1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K For the year ended DECEMBER 31, 2000 of W.P. CAREY & CO. LLC ("WPC") (FORMERLY CAREY DIVERSIFIED LLC) A DELAWARE Limited Liability Company IRS Employer Identification No. 13-3912578 SEC File Number 001-13779 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (212) 492-1100 WPC has LISTED SHARES registered pursuant to Section 12(g) of the Act. WPC is registered on the NEW YORK STOCK EXCHANGE. WPC does not have any Securities registered pursuant to Section 12(b) of the Act. WPC is unaware of any delinquent filers pursuant to Item 405 of Regulation S-K. WPC (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Non-affiliates held 23,343,368 Listed Shares at March 26, 2001. There are 33,731,706 Listed Shares outstanding at March 26, 2001.
2 PART I Item 1. Business. W. P. Carey & Co. LLC (the "Company" or "WPC") is a real estate investment company that acquires, owns and manages commercial properties leased to companies nationwide, primarily on a triple net basis. As of December 31, 2000, WPC owned 189 properties in the United States and 5 properties in Europe totaling more than 20 million square feet, and managed an additional 232 properties. W.P. Carey & Co. LLC manages net leased properties on behalf of four real estate investment trusts of which it is the advisor and manager: Corporate Property Associates 10, Inc., Carey Institutional Properties, Incorporated, Corporate Property Associates 12, Inc., and Corporate Property Associates 14, Inc. WPC's core strategy is to purchase properties, leased to a variety of companies on a single tenant net lease basis, that are either owned outright or owned by an entity managed by WPC. These leases generally place the economic burden of ownership on the tenant by requiring them to pay the costs of maintenance, insurance, taxes, structural repairs and other operating expenses. WPC also generally seeks to include in its leases: - clauses providing for mandated rent increases or periodic rent increases tied to increases in the consumer price index or other indices or, when appropriate, increases tied to the volume of sales at the property; - covenants restricting the activity of the tenant to reduce the risk of a change in credit quality; - indemnification of WPC for environmental and other liabilities; and - guarantees from parent companies or other entities. On June 28, 2000 following shareholder approval, Carey Diversified LLC ("Carey Diversified") acquired the net lease real estate advisory operations of Carey Management LLC by issuing 8,000,000 Listed Shares and changed its name to W.P. Carey & Co. LLC ("WPC") and its ticker symbol changed from "CDC" to "WPC." As a result of acquiring the operations of Carey Management, WPC has acquired its workforce of approximately 95 employees, assumed the advisory contracts with four affiliated real estate investment trusts ("REITs") and terminated the management contract between Carey Diversified and Carey Management. As a result of this transaction, WPC has diversified its revenue sources and entered into a new business segment. The Company was formed as a limited liability company under the laws of Delaware on July 15, 1996. On January 1, 1998, The Company was consolidated with nine Corporate Property Associates limited partnerships and became the General Partner and owner of over 90% of the limited partnership interests in each partnership. The Company's shares began trading on the New York Stock Exchange on January 21, 1998. On July 15, 1998, each CPA(R) Partnership redeemed the interests of the holdover CPA(R) limited partners and became the owner of substantially all of the limited partnership interests in the CPA(R) Partnerships. The former general partners of each partnership have a right to receive a portion of the distributions made by each partnership. As a limited liability company, WPC is not subject to federal income taxation as long as it satisfies certain requirements relating to its operations. WPC is now a fully integrated company that will continue and expand the nationwide real estate investment business. WPC's principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020 and its telephone number is (212) 492-1100. WPC's website address is http://www.wpcarey.com. As of March 20, 2001, WPC employed no employees directly, however a wholly-owned subsidiary of WPC employs individuals who perform services for WPC. BUSINESS OBJECTIVES AND STRATEGY WPC's objective is to increase shareholder value, cash flow, and its funds from operations through its focus on the net lease investment business. WPC is structured with two business segments, net lease ownership and net lease advisory services. WPC intends to: - increase revenues from its advisory business through additional fundraising and investment; - optimize the net lease ownership portfolio through expansion of existing properties, timely dispositions and favorable lease modifications; and - utilize its size and access to capital to refinance existing debt. -1-
3 DEVELOPMENTS DURING 2000 During 2000, WPC purchased 11 acres of land in Broomfield, Colorado for $1,700,000 ($922,000 in cash and $778,000 in Listed Shares) and completed construction of a building on a build-to-suit basis for Bouygues Telecom, SA in Tours, France for $10,771,000. The Broomfield land is adjacent to an existing WPC property. The Bouyges Telecom lease has an initial term of twelve years and provides for annual rent, based on current exchange rates, of $754,000. In May 2000, WPC entered into a new net lease with Pillowtex Corporation at WPC's property in Salisbury, North Carolina at an annual rent of $691,000. The property had been occupied by Family Dollar Stores, Inc. until February 2000 at an annual rent of $692,000. DeVlieg Bullard, Inc., a lessee of properties in Frankenmuth, Michigan and McMinnville, Tennessee filed a petition of bankruptcy in 1999. The bankruptcy court approved a termination of the DeVlieg Bullard master lease for the two properties in July 2000. The properties are currently occupied under license agreements and WPC is negotiating leases with the current occupants. If the two lease agreements are completed as proposed, WPC will receive annual rents of $785,000. In 1999, WPC had drawn $854,000 from a letter of credit that had been provided by DeVlieg Bullard. In January and February 2000, WPC received $1,800,000 from drawing on a letter of credit that had been provided by the Copeland Beverage Group, an amount equal to one year's rent on the Copeland lease. The Copeland lease was terminated in the fourth quarter of 1999 by the receiver appointed by the court to oversee Copeland's liquidation. WPC is engaged in redeveloping the property. WPC completed construction of a four-building facility in Colliersville, Tennessee in February 2000 at which time a 20-year lease with Federal Express Corporation commenced at an annual rent of $6,360,000. In order to mitigate the concentration of risk related to a single lease, the Company sold a 60% interest in the limited liability company that directly owns the property to an affiliate, Corporate Property Associates 14 Incorporated, for $42,631,000 with the purchase price based on an independent appraisal of the property. At the time of the sale of the interest, the limited liability company obtained $45,000,000 of limited recourse mortgage financing, with the proceeds of the financing distributed to the two owners. During 2000, the Company sold fourteen properties including ten retail properties leased to Kobacker Stores, Inc., a retail property leased to a lessee of a property in Silver City, New Mexico, a retail property leased to AutoZone, Inc. and a manufacturing property leased to Sunds Defibrator, Inc. The sales of the Kobacker Stores and Silver City, New Mexico properties are part of an on-going evaluation by Management to sell small properties that do not fully meet WPC's investment objectives. At the time the Sunds Defibrator property was sold to a third party, Sunds Defibrator and WPC entered into a lease termination agreement that provided WPC with a payment representing approximately 65% of the remaining rents that would have been paid over the remaining term of the Sunds Defibrator lease, which would have expired in August 2005. The sale of the AutoZone property was pursuant to a provision in the AutoZone master lease that allows AutoZone to purchase back properties under certain conditions. Since December 31, 2000, WPC has sold its two remaining Kobacker properties and has completed or is in the process of completing sales of three smaller retail properties. During 2000, General Cinema Corporation filed a petition of bankruptcy and stopped paying rent on its leased property in Burnsville, Minnesota. The lease obligations of General Cinema Corporation had been guaranteed by Harcourt General, Inc.. Since December 31, 2000, Harcourt General has made a payment which is being held in an escrow account by the lender of the limited recourse mortgage loan on the Burnsville property. WPC has entered into discussions with Harcourt General regarding a possible lease termination payment. In December 2000, Sybron International Corporation, a guarantor of leases of five wholly-owned subsidiaries, agreed to pay WPC $400,000 to terminate its guarantee of two leases, in connection with Sybron International's spin-off of Sybron Dental Specialties, Inc. WPC negotiated increased rents on the two leases with Sybron Dental Specialties and the initial lease terms for the two leases were extended for an additional five years through December 2018. During 2000, WPC committed to fund expansions at a property leased to Sprint Spectrum LP in Rio Rancho, New Mexico and a property leased to AT&T Corporation in Bridgeton, Missouri. The Sprint expansion will be approximately 20,000 square feet and is estimated to cost $1,428,000. Additional annual rent as a result of the Sprint Spectrum expansion will be approximately $270,000. The funding commitment at the AT&T property is for up to $4,000,000. In connection with this commitment, AT&T agreed to extend the term of its lease for ten years from the earlier of completion or June 30, 2001. The lease with AT&T had been scheduled to expire in October 2000. If the entire commitment for funding is used, annual rent will increase by approximately $516,000. -2-
4 OTHER SIGNIFICANT RECENT EVENTS On December 20, 1999, Carey Diversified LLC and Carey Management LLC entered into an Agreement and Plan of Merger, whereby Carey Management contributed certain assets relating to its real estate investment advisory business to Carey Diversified by way of a merger with and into a wholly-owned subsidiary of Carey Diversified (the "Merger"). The Merger was approved by the shareholders of Carey Diversified on June 28, 2000. Following the Merger, Carey Diversified was renamed W. P. Carey & Co. LLC and is listed on the New York Stock Exchange and the Pacific Exchange under the symbol "WPC". At the effective time of the merger, Carey Diversified issued 8,000,000 Listed Shares to the shareholders of the Manager, and will issue up to and additional 2,000,000 Listed Shares over the next four years if funds from operations and total share value return targets are met. The 8,000,000 shares are subject to a three-year lock-up agreement (with one-third of the shares released from the lock-up each year). The owners of these shares will have the benefit of registration rights once free from the lock-up. In connection with meeting certain conditions as of December 31, 2000, an additional 500,000 Listed Shares will be issued to the former shareholders of Carey Management LLC. Effective January 1, 2001, WPC acquired all remaining interest in the CPA(R) Partnerships. An independent valuation is being completed which will determine the Listed Shares to be issued for the remaining minority interests. Concurrent with the purchase of the remaining interests, certain CPA(R) Partnerships were merged so that as January 1, 2001 the four remaining partnerships will be wholly-owned subsidiaries. With the reduction in the number of partnerships and the elimination of the minority interest owners, WPC expects to achieve certain operating efficiencies. ACQUISITION STRATEGIES The Company's Management Agreement with Carey Management was cancelled effective with the acquisition of the business operations of Carey Management; as such, the Company is now internally managed. WPC has a well-developed process with established procedures and systems for acquiring net leased property. As a result of its reputation and experience in the industry and the contacts maintained by its professionals, the Company has a presence in the net lease market that has provided it with the opportunity to invest in a significant number of transactions on an ongoing basis. In evaluating opportunities for the Company, we carefully examine the credit, management and other attributes of the tenant and the importance of the property under consideration to the tenant's operations. Careful credit analysis is a crucial aspect of every transaction. We believe that we have one of the most extensive underwriting processes in the industry and have an experienced staff of professionals involved with underwriting transactions. We seek to identify those prospective tenants whose creditworthiness is likely to improve over time. We believe that our experience in structuring sale-leaseback transactions to meet the needs of a prospective tenant enables us to obtain a higher return for a given level of risk than would typically be available by purchasing a property subject to an existing lease. Our strategy in structuring our net lease investments is to: - combine the stability and security of long-term lease payments, including rent increases, with the appreciation potential inherent in the ownership of real estate; - enhance current returns by utilizing varied lease structures; - reduce credit risk by diversifying investments by tenant, type of facility, geographic location and tenant industry; and - increase potential returns by obtaining equity enhancements from the tenant when possible, such as warrants to purchase tenant common stock. As of December 31, 2000, WPC held a warrant position in one tenant. FINANCING STRATEGIES Consistent with its investment policies, WPC employs leverage when available on favorable terms. WPC has in place a $185,000,000 credit facility, which it has used and intends to continue to use in connection with acquiring additional properties, funding build-to-suit projects and refinancing existing debt. As of December 31, 2000, WPC also had approximately $196,000,000 in property-level debt outstanding. We continually seek opportunities and consider alternative financing techniques to refinance debt, reduce interest expense or improve its capital structure. The entities managed by WPC held a total of $812,770,000 in property-level limited recourse debt outstanding as of December 31, 2000. -3-
5 TRANSACTION ORIGINATION In analyzing potential acquisitions for WPC and the CPA(R) REITs, we review and structure many aspects of a transaction, including the tenant, the real estate and the lease, to determine whether a potential acquisition can be structured to satisfy our acquisition criteria. The aspects of a transaction which are reviewed and structured by our management team include the following: Tenant Evaluation. We subject each potential tenant to an extensive evaluation of its credit, management, position within its industry, operating history and profitability. We seek tenants we believe will have stable or improving credit. By leasing properties to these types of tenants, WPC can generally charge rent that is higher than the rent charged to tenants with recognized credit and, thereby, enhance its current return from these properties as compared with properties leased to companies whose credit potential has already been recognized by the market. Furthermore, if a tenant's credit does improve, the value of the properties leased to that tenant will likely increase (if all other factors affecting value remain unchanged). We may also seek to enhance the likelihood of a tenant's lease obligations being satisfied, such as through a letter of credit or a guaranty of lease obligations from the tenant's corporate parent. This credit enhancement provides the owner with additional financial security. Leases with Increasing Rents. We seek to include clauses in our leases that provide for increases in rent over the term of the leases. These increases are generally tied to increases in certain indices such as the consumer price index, in the case of retail stores, participation in gross sales above a stated level, mandated rental increases on specific dates and through other methods. WPC seeks to avoid entering into leases that provide for contractual reductions in rents during their primary term (other than reductions related to reductions in debt service). Properties Important to Tenant Operations. We generally seek to acquire properties with operations that are essential or important to the ongoing operations of the tenant. WPC believes that these properties provide better protection in the event that tenants file for bankruptcy, because leases on properties essential or important to the operations of a bankrupt tenant are less likely to be rejected and terminated by a bankrupt tenant. We also seek to assess the income, cash flow and profitability of the business conducted at the property, so that, if the tenant is unable to operate its business, Carey Diversified can either continue operating the business conducted at the property or re-lease the property to another entity in the industry which can operate the property profitably. Lease Provisions that Enhance and Protect Value. When appropriate, we attempt to include provisions in our leases that require our consent to certain tenant activities or require the tenant to satisfy certain operating tests. These provisions include, for example, operational and financial covenants of the tenant, prohibitions on a change in control of the tenant and indemnification from the tenant against environmental and other contingent liabilities. Including these provisions in its leases enables WPC to protect its investment from changes in the operating and financial characteristics of a tenant that may impact its ability to satisfy its obligations to WPC or could reduce the value of our Properties. Diversification. We try to diversify our portfolio of properties to avoid dependence on any one particular tenant, type of facility, geographic location and tenant industry. By diversifying our portfolio, we reduce the adverse effect on WPC of a single underperforming investment or a downturn in any particular industry or geographic location. WPC employs a variety of other strategies and practices in connection with the acquisitions it makes on its own behalf and on behalf of the REITs. These strategies include attempting to obtain equity enhancements in connection with transactions. Typically, these equity enhancements involve warrants to purchase stock of the tenant to which the property is leased or the stock of the parent of the tenant. In certain instances, WPC grants to the tenant a right to purchase the property leased by the tenant, but generally the option purchase price will be not less than the fair market value of the property. Our practices include performing evaluations of the physical condition of properties and performing environmental surveys in an attempt to determine potential environmental liabilities associated with a property prior to its acquisition. As a transaction is structured, it is evaluated by the Chairman of the Investment Committee with respect to the potential tenant's credit, business prospects, position within its industry and other characteristics important to the long-term value of the property and the capability of the tenant to meet its lease obligations. Before a property is acquired, the transaction is reviewed by the Investment Committee to ensure that it satisfies WPC's investment criteria. Aspects of the transaction that are typically reviewed by the Investment Committee include the expected financial returns, the creditworthiness of the tenant, the real estate characteristics and the lease terms. -4-
