company 12,167 10,009 Other liabilities 651 598 Equity 749 241 -------- -------- $ 43,595 $ 41,328 ======== ======== 2002 2001 2000 -------- -------- -------- Rental income $ 4,499 $ 2,558 $ -- Advisory fees 1,417 1,125 1,619 Other income 6 14 70 -------- -------- -------- 5,922 3,697 1,689 -------- -------- -------- Interest expense (2,582) (1,574) (19) Operating expenses (1,716) (1,555) (1,104) Depreciation expense (1,116) (760) -- Other -- -- (136) -------- -------- -------- (5,414) (3,889) (1,259) -------- -------- -------- Net income (loss) $ 508 $ (192) $ 430 ======== ======== ======== Included in operating expenses for the years ended December 31, 2002, 2001 and 2000 are personnel costs reimbursable to the Company of $1,189, $1,008 and $1,104 respectively. During 2002 and 2001 LRA made the following acquisitions: Net Rentable Date of Acquisition Base Rent Lease Square Acquisition Tenant Location Cost December 31, Expires Feet - --------------------------------------------------------- -------------------------------------------- 2002 August 5 TNT Canada, Inc. Alberta, Canada $ 2,896 $ 331 08-12 122,876 ========= ========= ======= 2001 January 15 Owens Corning, Inc. Chester, SC $ 15,401 $ 1,619 12-20 193,891 December 27 Harbor Freight Tools, Inc. Dillon, SC 16,113 1,812 12-16 474,473 --------- --------- ------- $ 31,514 $ 3,431 668,364 ========= ========= ======= 27 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Minimum future rental receipts under non-cancelable tenant operating leases, assuming no new or negotiated leases, for the next five years and thereafter are as follows: Year ending December 31, - ------------ 2003 $ 4,513 2004 4,513 2005 4,513 2006 4,524 2007 4,677 Thereafter 47,517 -------- $ 70,257 ======== Scheduled principal amortization and balloon payments for the mortgages for the next five years and thereafter are as follows: Year ending Scheduled Balloon December 31, Amortization Payments Total - ------------ ------------ ---------- --------- 2003 $ 636 $ -- $ 636 2004 594 10,474 11,068 2005 452 -- 452 2006 491 -- 491 2007 532 -- 532 Thereafter 6,998 9,851 16,849 ------- ---------- --------- $ 9,703 $ 20,325 $ 30,028 ======= ========== ========= Lexington Florence LLC Lexington Florence LLC ("Florence") is a joint venture established in January 2002 with unaffiliated investors. Its sole purpose is to own a property in Florence, South Carolina net leased to Washington Mutual Home Loans, Inc. through June 2008. The property is encumbered by a non- recourse mortgage bearing interest at 7.50% per annum which matures February 2009. The Company sold a 77.3% interest in Florence to the unaffiliated investors for $4,581. The investors have the right to put their interests in Florence to the Company for units in LCIF (valued at $4,581). The number of units issued will have a minimum price of $13.92 and a maximum price of $15.82. The put is effective January 2004 and expires June 2004. LRA earns annual asset management fees of 3.5% of rents collected. 28 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Summarized financial information for the underlying property investment as of December 31, 2002 and for the period January 25, 2002 (date of inception) to December 31, 2002 is as follows: Real estate, net $ 15,544 Other assets 656 --------- $ 16,200 ========= Mortgage payable $ 9,544 Other liabilities 163 Equity 6,493 --------- $ 16,200 ========= Rental income $ 1,576 Interest expense (676) Depreciation (304) Other (46) --------- Net income $ 550 ========= Minimum future rental receipts under the non-cancelable operating lease, assuming no new or renegotiated lease, for the next five years and thereafter is as follows: Year ending December 31, - ------------ 2003 $ 1,635 2004 1,750 2005 1,750 2006 1,750 2007 1,750 Thereafter 875 ------- $ 9,510 ======= Scheduled principal amortization and balloon payment for the mortgage for the next five years and thereafter is as follows: Year ending Scheduled Balloon December 31, Amortization Payment Total - ------------ ------------ ------- ------- 2003 $ 149 $ -- $ 149 2004 158 -- 158 2005 173 -- 173 2006 186 -- 186 2007 201 -- 201 Thereafter 234 8,443 8,677 ------- ------- ------- $ 1,101 $ 8,443 $ 9,544 ======= ======= ======= 29 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (7) MORTGAGES AND NOTES PAYABLE The following table sets forth certain information regarding the Company's mortgage and notes payable as of December 31, 2002 and 2001: 2003 Estimated Annual Debt Balloon Property Level Debt - Fixed Rate 2002 2001 Interest Rate Maturity Service Payment - -------------------------------- ----------- ----------- ------------- -------- ---------- ---------- Gainesville, GA $ 219 $ 396 13.000% 01-01-04 $ 219 $ -- Oxon Hill, MD 457 825 6.250% 03-01-04 381 -- REMIC Financing (b) 63,054 64,205 8.150% 05-25-05 6,353 60,001 Salt Lake City, UT 5,145 6,759 7.870% 10-01-05 2,099 -- Bethesda, MD 1,955 2,456 9.250% 05-01-06 669 -- Warren, OH 25,615 29,763 7.000% 10-01-07 6,160 -- Bristol, PA 9,833 9,916 7.400% 02-01-08 831 9,262 Decatur, GA 6,830 6,936 6.720% 06-01-08 579 6,049 Phoenix, AZ 14,553 14,805 7.890% 06-05-08 1,434 12,591 Palm Beach Gardens, FL 11,509 13,288 7.010% 06-15-08 970 10,418 Canton, OH 3,395 3,459 7.150% 08-11-08 313 2,936 Spartanburg, SC 2,819 2,873 7.150% 08-11-08 260 2,438 Hebron, KY 5,414 5,479 7.000% 10-23-08 451 4,935 Gainesville, GA (f) 837 777 7.500% 01-01-09 -- -- Ocala, FL 13,429 13,746 7.250% 02-01-09 1,332 10,700 Canton, OH 1,823 2,010 9.490% 02-28-09 388 -- Baton Rouge, LA 1,969 2,025 7.375% 03-01-09 208 1,470 Bristol, PA 6,190 6,298 7.250% 04-01-09 571 5,228 Livonia, MI (2 properties) 11,133 11,240 7.800% 04-01-09 992 10,236 Henderson, NC 4,497 4,574 7.390% 05-01-09 417 3,854 Westland, MI 3,320 3,611 10.500% 09-01-09 683 -- Salt Lake City, UT 15,204 16,868 7.610% 10-01-09 2,901 -- Richmond, VA 16,633 16,772 8.100% 02-01-10 1,511 15,257 Hampton, VA 4,512 4,545 8.260% 04-01-10 415 4,144 Hampton, VA 7,357 7,415 8.270% 04-01-10 677 6,758 Tampa, FL (Queen Palm Dr.) 6,096 6,150 6.880% 08-01-10 485 5,495 Tampa, FL (North 30th) 8,427 8,500 6.930% 08-01-10 674 7,603 Herndon, VA 18,964 19,107 8.180% 12-05-10 1,723 17,301 San Diego, CA 4,347 4,422 7.500% 01-01-11 411 3,420 Tuscon, AZ 2,483 2,519 7.500% 01-01-11 226 2,076 Columbia, SC 3,472 3,522 7.540% 01-01-11 317 2,905 Valley Forge, PA 13,306 -- 7.120% 02-10-11 1,166 10,927 Glendale, AZ 14,930 15,054 7.400% 04-01-11 1,258 13,365 Auburn Hills, MI 7,325 7,444 7.010% 06-01-11 637 5,918 Plymouth, MI 4,866 4,932 7.960% 07-01-11 463 3,949 New Kingston, PA 7,364 7,450 7.790% 01-01-12 678 6,101 Mechanicsburg, PA 5,437 5,500 7.780% 01-01-12 500 4,503 New Kingston, PA 3,509 3,550 7.780% 01-01-12 323 2,906 Lake Forest, CA 10,939 -- 7.260% 02-01-12 901 9,708 Groveport, OH (g) 7,800 -- 6.030% 10-01-12 477 6,860 Dallas, TX 21,785 22,128 7.490% 12-31-12 2,020 16,030 Fort Mill, SC 11,657 -- 6.000% 01-01-13 839 9,904 Lancaster, CA 10,761 10,881 7.020% 09-01-13 900 8,637 Knoxville, TN (h) 5,330 -- 5.950% 09-01-13 356 4,488 Eau Claire, WI 2,360 2,470 8.000% 07-01-14 313 -- Franklin, NC 2,053 2,111 8.500% 04-01-15 263 -- Southborough, MA 2,251 2,345 7.500% 09-01-15 275 -- Phoenix, AZ (k) -- 5,154 8.120% -- -- -- Phoenix, AZ (k) -- 3,488 7.500% -- -- -- 30 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) 2003 Estimated Annual Debt Balloon Property Level Debt - Fixed Rate 2002 2001 Interest Rate Maturity Service Payment - ------------------------------------- --------- --------- --------------- ---------- ----------- ---------- Brownsville, TX (l) -- 616 8.375% -- -- -- Florence, SC (m) -- 9,681 7.500% -- -- -- --------- --------- ----- -------- -------- 413,164 398,065 7.534% 46,019 308,373 --------- --------- ----- -------- -------- Property Level debt - Variable Rate - ----------------------------------- Milpitas, CA (a) (e) 17,100 17,100 4.409% 07-01-04 2,299 14,356 Marlborough, MA (c) 8,102 8,306 3.610% 08-01-05 524 7,477 Hebron, OH (d) (2 properties) 9,651 9,800 3.688% 12-05-05 542 9,080 --------- --------- ----- -------- -------- 34,853 35,206 4.024% 3,365 30,913 --------- --------- ----- -------- -------- Corporate Level Debt - -------------------- Credit Facility (i) 31,000 10,000 3.199% 03-30-04 1,005 31,000 Warren, OH (j) 12,500 12,500 5.170% 10-01-07 655 12,500 --------- --------- ----- -------- -------- 43,500 22,500 3.765% 1,660 43,500 --------- --------- ----- -------- -------- Total $ 491,517 $ 455,771 6.952% $ 51,044 $ 382,786 ========= ========= ===== ======== ========= (a) Floating rate debt, 30 day LIBOR plus 297 bps. (b) The REMIC Financing is secured by mortgages on 17 properties. (c) Floating rate debt, 90 day LIBOR plus 190 bps. (d) Floating rate debt, 30 day LIBOR plus 225 bps. (e) Commencing 03/01/03 all property cash flows will be used for principal amortization. (f) Accrual only through 01/31/04. Commencing 02/01/04 annual debt service of $218 is due. (g) Interest only through April 2004, and $563 in annual debt service thereafter. (h) Interest only through May 2003, and $381 in annual debt service thereafter. (i) The Company's $60,000 unsecured revolving credit facility, which expires March 2004, bears interest at 150-250 basis points over LIBOR depending on the amount of properties the Company owns free and clear of mortgage debt and has an interest rate period of one, three or six months, at the option of the Company, which rate at December 31, 2002 was 3.20%. The credit facility is provided by Fleet Bank, NA. The credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants with which the Company is in compliance as of December 31, 2002. Approximately $24,836 was available to the Company at December 31, 2002. The Company has six outstanding letters of credit aggregating $4,164 which mature between 2003 and 2010. The Company pays an unused facility fee equal to 25 basis points of 50% or less of the facility is utilized and 15 basis points if greater than 50% of the facility is utilized. (j) Floating rate debt, 90 day LIBOR plus 375 bps. (k) Note was satisfied in 2002. (l) Property was sold in 2002 and mortgage assumed. (m) Property was sold to a joint venture in 2002 therefore is no longer consolidated. 