6 The Investment Committee is not directly involved in originating or negotiating potential acquisitions, but instead functions as a separate and final step in the acquisition process. WPC places special emphasis on having experienced individuals serve on its Investment Committee and does not invest in a transaction unless it is approved by the Investment Committee. We believe that the Investment Committee review process gives us a unique, competitive advantage over other unaffiliated net lease companies because of the substantial experience and perspective that the Investment Committee has in evaluating the blend of corporate credit, real estate and lease terms that combine to make an acceptable risk. The following people serve on the Investment Committee: - George E. Stoddard, Chairman, was formerly responsible for the direct corporate investments of The Equitable Life Assurance Society of the United States and has been involved with the CPA(R) Programs for over 20 years. - Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman, Director and Chief Investment Officer of The Prudential Insurance Company of America. As Chief Investment Officer, Mr. Hoenemeyer was responsible for all of Prudential's investments, including stocks, bonds, private placements, real estate and mortgages. - Nathaniel S. Coolidge previously served as Senior Vice President - Head of Bond & Corporate Finance Department of the John Hancock Mutual Life Insurance Company. His responsibilities included overseeing $21 billion of fixed income investments for Hancock, its affiliates and outside clients. - Lawrence R. Klein is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania and its Wharton School. Dr. Klein has been awarded the Alfred Nobel Memorial Prize in Economic Sciences and currently advises various governments and government agencies. ASSET MANAGEMENT WPC believes that effective management of net lease assets is essential to maintain and enhance property values. Important aspects of asset management include restructuring transactions to meet the evolving needs of current tenants, re-leasing properties, refinancing debt, selling properties and knowledge of the bankruptcy process. WPC monitors, on an ongoing basis, compliance by tenants with their lease obligations and other factors that could affect the financial performance of any of its Properties. Monitoring involves receiving assurances that each tenant has paid real estate taxes, assessments and other expenses relating to the Properties it occupies and confirming that appropriate insurance coverage is being maintained by the tenant. WPC reviews financial statements of its tenants and undertakes regular physical inspections of the condition and maintenance of its Properties. Additionally, WPC periodically analyzes each tenant's financial condition, the industry in which each tenant operates and each tenant's relative strength in its industry. COMPETITION WPC faces competition for the acquisition of office and industrial properties in general, and such properties net leased to major corporations in particular, from insurance companies, credit companies, pension funds, private individuals, investment companies and unaffiliated real estate investment trusts. WPC also faces competition from institutions that provide or arrange for other types of commercial financing through private or public offerings of equity or debt or traditional bank financings. WPC believes its management's experience in real estate, credit underwriting and transaction structuring will allow WPC to compete effectively for office and industrial properties on its own behalf and on behalf of its managed REITs. ENVIRONMENTAL MATTERS Under various federal, state and local environmental laws, regulations and ordinances, current or former owners of real estate, as well as other parties, may be required to investigate and clean up hazardous or toxic chemicals, substances or waste or petroleum product or waste, releases on, under, in or from a property. These parties may be held liable to governmental entities or to third parties for specified damages and for investigation and cleanup costs incurred by these parties in connection with the release or threatened release of hazardous materials. These laws typically impose responsibility and liability without regard to whether the owner knew of or was responsible for the presence of hazardous materials, and the liability under these laws has been interpreted to be joint and several under some circumstances. WPC's leases often provide that the tenant is responsible for all environmental liability and for compliance with environmental regulations relating to the tenant's operations. WPC typically undertakes an investigation of potential environmental risks when evaluating an acquisition. Phase I environmental assessments are performed by independent environmental consulting and engineering firms for all properties acquired by WPC. Where warranted, Phase II environmental assessments are performed. Phase I assessments do not involve subsurface testing, whereas Phase II assessments involve some degree of soil and/or groundwater testing. WPC may -5-
7 acquire a property which is known to have had a release of hazardous materials in the past, subject to a determination of the level of risk and potential cost of remediation. WPC normally requires property sellers to indemnify it fully against any environmental problem existing as of the date of purchase. Additionally, WPC often structures its leases to require the tenant to assume most or all responsibility for compliance with the environmental provisions of the lease or environmental remediation relating to the tenant's operations and to provide that non-compliance with environmental laws is a lease default. In some cases, WPC may also require a cash reserve, a letter of credit or a guarantee from the tenant, the tenant's parent company or a third party to assure lease compliance and funding of remediation. The value of any of these protections depends on the amount of the collateral and/or financial strength of the entity providing the protection. Such a contractual arrangement does not eliminate WPC's statutory liability or preclude claims against WPC by governmental authorities or persons who are not a party to the arrangement. Contractual arrangements in WPC's leases may provide a basis for WPC to recover from the tenant damages or costs for which it has been found liable. Some of the properties are located in urban and industrial areas where fill or current or historic industrial uses of the areas may have caused site contamination at the properties. In addition, WPC is aware of environmental conditions at certain of the properties that require some degree of remediation. All such environmental conditions are primarily the responsibility of the respective tenants under their leases. WPC and its consultants estimate that the majority of the aggregate cost of addressing environmental conditions known to require remediation at the properties is covered by existing letters of credit and corporate guarantees. WPC believes that its tenants are taking or will soon be taking all required remedial action with respect to any material environmental conditions at the properties. However, WPC could be responsible for some or all of these costs if one or more of the tenants fails to perform its obligations or to indemnify WPC. Furthermore, no assurance can be given that the environmental assessments that have been conducted at the properties disclosed all environmental liabilities, that any prior owner did not create a material environmental condition not known to the Company, or that a material condition does not otherwise exist as to any of the properties. OPERATING SEGMENTS WPC operates in two operating segments, real estate operations, with investments in the United States and Europe, and advisory operations. For the year ended December 31, 2000, no lessee represented 10% or more of the total operating revenue of WPC. FACTORS AFFECTING FUTURE OPERATING RESULTS The provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") became effective in December 1995. The Act provides a "safe harbor" for companies which make forward-looking statements providing prospective information. The "safe harbor" under the Act relates to protection for companies with respect to litigation filed on the basis of such forward-looking statements. WPC wishes to take advantage of the "safe harbor" provisions of the Act and is therefore including this section in its Annual Report on Form 10-K. The statements contained in this Annual Report, if not historical, are forward-looking statements and involve risks and uncertainties which are described below that could cause actual results to differ materially from the results, financial or otherwise, or other expectations described in such forward-looking statements. These statements are identified with the words "anticipated," "expected," "intends," "seeks" or "plans" or words of similar meaning. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results or occurrences. WPC's future results may be affected by certain risks and uncertainties including the following: Single tenant leases increase our exposure in the event of a failure of tenant. We focus our acquisition activities on net leased real properties or interests therein. Due to the fact that our net leased real properties are leased to single tenants, the financial failure of or other default by a tenant resulting in the termination of a lease is likely to cause a reduction in the operating cash flow of WPC and might decrease the value of the property leased to such tenant. We depend on major tenants. Revenues from several of our tenants and/or their guarantors constitute a significant percentage of our consolidated rental revenues. Our five largest tenants/guarantors, which occupy 13 properties, represent 25% of annualized revenues. The default, financial distress or bankruptcy of any of the tenants of such Properties could cause interruptions in the receipt of lease revenues from such tenants and/or result in vacancies in the respective Properties, which would reduce our revenues until the affected property is re-let, and could decrease the ultimate sale value of each such property. -6-
8 We can borrow a significant amount of funds. We have incurred, and may continue to incur, indebtedness (secured and unsecured) in furtherance of our activities. Neither the Operating Agreement nor any policy statement formally adopted by the Board of Directors limits either the total amount of indebtedness or the specified percentage of indebtedness (based upon the total market capitalization of WPC) which may be incurred. Accordingly, we could become more highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions. Our current unsecured revolving credit facility with Chase Manhattan Bank, as agent, contains various covenants which limit the amount of secured and unsecured indebtedness we may incur. We may not be able to refinance balloon payments on our mortgage debts. A significant number of our properties are subject to mortgages with balloon payments. Scheduled balloon payments for the next five years are as follows: <TABLE> <S> <C> 2001 - $13 million; 2002 - $2.5 million; 2003 - $3 million; 2004 - $20 million; and 2005 - $0 million. </TABLE> Our credit facility has been extended through March 2004. As of December 31, 2000, the Company had $94,000,000 drawn from the line of credit. An additional $16,000 was drawn from the line of credit through March 24, 2001. Our ability to make such balloon payments will depend upon our ability either to refinance the obligation when due, invest additional equity in the property or to sell the related property. Our ability to accomplish these goals will be affected by various factors existing at the relevant time, such as the state of the national and regional economies, local real estate conditions, available mortgage rates, our equity in the mortgaged properties, our financial condition, the operating history of the mortgaged properties and tax laws. We may be unable to renew leases or re-let vacated spaces. We will be subject to the risks that, upon expiration of leases, the premises may not be re-let or the terms of re-letting (including the cost of concessions to tenants) may be less favorable than current lease terms. If we are unable to re-let promptly all or a substantial portion of our properties or if the rental rates upon such re-letting were significantly lower than current rates, our net income and ability to make expected distributions to our shareholders would be adversely affected. There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases. Our scheduled lease expirations, as a percentage of annualized revenues for the next five years, are as follows: <TABLE> <S> <C> 2001 - 3% 2002 - 1% 2003 - 3% 2004 - 5% 2005 - 3% </TABLE> We are subject to possible liabilities relating to environmental matters. We own industrial and commercial properties and are subject to the risk of liabilities under federal, state and local environmental laws. Some of these laws could impose the following on WPC: - Responsibility and liability for the cost of investigation and removal or remediation of hazardous substances released on our property, generally without regard to our knowledge or responsibility of the presence of the contaminants; - Liability for the costs of investigation and removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of such substances; and - Potential liability for common law claims by third parties based on damages and costs of environmental contaminants. We may be unable to make acquisitions on an advantageous basis. A significant element of our business strategy is the enhancement of our portfolio through acquisitions of additional properties. The consummation of any future acquisition will be subject to satisfactory completion of our extensive analysis and due diligence review and to the negotiation of definitive documentation. There can be no assurance that we will be able to identify and acquire additional properties or that we will be able to finance acquisitions in the future. In addition, there can be no assurance that any such acquisition, if consummated, will be -7-
9 profitable for us. If we are unable to consummate the acquisition of additional properties in the future, there can be no assurance that we will be able to increase the cash available for distribution to our shareholders. We may suffer uninsured losses. There are certain types of losses (such as due to wars or some natural disasters) that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of the limits of our insurance occur, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any such loss would adversely affect our financial condition. Changes in market interest rates could cause our stock price to go down. The trading prices of equity securities issued by real estate companies have historically been affected by changes in broader market interest rates, with increases in interest rates resulting in decreases in trading prices, and decreases in interest rates resulting in increases in such trading prices. An increase in market interest rates could therefore adversely affect the trading prices of any equity securities issued by us. We face intense competition. The real estate industry is highly competitive. Our principal competitors include national REITs, many of which are substantially larger and have substantially greater financial resources than us. The value of our real estate is subject to fluctuation. We are subject to all of the general risks associated with the ownership of real estate. In particular, we face the risk that rental revenue from the properties will be insufficient to cover all corporate operating expenses and debt service payments on indebtedness we incur. Additional real estate ownership risks include: - Adverse changes in general or local economic conditions, - Changes in supply of or demand for similar or competing properties, - Changes in interest rates and operating expenses, - Competition for tenants, - Changes in market rental rates, - Inability to lease properties upon termination of existing leases, - Renewal of leases at lower rental rates, - Inability to collect rents from tenants due to financial hardship, including bankruptcy, - Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate, - Uninsured property liability, property damage or casualty losses, - Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws, and - Acts of God and other factors beyond the control of our management. We depend on key personnel for our future success. We depend on the efforts of the executive officers and key employees. The loss of the services of these executive officers and key employees could have a material adverse effect on our operations. The investment advisory business presents different risks. The merger exposes WPC to risks of the real estate management business to which it has not historically been exposed. These risks include the following: - More volatility in WPC's earnings may occur because revenue from the real estate management business has been traditionally more volatile than revenue from ownership of real estate subject to triple net leases and - The growth in revenue from the management business is dependent in part on future capital raising in existing or future managed entities, which is subject to uncertainty and is subject to capital market and real estate market conditions. -8-
10 Future sales of our stock by shareholders of WPC may adversely affect the market price of our stock. Sales of a substantial number of shares by shareholders of WPC, or the perception that these sales could occur, could adversely affect prevailing market prices for the shares. These sales also might make it more difficult for WPC to sell equity securities in the future at a time and price it deems appropriate. WPC has issued 8,000,000 shares to the shareholders of Carey Management and may issue up to an additional 2,000,000 to them upon the satisfaction of performance targets. In addition, directors and officers of WPC own or have the right to acquire up to an additional approximately 3,275,000 shares. The revenue streams from the investment advisory agreements are subject to limitation or cancellation. The agreements under which WPC provides investment advisory services may generally be terminated by each CPA(R) REIT upon 60 days notice, with or without cause. In addition, the fees payable under each agreement are subject to a variable annual cap based on a formula tied to the assets and income of that CPA(R) REIT. This cap may limit the growth of the management fees. There can be no assurance that these agreements will not be terminated or that WPC's income will not be limited by the cap on fees payable under the agreements. A cap on the fees could have a material adverse effect on our business, results of operations and financial condition. The officers and directors of W.P. Carey & Co. LLC may exercise significant influence. WPC's business, results of operations or financial condition could be materially adversely affected if any of these outcomes were to occur. The risk factors may have affected, and in the future could affect, our actual operating and financial results and could cause such results to differ materially from those in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically, and we cannot completely assure you that the factors we describe above list all material risks to WPC at any specific point in time. We have disclosed many of the important risk factors discussed above in our previous filings with the Securities and Exchange Commission. -9-
11 Item 2. Properties. Set forth below is certain information relating to the Company's properties owned as of December 31, 2000: <TABLE> <CAPTION> RENT PER SHARE OF LEASE OBLIGOR/ SQUARE SQUARE CURRENT ANNUAL INCREASE LEASE MAXIMUM LOCATION FOOTAGE FOOT RENTS(a) FACTOR TERM TERM - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> DR PEPPER BOTTLING COMPANY OF TEXAS Irving and Houston, Texas 721,947 5.98 4,318,931 CPI Jun. 2014 Jun. 2014 DETROIT DIESEL CORPORATION(b) Detroit, MI 2,730,750 1.45 3,957,524 PPI Jun. 2010 Jun. 2030 GIBSON GREETINGS, INC Berea, KY and Cincinnati, OH 1,194,840 3.11 3,720,000 Stated Nov. 2013 Nov. 2023 AMERICA WEST HOLDINGS CORPORATION(b,d) Tempe, AZ 218,000 15.61 3,404,000 CPI Nov. 2019 Nov. 2029 LIVHO, INC Livonia, MI 158,000 19.08 3,014,545 Stated Dec. 2008 Dec. 2028 FEDERAL EXPRESS CORPORATION(e) College Station, TX 12,080 5.38 65,000 Market Feb. 2002 Feb. 2009 Colliersville, TN 390,380 16.30 2,572,038 CPI Nov. 2019 Nov. 2029 Corpus Christi, TX 30,212 6.29 189,986 Market May 1999 May 2001 --------- --------- Total: 432,672 2,827,024 ORBITAL SCIENCES CORPORATION(b) Chandler, AZ 280,000 9.48 2,655,320 CPI Sep. 2009 Sep. 2029 THERMADYNE HOLDINGS CORP Industry, CA 325,800 7.75 2,525,163 CPI Feb. 2010 Feb. 2035 FURON COMPANY(b) New Haven, CT; Mickleton, NJ; Aurora (2) and Mantua, OH; Bristol, RI 627,290 3.85 2,414,800 PPI Jul. 2012 Jul. 2037 QUEBECOR PRINTING INC.(b) Doraville, GA 432,559 3.30 1,428,094 CPI Dec. 2009 Dec. 2034 Olive Branch, MS 270,500 3.60 973,255 CPI Jun. 2008 Jun. 2033 --------- --------- Total: 703,059 2,401,349 AUTOZONE, INC.(b,g) 31 Locations : NC, TX, AL, GA, IL, LA, MO 185,990 7.11 1,321,567 % Sales Jan. 2011 Feb. 2026 11 Locations: FL, GA, NM, SC, TX 54,000 9.64 520,391 % Sales Aug. 2013 Aug. 2038 12 Locations : FL, LA, MO, NC, TN 64,965 5.71 370,636 % Sales Aug. 2012 Aug. 2037 --------- --------- Total: 304,955 2,212,594 THE GAP, INC.(b) Erlanger, KY (2) 753,750 2.93 2,205,385 CPI Feb. 2003 Feb. 2043 </TABLE> -10-
12 <TABLE> <CAPTION> RENT PER SHARE OF LEASE OBLIGOR/ SQUARE SQUARE CURRENT ANNUAL INCREASE LEASE MAXIMUM LOCATION FOOTAGE FOOT RENTS(a) FACTOR TERM TERM - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> SYBRON INTERNATIONAL CORPORATION Dubuque, IA; Portsmouth, NH and Rochester, NY 494,100 4.38 2,163,816 CPI Dec. 2013 Dec. 2038 CHECKFREE HOLDINGS, INC.(o) Norcross, GA 278,709 23.17 2,068,707 CPI Dec. 2015 Dec. 2015 UNISOURCE WORLDWIDE, INC Anchorage, AK 44,712 7.34 328,360 Stated Dec. 2009 Dec. 2029 Commerce, CA(b) 411,579 3.46 1,422,080 Stated Apr. 2010 Apr. 2030 --------- --------- Total: 456,291 1,750,440 INFORMATION RESOURCES, INC.(f) Chicago, IL 252,000 19.57 1,643,604 CPI Oct. 2005 Oct. 2015 AP PARTS INTERNATIONAL, INC Toledo, OH 1,132,566 1.43 1,617,251 CPI Dec. 2007 Dec. 2022 RED BANK DISTRIBUTION, INC.(b) Cincinnati, OH 589,150 2.68 1,579,212 CPI Jul. 2015 Jul. 2035 BRODART COMPANY(b) Williamsport, PA (2) 521,231 2.91 1,519,253 CPI Jun. 2008 Jun. 2028 CSS INDUSTRIES, INC Memphis, TN 1,006,566 1.49 1,500,000 CPI Dec. 2005 Dec. 2015 PEERLESS CHAIN COMPANY Winona, MN 357,760 4.09 1,463,425 CPI Jun. 2011 Jun. 2026 COMARK, INC 36,967 7.55 278,949 Stated May 2001 May 2001 GENERAL SERVICES ADMINISTRATION 3,410 17.60 60,025 Stated Apr. 2006 Apr. 2006 UNITED STATES POSTAL SERVICE 116,000 9.40 1,089,982 Stated Apr. 2006 Apr. 2006 --------- --------- Total for property in Bloomingdale, IL: 156,377 1,428,955 LOCKHEED MARTIN CORPORATION Glen Burnie, MD 45,804 7.53 345,000 Stated Apr. 2001 Apr. 2021 King of Prussia, PA 88,578 11.00 974,358 Market Jul. 2003 Jul. 2008 --------- --------- Total: 134,382 1,319,358 SYBRON DENTAL SPECIALTIES, INC Glendora, CA and Romulus, MI 245,000 5.97 1,463,096 CPI Dec. 2018 Dec. 2043 EAGLE HARDWARE & GARDEN, INC.(b,g) Bellevue, WA 154,880 7.73 1,197,726 CPI & % Sales Sep. 2001 Sep. 2001 DUFF-NORTON COMPANY, INC Forrest City, AR 265,000 4.39 1,164,280 CPI Dec. 2012 Dec. 2032 SPRINT SPECTRUM L.P. Albuquerque, NM 94,731 12.19 1,154,331 CPI Sep. 2008 Sep. 2018 </TABLE> -11-
13 <TABLE> <CAPTION> RENT PER SHARE OF LEASE OBLIGOR/ SQUARE SQUARE CURRENT ANNUAL INCREASE LEASE MAXIMUM LOCATION FOOTAGE FOOT RENTS(a) FACTOR TERM TERM - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> BELL SOUTH TELECOMMUNICATIONS, INC.(b) Lafayette Parish, LA 66,846 16.40 1,096,170 Stated Dec. 2001 Dec. 2039 CENDANT OPERATION, INC.(b) Moorestown, NJ 74,066 14.06 1,041,696 Stated Jun. 2004 Jun. 2004 JOHNSON ENGINEERING CORPORATION(b) 48,214 9.89 476,964 Stated Jun. 2003 Jun. 2003 LOCKHEED MARTIN SERVICES GROUP(b) 60,364 9.30 561,264 Stated Jul. 2004 Jul. 2004 --------- --------- Total for property in Houston, TX: 108,578 1,038,228 BOUYGUES TELECOM, SA(b) Tours, France 105,055 9.57 1,005,356(h) INSEE(i) Sep. 2009 Sep. 2012 AMS HOLDING GROUP 52,261 14.64 765,101 None Dec. 2004 Dec. 2009 TEXAS DIGITAL SYSTEMS, INC 36,291 5.37 194,820 None Aug. 2002 Aug. 2002 --------- --------- Total for property in College Station, TX: 88,552 959,921 ANTHONY'S MANUFACTURING COMPANY, INC San Fernando, CA 182,845 5.17 945,444 CPI May 2007 May 2012 UNITED STATIONERS SUPPLY COMPANY New Orleans, LA; Memphis, TN and San Antonio, TX 197,321 4.64 915,834 CPI Mar. 2010 Mar. 2030 WAL-MART STORES, INC.(b) West Mifflin, PA 118,125 7.54 891,129 CPI Jan. 2007 Jan. 2037 PRE FINISH METALS INCORPORATED Walbridge, OH 313,704 2.64 828,506 CPI Jun. 2003 Jun. 2028 IMO INDUSTRIES, INC.(b) Garland, TX 150,203 5.48 822,750 Stated Sep. 2001 Sep. 2001 ALPENA HOLIDAY INN(b) Alpena, MI 96,333 791,411(c) Dec. 2009 NV RYAN, INC Thurmont, MD and Farmington, NY 179,741 4.30 773,370 CPI Mar. 2014 Mar. 2030 WINN-DIXIE STORES, INC.(g) Bay Minette, AL 34,887 3.68 128,470 % Sales Jun. 2007 Jun. 2037 Brewton, AL 30,625 4.39 134,500 % Sales Oct. 2010 Oct. 2030 Leeds, AL 25,600 5.65 144,713 % Sales Mar. 2004 Mar. 2034 Montgomery, AL 32,690 5.86 191,534 % Sales Mar. 2008 Mar. 2038 Panama City, FL 34,710 4.91 170,399 % Sales Mar. 2008 Mar. 2038 --------- --------- Total: 158,512 769,616 AT&T CORPORATION Bridgeton, MO 82,810 9.15 757,846 Stated Jun. 2011 Jun. 2021 </TABLE> -12-
14 <TABLE> <CAPTION> LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> LOCKHEED MARTIN CORPORATION 66,000 7.38 486,960 Stated MERCHANTS HOME DELIVERY, INC. 22,716 11.37 258,312 Stated ------ ------- Total for property in Oxnard, CA: 88,716 745,272 PANTIN, FRANCE - MULTI-TENANT (b) 51,714 18.22 706,509(j) INSEE(i) HARCOURT GENERAL, INC.(b,g) Canton, MI 29,818 7.84 233,750 % Sales Burnsville, MN 31,837 14.68 467,500 % Sales ------ ------- Total: 61,655 701,250 PILLOWTEX CORPORATION Salisbury, NC 288,000 2.40 691,200 Stated DATCON INSTRUMENT COMPANY Lancaster, PA 70,712 9.60 679,083 CPI HIGH VOLTAGE ENGINEERING CORP. Sterling, MA 70,000 9.28 649,555 CPI EXIDE ELECTRONICS CORPORATION Raleigh, NC 27,770 23.22 644,937 CPI MOTOROLA, INC.(p) Urbana, IL 46,350 12.94 600,000 None WESTERN UNION FINANCIAL SERVICES, INC. Bridgeton, MO 78,080 7.34 573,221 Stated EXCEL COMMUNICATIONS, INC. Reno, NV 53,158 10.02 532,800 Stated TITAN CORPORATION(k) San Diego, CA 166,403 16.43 506,783 CPI UNITED SPACE ALLIANCE LLC(b) Webster, TX 88,200 5.73 505,020 Stated DS GROUP LIMITED Goshen, IN 54,270 9.22 500,212 CPI WOZNIAK INDUSTRIES, INC. Schiller Park, IL 84,197 5.91 497,400 Stated JET EQUIPMENT AND TOOLS, INC. McMinnville, TN(s) 276,991 1.75 485,004 None B&G CONTRACT PACKAGING, INC. 80,000 2.25 179,966 Stated VITAL RECORDS COMPANY OF ARKANSAS, INC. 80,000 3.40 272,000 Stated ------- ------- Total for property in Maumelle, AR: 160,000 451,966 <CAPTION> LEASE OBLIGOR/ LOCATION LEASE TERM MAXIMUM TERM - ------------------------------------------------------------------------------- <S> <C> <C> LOCKHEED MARTIN CORPORATION Aug. 2001 Aug. 2002 MERCHANTS HOME DELIVERY, INC. Jan. 2004 Jan. 2014 Total for property in Oxnard, CA: PANTIN, FRANCE - MULTI-TENANT (b) HARCOURT GENERAL, INC.(b,g) Canton, MI Jul. 2005 Jul. 2030 Burnsville, MN Jul. 2006 Jul. 2031 Total: PILLOWTEX CORPORATION Salisbury, NC Apr. 2005 Apr. 2009 DATCON INSTRUMENT COMPANY Lancaster, PA Nov. 2013 Nov. 2030 HIGH VOLTAGE ENGINEERING CORP. Sterling, MA Nov. 2013 Nov. 2030 EXIDE ELECTRONICS CORPORATION Raleigh, NC Jul. 2006 Jul. 2006 MOTOROLA, INC.(p) Urbana, IL Monthly Renewals WESTERN UNION FINANCIAL SERVICES, INC. Bridgeton, MO Nov. 2001 Nov. 2011 EXCEL COMMUNICATIONS, INC. Reno, NV Dec. 2006 Dec. 2020 TITAN CORPORATION(k) San Diego, CA Jul. 2007 Jul. 2023 UNITED SPACE ALLIANCE LLC(b) Webster, TX Sep. 2006 Sep. 2006 DS GROUP LIMITED Goshen, IN Feb. 2010 Feb. 2035 WOZNIAK INDUSTRIES, INC. Schiller Park, IL Aug. 2005 Dec. 2023 JET EQUIPMENT AND TOOLS, INC. McMinnville, TN(s) Monthly Renewals B&G CONTRACT PACKAGING, INC. Dec. 2001 Dec. 2003 VITAL RECORDS COMPANY OF ARKANSAS, INC. Jul. 2010 Jul. 2020 Total for property in Maumelle, AR: </TABLE> -13-
15 <TABLE> <CAPTION> LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> PETOSKEY HOLIDAY INN(b) Petoskey, MI 83,462 446,985(c) CSK AUTO, INC.(q) Apache Junction, AZ 5,055 9.76 49,348 CPI Casa Grande, AZ 11,588 5.57 64,590 CPI Glendale, AZ 3,406 19.59 66,720 CPI Mesa, AZ 3,401 20.08 68,304 CPI Scottsdale, AZ 8,000 16.89 135,100 CPI Denver, CO 8,129 7.25 58,910 CPI ------ ------- Total: 39,579 442,972 CHILDTIME CHILDCARE, INC.(b,l) 12 Locations: AZ, CA, MI, TX 83,694 15.45 439,008 CPI YALE SECURITY INC. Lemont, IL 130,000 3.07 399,000 Stated PENN CRUSHER CORPORATION Cuyahoga Falls, OH and Broomall, PA 103,255 3.65 377,234 Market TELLIT ASSURANCES(b) Rouen, France 27,593 16.58 343,113(j) INSEE(i) SOCIETE DE TRAITEMENTS(b) 69,470 183,320(m) INSEE(i) GIST-BROCADES FRANCE S. A.(b) 37,337 159,509(m) INSEE(i) ------- ------- Total for property in Indre et Loire, France: 106,807 342,829(m) VARIOUS TENANTS(b) Broomfield, CO 101,100 3.24 327,226 CPI ADAPTIVE CONTROLS, INC. 18,058 5.97 107,880 Stated ADPLEX, INC. 13,698 6.74 92,280 Stated CUSTOM TRAINING GROUP, INC. 7,248 7.80 56,520 Stated WORK READY, INC. 7,306 8.52 62,220 Stated ------ ------- Total for property in Houston, TX: 46,310 318,900 BELL SOUTH ENTERTAINMENT, INC. Ft. Lauderdale, FL 80,540 3.84 309,000 CPI OLMSTEAD KIRK PAPER COMPANY 5,760 6.25 36,000 Stated PETROCON ENGINEERING, INC. 48,700 5.46 265,740 Stated ------ ------- Total for property in Beaumont, TX: 54,460 301,740 BLUE TOOL, INC. Frankenmuth, MI(s) 132,400 2.27 300,000 None BIKE BARN HOLDING COMPANY, INC. 6,216 10.42 64,800 Stated SEARS ROEBUCK AND CO. 21,069 10.60 223,331 Stated ------ ------- Total for property in Houston, TX(b): 27,285 288,131 <CAPTION> LEASE OBLIGOR/ LOCATION LEASE TERM MAXIMUM TERM - ------------------------------------------------------------------------------- <S> <C> <C> PETOSKEY HOLIDAY INN(b) Petoskey, MI Dec. 2009 CSK AUTO, INC.(q) Apache Junction, AZ Jan. 2002 Jan. 2022 Casa Grande, AZ Jan. 2002 Jan. 2022 Glendale, AZ Jan. 2002 Jan. 2022 Mesa, AZ Jan. 2002 Jan. 2022 Scottsdale, AZ Jan. 2002 Jan. 2022 Denver, CO Jan. 2008 Jan. 2038 Total: CHILDTIME CHILDCARE, INC.(b,l) 12 Locations: AZ, CA, MI, TX Jan. 2016 Jan. 2041 YALE SECURITY INC. Lemont, IL Apr. 2011 Apr. 2011 PENN CRUSHER CORPORATION Cuyahoga Falls, OH and Broomall, PA Jan. 2005 Jan. 2020 TELLIT ASSURANCES(b) Rouen, France Aug. 2004 Aug. 2009 SOCIETE DE TRAITEMENTS(b) Jun. 2005 Jun. 2008 GIST-BROCADES FRANCE S. A.(b) Jun. 2005 Jun. 2008 Total for property in Indre et Loire, France: VARIOUS TENANTS(b) Broomfield, CO Dec. 2001 Dec. 2001 ADAPTIVE CONTROLS, INC. Nov. 2001 Nov. 2001 ADPLEX, INC. May 2001 May 2001 CUSTOM TRAINING GROUP, INC. Apr. 2003 Apr. 2003 WORK READY, INC. Aug. 2001 Aug. 2001 Total for property in Houston, TX: BELL SOUTH ENTERTAINMENT, INC. Ft. Lauderdale, FL Jul. 2006 Jul. 2009 OLMSTEAD KIRK PAPER COMPANY Jan. 2003 Jan. 2003 PETROCON ENGINEERING, INC. Jan. 2001 Jan. 2001 Total for property in Beaumont, TX: BLUE TOOL, INC. Frankenmuth, MI(s) Monthly Renewals BIKE BARN HOLDING COMPANY, INC. Aug. 2005 Aug. 2005 SEARS ROEBUCK AND CO. Sep. 2005 Sep. 2005 Total for property in Houston, TX(b): </TABLE> -14-
16 <TABLE> <CAPTION> LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> THE ROOF CENTERS, INC. Manassas, VA 60,446 4.31 260,749 Stated VERIZON NETWORKS Milton, VT 30,624 7.54 231,000 Stated DRASS(b) Rouen, France 25,228 9.03 225,574(n) INSEE(i) NORTHERN TUBE, INC. Pinconning, MI 220,588 1.02 225,000 CPI HONEYWELL, INC. 119,320 2.81 335,484 Stated CONTINENTAL AIRLINES, INC. 25,125 5.67 142,560 Stated ------- ------- Total for property in Houston, TX(b): 144,445 478,044 PENBERTHY PRODUCTS, INC. Prophetstown, IL 161,878 1.29 209,507 CPI DESIGNER ENSEMBLES, INC. Travelers Rest, SC 85,959 2.38 204,582 None ROCHESTER BUTTON COMPANY South Boston and Kenbridge, VA 81,387 2.21 180,000 None PEPSI-COLA METROPOLITAN BOTTLING COMPANY, INC. Houston, TX 17,725 6.29 111,557 Stated STAIR PANS OF AMERICA, INC. Fredericksburg, VA 45,821 2.06 94,300 Stated LOCKHEED MARTIN SERVICES GROUP(b) Webster, TX 10,960 8.27 90,603 Stated POPULAR STORES, INC. (b) Scottsdale, AZ 11,800 6.57 77,500 %Sales PENN VIRGINIA COAL COMPANY Duffield, VA 12,804 5.78 73,999 CPI EASTSIDE APPLIANCE, INC. Canton, OH 4,800 15.00 72,000 None CENTS STORES, INC.(q) Mesa, AZ 11,039 5.04 55,620 None THE CRAFTERS MALL, INC. Glendale, AZ 11,760 4.08 47,968 None KOBACKER STORES, INC.(q) Tallmadge and Fremont, OH 8,000 4.74 37,958 None <CAPTION> LEASE OBLIGOR/ LOCATION LEASE TERM MAXIMUM TERM - -------------------------------------------------------------------------------- <S> <C> <C> THE ROOF CENTERS, INC. Manassas, VA Mar. 2002 Jul. 2009 VERIZON NETWORKS Milton, VT Feb. 2003 Feb. 2013 DRASS(b) Rouen, France Oct. 2004 Oct. 2004 NORTHERN TUBE, INC. Pinconning, MI Dec. 2007 Dec. 2022 HONEYWELL, INC. Sep. 2002 Sep. 2002 CONTINENTAL AIRLINES, INC. Jul. 2003 Jul. 2003 Total for property in Houston, TX(b): PENBERTHY PRODUCTS, INC. Prophetstown, IL Apr. 2006 Apr. 2026 DESIGNER ENSEMBLES, INC. Travelers Rest, SC Monthly Renewals ROCHESTER BUTTON COMPANY South Boston and Kenbridge, VA Dec. 2016 Dec. 2036 PEPSI-COLA METROPOLITAN BOTTLING COMPANY, INC. Houston, TX Oct. 2004 Oct. 2004 STAIR PANS OF AMERICA, INC. Fredericksburg, VA Jul. 2007 Jul. 2007 LOCKHEED MARTIN SERVICES GROUP(b) Webster, TX Jul. 2002 Jul. 2002 POPULAR STORES, INC. (b) Scottsdale, AZ Jul. 2005 Jul. 2010 PENN VIRGINIA COAL COMPANY Duffield, VA Nov. 2004 Nov. 2004 EASTSIDE APPLIANCE, INC. Canton, OH Oct. 2003 Oct. 2013 CENTS STORES, INC.(q) Mesa, AZ Jan. 2003 Jan. 2003 THE CRAFTERS MALL, INC. Glendale, AZ Quarterly Renewals KOBACKER STORES, INC.(q) Tallmadge and Fremont, OH Dec. 2006 Dec. 2036 </TABLE> -15-
17 <TABLE> <CAPTION> LEASE OBLIGOR/ RENT PER SHARE OF CURRENT INCREASE LOCATION SQUARE FOOTAGE SQUARE FOOT ANNUAL RENTS(a) FACTOR - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> RECLAMATION FOODS, INC. Apache Junction, AZ 9,945 2.55 25,400 CPI CLEAR VISION CENTER(g) New Orleans, LA 1,641 12.00 19,692 % Sales SCALLON'S CARPET CASTLE, INC. Casa Grande, AZ 3,134 5.90 18,480 Stated C. PARKER & Y. SMITH Greensboro, NC 1,700 5.44 9,240 None CARE FREE HAIR DESIGN Colville, WA 800 10.40 8,400 None VACANT LAND Broomfield, CO 11 acres <CAPTION> LEASE OBLIGOR/ LOCATION LEASE TERM MAXIMUM TERM - ------------------------------------------------------------------------------- <S> <C> <C> RECLAMATION FOODS, INC. Apache Junction, AZ Jun. 2001 Jun. 2001 CLEAR VISION CENTER(g) New Orleans, LA Oct. 2005 Oct. 2015 SCALLON'S CARPET CASTLE, INC. Casa Grande, AZ Dec. 2001 Dec. 2001 C. PARKER & Y. SMITH Greensboro, NC Oct. 2001 Oct. 2001 CARE FREE HAIR DESIGN Colville, WA Monthly Renewals VACANT LAND Broomfield, CO </TABLE> (a) Share of Current Annual Rents is the product of the Square Footage, the Rent per Square Foot, and any ownership interest percentage as noted below. (b) These properties are encumbered by mortgage notes payable. (c) The Company operates a hotel business at this property. Dollar amounts are net operating income for 2000 for the hotel business. (d) Current annual rent represents the 74.583% ownership interest in this property. (e) Current annual rent for the Colliersville, TN property represents the 40% ownership interest in this property. (f) Current annual rent represents the 33.33% ownership interest in this property. (g) Current annual rent does not include percentage of sales rent, payable under the lease contract. (h) Current annual rent represents the 95% ownership interest in this property. Rents are collected in French Francs, conversion rate at December 31, 2000 used. (i) INSEE construction index, an index published quarterly by the French Government. (j) Current annual rent represents the 75% ownership interest in this property. Rents are collected in French Francs, conversion rate at December 31, 2000 used. (k) Current annual rent represents the 18.54% ownership interest in this property. (l) Current annual rent represents the 33.93% ownership interest in this property. (m) Current annual rent represents the 80% ownership interest in this property and rents are collected in French Francs, conversion rate at December 31, 2000 used. (n) Current annual rent represents the 99% ownership interest in this property. Rents are collected in French Francs, conversion rate at December 31, 2000 used (o) Current annual rent represents the 50% ownership interest in this property. (p) Tenant vacated property in January 2001. (q) Property subsequently sold in 2001. (r) Property is currently under development. (s) Tenant currently occupies the space under a month-to-month license agreement. -16-
18 Item 3. Legal Proceedings. As of the date hereof, the Company is not a party to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the year ended December 31, 2000 to a vote of security holders, through the solicitation of proxies or otherwise. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Listed Shares are listed on the New York Stock Exchange. Trading commenced on January 21, 1998. As of December 31, 2000 there were 20,385 shareholders of record. Dividend Policy Quarterly cash dividends are usually declared in December, March, June and September and paid in January, April, July and October. Quarterly cash dividends paid in 2000 and 1999 are as follows: Cash dividends declared per share: <TABLE> <CAPTION> Quarter 2000 1999 ------- ---- ---- <S> <C> <C> 1 $ .4225 $ .4175 2 .4225 .4175 3 .4225 .4175 4 .4225 .4175 ------- ------- Total: $1.6900 $1.6700 ======= ======= </TABLE> Listed Shares The high, low and closing prices on the New York Stock Exchange for a Listed Share for each fiscal quarter of 2000 and 1999 were as follows (in dollars): <TABLE> <CAPTION> 2000 High Low Close ---- ---- --- ----- <S> <C> <C> <C> First Quarter $16.03 $14.39 $15.45 Second Quarter 17.02 15.51 15.60 Third Quarter 17.15 15.90 17.15 Fourth Quarter 18.10 16.11 18.10 </TABLE> <TABLE> <CAPTION> 1999 High Low Close ---- ---- --- ----- <S> <C> <C> <C> First Quarter $17.88 $17.44 $17.69 Second Quarter 17.38 17.06 17.25 Third Quarter 20.00 17.38 20.00 Fourth Quarter 17.19 16.63 16.88 </TABLE> -17-
19 Item 6. Selected Financial Data. (in thousands, except per share data) <TABLE> <CAPTION> The Company Consolidated ------------------------ Operating Data 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Revenues $120,251 $ 88,506 $ 85,330 (Loss) income before extraordinary items (9,278) 34,039 39,085 Basic and diluted (loss) earnings per Listed Share (.31) 1.33 1.55 Cash distributions (1) 49,957 42,525 30,820 Cash provided by operating activities 58,448 48,202 51,944 Cash provided by (used in) investing activities 40,958 (55,189) (71,525) Cash (used in) provided by financing activities (91,498) 3,392 6,668 Cash dividends declared per share 1.69 1.67 1.65 Balance Sheet Data: Real estate, net (2) $433,867 $501,350 $453,181 Net investment in direct financing leases 287,876 295,556 295,826 Total assets 904,242 856,259 813,264 Long-term obligations (3) 176,657 310,562 254,827 <CAPTION> The Predecessor Combined ------------------------ Operating Data 1997 1996 ---- ---- Revenues $96,271 $101,576 (Loss) income before extraordinary items 40,561 45,547 Basic and diluted (loss) earnings per Listed Share Cash distributions (1) 43,620 34,173 Cash provided by operating activities 51,641 53,317 Cash provided by (used in) investing activities (273) 19,545 Cash (used in) provided by financing activities (61,335) (72,020) Cash dividends declared per share Balance Sheet Data: Real estate, net (2) $240,498 $271,660 Net investment in direct financing leases 216,761 215,310 Total assets 523,420 544,728 Long-term obligations (3) 150,907 187,414 </TABLE> (1) 1997 and 1996 amounts represent cash distributions to Limited Partners of the predecessor partnerships. (2) Includes real estate accounted for under the operating method, operating real estate and real estate under construction, net of accumulated depreciation. (3) Represents mortgage and note obligations and deferred acquisition fees due after more than one year. -18-