31 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Scheduled principal amortization and balloon payments for mortgages and notes payable for the next five years and thereafter are as follows: Years ending Scheduled Balloon December 31, Amortization Payments Total - ------------ ------------- ---------- --------- 2003 $ 17,417 $ -- $ 17,417 2004 17,709 45,356 63,065 2005 16,117 76,558 92,675 2006 14,496 -- 14,496 2007 15,313 12,500 27,813 Thereafter 27,679 248,372 276,051 ------------ ---------- --------- $ 108,731 $ 382,786 $ 491,517 ============ ========== ========= (8) ORIGINATION FEES PAYABLE In connection with certain acquisitions the Company assumed obligations ($2,178 in principal plus accrued interest) which bear interest, on the outstanding principal balances only at rates ranging from 12.3% to 19.0%. As of December 31, 2002, $3,411 in origination fees payable are owed to two executive officers of the Company. The scheduled payments of these obligations for the next five years and thereafter are as follows: Years ending December 31, Principal Interest Total - ------------ ----------- ---------- --------- 2003 $ 89 $ 283 $ 372 2004 98 274 372 2005 110 262 372 2006 452 209 661 2007 773 141 914 Thereafter 5,043 331 5,374 ----------- ---------- --------- $ 6,565 $ 1,500 $ 8,065 =========== ========== ========= (9) LEASES Minimum future rental receipts under noncancellable tenant operating leases, assuming no new or negotiated leases, for the next five years and thereafter are as follows: Year ending December 31, - ------------ 2003 $ 99,279 2004 101,887 2005 100,016 2006 87,839 2007 75,321 Thereafter 274,879 --------- $ 739,221 ========= The Company holds various leasehold interests in properties. The ground rent on these properties are either directly paid by the tenants or reimbursed to the Company as additional rent. 32 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) Minimum future rental payments under all noncancellable leasehold interests for the next five years and thereafter are as follows: Year ending December 31, - ----------- 2003 $ 898 2004 898 2005 898 2006 898 2007 898 Thereafter 8,071 --------- $ 12,561 ========= The Company leases its corporate headquarters, but no other corporate facility, for approximately $263 per annum through June 30, 2004. (10) MINORITY INTERESTS In conjunction with several of the Company's acquisitions, sellers were issued interests in partnerships controlled by the Company as a form of consideration. All of such interests are redeemable at certain times for common shares on a one-for-one basis. As of December 31, 2002, there were 5,257,365 operating partnership units outstanding of which 4,867,319 were currently redeemable for common shares. As of December 31, 2002 these units, subject to certain adjustments through the date of conversion, had annual distributions per unit in varying amounts from $0 to $1.32 per unit with a weighted average distribution of $1.17 per unit. (11) PREFERRED AND COMMON SHARES During 2002 and 2001, the Company issued 64,249 and 100,000 common shares, respectively, to certain employees and trustees resulting in $996 and $1,181 of deferred compensation, respectively. These common shares vest ratably, primarily over a 5 year period. During 2002, the Company issued 34,483 common shares in respect of a 15 year, 8% interest only recourse note to an officer for $500. The note provides for forgiveness of the principal balance under certain circumstances. During 2002, the holders of the Company's outstanding 2,000,000 preferred shares converted these shares into 2,000,000 common shares. During 2002 and 2001, holders of an aggregate of 50,997 and 418,411 partnership units redeemed such units for common shares of the Company. These redemptions resulted in an increase in shareholders' equity and corresponding decrease in minority interest of $619 and $5,713, respectively. During 2002 and 2001, the Company issued 2,690,000 and 4,400,000 common shares raising $40,508 and $63,400 in proceeds, respectively, which was used to retire mortgage debt and fund acquisitions. In addition, in 2001 the Company issued 2,143,840 common shares valued at $31,622 in connection with the acquisition of the Net Partnerships. 