20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (dollar amounts in thousands) Overview The following discussion and analysis of financial condition and results of operations of W.P. Carey & Co. LLC ("WPC") (formerly Carey Diversified, LLC) should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2000. The following discussion includes forward looking statements. Forward looking statements, which are based on certain assumptions, describe future plans, strategies and expectations of WPC. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievement of WPC to be materially different from the results of operations or plan expressed or implied by such forward looking statements. The risk factors are fully described in Item I of this Annual Report on Form 10-K. Accordingly, such information should not be regarded as representations by WPC that the results or conditions described in such statements or objectives and plans of WPC will be achieved. Effective June 29, 2000, Carey Diversified LLC acquired the net lease real estate management operations of Carey Management LLC by issuing 8,000,000 shares, and changed its name to W. P. Carey & Co. LLC. As a result of acquiring the operations of Carey Management, WPC acquired its workforce of approximately 95 employees, assumed the advisory contracts with four affiliated real estate investment trusts ("REITs") and terminated the management contract between Carey Diversified LLC and Carey Management LLC. Management believes that the acquisition will provide WPC with several potential advantages including, but not limited to, increased diversification of revenue sources, reduced operating expenses through the elimination of management fees formerly paid to Carey Management, potentially increased earnings growth rate, the ability to offer a full range of financial options to corporate property owners and lessees, a strengthened credit profile and improved access to capital markets. WPC has substantially increased its asset base without increasing its long-term debt, and the acquisition may provide WPC the ability to increase its debt capacity, if necessary. The net income of the management business of Carey Management has historically grown at a faster rate than the net income of WPC's real estate operations, and Management believes that the prospects for an increase in the growth rate of earnings will be improved. Because the capital markets have indicated a strong preference for internally managed real estate companies, the ability of WPC to raise additional equity capital in the public markets should be enhanced. Public business enterprises are required to report financial and descriptive information about their reportable operating segments. WPC's management evaluates the performance of its portfolio as a whole, but allocates its resources between two operating segments: real estate operations with domestic and international investments and management services. Results of Operations: Year-Ended December 31, 2000 Compared to Year-Ended December 31, 1999 WPC reported a net loss of $9,278 and net income of $34,039 for the years ended December 31, 2000 and 1999, respectively. The results for 2000 and 1999 are not fully comparable, primarily due to the acquisition of the operations of Carey Management. WPC incurred a charge of $38,000 on the termination of its management contract with Carey Management. Management believes that the termination of the management contract will provide substantial benefit to WPC. In addition to the $38,000 fair value attributed to the terminated management contract, a substantial portion of the other net assets acquired consists of intangible assets including goodwill. Intangible assets and goodwill are amortized over their estimated useful lives, and such amortization, a non-cash charge, was $5,958 in the current year. Results for 2000 include approximately six months of operations for the management services business. Prior to the acquisition, real estate operations contributed substantially all of WPC's income. Excluding the charges for amortization and the writeoff of the management contract, the management business segment contributed income of $13,081. Income from real estate operations provided operating income (income before gains and losses on sales and extraordinary items) of $23,113 in 2000 as compared with $32,522 in 1999. The results for 2000 and 1999 include charges of $11,047 and $5,988, respectively, for writedowns of assets to estimated fair value. Excluding the effect of the writedowns, operating income from real estate operations for 2000 would have reflected a decrease of $4,350. -19-
21 The decrease in real estate operating income was primarily due to increases in interest expense and depreciation offset by increases in lease revenues (rental income and interest income from direct financing leases) and other income. The increase in interest expense of $7,731 was primarily due to mortgage financing obtained in 1999 and a change in the use of amounts drawn from the credit line. Limited recourse financings included a new loan on the America West property, refinancings of the Gap, Inc. and Orbital Sciences Corporation properties and obtaining mortgage debt in connection with the December 1999 purchase of the Bell South property. Interest expense from the line of credit increased because a substantial portion of the interest incurred in 1999 was on borrowings used to fund construction of the America West and Federal Express projects, and was capitalized rather than expensed in accordance with generally accepted accounting principles. Subsequent to the completion of the projects, interest costs were expensed. The credit facility is a variable rate obligation and also was affected by increases in interest rates during 2000. The increase in depreciation of $3,051 was due to the completion of build-to-suit projects on properties leased to America West Airlines and Federal Express, the acquisition of the Bell South property, the expansion of the Orbital Sciences property and the renovation of a property in Moorestown, New Jersey in 1999 now leased to Cendant. The increase in lease revenues was primarily due to the completion of build-to-suit projects with Federal Express Corporation in February 2000 and America West Holdings Corp. in May 1999, new leases with Cendant Operations, Inc. and Bell South Telecommunications, Inc. in May and December 1999, respectively, and rent increases on various leases in 2000 and 1999. Lease revenue increases were partially offset by the sale of fourteen properties in 2000, the sales of the KSG, Inc. and Hotel Corporation of America properties in 1999 pursuant to the exercise of purchase options by the lessees, and the termination of the Copeland Beverage Group, Inc. lease in December 1999. As a result of financial difficulties, Copeland was placed in receivership and subsequently liquidated. Annual rent from the Copeland lease was $1,800. WPC drew $1,800 from a letter of credit that had been provided by Copeland which was used to cover property expenses for the period subsequent to the lease termination. Other income in the accompanying consolidated statements consists of income from real estate operations other than lease revenues. Other income increased by $1,418 in 2000. These items include, but are not limited to, bankruptcy distributions on claims against former tenants and termination agreements. The increase in other income in 2000 included bankruptcy distributions received from a former lessee and termination consideration. Hotel operating income (hotel revenues less hotel expenses) increased from $1,113 to $1,324 primarily due to increases in occupancy and average room rates of 4%. Income from equity investments increased by $996 due to the improved performance of the operating partnership of Meristar Hospitality Corporation, a publicly traded real estate investment trust, and an increase in income from the investment in a net lease with Checkfree Holdings Corp., which is owned with an affiliate. The increase in income from the Checkfree investment was due to recognition of a full year's revenues on the property leased to Checkfree which was purchased in June 1999. Rent on the Checkfree lease also increased in connection with the completion of an expansion in 2000. General and administrative expenses increased due to the acquisition of the management operations, including the personnel and office facilities necessary to render advisory and administrative services to the REITs. The general and administrative expense of the real estate operations segment reflected a decrease. Management and performance fee expenses for periods subsequent to the merger have been terminated effective June 29, 2000, resulting in a decrease in property expenses for the year ended December 31, 2000. The provision for income taxes increased as a result of forming a wholly-owned subsidiary that is responsible for management operations and all administrative functions. Formation of the taxable subsidiary allows the Company to maintain its status as a publicly-traded partnership. Management monitors its real estate assets and securities on an on-going basis. In the event of certain circumstances, including, but not limited to, lease terminations, vacating of a property by a lessee or nonpayment of rent or interest, Management evaluates whether the fair value of an asset is less than its carrying value. In these instances, when the estimate of fair value is less than the carrying value, a writedown is recorded for the difference. In 2000 and 1999, WPC recognized writedowns of $11,047 and $5,988, respectively. Earnings from the management business segment include transaction-based revenues that are directly related to the acquisition activity of the CPA(R) REITs. The ability of a CPA(R) REIT to acquire interests in real estate depends on its ability to raise capital and to leverage its properties with limited recourse mortgage debt. Accordingly, the growth of the management business segment will be affected by the amount of equity capital raised by CPA(R) REIT acquisition activity in -20-
22 2001. Management expects the level of acquisition activity on behalf of the CPA(R) REITs for 2001 to approximate the annualized rate for 2000. WPC is in the process of preparing a "best efforts" public offering for a new CPA(R) REIT which is expected to commence before the end of 2001. An on-going "best efforts" offering of Corporate Property Associates 14 Incorporated is scheduled to conclude in the third quarter of 2001. Year-Ended December 31, 1999 Compared to Year-Ended December 31, 1998 Income before the effects of non-recurring items consisting of the noncash writedown of investments, gains from sales and extraordinary items increased by $437 or 1% in 1999 as compared to 1998. This increase is primarily due to the growth of lease revenues, which was partially offset by increases in depreciation, interest and general and administrative expenses. Net income for the twelve months ended December 31, 1999 decreased by $4,425 as compared to 1998 primarily due to a noncash writedown to fair value of $4,830 of WPC's investment in Meristar Hospitality. The noncash writedown was recognized because of continued weakness in the public market's valuation of equity securities of real estate investment companies, including Meristar. The carrying value of the equity investment in Meristar subsequent to the writedown approximates WPC's pro rata share of Meristar at Meristar's reported net asset value. Lease revenues, including rental income from operating leases and interest income from financing leases, increased by approximately $3,300 for the year ended December 31, 1999 as compared to 1998. This increase represents the excess of additional lease revenues of approximately $6,000 from completed build-to-suit construction projects and the effect of property acquisitions, over revenue decreases as compared with 1998 of approximately $2,700 due to sales of properties and lease terminations. During 1999, WPC completed construction of a new $37,000 office building for America West in which WPC owns an approximate 75% interest, a $3,000 renovation for property leased to Cendant and a $1,800 expansion on the Orbital Sciences property. Annual rent on the America West and Cendant properties is $2,539 and $1,000 respectively. Additional annual rent from the Orbital Science expansion is $234. Approximately $2,500 of the increase in lease revenues was realized as a result of recognizing a full year's rent in 1999 on properties acquired in 1998, including a property leased to Eagle Hardware and Garden Inc., a portfolio of seven properties acquired from J.A. Billipp Development Corporation and three properties located in France. Decreases in lease revenues in 1999 of approximately $2,700 resulted from the scheduled expiration of a lease with Hughes Markets in April 1998 and the sale of properties. Approximately $1,300 of the decrease in lease revenues was due to the termination of the lease with Hughes Markets for a dairy processing plant in Los Angeles, California. On April 30, 1998, WPC's two-year extension term with Hughes Markets at above-market rental rates ended, and the new lease for the property with Copeland became effective. Annual rent of $1,800 from the lease with Copeland approximated the rent in effect before commencement of Hughes' two-year extension term. In April 1998, WPC received a final rent payment of $3,500 from Hughes. Loss of revenues from the sale of properties in 1999 and 1998 account for approximately $1,400 of the decrease in lease revenues. These properties were sold as a result of exercise of purchase options by the lessees of the properties. Hotel operating income (hotel revenues less hotel expenses) decreased from $1,333 to $1,113 primarily due to a transfer of hotel operations in 1998. Income from hotels in 1998 included one month of operating income from a hotel in Livonia, Michigan, whose operations were transferred to an affiliated entity on February 1, 1998. Operating income from the hotels located in Alpena and Petoskey, Michigan was substantially unchanged. Other income increased by $250, primarily due to the receipt of payments in connection with the settlement of a dispute with the former tenant of a property in Broomfield, Colorado. Pursuant to the settlement, WPC received $700 of unpaid rents, interest and penalties due from the former tenant. WPC also received proceeds of $265 from the settlement of a bankruptcy by a former tenant. Income from equity investments increased by 3% in 1999 as compared to 1998. Interest expense increased primarily due to an increase in debt balances for the acquisition of additional properties. Total debt, consisting of limited recourse mortgage debt and advances on the revolving line of credit, increased from approximately $271,000 in 1998 to $317,000 in 1999. The increase in interest expense from additional borrowings was substantially offset by the decrease in expense from lower principal balances on amortizing mortgage loans. WPC used draws on its $185,000 revolving line of credit to fund construction costs, acquisitions and refinance high rate debt on a transitional basis. Advances made on the revolving line of credit during 1999 were repaid from the proceeds of limited recourse mortgage loans and property sales. -21-
23 Depreciation and amortization expense increased by $2,786 in 1999 as compared to 1998 primarily due to the acquisition of properties in 1998 and the completion of construction on properties leased to America West and Cendant in 1999. General and administrative expenses increased by approximately $1,051 in 1999 as compared to 1998 primarily due to increases in professional fees. Professional fees increased due to the implementation of a new integrated accounting and asset management system and costs related to the evaluation and remediation of Year 2000 issues. A portion of the increase in professional fees was due to efforts to improve WPC's tax reporting capabilities to shareholders. WPC revised its systems and procedures to provide accelerated reporting of tax information to shareholders and engaged an external processing agent to provide shareholders with internet access to their tax information. State and local income taxes have increased due to the growth of WPC's portfolio of properties. Because of the long-term nature of WPC's net leases, inflation and changing prices should not unfavorably affect revenues and net income or have an impact on the continuing operations of WPC's properties. WPC's leases usually have rent increases based on the consumer price index and other similar indexes and may have caps on such increases, or sales overrides, which should increase operating revenues in the future. The moderate increases in the consumer price index over the past several years will affect the rate of such future rent increases. Management believes that hotel operations will not be significantly impacted by changing prices. Financial Condition WPC's primary sources of capital to meet its short-term and long-term needs are cash generated from operations, limited recourse mortgage loans, unsecured indebtedness and the issuance of additional equity securities. During 2000, WPC issued 8,000,000 shares in connection with acquiring the business operations of Carey Management. WPC assesses its ability to obtain debt financing on an ongoing basis. Cash flows from operations and distributions from equity investments for the year ended December 31, 2000 of $60,000 were sufficient to fund dividends to shareholders of $49,957 and distributions to minority interests of $1,321. Cash flow from operations for 2000 is not fully representative of future cash flows. Cash flows for 2000 only reflect six months of operations for the management business. A full year's cash flow from the management segment is expected to substantially benefit cash flow from operations. In connection with the acquisition, WPC also acquired Carey Management's minority partner interest in the CPA(R) Partnerships. Annual distributions relating to Carey Management's minority partner interest had been approximately $2,045. Cash flows from operations are expected to increase as a result of the expected growth of the management business segment. Cash flow from operations should continue to fully fund distributions. Cash flow from real estate operations will benefit from the completion of the build-to-suit project in October 2000 for a property leased to Bouygues Telecom, S.A. in France which will provide annual cash flow of $445. Expansions of properties leased to Sprint and AT&T Corporation being funded by WPC in consideration for increases in rent and extensions of remaining lease terms are expected to be completed in April 2001 and July 2001, respectively, and will provide additional annual cash flow of approximately $600. In connection with the sale of its 60% interest in the Federal Express properties in Colliersville, Tennessee to an affiliate and the concurrent placement of limited recourse mortgage debt on the properties, annual cash flow will decrease by $5,091. Solely as a result of using $60,000 from the proceeds from the sale and the concurrent placement of debt on the Federal Express properties, annual interest on the line of credit will decrease by up to $4,500. Additionally, the sale of the Federal Express properties has reduced the concentration of risk in a single lessee. Prior to the sale of this interest, Federal Express represented more than 7% of lease revenues and total assets. WPC's investing activities in 2000 primarily consisted of funding construction costs in connection with the completion of build-to-suit projects for the Federal Express and Bouygues Telecom properties of $18,417, the purchase of 11 acres of land adjacent to an existing WPC property in Broomfield, Colorado for $922 in cash and $778 in stock, and capital improvements to existing properties of $2,078. WPC also completed a buyout of the joint venture partner in the Cendant property for $527. WPC is seeking approvals which will allow WPC the ability to redevelop the existing property and adjacent land in Broomfield. WPC also has commenced a commercial redevelopment of its property in Los Angeles formerly leased to Copeland. Estimated costs for the Broomfield and Copeland projects are $115,000. Management is still evaluating its financing alternatives for these construction costs but a significant portion could be drawn from its line of credit to fund such costs, if necessary. -22-
24 During 2000, WPC sold (a) its interest in Federal Express for $42,287, (b) fourteen small properties for $3,007 and (c) 18,540 shares of common stock of Titan Corporation for $324. WPC had previously converted warrants it received in 1991 in connection with structuring its net lease with Titan Corporation to Titan common stock. WPC continues to assess its real estate portfolio, and will continue to sell smaller properties when Management believes sufficient value can be received. In addition to meeting its commitment to pay dividends to shareholders, WPC's financing activities in 2000 included paying down of the line of credit by $35,000, using $13,944 to purchase back WPC stock on the open market at share prices ranging from $15.75 to $18.00 and making distributions to minority interests of $1,321. WPC obtained limited recourse mortgage financing on the Cendant property and the Bouygues Telecom property of $6,000 and $10,397, respectively. WPC uses limited recourse mortgage notes for a substantial portion of its long-term financing strategy because the cost of this financing is attractive and the exposure of its assets is limited to the collateral designated for each loan. WPC maintains a revolving line of credit that provides for borrowings of up to $185,000. Advances from the line of credit bear interest at an annual rate indexed to the LIBOR Rate. The revolving credit agreement has financial covenants that require the Company to (i) maintain minimum equity value of $400,000 plus 85% of amounts received by the Company as proceeds from the issuance of equity interests and (ii) meet or exceed certain operating and coverage ratios. Such operating and coverage ratios include, but are not limited to, (a) ratios of earnings before interest, taxes, depreciation and amortization to fixed charges for interest and (b) ratios of net operating income, as defined, to interest expense. The Company is in compliance with these covenants. The current revolving line of credit had initially been scheduled to mature in March 2001 and has been extended to March 2004. In the case of limited recourse mortgage financing that does not fully amortize over its term or is currently due, WPC is responsible for the balloon payment only to the extent of its interest in the encumbered property because the holder has recourse only to the collateral. In the event that balloon payments come due, WPC may seek to refinance the loans, restructure the debt with the existing lenders or evaluate its ability to satisfy the obligation from its existing resources including its revolving line of credit, to satisfy the mortgage debt. To the extent the remaining initial lease term on any property remains in place for a number of years beyond the balloon payment date, WPC believes that the ability to refinance balloon payment obligations is enhanced. WPC also evaluates all its outstanding loans for opportunities to refinance debt at lower interest rates that may occur as a result of decreasing interest rates or improvements in the credit rating of tenants. Scheduled balloon payments on limited recourse mortgage notes approximate $12,981 in 2001 and $2,333 in 2002. WPC expects to meet its capital requirements to fund future property acquisitions, construction costs on build-to-suit transactions, capital expenditures on existing properties and scheduled debt maturities through long-term secured and unsecured indebtedness and the possible issuance of additional equity securities. WPC's remaining commitments on the expansions of the Sprint and AT & T properties total $4,931. Commitments for capital expenditures on the Livonia, Alpena and Petoskey, Michigan hotels are currently estimated to be approximately $801. In connection with the purchase of many of its properties, WPC required the sellers to perform environmental reviews. Management believes, based on the results of such reviews, that WPC's properties were in substantial compliance with Federal and state environmental statutes at the time the properties were acquired. However, portions of certain properties have been subject to some degree of contamination, principally in connection with leakage from underground storage tanks, surface spills or historical on-site activities. In most instances where contamination has been identified, tenants are actively engaged in the remediation process and addressing identified conditions. Tenants are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. In addition, WPC's leases generally require tenants to indemnify WPC from all liabilities and losses related to the leased properties with provisions of such indemnification specifically addressing environmental matters. The leases generally include provisions that allow for periodic environmental assessments, paid for by the tenant, and allow WPC to extend leases until such time as a tenant has satisfied its environmental obligations. Certain of the leases allow WPC to require financial assurances from tenants such as performance bonds or letters of credit if the costs of remediating environmental conditions are, in the estimation of WPC, in excess of specified amounts. Accordingly, Management believes that the ultimate resolution of environmental matters will not have a material adverse effect on WPC's financial condition, liquidity or results of operations. -23-
25 Item 7A.Quantitative and Qualitative Disclosures about Market Risk: (in thousands) $159,969 of the WPC's long-term debt bears interest at fixed rates, and therefore the fair value of these instruments is affected by changes in the market interest rates. The following table presents principal cash flows based upon expected maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the fixed rate debt. The interest rate on the variable rate debt as of December 31, 2000 ranged from 4.56% to 9.82%. Advances from the line of credit bear interest at an annual rate of either (i) the one, two, three or six-month LIBOR, plus a spread which ranges from 0.6% to 1.45% depending on leverage or corporate credit rating or (ii) the greater of the bank's Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a spread of up to .125% depending on WPC's leverage. (in thousands) <TABLE> <CAPTION> 2001 2002 2003 2004 2005 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt $10,506 $9,223 $9,694 $26,616 $7,550 $96,380 $159,969 $164,087 Weighted average interest rate 7.75% 7.74% 7.81% 7.71% 7.61% 7.55% Variable rate debt $106,279 $3,123 $1,014 $1,042 $1,077 $17,656 $130,191 $130,191 </TABLE> Item 8. Consolidated Financial Statements and Supplementary Data: (i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 2000 and 1999. (iii) Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998. (iv) Consolidated Statements of Members' Equity for the years ended December 31, 2000, 1999 and 1998. (v) Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. (vi) Notes to Consolidated Financial Statements. -24-
26 REPORT of INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of W.P. Carey & Co. LLC and Subsidiaries: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of W.P. Carey & Co. LLC and Subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 51 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP New York, New York February 22, 2001 -25-
27 W.P. CAREY & CO. LLC and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (In thousands except share amounts) DECEMBER 31, ---------------- 2000 1999 ----- ------ <S> <C> <C> ASSETS: Real estate leased to others: Accounted for under the operating method, net of accumulated depreciation of $24,159 and $16,455 at December 31, 2000 and 1999 $414,006 $425,421 Net investment in direct financing leases 287,876 295,556 -------- -------- Real estate leased to others 701,882 720,977 Operating real estate, net of accumulated depreciation of $1,442 and $832 at December 31, 2000 and 1999 6,502 6,753 Real estate under construction and redevelopment 13,359 69,176 Equity investments 47,224 32,167 Assets held for sale 2,573 3,091 Cash and cash equivalents 10,165 2,297 Due from affiliates 7,945 - Intangible assets, net of accumulated amortization of $5,958 at December 31, 2000 94,183 - Other assets, net of accumulated amortization of $1,971 and $1,125 at December 31, 2000 and 1999 and reserve for uncollected rent of $2,207 and $1,839 at December 31, 2000 and 1999 20,409 21,798 -------- -------- Total assets $904,242 $856,259 ======== ======== LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY: Liabilities : Mortgage notes payable $196,094 $188,248 Notes payable 94,066 129,103 Accrued interest 2,655 874 Dividends payable 14,182 10,718 Due to affiliates 15,308 7,227 Accrued taxes 2,688 1,205 Other liabilities 16,374 9,420 -------- -------- Total liabilities 341,367 346,795 -------- -------- Minority interest 802 (3,136) -------- -------- Commitments and contingencies Members' Equity: Listed shares, no par value, 33,604,716 and 25,833,603 shares issued and outstanding at December 31, 2000 and 1999 644,749 526,130 Distributions in excess of accumulated earnings (74,260) (11,560) Unearned compensation (5,291) - Accumulated other comprehensive loss (3,125) (910) -------- ------- 562,073 513,660 Less, shares in treasury at cost, 62,300 shares at December 31, 1999 - (1,060) -------- ------- Total members' equity 562,073 512,600 -------- ------- Total liabilities, minority interest and members' equity $904,242 $856,259 ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. -26-
28 W.P. CAREY & CO. LLC and SUBSIDIARIES CONSOLIDATED STATEMENTS of OPERATIONS <TABLE> <CAPTION> (In thousands except share and per share amounts) For the years ended December 31, -------------------------------- 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Revenues: Rental income $ 52,086 $46,719 $42,771 Interest income from direct financing leases 33,572 33,842 34,529 Management income from affiliates 25,271 - - Other interest income 452 962 783 Other income 2,626 1,208 958 Revenues of hotel operations 6,244 5,775 6,289 -------- ------- ------- 120,251 88,506 85,330 ======== ======= ======= Expenses: Interest 26,571 18,840 18,266 Depreciation 13,508 10,457 7,725 Amortization 7,801 735 681 General and administrative 16,487 7,293 6,241 Property expenses 5,644 5,433 5,059 Termination of management contract 38,000 - - Impairment of real estate and securities 11,047 5,988 1,585 Operating expenses of hotel operations 4,920 4,662 4,956 -------- ------- ------- 123,978 53,408 44,513 ======== ======= ======= (Loss) income before income from equity investments, (loss) gain on sale, minority interest, income taxes and extraordinary item (3,727) 35,098 40,817 Income from equity investments 2,882 1,886 1,837 -------- ------- ------- (Loss) income before (loss) gain on sale, minority interest, income taxes and extraordinary item (845) 36,984 42,654 (Loss) gain on sale of real estate and securities, net (2,752) 471 1,512 -------- ------- ------- (Loss) income before minority interest, income taxes and extraordinary item (3,597) 37,455 44,166 Minority interest in income (1,517) (2,664) (4,662) -------- ------- ------- (Loss) income before income taxes and extraordinary item (5,114) 34,791 39,504 Provision for income taxes (4,164) (752) (419) -------- ------- ------ (Loss) income before extraordinary item (9,278) 34,039 39,085 Extraordinary loss on early extinguishment of debt, net of minority interest of $79 - - (621) ---------- -------- ------- Net (loss) income $ (9,278) $34,039 $38,464 ========= ======= ======= Basic and diluted (loss) earnings per share: (Loss) earnings before extraordinary item $(.31) $1.33 $1.57 Extraordinary item - - (.02) ---------- -------- ------- $(.31) $1.33 $1.55 ========= ======== ======= Weighted average shares outstanding: Basic 29,652,698 25,596,793 24,866,225 ========== ========== ========== Diluted 29,652,698 25,596,793 24,869,570 ========== ========== ========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. -27-
29 W.P. CAREY & CO. LLC and SUBSIDIARIES CONSOLIDATED STATEMENTS of MEMBERS' EQUITY For the years ended December 31, 2000, 1999 and 1998 In thousands except share amounts <TABLE> <CAPTION> Accuulma- Dividends ted in Other Excess Comprehen- Comprehen- of Unearned sive sive Paid-in Accumulated Compen- Income Income Treasury Shares Capital Earnings sation (Loss) (Loss) Shares Total ------ ------- -------- --------- ------ ------ ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at January 1, 1998 23,959,101 $490,820 $490,820 Cash proceeds on issuance of shares, net 384,708 6,191 6,191 Shares issued in connection with services rendered and properties acquired 999,593 20,744 20,744 Dividends declared $(41,267) (41,267) Comprehensive income: Net income 38,464 $38,464 38,464 ------- Other comprehensive income: Change in unrealized appreciation (depreciation) of marketable securities (233) Foreign currency translation adjustment (486) ------ (719) $(719) (719) ------ $37,745 Balance at ======= ---------- --------- -------- ----- -------- December 31, 1998 25,343,402 517,755 (2,803) (719) 514,233 Cash proceeds on issuance of shares, net 34,272 652 652 Shares issued in connection with services rendered and properties acquired 455,929 7,723 7,723 Dividends declared (42,796) (42,796) Repurchase of shares (62,300) $(1,060) (1,060) Comprehensive income: Net income 34,039 $34,039 34,039 ------- Other comprehensive income: Change in unrealized appreciation (depreciation) of marketable securities 497 Foreign currency translation adjustment (688) ------ (191) $(191) (191) ------ $33,848 Balance at ======= ---------- --------- --------- ----- ------ ------- December 31, 1999 25,771,303 526,130 (11,560) (910) (1,060) 512,600 </TABLE> - continued - -28-
30 W.P. CAREY & CO. LLC and SUBSIDIARIES CONSOLIDATED STATEMENTS of MEMBERS' EQUITY For the years ended December 31, 2000, 1999 and 1998 In thousands except share amounts <TABLE> <CAPTION> Accumula- Dividends ted in Other Excess Comprehen- Comprehen- of Unearned sive sive Paid-in Accumulated Compen- Income Income Treasury Shares Capital Earnings sation (Loss) (Loss) Shares Total ------ ------- -------- --------- ------ ------ ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1999 25,771,303 526,130 (11,560) (910) (1,060) 512,600 Shares issued in connection with services rendered and properties acquired 226,290 3,169 3,169 Shares issued in connection with acquisition 8,104,673 124,630 124,630 Shares and options issued under share incentive plans 347,100 6,311 $(6,311) - Forfeitures (8,050) (160) 160 - Dividends declared (53,422) (53,422) Amortization of unearned compensation 860 860 Repurchase of shares (836,600) (14,271) (14,271) Cancellation of treasury shares (15,331) 15,331 - Comprehensive loss: Net loss (9,278) $ (9,278) (9,278) ------- Other comprehensive income: Change in unrealized depreciation of marketable securities (1,155) Foreign currency translation adjustment (1,060) ------ (2,215) (2,215) (2,215) ------ $(11,493) Balance at - ========= ----------- ---------- ---------- -------- -------- -------- --------- December 31, 2000 33,604,716 $644,749 $(74,260) $(5,291) $(3,125) - $562,073 =========== ========== ========== ======== ======= ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. -29-
31 W.P. CAREY & CO. LLC and SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS <TABLE> <CAPTION> (In thousands) For the years ended December 31, -------------------------------- 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Cash flows from operating activities: Net (loss) income $(9,278) $34,039 $38,464 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 21,309 11,192 8,406 Amortization of deferred income (566) (1,397) (964) Extraordinary loss - - 621 Loss (gain) on sales of real estate and securities, net 2,752 (471) (1,512) Minority interest in income 1,517 2,664 4,662 Straight-line rent adjustments and other noncash rent adjustments (1,831) (1,646) (2,642) Management income received in shares of affiliates (2,747) - - Writedown of real estate and securities to estimated fair value 11,047 5,988 1,585 Structuring fees receivable (6,351) - - Provision for uncollected rents 743 328 682 Costs paid by issuance of shares 1,482 1,647 881 Amortization of unearned compensation 860 - - Termination of management contract 38,000 - - Net changes in operating assets and liabilities, net of assets and liabilities acquired on acquisition 1,511 (4,142) 1,761 ------- ------- ------- Net cash provided by operating activities 58,448 48,202 51,944 ------- ------- ------- Cash flows from investing activities: Purchases of real estate (21,497) (60,804) (89,650) Additional capital expenditures (2,078) (3,784) (5,156) Payment of deferred acquisition fees (392) - - Proceeds from sales of real estate and securities 45,617 9,631 21,567 Accrued disposition fees payable - (1,007) 1,007 Purchases of mortgage receivable and marketable securities - (3,676) (56) Sale of mortgage receivable - 3,676 - Distributions received from equity investments in excess of equity income 1,552 775 763 Capital distribution from equity investment 17,544 - - Cash acquired on acquisition of business operations 212 - - -------- -------- ------ Net cash provided by (used in) investing activities 40,958 (55,189) (71,525) -------- ------- ------- Cash flows from financing activities: Dividends paid (49,957) (42,525) (30,820) Payment of accrued preferred distributions - - (4,422) Distributions paid to minority interest (1,321) (2,344) (2,499) Redemption of subsidiary partnership unitholders - - (8,789) Payments of mortgage principal (7,590) (6,393) (6,627) Proceeds from mortgages and notes payable 64,397 74,251 157,823 Prepayments of mortgages and notes payable (83,037) (17,803) (101,555) Prepayment charges paid - - (700) Deferred financing costs - (1,744) (1,963) Proceeds from issuance of shares - 652 7,304 Repurchase of shares (13,944) (627) Other (46) (75) (1,084) ------- ------- ------- Net cash (used in) provided by financing activities (91,498) 3,392 6,668 ------- ------- ------- Effect of exchange rate changes on cash (40) 219 - ------- ------- ------ Net increase (decrease) in cash and cash equivalents 7,868 (3,376) (12,913) Cash and cash equivalents, beginning of year 2,297 5,673 18,586 ------- ------- ------- Cash and cash equivalents, end of year $10,165 $ 2,297 $ 5,673 ======= ======= ======= </TABLE> -continued- The accompanying notes are an integral part of the consolidated financial statements. -30-
32 W.P. CAREY & CO. LLC and SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS, Continued Noncash operating, investing and financing activities: A. The purchase of Carey Management consisted of the acquisition of certain assets and liabilities at fair value in exchange for the issuance of listed shares as follows: <TABLE> <CAPTION> <S> <C> Intangible assets: Management contracts $ 97,135 Trade name 4,700 Workforce 4,900 Goodwill 31,406 -------- 138,141 Liability for 500,000 shares to be issued, net (9,050) Other assets and liabilities, net (4,673) Listed shares issued (124,630) -------- Net cash acquired $ 212 ======== </TABLE> B. The Company issued 181,644, 203,166 and 215,424 restricted shares valued at $2,424, $3,311 and $4,367 in 2000, 1999 and 1998, respectively, to certain directors, officers and affiliates in consideration of services rendered. In connection with the acquisition of Carey Management in 2000, restricted shares and stock options valued at $6,295 have been recorded as unearned compensation, of which $160 has subsequently been forfeited and $860 has been included in compensation expense. C. In connection with the acquisition of real estate interests in 2000, 1999 and 1998, the Company issued shares valued at $778, $4,412 and $16,377, respectively. The Company also assumed mortgage obligations of $6,098 and $13,593 in 1999 and 1998, respectively. D. In connection with the disposition of a property in Topeka, Kansas in 1999, the property was transferred to the purchaser in exchange for assumption of the mortgage obligation on the property and certain other assets and liabilities. The gain on sale was as follows: <TABLE> <CAPTION> <S> <C> Land, buildings and personal property, net of accumulated depreciation $(7,654) Mortgage note payable 8,107 Other (373) ------- Gain on sale $ 80 ======= </TABLE> E. Deferred acquisition fees payable to an affiliate at December 31, 2000, 1999 and 1998 are $4,330, $3,945 and $3,137, respectively. Supplemental Cash Flow Information: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Cash paid for interest, net of amounts capitalized $24,790 $20,055 $17,936 ======= ======= ======= Income taxes paid $ 1,437 $ 659 $ 353 ========= ======= ======= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. -31-