33 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (12) BENEFIT PLANS The Company maintains a common share option plan pursuant to which qualified and non-qualified options may be issued. Options granted under the plan generally vest over a period of one to four years and expire five years from date of grant. No compensation cost is reflected in net income as all options granted under the plan had an exercise price equal to the market value of the underlying common shares on the date of grant. Share option activity during the years indicated is as follows: Weighted-Average Number of Shares Exercise Price Per Share ---------------- ------------------------ Balance at December 31, 1999 1,503,648 $ 12.54 Granted 831,625 9.85 Forfeited (26,000) 13.12 Expired (331,250) 11.13 ---------- ---------- Balance at December 31, 2000 1,978,023 11.63 Granted 568,000 11.99 Exercised (603,142) 11.02 Forfeited (9,308) 12.17 Expired (5,000) 11.25 ---------- ---------- Balance at December 31, 2001 1,928,573 11.93 Granted 411,500 15.50 Exercised (1,050,866) 11.59 Forfeited (53,650) 11.98 Expired (2,500) 14.25 ---------- ---------- Balance at December 31, 2002 1,233,057 $ 13.39 ========== ========== The following is additional disclosures for common share options outstanding at December 31, 2002: Options Outstanding Exercisable Options ----------------------------------------- ----------------------- Weighted Weighted Range of Average Remaining Average Exercise Exercise Life Exercise Prices Number Price (Years) Number Price --------- --------- -------- -------- ------- -------- $9.00-$10.875 153,863 $ 9.23 1.9 117,897 $ 9.22 $11.8125-$12.5625 407,082 11.91 2.5 228,766 11.94 $13.1875-$15.50 672,112 15.23 2.7 331,237 15.13 --------- -------- --- ------- -------- 1,233,057 $ 13.39 2.5 677,900 $ 13.03 ========= ======== === ======= ======== 34 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) There are 1,584,749 options available for grant at December 31, 2002. The Company has a 401(k) retirement savings plan covering all eligible employees. The Company will match 25% of the first 4% of employee contributions. In addition, based on its profitability, the Company may make a discretionary contribution at each fiscal year end to all eligible employees. The matching and discretionary contributions are subject to vesting under a schedule providing for 25% annual vesting starting with the first year of employment and 100% vesting after four years of employment. Approximately $124, $112 and $107 were contributed in 2002, 2001 and 2000, respectively. The Company has established a trust for certain officers in which nonvested common shares, which vest ratably over five years, granted for the benefit of the officers are deposited. The officers exert no control over the common shares in the trust and the common shares are available to the general creditors of the Company. As of December 31, 2002 and 2001, there were 265,385 and 227,708 common shares, respectively, in the trust. In addition, certain officers can delay, to a specified date, the receipt of common shares that would be received upon exercise of common share options. These common shares are deposited in the trust. As of December 31, 2002 there were 222,615 common shares deposited in the trust. (13) COMMITMENTS AND CONTINGENCIES The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company, including its non-consolidated entities, is obligated under certain tenant leases to fund the expansion of the underlying leased properties. (14) RELATED PARTY TRANSACTIONS In 2002, the Company issued 34,483 common shares in respect of a 15-year, 8% interest only recourse note to an officer for $500. On November 28, 2001, the Company acquired Net 1 L.P. and Net 2 L.P. (collectively, the "Net Partnerships"), in a merger transaction valued at approximately $136,300, which owned twenty-three properties in fourteen states. The Company issued 2,143,840 common shares (valued at $31,622), 44,858 operating partnership units (valued at $661), $31,612 in cash and assumed approximately $61,389 of third party mortgage debt (excluding $11,114 in Net Partnership obligations to the Company). The Company's Chairman was the controlling shareholder of the general partners of the Net Partnerships. The general partners received 44,858 operating partnership units valued on the same basis as the limited partners for their 1% ownership interest in the Net Partnerships. The units, which receive distributions equal to the dividends on common shares, are convertible into the Company's common shares on a one-for-one basis beginning November 2006. During 2001, the Company issued 24,620 common shares to acquire a company controlled by the Chairman, whose sole asset was a mortgage note receivable from a 64% owned partnership of the Company. 