33 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands except share and per share amounts) 1. Organization: W.P. Carey & Co. LLC (the "Company") (formerly known as Carey Diversified LLC) commenced operations on January 1, 1998, pursuant to a consolidation transaction, when the Company acquired the majority ownership interests in the nine Corporate Property Associates (CPA(R)) Partnerships. The former General Partner interests in the CPA(R) Partnerships were retained by two special limited partners, William Polk Carey, formerly the Individual General Partner of the nine CPA(R) Partnerships, and Carey Management LLC ("Carey Management"). Limited partners in the CPA(R) Partnerships who did not elect to receive shares in the Company retained direct ownership interests in the applicable CPA(R) Partnerships as subsidiary partnership unitholders. In July 1998, the Company redeemed all subsidiary partnership units for $8,377. The exchange of CPA(R) Partnership limited partner interests for interests in Carey Diversified was accounted for as a purchase with the limited partner interests recorded at the fair value of the shares exchanged. The excess of fair value over the related historical cost basis of $189,932 was allocated principally to real estate leased to others under operating leases, net investment in direct financing leases and equity investments. The exchange of the former General Partners' interests for shares was accounted for at their historical cost basis. On June 28, 2000 the Company acquired the net lease real estate management operations of Carey Management subsequent to receiving shareholder approval. The assets acquired include the Advisory Agreements with four affiliated publicly owned real estate investment trusts (the "CPA(R) REITs"), the Company's Management Agreement, the stock of an affiliated broker-dealer, investments in the common stock of the CPA(R) REITs, and certain office furniture, fixtures, equipment and employees required to carry on the business operations of Carey Management. The purchase price consisted of the initial issuance of 8,000,000 Listed Shares ("shares") with an additional 2,000,000 shares issuable over four years if specified performance criteria are achieved (of which 500,000 shares will be issued based on meeting performance criteria as of December 31, 2000 and valued at $9,050, based on the quoted price of the Company's shares at December 31, 2000). The initial 8,000,000 shares issued are restricted from resale for a period of up to three years. The total initial purchase price was approximately $131,300 including the issuance of 8,000,000 shares, transaction costs of $2,605, the acquisition of Carey Management's special limited partnership minority interests in the CPA(R) Partnerships and the value of restricted shares and options issued in respect of the interests of certain officers in a non-qualified deferred compensation plan of Carey Management. The Company has guaranteed loans of $7,995 to these officers in connection with their acquisition of equity interests in the Company. The acquisition of interests in Carey Management was accounted for as a purchase and is recorded at the fair value of the initial 8,000,000 shares issued and an additional 500,000 shares issuable based on meeting certain performance criteria as of December 31, 2000. For financial reporting purposes, the value of the 500,000 shares is recorded as additional purchase price. The fair value of the initial shares was based upon the average market price for a reasonable period before and after the date the terms of the acquisition were announced, including a discount to reflect the restrictions on their disposition. Any subsequent issuances based on performance criteria are valued based on the market price of the shares on the date when the performance criteria are achieved. The purchase price has been allocated to the assets and liabilities acquired based upon their fair market values. Intangible assets acquired, including the Advisory Agreements with the CPA(R) REITs, the Company's Management Agreement, the trade name, and workforce, were determined pursuant to an independent valuation. The value of the Advisory Agreements and the Management Agreement have been computed based on a discounted cash flow analysis of the projected fees. The excess of the purchase price over the fair values of the identified tangible and intangible assets, has been recorded as goodwill. The acquisition of the Company's Management Agreement has been accounted for as a contract termination and the fair value of the Agreement of $38,000 was expensed as of the date of the merger. Effective January 1, 2001, the Company has acquired all remaining minority interests in the CPA(R) Partnerships. An independent valuation is being completed which will determine the shares to be issued for the acquisition of the remaining minority interests. Concurrent with the purchase of the remaining interests in the CPA(R) Partnerships, certain CPA(R) Partnerships were merged so that as of January 1, 2001, the four remaining CPA(R) Partnerships will be wholly-owned subsidiaries. With the reduction in the number of Partnerships and the elimination of the minority interest owners in such Partnerships, the Company expects to achieve certain operating efficiencies. -32-
34 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. Summary of Significant Accounting Policies: Basis of Consolidation: The consolidated financial statements include the Company and its wholly-owned and majority-owned subsidiaries including the CPA(R) Partnerships. All material inter-entity transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the assessment of recoverability of real estate and intangible assets and goodwill. Actual results could differ from those estimates. Real Estate Leased to Others: Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Company diversifies its real estate investments among various corporate tenants engaged in different industries and by property type. No lessee currently represents 10% or more of total leasing revenues. The leases are accounted for under either the direct financing or operating methods. Such methods are described below (also see Notes 4 and 5): Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Company's net investment in the lease. Operating method - Real estate is recorded at cost less accumulated depreciation, minimum rental revenue is recognized on a straight-line basis over the term of the related leases and expenses (including depreciation) are charged to operations as incurred. Substantially all of the Company's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides. Certain of the Company's leases provide for additional rental revenue by way of percentage rents to be paid based upon the level of sales to be achieved by the lessee. These percentage rents are recorded once the required sales level is achieved and are included in the accompanying consolidated financial statements in rental income and interest income from direct financing leases. Operating Real Estate: Land and buildings and personal property are carried at cost less accumulated depreciation. Renewals and improvements are capitalized, while replacements, maintenance and repairs that do not improve or extend the lives of the respective assets are expensed currently. Real Estate Under Construction and Redevelopment: For properties under construction, interest charges are capitalized rather than expensed and rentals received are recorded as a reduction of capitalized project (i.e., construction) costs. The amount of interest capitalized is determined by applying the interest rate applicable to outstanding borrowings on the line of credit to the average amount of accumulated expenditures for properties under construction during the period. -33-
35 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Equity Investments: The Company's interests in entities in which the Company's ownership is 50% or less and the Company exerts significant influence are accounted for under the equity method, i.e. at cost, increased or decreased by the Company's pro rata share of earnings or losses, less distributions. Assets Held for Sale: Assets held for sale are accounted for at the lower of carrying value or fair value, less costs to dispose. The Company recognizes gains and losses on the sale of properties when among other criteria, the parties are bound by the terms of the contract, all consideration has been exchanged and all conditions precedent to closing have been performed. At the time the sale is consummated, a gain or loss is recognized as the difference between the sale price less any closing costs and the carrying value of the property. Intangible Assets: Goodwill represents the excess of the purchase price of the net lease real estate management operations over the fair value of net assets acquired. Other intangible assets represent cost allocated to trade names, advisory contracts with the CPA(R) REITs and the acquired workforce. Intangible assets are being amortized over their estimated useful lives which range from 2 1/2 to 16 1/2 years. Intangible assets as of December 31, 2000 is as follows: <TABLE> <CAPTION> <S> <C> Management contracts $ 59,135 Workforce 4,900 Trade name 4,700 Goodwill 31,406 -------- 100,141 Less accumulated amortization 5,958 -------- $ 94,183 ======== </TABLE> Long-Lived Assets: When events or changes in circumstances indicate that the carrying amount may not be recoverable, the Company assesses the recoverability of its long-lived assets, including residual interests of real estate assets and investments, based on projections of undiscounted cash flows, without interest charges, over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated fair value. Depreciation: Depreciation is computed using the straight-line method over the estimated useful lives of the properties (generally forty years) and for furniture, fixtures and equipment (generally up to seven years). Foreign Currency Translation: The Company consolidates its real estate investments in France. The functional currency for these investments is the French Franc. The translation from the French Franc to U. S. dollars is performed for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains and losses resulting from such translation are reported as a component of other comprehensive income as part of members' equity. -34-
36 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Cash Equivalents: The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Company's cash and cash equivalents at December 31, 2000 and 1999 were held in the custody of four financial institutions and which balances, at times, exceed federally insurable limits. The Company mitigates this risk by depositing funds with major financial institutions. Other Assets and Liabilities: Included in other assets are accrued rents and interest receivable, deferred rent receivable, deferred charges and marketable securities. Included in other liabilities are accrued interest, accounts payable and accrued expenses and deferred income taxes. Deferred charges include costs incurred in connection with debt financing and refinancing and are amortized over the terms of the related debt obligations. Deferred rent receivable is the aggregate difference for operating method leases between scheduled rents which vary during the lease term and rent recognized on a straight-line basis. Also included in deferred rent receivable are lease restructuring fees received which are recognized over the remainder of the initial lease terms. Marketable securities are classified as available-for-sale securities and reported at fair value with the Company's interest in unrealized gains and losses on these securities reported as a component of other comprehensive income until realized. Such marketable securities had a cost basis of $1,362 and $2,065 and reflected a fair value of $470 and $2,329 at December 31, 2000 and 1999, respectively. Due to Affiliates: Included in due to affiliates are deferred acquisition fees which are payable for services provided by Carey Management prior to the termination of the Management Contract, relating to the identification, evaluation, negotiation, financing and purchase of properties and additional shares for meeting performance criteria related to the acquisition of the net lease real estate management operations. The fees are payable in eight annual installments each January 1 following the first anniversary of the date a property was purchased, with each installment equal to .25% of the purchase price of the property. Revenue Recognition: In connection with the acquisition of Carey Management described in Note 1, the Company earns transaction and asset-based fees. Structuring and financing fees are earned for investment banking services provided in connection with the analysis, negotiation and structuring of transactions, including acquisitions and the placement of mortgage financing obtained by the CPA(R) REITs. Asset-based fees consist of property management, leasing and advisory fees and reimbursement of certain expenses in accordance with the separate management agreements with each CPA(R) REIT for administrative services provided for operation of such CPA(R) REIT. Receipt of the incentive fee portion of the management fee, however, is subordinated to the achievement of specified cumulative return requirements by the shareholders of the CPA(R) REITs. The incentive portion of management fees may be collected in cash or shares of the CPA(R) REIT at the option of the Company. During 2000, the Company elected to receive its earned incentive fees in CPA(R) REIT shares. All fees are recognized as earned. Transaction fees are earned upon the consummation of a transaction and management fees are earned when services are performed. Fees subject to subordination are recognized only when the contingencies affecting the payment of such fees are resolved, that is, when the performance criterion or criteria of the CPA(R) REIT is achieved. The Company also receives reimbursement of certain marketing costs in connection with the sponsorship of a CPA(R) REIT that is conducting a "best efforts" public offering. Reimbursement income is recorded as the expenses are incurred (see Note 3). -35-
37 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Income Taxes: The Company is a limited liability company and has elected partnership status for federal income tax purposes. The Company is not liable for Federal income taxes as each member recognizes his or her proportionate share of income or loss in his or her tax return. Certain wholly-owned subsidiaries are not eligible for partnership status and, accordingly, all tax liabilities incurred by these subsidiaries do not pass through to the members. Accordingly, the provision for Federal income taxes is based on the results of those consolidated subsidiaries that do not pass through any share of income or loss to members. The Company is subject to certain state and local taxes. Deferred income taxes are provided for based on earnings reported. The provision for income taxes differs from the amounts currently payable because of temporary differences in the recognition of certain income and expense items for financial reporting and tax reporting purposes. Income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial bases of assets and liabilities (see Note 17) Earnings Per Share: The Company presents both basic and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount. Basic and diluted earnings (loss) per share were calculated as follows: <TABLE> <CAPTION> Basic and Diluted Weighted Per Net (Loss) Shares Share Income Outstanding Amount ---------- ---------------- ------- <S> <C> <C> <C> Year Ended December 31, 2000 ---------------------------- Basic and diluted net loss $(9,278) 29,652,698 $(.31) ======= ===== Year Ended December 31, 1999 ---------------------------- Basic and diluted net income $34,039 25,596,793 $1.33 ======= ===== Year Ended December 31, 1998 ---------------------------- Basic earnings before extraordinary item $39,085 24,866,225 $1.57 Extraordinary item (621) (.02) ------- ----- Basic net income $38,464 24,866,225 $1.55 ======= ===== Effect of dilutive securities - options for shares 3,345 ---------- Diluted earnings before extraordinary item $39,085 24,869,570 $1.57 Extraordinary item (621) (.02) ------- ----- Diluted net income $38,464 24,869,570 $1.55 ======= ========== ===== </TABLE> For the years ended 2000 and 1999, 4,143,254 and 3,199,280 share options, respectively, were not reflected because such options were anti-dilutive, either because of the exercise price of the options or because the Company incurred a net loss. The Company repurchased 836,600 of its shares outstanding during 2000 in connection with an announcement in December 1999 that it would purchase up to 1,000,000 shares. Stock Based Compensation: The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations ("APB No. 25"). Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price of the Company's shares at the date of grant over the exercise price of the option granted. -36-
38 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company has granted restricted shares and stock options to substantially all employees. Shares were awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions of transferability and a risk of forfeiture. The forfeiture provisions on the awards expire annually, over periods of four and three years for the shares and stock options, respectively. Shares and stock options subject to forfeiture provisions have been recorded as unearned compensation and are presented as a separate component of members' equity. Compensation cost for stock options and restricted stock, if any, is recognized ratably over the vesting period of three and four years, respectively. Compensation cost for share plans was $860 in 2000. No compensation cost was recognized in 1999 and 1998 in connection with the Company's share plans. The Company provides additional pro forma disclosures as required (see Note 15). All transactions with non-employees in which the Company issues stock as consideration for services received are accounted for based on the fair value of the stock issued or services received, whichever is more reliably determinable. Reclassification: Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. 3. Transactions with Related Parties: For the years ended 2000, 1999 and 1998, the Company incurred combined management and performance fees of $1,924, $3,025 and $2,201, respectively, and general and administrative costs of $861, $1,457, and $1,540, respectively. As described in Note 1, the Company's Management Agreement with Carey Management was cancelled effective with the acquisition of the business operations of Carey Management. The Company is now internally managed and, as a result of the cancellation of the Management Agreement and acquisition of Carey Management's workforce as of the date of the acquisition, no longer incurs management and performance fees nor reimburses a manager for general and administrative reimbursements, primarily consisting of the manager's cost of providing administration to the operation of the Company. As a result of acquiring the Advisory Agreements with the CPA(R) REITs, the Company has engaged in a new business segment, advisory operations, and earns fees as the Advisor to the four affiliated CPA(R) REITs as described in Note 2. Under the Advisory Agreements with the CPA(R) REITs, the Company performs various services, including but not limited to the day-to-day management of the CPA(R) REITs and transaction-related services. In addition, the Company's broker-dealer subsidiary earns fees in connection with the on-going "best efforts" public offering of CPA(R):14. The Company earns an asset management fee of 1/2 of 1% per annum of Average Invested Assets, as defined in the Agreements, for each CPA(R) REIT and, based upon certain performance criteria for each REIT, may be entitled to receive performance fees, calculated on the same basis as the asset management fee, and is reimbursed for certain costs, primarily the cost of personnel. For the year ended December 31, 2000, asset-based fees and reimbursements earned were $10,377. In connection with structuring and negotiating acquisitions and related mortgage financing for the CPA(R) REITs, the Advisory Agreements provide for transaction fees based on the cost of the properties acquired. A portion of the fees are payable in equal annual installments over no less than eight years, subject to certain limitations. Such unpaid amounts bear interest at annual rates ranging from 6% to 7%. The Company may also earn fees related to the disposition of properties, subject to subordination provisions and will only be recognized as such subordination provisions are achieved. For the year ended December 31, 2000, the Company earned transaction fees of $14,894. In connection with the acquisition of the CPA(R) Partnerships described in Note 1, the former Corporate General Partners of eight of the CPA(R) Partnerships satisfied provisions for receiving a subordinated preferred return from the Partnerships totaling $4,422 based upon the cumulative proceeds from the sale of the assets of each Partnership from inception through the date of the consolidation. Payment was based on achieving a specified -37-
39 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED cumulative return to limited partners. For the partnership that has not yet achieved the specified cumulative return, its subordinated preferred return of $1,423 is included in due to affiliates, and will be paid if the Company achieves a closing price equal to or in excess of $23.11 for five consecutive trading days. Prior to the termination of the Management Agreement, Carey Management performed certain services for the Company and earned transaction fees in connection with the purchase and disposition of properties. Transaction fees paid to Carey Management and affiliates were $1,832 and $4,510 in 1999 and 1998, respectively. The Company is also obligated to pay deferred acquisition fees in equal annual installments over a period of no less than eight years. As of December 31, 2000 and 1999, unpaid deferred acquisition fees were $3,802 and $3,945, respectively, and bear interest at an annual rate of 6%. An installment of $392 was paid in January 2000. The Company is a participant in an agreement with certain affiliates for the purpose of leasing office space used for the administration of the Company and other affiliated real estate entities and sharing the associated costs. Pursuant to the terms of the agreement, the Company's share of rental, occupancy and leasehold improvement costs is based on gross revenues. Expenses incurred were $348, $545, and $558 in 2000, 1999 and 1998, respectively. An independent director of the Company has an ownership interest in companies that own the minority interest in the Company's French majority-owned subsidiaries. The director's ownership interest is subject to the same terms as all other ownership interests in the subsidiary companies. An officer of the Company is the sole shareholder of Livho, Inc., a lessee of the Company (see Note 8). 4. Real Estate Leased to Others Accounted for Under the Operating Method: Real estate leased to others, at cost, and accounted for under the operating method is summarized as follows: <TABLE> <CAPTION> December 31, ------------ 2000 1999 ---- ---- <S> <C> <C> Land $ 86,134 $ 91,447 Buildings and improvements 352,031 350,429 -------- -------- 438,165 441,876 Less: Accumulated depreciation 24,159 16,455 -------- -------- $414,006 $425,421 ======== ======== </TABLE> The scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to $45,214 in 2001, $43,909 in 2002, $39,909 in 2003, $36,189 in 2004, $33,136 in 2005, and aggregate $335,527 through 2019. Contingent rentals were $621, $563 and $614 in 2000, 1999 and 1998 respectively. 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows: <TABLE> <CAPTION> December 31, ------------ 2000 1999 ---- ---- <S> <C> <C> Minimum lease payments receivable $348,316 $365,558 Unguaranteed residual value 284,843 293,550 -------- -------- 633,159 659,108 Less: Unearned income 345,283 363,552 -------- -------- $287,876 $295,556 ======== ======== </TABLE> The scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to $30,679 in 2001, $30,154 in 2002, $30,168 in 2003, $30,157 in 2004, $30,240 in 2005, and aggregate $348,316 through 2018. Contingent rentals were approximately $1,491, $995 and $320 in 2000, 1999 and 1998, respectively. -38-
40 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. Mortgage Notes Payable and Notes Payable: Mortgage notes payable, substantially all of which are limited recourse obligations, are collateralized by the assignment of various leases and by real property with a carrying value of approximately $325,066. As of December 31, 2000, mortgage notes payable have interest rates varying from 4.56% to 9.82% per annum and mature from 2001 to 2015. Certain of the mortgage notes payable are prepayable, subject to prepayment charges. Scheduled principal payments for the mortgage notes during each of the next five years following December 31, 2000 and thereafter are as follows: <TABLE> <CAPTION> Year Ending December 31, ------------------------ <S> <C> 2001 $ 22,719 2002 12,345 2003 10,708 2004 27,659 2005 8,627 Thereafter 114,036 -------- Total $196,094 ======== </TABLE> The Company has a line of credit of $185,000 pursuant to a revolving credit agreement with The Chase Manhattan Bank in which nine lenders participate. The revolving credit agreement had an initial term of three years through March 20, 2001 and has been extended for an additional three years through March 2004. As of December 31, 2000, the Company had $94,000 drawn from the line of credit. Additional advances of $16,000 have been drawn from the line of credit since December 31, 2000. Advances, which are prepayable at any time, bear interest at an annual rate of either (i) the one, two, three or six-month LIBOR, as defined, plus a spread which ranges from 0.6% to 1.45% depending on leverage or corporate credit rating or (ii) the greater of the bank's Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a spread of up to .125% depending upon the Company's leverage. At December 31, 2000 and 1999, the average interest rate on advances on the line of credit was 7.86% and 7.8%, respectively. In addition, the Company will pay a fee (a) ranging between 0.15% and 0.20% per annum of the unused portion of the credit facility, depending on the Company's leverage, if no minimum credit rating for the Company is in effect or (b) equal to .15% of the total commitment amount, if the Company has obtained a certain minimum credit rating. The revolving credit agreement has financial covenants that require the Company to (i) maintain minimum equity value of $400,000 plus 85% of amounts received by the Company as proceeds from the issuance of equity interests and (ii) meet or exceed certain operating and coverage ratios. Such operating and coverage ratios include, but are not limited to, (a) ratios of earnings before interest, taxes, depreciation and amortization to fixed charges for interest and (b) ratios of net operating income, as defined, to interest expense. The Company has always been in compliance with the financial covenants. 7. Dividends Payable: The Company declared a quarterly dividend of $.4225 per share on December 22, 2000 payable to shareholders of record as of December 29, 2000. The dividend was paid in January 2001. -39-
41 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued 8. Lease Revenues: For the years ended December 31, 2000, 1999 and 1998, the Company earned its net leasing revenues (i.e., rental income and interest income from direct financing leases) from over 75 lessees. A summary of net leasing revenues including all current lease obligors with more than $1,000 in annual revenues is as follows: <TABLE> <CAPTION> Years Ended December 31, ------------------------ 2000 % 1999 % 1998 % ---- - ---- - ---- - <S> <C> <C> <C> <C> <C> <C> Federal Express Corporation $ 5,659 7% $ 247 - $ 254 - Dr Pepper Bottling Company of Texas 4,283 5 4,123 5% 3,998 5% Gibson Greetings, Inc. 4,046 5 3,954 5 3,870 5 Detroit Diesel Corporation 3,795 4 3,658 5 3,658 5 Sybron International Corporation 3,627 4 3,627 4 3,311 4 Livho, Inc. 3,226 4 3,226 4 2,958 4 Orbital Sciences Corporation 2,655 3 2,311 3 2,154 3 Quebecor Printing, Inc. 2,586 3 2,552 3 2,523 3 America West Holdings Corp 2,539 3 1,839 2 - - Thermadyne Holdings Corp 2,477 3 2,243 3 2,234 3 Furon Company 2,415 3 2,415 3 2,415 3 AutoZone, Inc. 2,378 3 2,331 3 2,469 3 The Gap, Inc. 2,205 3 2,205 3 2,199 3 Lockheed Martin Corporation 2,056 2 2,740 3 1,621 2 Unisource Worldwide, Inc. 1,725 2 1,726 2 1,714 2 Bell South Telecommunications, Inc. 1,711 2 175 - - - AP Parts International, Inc. 1,617 2 1,617 2 1,783 2 CSS Industries, Inc. 1,598 2 1,588 2 1,580 2 Brodart, Co. 1,519 2 1,519 2 1,432 2 Red Bank Distribution, Inc. 1,475 2 1,401 2 1,401 2 Peerless Chain Company 1,463 2 1,463 2 1,463 2 United States Postal Service 1,425 2 1,396 2 1,090 1 High Voltage Engineering Corp. 1,329 2 1,329 2 1,187 2 Eagle Hardware & Garden, Inc. 1,288 2 1,387 2 - - Duff-Norton Company, Inc. 1,164 1 1,164 1 1,164 2 Sprint Spectrum, Inc. 1,154 1 1,154 1 - - Cendant Operations, Inc. 1,075 1 634 - - - Other 23,168 25 26,537 34 30,822 40 ------- --- ------- ---- ------- ---- $85,658 100% $80,561 100% $77,300 100% ======= === ======= === ======= === </TABLE> -40-
42 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. Gains and Losses on Sale of Real Estate and Securities: Significant sales of properties are summarized as follows: 2000 In 1998, the Company acquired land in Colliersville, Tennessee and entered into a build-to-suit commitment to construct four office buildings to be occupied by Federal Express Corporation ("Federal Express") at a cost of up to $77,000. In February 2000, a net lease with Federal Express with an initial lease term of 20 years commenced at an annual rent of $6,360. In order to mitigate the concentration of risk in a single lease, the Company agreed to sell a 60% majority interest in the subsidiary that owns the Federal Express property to an affiliate, Corporate Property Associates 14 Incorporated ("CPA(R):14"), at a purchase price based on an independent appraisal. Based on such independent appraisal, the Company received $42,287 and recognized a loss of $2,262 in connection with the sale. During 2000, the Company sold ten properties formerly leased to The Kobacker Stores, Inc. and a property formerly leased to AutoZone, Inc. located in Pensacola, Florida. In connection with the sales, the Company received $2,672, net of costs, and incurred combined losses on the sales of $755. The Company also sold two properties, located in Silver City, New Mexico and Carthage, New York, for $700, and recognized a net loss of $20. The Company recognized a gain of $257 on the sale of its 18,540 shares of common stock of Titan Corporation. The Company had previously exercised warrants that were granted in connection with structuring its net lease with Titan Corporation in 1991. 1999 On September 30, 1999, the Company sold its property in Topeka, Kansas, leased to Hotel Corporation of America ("Hotel Corp.") for $8,107 pursuant to Hotel Corp.'s exercise of its purchase option. In connection with the sale, the Company realized a $80 gain. In December 1996, KSG, Inc. ("KSG") notified the Company that it was exercising its option to purchase the property it leases in Hazelwood, Missouri. In January 1999, the Company and KSG entered into an agreement to establish a minimum and maximum exercise price of $9,000 and $11,500 and agreed to defer the exercise price determination until a dispute regarding an interpretation of the purchase option provisions of the lease was resolved. The court ruled in favor of the Company in 1999, and the Company sold the property to KSG for $11,000 plus an allowance of $100 for legal costs. In connection with the sale, the Company realized a $391 gain. 1998 In April 1998 Simplicity Manufacturing, Inc. purchased its leased property in Port Washington, Wisconsin for $9,684 pursuant to the exercise of its purchase option. A loss of $291 was recognized on the sale. In December 1998, NVR, Inc. purchased its leased property in Pittsburgh, Pennsylvania for $12,193 pursuant to a purchase option exercised in 1998. A gain of $1,754 was recognized on the sale. 10. Extraordinary Gains and Losses on Extinguishment of Debt: In connection with the prepayment of high interest loans collateralized by properties leased to Dr Pepper Bottling Company of Texas, Orbital Sciences Corporation and Simplicity Manufacturing, Inc., the Company incurred $700 in prepayment charges resulting in an extraordinary loss on the extinguishment of debt of $621, net of $79 attributable to minority interests in 1998. -41-
43 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. Impairment of Real Estate and Securities: Significant writedowns of properties and securities to estimated fair value based on assessment of recoverability are summarized as follows: 2000 The Company incurred impairment losses of $11,047 in 2000 in connection with the writedown of real estate interests and other long-lived assets to estimated fair value based on the following circumstances: The Company owns a property in Garland, Texas leased to Varo, Inc. ("Varo"). Although the lease ends in October 2002 and Varo continues to meet its lease obligations, the property is vacant. As a result, the Company is actively remarketing the property. The property has been written down to its estimated fair value and a writedown of $2,238 has been recognized. The Company owns a property in Traveler's Rest, South Carolina formerly leased to Swiss-M-Tex L.P. ("M-Tex"). Based on M-Tex's weak financial condition and its inability to meet its lease obligations, the lease was terminated in 2000. The property has been written down to its estimated fair value and a writedown of $2,657 has been recognized. DeVlieg Bullard, Inc., the former lessee of properties in Frankenmuth, Michigan and McMinnville, Tennessee disaffirmed its master lease for the two properties in connection with its petition of voluntary bankruptcy. The two properties are currently occupied under short-term license agreements and the Company expects to enter into leases with the current occupants. The McMinnville property has been written down to its estimated fair value and a writedown of $2,677 has been recognized. The Company owns a property in Burnsville, Minnesota leased to General Cinema Corporation ("General Cinema"). During 2000, General Cinema filed a petition of voluntary bankruptcy. Because General Cinema had vacated the property prior to the filing of its petition, the Company anticipates that the lease will be disaffirmed. Accordingly, the property has been written down to its estimated fair value and a writedown of $1,500 has been recognized. The lease obligations of General Cinema are guaranteed by Harcourt General, Inc. The Company also recognized writedowns of $1,514 on its assessments of the recoverability of a redeemable preferred limited partnership interest that was acquired in connection with the sale of a property in 1995 and debentures received in connection with a bankruptcy settlement with a former lessee and $461 in connection with other properties held for sale. 1999 The Company owned a property in Carthage, New York which was leased to Sunds Defibrator, Inc. ("Sunds"). During 1999, the Company accepted offers to sell the property for $300 and to receive a lease termination payment of $500, payable at the time of sale. In connection with the proposed sale, the Company recognized a noncash charge of $1,000 on the writedown of the property to the anticipated sales price. Annual rent for the property was $144. The initial term of the Sunds lease was scheduled to expire in 2005. The property was subsequently sold in 2000. As described in Note 12, the Company recognized a noncash charge of $4,830 on the writedown of the Company's equity interest in Meristar Hospitality Corporation. 1998 The Company owns a property in Urbana, Illinois leased to Motorola, Inc. ("Motorola"). During 1998, Motorola notified the Company of its intention to exercise its option to purchase the property. Based on the appraisal prepared for the Company and the expectation that the appraisal would be the basis for the exercise price, the Company recognized a writedown of $1,575 to an amount representing the fair value of the property, less costs to sell. An additional writedown of $158 was recognized in 1999. The purchase option was not exercised. -42-
44 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 12. Equity Investments: The Company owns 780,269 units of the operating partnership of Meristar Hospitality Corporation ("Meristar"), a publicly traded real estate investment trust which primarily owns hotels. The Company has the right to convert its units in the operating partnership to shares of common stock in Meristar at any time on a one-for-one basis. The exchange of units for common stock would be a taxable transaction in the year of exchange. The Company's interest in the Meristar operating partnership is being accounted for under the equity method. The carrying value of the equity interest in the Meristar operating partnership was $18,889 and $18,725 as of December 31, 2000 and 1999, respectively. Because of a continued weakness in the public market's valuation of equity securities of real estate investment companies including Meristar, Management concluded that the underlying value of its investment in operating partnership units was impaired. Accordingly, the Company wrote down its equity investment by $4,830 in 1999. The carrying value of the investment in Meristar subsequent to the writedown approximated the Company's pro rata ownership of Meristar at Meristar's reported net asset value. As of December 31, 2000, Meristar's quoted per share market value was $19.69 resulting in an aggregate value of approximately $15,364 if converted. The audited consolidated financial statements of Meristar filed with the United States Securities and Exchange Commission ("SEC") reported total assets of $3,013,008 and $3,094,201 and shareholders' equity of $1,134,555 and $1,183,896 as of December 31, 2000 and 1999, respectively, and revenues of $400,778, $374,904 and $525,297 and net income of $105,861, $98,964 and $43,707 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company owns equity interests as a limited partner in two limited partnerships that each own real estate net leased to a single tenant. Corporate Property Associates 10 Incorporated owns the remaining controlling interests as a general partner in each partnership. The Company also owns equity interests in two limited liability companies that each own real estate net leased to a single tenant with CPA(R):14. Effective as of June 29, 2000, the Company acquired 20,000 shares of common stock in the four CPA(R) REITs with which it has advisory agreements. Since June 29, 2000, the Company has acquired an additional 105,691 and 132,066 shares, respectively, of Carey Institutional Properties Incorporated and Corporate Property Associates 12 Incorporated, both CPA(R) REITs, in connection with earning incentive fees (see Note 3). The interests in the CPA(R) REITs are accounted for under the equity method due to the Company's ability to exercise significant influence as the Advisor to the REITs. The Company's ownership interests in each of the CPA(R) REITs represent less than 1% of the outstanding shares of each CPA(R) REIT. The audited consolidated financial statements of the CPA(R) REITs are filed with the SEC. Combined financial information of the affiliated equity investees is summarized as follows: <TABLE> <CAPTION> December 31, ------------ 2000 1999 ---- ---- <S> <C> <C> Assets $1,745,901 $81,054 Liabilities 789,984 51,211 ---------- ------- Capital $ 955,917 $29,843 ========== ======= </TABLE> <TABLE> <CAPTION> Year Ended December 31, ----------------------- 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Revenue(1) $173,006 $8,465 $6,990 Expenses 100,006 5,603 4,536 -------- ------ ------ Net income $ 73,000 $2,862 $2,454 ======== ====== ====== </TABLE> (1). Includes the net effect of minority interests in income, income from equity investments and gains (losses) on the sale of real estate and securities. -43-
45 13. Disclosures About Fair Value of Financial Instruments: The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The Company estimates that the fair value of mortgage notes payable and other notes payable was $294,278 and $313,747 at December 31, 2000 and 1999, respectively (see Note 6). The fair value of fixed rate debt instruments was evaluated using a discounted cash flow model with discount rates that take into account the credit of the tenants and interest rate risk. The fair value of the note payable from the line of credit approximates the carrying value as it is a variable rate obligation with an interest rate that resets to market rates. 14. Selected Quarterly Financial Data (unaudited): <TABLE> <CAPTION> Three Months Ended ------------------ March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000 -------------- ------------- ------------------ ----------------- <S> <C> <C> <C> <C> Revenues $23,276 $26,611 $33,929 $36,435 Expenses 13,659 54,744 22,114 33,461 Net income (loss) 9,625 (30,041) 11,375 (237) Net income (loss) per share - basic and diluted .38 (1.18) .34 (.01) Dividends declared per share .4225 .4225 .4225 .4225 </TABLE> <TABLE> <CAPTION> Three Months Ended ------------------ March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999 -------------- ------------- ------------------ ----------------- <S> <C> <C> <C> <C> Revenues $21,114 $21,877 $23,731 $21,784 Expenses 11,084 11,687 13,872 17,478 Income before extraordinary items 9,866 9,620 9,470 5,122 Net income 9,827 9,620 9,470 5,122 Net income per share - basic and diluted .39 .38 .37 .20 Dividends declared per share .4175 .4175 .4175 .4175 </TABLE> 15. Stock Options and Warrants: In January 1998, an affiliate was granted warrants to purchase 2,284,800 shares exercisable at $21 per share and 725,930 shares exercisable at $23 per share as compensation for investment banking services in connection with structuring the consolidation on the CPA(R) Partnerships. The warrants are exercisable until January 2009. The Company maintains stock option incentive plans pursuant to which share options may be issued. The 1997 Share Incentive Plan (the "Incentive Plan"), as amended, authorizes the issuance of up to 2,600,000 shares. The Company Non-Employee Directors' Plan (the "Directors' Plan") authorizes the issuance of up to 300,000 shares. The Incentive Plan provides for the grant of (i) share options which may or may not qualify as incentive stock options, (ii) performance shares, (iii) dividend equivalent rights and (iv) restricted shares. In 2000, 922,152 share options were granted at exercise prices ranging from $7.69 to $16.50 per share. In 1999, share options for 38,500 shares were granted at an exercise price of $19.69 per share. In 1998, share options for 113,500 shares were granted at an exercise price of $20 per share. The options granted under the Incentive Plan have a 10-year term and are exercisable for one-third of the granted options on the first, second and third anniversaries of the -44-