35 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) During 2001, the Company renegotiated $1,973 in notes receivable from two officers. The notes were issued in connection with the officers' purchases of 131,000 common shares at $15.25 per common share. The new notes have a 15-year maturity, are 8% interest only, recourse to the officers and provide for forgiveness of the principal balances if certain operating results are achieved. During 2000, the Company sold two properties to the Net Partnerships which are located in Henderson, North Carolina (leased to Corporate Express Office Products, Inc.) and Plymouth, Michigan (leased to Johnson Controls, Inc.) for $15,600 resulting in gains of $2,300. During 2000, the Company issued 83,400 operating partnership units in LCIF to acquire the property management contract for the Net Partnerships from an affiliate of the Chairman of the Company and was subsequently sold to LRA for $585. The fees earned during 2001 and 2000, under this contract, were $139 and $91 and the reimbursement of costs for services provided by the Company on behalf of the Net Partnerships were $564 and $359 for the years ended December 31, 2001 and 2000, respectively. The reimbursements are shown net, in the Company's general and administrative expenses in the accompanying consolidated statements of income. The Company and LRA also received brokerage commissions relating to the purchase and sale of properties by the Net Partnerships, with unaffiliated parties, totaling $120 in 2000 which is included in interest and other income in the accompanying consolidated statements of income. In connection with the acquisition of certain properties in 1996, the Company assumed an obligation to pay The LCP Group, L.P., an affiliate of the Company's Chairman, an aggregate principal amount of $2,178 for rendering services in connection with the original acquisition of the properties in 1980 and 1981. Simple interest is payable monthly from available net cash flow of the respective original properties on the various unpaid principal portions of the fees, at annual rates ranging from 12.3% to 19.0%. All related party acquisitions, sales and loans were approved by the independent members of the Board of Trustees. (15) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts ------------------------------------------------------------------- Payable ------- The Company estimates that the fair value approximates carrying value due to the relatively short maturity of the instruments. Mortgages and Notes Payable --------------------------- The Company determines the fair value of these instruments based on a discounted cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this, the Company has determined that the fair value of these instruments approximates carrying values. (16) CONCENTRATION OF RISK The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its properties, avoiding dependency on a single property and the creditworthiness of its tenants. 36 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) For the year ended December 31, 2002, no tenant represented 10% or more of rental income. For the years ended December 31, 2001 and 2000 the following tenants represented 10% or greater of rental income: 2001 2000 -------- ------ Northwest Pipeline Corporation 11% 11% Kmart Corporation 11% 11% Both of these tenants are publicly registered companies subject to the Securities Exchange Act of 1934, as amended and accordingly file financial information with the Securities and Exchange Commission. (17) SUPPLEMENTAL DISCLOSURE OF STATEMENT OF CASH FLOW INFORMATION During 2002, 2001 and 2000, the Company paid $32,255, $30,624 and $29,758, respectively, for interest and $262, $204 and $126, respectively, for taxes. During 2002, the holder of the Company's 2 million preferred shares converted them into 2 million common shares. In 2002, 2001 and 2000, the Company contributed properties (along with non-recourse mortgage notes) to joint venture entities for capital contributions of $643, $1,168 and $2,393, respectively. During 2002, 2001 and 2000, holders of an aggregate of 50,997, 418,411 and 102,849 operating partnership units, respectively, redeemed such units for common shares of the Company. These redemptions resulted in increases in shareholders' equity and corresponding decreases in minority interests of $619, $5,713 and $1,438, respectively. During 2001, the Company purchased the Net Partnerships by issuing, in addition to $31,612 in cash, 2,143,840 common shares (valued at $31,622), 44,858 operating partnership units (valued at $661), assumed $61,389 in third party debt and $11,114 in Net Partnership debt obligations to the Company. During 2000, the Company issued 83,400 operating partnership units (valued at $585) in LCIF to acquire a property management contract from an affiliate of the Chairman of the Company. During 2000, the Company purchased a property and issued a note payable to the seller of $3,488 as partial satisfaction of the purchase price. During 2002, 2001 and 2000, the Company issued 64,249, 100,000 and 73,800 common shares to certain employees and trustees resulting in $996, $1,181 and $664 of deferred compensation. These common shares vest ratably over a 2 to 5 year period. 37 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements ($000's except per share data) (18) UNAUDITED QUARTERLY FINANCIAL DATA 2002 ----------------------------------------------------------------------------- 3/31/02 6/30/02 9/30/02 12/31/02 ----------- ----------- ----------- ------------ Revenues (1) $ 24,258 $ 24,199 $ 24,884 $ 26,052 Net income $ 7,961 $ 7,879 $ 7,646 $ 7,109 Net income per common share: Basic $ 0.30 $ 0.30 $ 0.28 $ 0.24 Diluted $ 0.29 $ 0.29 $ 0.28 $ 0.24 2001 ----------------------------------------------------------------------------- 3/31/01 6/30/01 9/30/01 12/31/01 ----------- ----------- ----------- ------------ Revenues (1) $ 19,904 $ 20,118 $ 19,904 $ 21,556 Net income $ 4,578 $ 5,090 $ 2,047 $ 6,347 Net income per common share: Basic $ 0.23 $ 0.25 $ 0.07 $ 0.25 Diluted $ 0.23 $ 0.25 $ 0.07 $ 0.24 (1) All periods have been adjusted to reflect the impact of properties sold during the six months ended June 30, 2003 and during the year ended Decemeber 31, 2002, and properties classified as held for sale which are reflected in discontinued operations in the Consolidated Statements of Income. The sum of the quarterly income per common share amounts may not equal the full year amounts primarily because the computations of the weighted average number of common shares outstanding for each quarter and the full year are made independently. (19) SUBSEQUENT EVENTS Subsequent to year end, the Company purchased a property for $23,500 net leased to Oce Printing Systems USA, Inc. through February 2020. The purchase was partially funded through the use of a $15,275 interest only, non-recourse mortgage which bears interest at 5.25%, and matures March 2008. The lease provides for an average annual rent of $2,245. The Company also obtained a $16,380 non-recourse mortgage note for its Westmont, Illinois property. The mortgage bears interest at 6.21%, provides for annual debt service of $1,292 and matures March 2018 when a balloon payment of $9,662 is due. The Company also obtained a $9,000 non-recourse mortgage note for the expansion of its Lancaster, California property. The mortgage bears interest at 5.92%, provides for annual debt service of $642 and matures September 2013 when a balloon payment of $7,518 is due. 38 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Real Estate and Accumulated Depreciation and Amortization Schedule III ($000) Initial cost to Company and Gross Amount at which carried at End of Year (A) - -------------------------------------------------------------------------------------------------------------------- Land and Buildings Land and Description Location Encumbrances Estates Improvements Total - -------------------------------------------------------------------------------------------------------------------- Office Southington, CT $ 8,120 $ 3,240 $ 20,440 $ 23,680 Research & Development Glendale, AZ 14,930 4,996 24,392 29,388 Retail/Health Club Countryside, IL 2,235 628 3,722 4,350 Retail/Health Club Voorhees NJ 2,827 577 4,820 5,397 Retail/Health Club DeWitt, NY 1,709 445 3,043 3,488 Warehouse & Distribution Mansfield, OH 3,089 120 5,965 6,085 Industrial Marshall, MI 2,071 33 3,378 3,411 Industrial Marshall, MI 789 14 926 940 Retail Newport, OR 5,784 1,400 7,270 8,670 Office & Warehouse Memphis, TN 6,245 1,053 11,174 12,227 Warehouse & Distribution Mechanicsburg, PA 9,531 1,439 13,987 15,426 Office & Warehouse Tampa, FL 6,096 1,389 7,762 9,151 Retail Klamath Falls, OR 6,573 727 9,160 9,887 Office Tampa, FL 8,427 1,900 9,854 11,754 Warehouse & Industrial Jacksonville, FL - 157 3,563 3,720 Retail Sacramento, CA 2,202 885 2,705 3,590 Office Phoenix, AZ - 2,804 13,921 16,725 Retail Reno, NV 1,906 1,200 1,904 3,104 Retail Las Vegas, NV 1,709 900 1,759 2,659 Retail Rockville, MD - - 1,784 1,784 Retail Oxon Hill, MD 457 403 2,765 3,168 Retail Laguna Hills, CA - 255 5,035 5,290 Retail Riverdale, GA - 333 2,233 2,566 Retail/Health Club Canton, OH 1,823 602 3,819 4,421 Office Salt Lake City, UT 20,349 - 55,404 55,404 Manufacturing Franklin, NC 2,053 386 3,062 3,448 Industrial Oberlin, OH 2,098 276 4,515 4,791 Retail Tulsa, OK - 447 2,432 2,879 Retail Clackamas, OR - 523 2,847 3,370 Retail Lynwood, WA - 488 2,658 3,146 Retail Honolulu, HI - - 11,147 11,147 Warehouse New Kingston, PA (Silver Springs) 3,509 674 5,360 6,034 Warehouse New Kingston, PA (Cumberland) 7,364 1,380 10,963 12,343 Warehouse Mechanicsburg, PA (Hampden IV) 5,437 1,012 8,039 9,051 Office/ Research & Development Marlborough, MA 8,102 1,999 13,834 15,833 Office Dallas, TX 21,785 3,582 30,598 34,180 Warehouse Waterloo, IA 4,194 1,025 8,296 9,321 Office/ Research & Development Milpitas, CA 17,100 3,542 18,603 22,145 Industrial Gordonsville, TN 1,972 52 3,325 3,377 Office Decatur, GA 6,829 975 13,677 14,652 Office Richmond, VA 16,634 - 27,282 27,282 Office/Warehouse Bristol, PA 9,833 2,508 10,031 12,539 Office Hebron, KY 5,414 1,615 6,462 8,077 Office Livonia, MI 5,344 1,554 6,219 7,773 Office Valley Forge, PA 13,306 3,960 15,891 19,851 Research & Development Livonia, MI 5,789 1,733 6,936 8,669 Office Palm Beach Gardens, FL 11,509 3,576 14,249 17,825 Warehouse/ Distribution Lancaster, CA 10,761 2,028 28,225 30,253 - ------------------------------------------------------------------------------------------------------------------------------- Useful life computing Accumulated depreciation in Depreciation latest income and Date Date statements Description Location Amortization Acquired Constructed (years) - ------------------------------------------------------------------------------------------------------------------------------- Office Southington, CT $ 9,344 Oct. 1986 1983 40 & 12 Research & Development Glendale, AZ 11,952 Nov. 1986 1985 40 & 12 Retail/Health Club Countryside, IL 1,802 Jul. 1987 1987 40 & 12 Retail/Health Club Voorhees NJ 2,237 Jul. 1987 1987 40 & 12 Retail/Health Club DeWitt, NY 1,414 Aug. 1987 1977 & 1987 40 & 12 Warehouse & Distribution Mansfield, OH 2,117 Jul. 1987 1970 40, 20 & 12 Industrial Marshall, MI 1,521 Aug. 1987 1968 & 1972 40, 20 & 12 Industrial Marshall, MI 418 Aug. 1987 1979 40, 20 & 12 Retail Newport, OR 3,267 Sept. 1987 1986 40, 20 & 12 Office & Warehouse Memphis, TN 5,010 Feb. 1988 1987 40 Warehouse & Distribution Mechanicsburg, PA 3,959 Oct. 1990 1985 & 1991 40 Office & Warehouse Tampa, FL 3,131 Nov. 1987 1986 40 & 20 Retail Klamath Falls, OR 3,387 Mar. 1988 1986 40 Office Tampa, FL 3,519 Jul. 1988 1986 40 Warehouse & Industrial Jacksonville, FL 1,133 Jul. 1988 1958 & 1969 40 & 20 Retail Sacramento, CA 1,240 Oct. 1988 1988 40, 20 & 12 Office Phoenix, AZ 5,258 Nov. 1988 1960 & 1979 40 & 3 Retail Reno, NV 850 Dec. 1988 1988 40, 20 & 12 Retail Las Vegas, NV 784 Dec. 1988 1988 40, 20 & 12 Retail Rockville, MD 669 Aug. 1995 1977 22.375, 16.583 & 15.583 Retail Oxon Hill, MD 967 Aug. 1995 1976 21.292 Retail Laguna Hills, CA 1,764 Aug. 1995 1974 20 & 20.5 Retail Riverdale, GA 391 Dec. 1995 1985 40 Retail/Health Club Canton, OH 668 Dec. 1995 1987 40 Office Salt Lake City, UT 14,150 May 1996 1982 25.958 Manufacturing Franklin, NC 459 Dec. 1996 1996 40 Industrial Oberlin, OH 677 Dec. 1996 1996 40 Retail Tulsa, OK 811 Dec. 1996 1981 23.583 & 13.583 Retail Clackamas, OR 949 Dec. 1996 1981 23.583 & 13.583 Retail Lynwood, WA 886 Dec. 1996 1981 23.583 & 13.583 Retail Honolulu, HI 2,755 Dec. 1996 1980 24.33 Warehouse New Kingston, PA (Silver Springs) 776 Mar. 1997 1981 40 Warehouse New Kingston, PA (Cumberland) 1,587 Mar. 1997 1989 40 Warehouse Mechanicsburg, PA (Hampden IV) 1,164 Mar. 1997 1985 40 Office/ Research & Development Marlborough, MA 1,888 Jul. 1997 1960 & 1988 40 Office Dallas, TX 3,924 Sept. 1997 1986 40 Warehouse Waterloo, IA 1,080 Oct. 1997 1996 & 1997 40 Office/ Research & Development Milpitas, CA 2,325 Dec. 1997 1985 40 Industrial Gordonsville, TN 478 Dec. 1997 1983 & 1985 34.75 Office Decatur, GA 1,710 Dec. 1997 1983 40 Office Richmond, VA 4,230 Dec. 1997 1990 32.25 Office/Warehouse Bristol, PA 1,191 Mar. 1998 1982 40 Office Hebron, KY 767 Mar. 1998 1987 40 Office Livonia, MI 739 Mar. 1998 1987 & 1988 40 Office Valley Forge, PA 149 Aug. 2002 1985 & 2001 40 Research & Development Livonia, MI 824 Mar. 1998 1987 & 1988 40 Office Palm Beach Gardens, FL 1,648 May 1998 1996 40 Warehouse/ Distribution Lancaster, CA 1,592 Jun. 1998 1998 40 39 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Real Estate and Accumulated Depreciation and Amortization Schedule III ($000) - -------------------------------------------------------------------------------------------------- Land and Buildings Land and Description Location Encumbrances Estates Improvements Total - -------------------------------------------------------------------------------------------------- Industrial Auburn Hills, MI 7,325 2,788 11,169 13,957 Warehouse/ Distribution Warren, OH 38,115 10,231 51,280 61,511 Warehouse/ Distribution Baton Rouge, LA 1,969 685 2,748 3,433 Retail Columbia, MD - 1,002 4,294 5,296 Retail Bakersfield, CA - 400 1,662 2,062 Retail Bethesda, MD 1,955 926 2,415 3,341 Office Bristol, PA 6,190 1,073 7,709 8,782 Office Southborough, MA 2,251 456 4,291 4,747 Office Herndon, VA 18,964 5,127 20,570 25,697 Office Hampton, VA 4,512 1,353 5,446 6,799 Office Phoenix, AZ 14,553 4,665 18,682 23,347 Industrial Hebron, OH 3,764 1,063 4,296 5,359 Industrial Hebron, OH 5,887 1,681 6,794 8,475 Retail Phoenix, AZ - 1,126 4,501 5,627 Retail Stockton, CA - 259 1,037 1,296 Retail Lynchburg, VA - 159 638 797 Office San Diego, CA 4,347 1,740 6,960 8,700 Office Phoenix, AZ - 2,287 9,149 11,436 Industrial Henderson, NC 4,497 1,488 5,954 7,442 Industrial Tempe, AZ - 378 1,514 1,892 Industrial Columbus, OH - 319 1,275 1,594 Office Tuscon, AZ 2,484 657 2,794 3,451 Retail Eau Claire, WI 2,360 860 3,442 4,302 Office Milford, CT - 567 2,265 2,832 Retail Westland, MI 3,320 1,444 5,777 7,221 Retail Canton, OH 3,395 883 3,534 4,417 Retail Spartanburg, SC 2,819 833 3,334 4,167 Office Wilsonville, OR - 2,666 10,662 13,328 Industrial Ocala, FL 13,429 3,803 15,210 19,013 Retail Jacksonville, AL - 392 1,567 1,959 Industrial Columbia, SC 3,472 928 3,710 4,638 Office Hampton, VA 7,357 2,333 9,351 11,684 Industrial Plymouth, MI 4,866 1,533 6,130 7,663 Retail Gainesville, GA 1,056 526 2,105 2,631 Office Lake Forest, CA 10,939 3,442 13,779 17,221 Office Knoxville, TN 5,330 1,624 6,503 8,127 Industrial Groveport, OH 7,800 2,385 9,547 11,932 Office Westmont, IL - 4,978 19,940 24,918 Office Fort Mill, SC 11,656 3,601 14,404 18,005 --------- --------- --------- -------- Total $ 460,517 $ 131,496 $ 781,874 $913,370 ========= ========= ========= ======== - -------------------------------------------------------------------------------------------------------------------- Useful life computing Accumulated depreciation in Depreciation latest income and Date Date statements Description Location Amortization Acquired Constructed (years) - -------------------------------------------------------------------------------------------------------------------- Industrial Auburn Hills, MI 1,237 Jul. 1998 1989 & 1998 40 Warehouse/ Distribution Warren, OH 9,305 Aug. 1998 1982 10 &40 Warehouse/ Distribution Baton Rouge, LA 287 Oct. 1998 1998 40 Retail Columbia, MD 411 Dec. 1998 1983 40 Retail Bakersfield, CA 586 Aug. 1995 1976 40 Retail Bethesda, MD 1,209 Aug. 1995 1980 40 Office Bristol, PA 586 Dec. 1999 1998 40 Office Southborough, MA 326 Dec. 1999 1984 40 Office Herndon, VA 1,547 Dec. 1999 1987 40 Office Hampton, VA 380 Mar. 2000 2000 40 Office Phoenix, AZ 1,225 May 2000 1997 40 Industrial Hebron, OH 111 Dec. 2001 2000 40 Industrial Hebron, OH 176 Dec. 2001 1999 40 Retail Phoenix, AZ 127 Nov. 2001 1988 40 Retail Stockton, CA 29 Nov. 2001 1968 40 Retail Lynchburg, VA 18 Nov. 2001 1986 40 Office San Diego, CA 196 Nov. 2001 1989 40 Office Phoenix, AZ 257 Nov. 2001 1985 & 1994 40 Industrial Henderson, NC 167 Nov. 2001 1998 40 Industrial Tempe, AZ 43 Nov. 2001 1981 40 Industrial Columbus, OH 36 Nov. 2001 1990 40 Office Tuscon, AZ 74 Nov. 2001 1988 40 Retail Eau Claire, WI 97 Nov. 2001 1994 40 Office Milford, CT 64 Nov. 2001 1994 40 Retail Westland, MI 162 Nov. 2001 1987 & 1997 40 Retail Canton, OH 99 Nov. 2001 1995 40 Retail Spartanburg, SC 94 Nov. 2001 1996 40 Office Wilsonville, OR 300 Nov. 2001 1980 & 1998 40 Industrial Ocala, FL 428 Nov. 2001 1976 40 Retail Jacksonville, AL 44 Nov. 2001 1983 40 Industrial Columbia, SC 104 Nov. 2001 1968 & 1998 40 Office Hampton, VA 263 Nov. 2001 1999 40 Industrial Plymouth, MI 172 Nov. 2001 1996 40 Retail Gainesville, GA 59 Nov. 2001 1984 40 Office Lake Forest, CA 273 Mar. 2002 2001 40 Office Knoxville, TN 61 Aug. 2002 2002 40 Industrial Groveport, OH 70 Sep. 2002 2002 40 Office Westmont, IL 21 Dec. 2002 1989 40 Office Fort Mill, SC 15 Dec. 2002 2002 40 --------- Total $ 134,220 ========= 40 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES Real Estate and Accumulated Depreciation and Amortization Schedule III ($000) (A) The initial cost includes the purchase price paid by the Company and acquisition fees and expenses. The total cost basis of the Company's properties at December 31, 2002 for Federal income tax purposes was approximately $669 million. Reconciliation of real estate owned: 2002 2001 2000 ------------------------------------- Balance at the beginning of the year $ 830,788 $ 682,627 $ 688,926 Additions during year 116,264 166,668 30,603 Properties sold during year (18,621) (4,107) (17,727) Property contributed to joint venture during year (15,061) (14,400) (19,175) --------- --------- --------- Balance at end of year $ 913,370 $ 830,788 $ 682,627 ========= ========= ========= Balance at beginning of year $ 116,741 $ 98,429 $ 82,334 Depreciation and amortization expense 21,480 18,312 17,513 Accumulated depreciation and amortization of properties sold during year (2,934) - (1,162) Accumulated depreciation of property contributed to joint venture during year (1,067) - (256) --------- --------- --------- Balance at end of year $ 134,220 $ 116,741 $ 98,429 ========= ========= ========= 41 Lexington Corporate Properties Trust Ratio of earnings to combined fixed charges and preferred dividends For the year ended December 31, ($000's) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Earnings Income from continuing operations $ 28,716 $ 17,499 $ 21,495 $ 20,828 $ 15,135 Interest expense 33,920 33,198 29,266 28,754 22,893 Amortization expense - debt cost 1,218 1,404 1,064 968 930 Equity in earnings from joint ventures (4,561) (3,502) (1,428) (61) (52) Cash received from joint ventures 5,660 4,110 810 -- 3 ------ ------ ------ ------ ------ Total $ 64,953 $ 52,710 $ 51,207 $ 50,490 $ 38,909 ====== ======= ====== ====== ====== Fixed Charges Interest expense $ 33,920 $ 33,198 $ 29,266 $ 28,754 $ 22,893 Capitalized interest expense 24 168 241 -- -- Preferred stock dividend 693 2,667 2,562 2,520 2,254 Amortization expense - debt cost 1,218 1,404 1,064 968 930 ------ ------ ------ ------ ------ Total $ 35,855 $ 37,437 $ 33,132 $ 32,242 $ 26,077 ====== ====== ====== ====== ====== Ratio 1.81 1.41 1.55 1.57 1.49 ====== ====== ====== ====== ====== 42