46 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED date of grant. The vesting of grants, however, may be accelerated upon a change in control of the Company and under certain other conditions. The Directors' Plan provides for the same terms as the Incentive Plan. Share options for 21,822, 12,704 and 23,846 shares were granted at exercise prices ranging from $16.38 to $20 per share in 2000, 1999 and 1998, respectively. Share option and warrant activity is as follows: <TABLE> <CAPTION> Weighted Average Exercise Price Number of Shares Per Share ---------------- --------- <S> <C> <C> Balance at January 1, 1998 - - Granted 3,148,076 $21.42 Exercised - - Forfeited - - ----------- Balance at December 31, 1998 3,148,076 $21.42 Granted 51,204 $19.31 Exercised - - Forfeited - ----------- Balance at December 31, 1999 3,199,280 $21.38 Granted 943,974 $13.24 Exercised - - Forfeited (29,000) $16.25 ----------- Balance at December 31, 2000 4,114,254 $19.57 =========== </TABLE> At December 31, 2000, 1999 and 1998, the range of exercise prices and weighted-average remaining contractual life of outstanding share options and warrants was $7.69 to $23 and 8.32 years, $17.25 to $23.00 and nine years, and $20 to $23 and ten years, respectively. The per share weighted average fair value of share options and warrants issued during 2000 were estimated to be $3.80 using a Black-Scholes option pricing formula. The more significant assumptions underlying the determination of the weighted average fair value include a risk-free interest rate of 6.8%, a volatility factor of 22.53%, a dividend yield of 8.44% and an expected life of ten years. The per share weighted average fair value of share options issued during 1999 was estimated to be $1.48, using a binomial option pricing formula. The more significant assumptions underlying the determination of the weighted average fair value include a risk-free interest rate of 5.54% a volatility factor of 18.35%, a dividend yield of 7.64% and an expected life of ten years. The per share weighted average fair value of share options and warrants issued during 1998 were estimated to be $1.45 using a binomial option pricing formula. The more significant assumptions underlying the determination of the weighted average fair value include a risk-free interest rate of 5.36%, a volatility factor of 18.16%, a dividend yield of 7.33% and an expected life of ten years. The Company has elected to adopt the disclosure only provisions of SFAS No. 123. If stock based compensation cost had been recognized based upon fair value at the date of grant for options awarded under the two plans in accordance with the provisions of SFAS No. 123, pro forma net (loss) income for 2000, 1999 and 1998 would have been $(12,770), $33,964 and $38,299, respectively, and pro forma basic and diluted earnings (loss) per share would have been $(.45) for 2000, unchanged for 1999 and $1.54 for 1998. -45-
47 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. Segment Reporting: The Company has determined that it operates in two business segments, management services and real estate operations with domestic and international investments. The two segments are summarized as follows: <TABLE> <CAPTION> Management Real Estate Other(3) Total Company ---------- ----------- ----- ------------- <S> <C> <C> <C> <C> Revenues: 2000 $25,271 $88,736 $6,244 $120,251 1999 - 82,731 5,775 88,506 1998 - 79,041 6,289 85,330 Operating, interest and tax expenses(1,2) (excluding depreciation and amortization): 2000 12,259 51,568 5,006 68,833 1999 - 38,306 4,662 42,968 1998 - 31,570 4,956 36,526 Income from equity investments: 2000 69 2,813 - 2,882 1999 - 1,886 - 1,886 1998 - 1,837 - 1,837 Net operating income (4): 2000 7,123 23,113 1,238 31,474 1999 - 32,522 1,046 33,568 1998 - 36,320 1,253 37,573 Total assets: 2000 111,375 784,628 8,239 904,242 1999 - 848,526 7,733 856,259 Total long-lived assets: 2000 105,504 761,028 7,136 873,668 1999 - 825,411 6,753 832,164 </TABLE> (1) Excludes the writeoff of an acquired management contract of $38,000 in 2000. (2) Excludes amortization of intangibles and goodwill of $5,958 in 2000 (3) Primarily consists of the Company's hotel operations (4) Net operating income excludes gains and losses on sales, extraordinary items and the writeoff of an acquired management contract. The Company acquired its first international real estate investment in 1998. For 2000, geographic information for the real estate operations segment is as follows: <TABLE> <CAPTION> Total Real Domestic International Estate -------- ------------- ---------- <S> <C> <C> <C> Revenues $ 86,312 $ 2,424 $ 88,736 Operating, interest and tax expenses(1,2,3) 48,670 2,898 51,568 Income from equity investments 2,813 - 2,813 Net operating income(4) 23,587 (474) 23,113 Total assets 752,126 32,502 784,628 Total long-lived assets 731,225 29,803 761,028 </TABLE> For 1999, geographic information is as follows: <TABLE> <CAPTION> Total Real Domestic International Estate -------- ------------- ---------- <S> <C> <C> <C> Revenues $ 80,683 $ 2,048 $ 82,731 Operating, interest and tax expenses(1,2,3) 37,227 1,079 38,306 Income from equity investments 1,886 - 1,886 Net operating income(4) 31,667 855 32,522 Total assets 826,312 22,214 848,526 Total long-lived assets 803,649 21,762 825,411 </TABLE> -46-
48 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For 1998, geographic information is as follows: <TABLE> <CAPTION> Total Real Domestic International Estate -------- ------------- ---------- <S> <C> <C> <C> Revenues $ 78,214 $ 827 $ 79,041 Operating, interest and tax expenses(1,2,3) 31,026 544 31,570 Income from equity investments 1,837 - 1,837 Net operating income(4) 36,224 96 36,320 </TABLE> (1) Excludes the writeoff of an acquired management contract of $38,000 in 2000. (2) Excludes amortization of intangibles and goodwill of $5,958 in 2000 (3) Excludes depreciation and amortization (4) Net (loss) income excluding gains and loss, extraordinary items and the writeoff of an acquired management contract. 17. Income Taxes: The components of the Company's provision for income taxes for the years ended December 31, 2000, 1999 and 1998 are as follows: <TABLE> <CAPTION> 2000 1999 1998 ---- ---- ---- <S> <C> <C> <C> Federal: Current $ 569 Deferred 848 ------ 1,417 State and local: Current 2,176 $ 752 $ 419 Deferred 571 - - ------ ------ ------ 2,747 752 419 ------ Total provision $4,164 $ 752 $ 419 ====== ====== ====== </TABLE> Deferred income taxes as of December 31, 2000 consist of the following: <TABLE> <CAPTION> 2000 ----- <S> <C> Deferred tax assets: Unearned compensation $ 634 Corporate fixed assets 142 ------ 776 Deferred tax liabilities: Receivables from affiliates 2,112 ------ Net deferred tax liability $1,336 ====== </TABLE> No deferred income taxes were recognized in 1999 and 1998. -47-
49 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The difference between the tax provision and the tax benefit recorded at the statutory rate at December 31, 2000 is as follows: <TABLE> <S> <C> Federal benefit at statutory tax rate $ (1,739) State and local taxes, net of federal benefit 2,629 Writeoff of management contract 12,920 Amortization of intangible assets 1,706 Income from entities not subject to federal taxation (11,240) Other (112) -------- Tax provision $ 4,164 ======== </TABLE> 18. Employee Benefit Plans: The Company sponsors a qualified profit-sharing plan and trust covering substantially all of its full-time employees who have attained age twenty-one, worked a minimum of 1,000 hours and completed one year of service. The Company is under no obligation to contribute to the plan and the amount of any contribution is determined by and at the discretion of the Board of Directors. The Board of Directors can authorize contributions to a maximum of 15% of an eligible participant's total compensation, limited to $25.5 annually per participant. For the year ended December 31, 2000, amounts expensed by the Company for contributions to the trust were $627. Annual contributions represent an amount equivalent to 15% of each eligible participant's total eligible compensation for that period. 19. Pro Forma Financial Information (unaudited): The following consolidated pro forma financial information has been presented as if the merger of Carey Management into the Company had occurred on January 1, 1999 for the years ended December 31, 2000 and 1999. In Management's opinion, all adjustments necessary to reflect the merger and the related issuance of common stock of the Company have been made. The pro forma financial information is not necessarily indicative of what the actual results would have been, nor does it purport to represent the results of operations for future periods. <TABLE> <CAPTION> Years ended December 31, ------------------------ 2000 1999 ---- ---- <S> <C> <C> Pro forma total revenues $133,666 $129,255 Pro forma net income 29,215 48,781 Pro forma basic and diluted earnings per share $0.86 $1.43 </TABLE> The pro forma net income and earnings per share figures presented above exclude a non-recurring noncash writeoff of $38,000 related to the termination of the Management Agreement between the Company and Carey Management upon completion of the merger. The pro forma (loss) income, including the $38,000 writeoff, for the years ended December 31, 2000 and 1999 is $(8,785) and $10,781, respectively. Pro forma basic and diluted (loss) income per share, including the $38,000 writeoff, for the years ended December 31, 2000 and 1999 is $(0.26) and $0.32, respectively. -48-
50 WP CAREY & CO. LLC and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 20. Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective January 1, 2001, which establishes accounting and reporting standards for derivative instruments. The Company believes that upon adoption SFAS No. 133 will not have a material impact on the consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") which provides guidance on several revenue recognition issues including recognition of fees earned from services performed and rents based upon lessees' sales. Certain of the Company's leases provide for additional rents to be paid based upon the level of sales achieved by the lessee. These percentage rents are recorded once the required sales level is achieved and included in the consolidated statements of income in the rental revenue and interest income from direct financing leases. The adoption of SAB 101 did not have any impact on the consolidated financial statements. -49-
51 Item 9. Disagreements on Accounting and Financial Disclosure. NONE PART III Item 10. Directors and Executive Officers of the Registrant. This information will be contained in Company's definitive Proxy Statement with respect to the Company's 2001 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference. Item 11. Executive Compensation. This information will be contained in Company's definitive Proxy Statement with respect to the Company's 2001 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. This information will be contained in Company's definitive Proxy Statement with respect to the Company's 2001 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions. This information will be contained in Company's definitive Proxy Statement with respect to the Company's 2001 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference. -50-
52 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements: The following financial statements are filed as a part of this Report: Consolidated Report of Independent Accountants. Consolidated Balance Sheets, December 31, 2000 and 1999. Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Members' Equity for the years ended December 31, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedule: The following schedule is filed as a part of this Report: Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2000. Notes to Schedule III. Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist. -51-
53 (a) 3 Exhibits: The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference. <TABLE> <CAPTION> Exhibit Method of No. Description Filing - -------- ----------- ----------------- <S> <C> <C> 3.1 Amended and Restated Limited Liability Company Exhibit 3.1 to Registration Agreement of Carey Diversified LLC. Statement on Form S-4 (No. 333-37901) 3.2 Bylaws of Carey Diversified LLC. Exhibit 3.2 to Registration Statement on Form S-4 (No. 333-37901) 4.1 Form of Listed Share Stock Certificate. Exhibit 4.1 to Registration Statement on Form S-4 (No. 333-37901) 10.1 Management Agreement Between Carey Management LLC Exhibit 10.1 to Registration and the Company. Statement on Form S-4 (No. 333-37901) 10.2 Non-Employee Directors' Incentive Plan. Exhibit 10.2 to Registration Statement on Form S-4 (No. 333-37901) 10.3 1997 Share Incentive Plan. Exhibit 10.3 to Registration Statement on Form S-4 (No. 333-37901) 10.4 Investment Banking Engagement Letter between Exhibit 10.4 to Registration W. P. Carey & Co. and the Company. Statement on Form S-4 (No. 333-37901) 10.5 Non-Statutory Listed Share Option Agreement. Exhibit 10.5 to Registration Statement on Form S-4 (No. 333-37901) 10.6 Credit Agreement by and among Carey Diversified LLC, Exhibit 10.1 to Form 8-K Chase Manhattan Bank, and the Bank of New York, dated dated May 15, 1998. March, 26, 1998 21.1 List of Registrant Subsidiaries Filed herewith 23.1 Consent of PricewaterhouseCoopers LLP Filed herewith 99.13 Amended and Restated Agreement of Limited Partnership Exhibit 99.13 to Registration of CPA(R):1. Statement on Form S-4 (No. 333-37901) 99.14 Amended and Restated Agreement of Limited Partnership Exhibit 99.14 to Registration of CPA(R):2. Statement on Form S-4 (No. 333-37901) </TABLE> -52-
54 <TABLE> <CAPTION> Exhibit Method of No. Description Filing - -------- ----------- ----------------- <S> <C> <C> 99.15 Amended and Restated Agreement of Limited Partnership Exhibit 99.15 to Registration of CPA(R):3. Statement on Form S-4 (No. 333-37901) 99.23 Press Release from Carey Diversified LLC Exhibit 99.1 to Form 8-K (March 26, 1998) dated May 15, 1998 99.16 Amended and Restated Agreement of Limited Partnership Exhibit 99.16 to Registration of CPA(R):4. Statement on Form S-4 (No. 333-37901) 99.17 Amended and Restated Agreement of Limited Partnership Exhibit 99.17 to Registration of CPA(R):5. Statement on Form S-4 (No. 333-37901) 99.18 Amended and Restated Agreement of Limited Partnership Exhibit 99.18 to Registration of CPA(R):6. Statement on Form S-4 (No. 333-37901) 99.19 Amended and Restated Agreement of Limited Partnership Exhibit 99.19 to Registration of CPA(R):7. Statement on Form S-4 (No. 333-37901) 99.20 Amended and Restated Agreement of Limited Partnership Exhibit 99.20 to Registration of CPA(R):8. Statement on Form S-4 (No. 333-37901) 99.21 Amended and Restated Agreement of Limited Partnership Exhibit 99.21 to Registration of CPA(R):9. Statement on Form S-4 (No. 333-37901) 99.22 Listed Share Purchase Warrant. Exhibit 99.22 to Registration Statement on Form S-4 ( No. 333-37901) 99.23 Press release from Carey Diversified LLC Exhibit 99.1 to Form 8-K (March 26, 1998) dated May 15, 1998 99.24 Press release from Carey Diversified LLC Exhibit 99.1 to Form 8-K (November 30, 1999) dated December 2, 1999 99.25 Presentation to Analysts Exhibit 99.2 to Form 8-K dated December 2, 1999 </TABLE> (b) Report on Form 8-K: During the quarter ended December 31, 2000 the Company was not required to file any reports on Form 8-K. -53-
55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. W.P. CAREY & CO. LLC 3/26/01 BY: /s/ John J. Park - ------------- -------------------------------------------- Date John J. Park Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY: W.P. CAREY & CO. LLC 3/26/01 BY: /s/ William P. Carey - ------------- -------------------------------------------- Date William P. Carey Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) 3/26/01 BY: /s/ Francis J. Carey - ------------- -------------------------------------------- Date Francis J. Carey Vice Chairman of the Board, Chairman of the Executive Committee and Director 3/26/01 BY: /s/ Gordon F. DuGan - ------------- -------------------------------------------- Date Gordon F. DuGan President, Chief Acquisitions Officer and Director 3/26/01 BY: /s/ Donald E. Nickelson - ------------- -------------------------------------------- Date Donald E. Nickelson Chairman of the Audit Committee and Director 3/26/01 BY: /s/ Eberhard Faber IV - ------------- -------------------------------------------- Date Eberhard Faber IV Director 3/26/01 BY: /s/ Dr. Lawrence R. Klein - ------------- -------------------------------------------- Date Dr. Lawrence R. Klein Director 3/26/01 BY: /s/ Charles C. Townsend, Jr. - ------------- -------------------------------------------- Date Charles C. Townsend, Jr. Director 3/26/01 BY: /s/ Reginald Winssinger - ------------- -------------------------------------------- Date Reginald Winssinger Director 3/26/01 BY: /s/ John J. Park - ------------- -------------------------------------------- Date John J. Park Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) 3/26/01 BY: /s/ Claude Fernandez - ------------- -------------------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) -54-
56 W.P. CAREY & CO. LLC and SUBSIDIARIES SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2000 <TABLE> <CAPTION> INITIAL COST TO COMPANY ----------------------- COSTS INCREASE CAPITALIZED (DECREASE) IN PERSONAL SUBSEQUENT TO NET DESCRIPTION ENCUMBRANCES LAND BUILDINGS PROPERTY ACQUISITION (a) INVESTMENTS(b) ----------- ------------ ---- --------- --------- --------------- -------------- <S> <C> <C> <C> <C> <C> <C> Operating Method: Office, warehouse and manufacturing buildings leased to various tenants in Broomfield, Colorado $ 1,897,951 $ 247,993 $ 2,538,263 $1,200,000 Office and manufacturing building leased to IMO Industries Inc. 803,700 814,267 4,761,042 $(2,238,231) Distribution facilities and warehouses leased to The Gap, Inc. 13,520,339 1,525,593 21,427,148 Supermarkets leased to Winn-Dixie Stores, Inc. 855,196 6,762,374 Warehouse and manufac- turing plant leased to Pre Finish Metals Incorporated 324,046 8,408,833 Retail store leased to C. Parker and Y. Smith 16,452 80,937 Retail stores leased to Eastside Appliance 14,844 185,541 10,600 Warehouse and distribution center leased to B&G Contract Packaging, Inc. and Vital Records Company of Arkansas, Inc. 201,721 2,870,928 129,737 Land leased to Unisource Worldwide, Inc. 4,573,360 Centralized telephone bureau leased to Excel Communications, Inc. 925,162 4,023,627 Computer and telecommunications facility in Urbana, Illinois leased to Motorola, Inc. 387,000 3,981,000 (1,513,642) Office building in Beaumont, Texas leased to Petrocon Engineering, Inc. and Olmstead Kirk Paper Company 164,113 2,343,849 <CAPTION> GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD (c) ---------------------------------------------------- LIFE ON WHICH DEPRECIATION IN LATEST ACCUMULATED STATEMENT OF PERSONAL DEPRECIATION DATE INCOME DESCRIPTION LAND BUILDINGS PROPERTY TOTAL (d) ACQUIRED IS COMPUTED ----------- ---- --------- -------- ----- ------------ -------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Operating Method: Office, warehouse and manufacturing buildings leased to various tenants in Broomfield, Colorado $ 247,993 $ 3,738,263 $ 3,986,256 $ 231,621 1/1/1998 40 yrs. Office and manufacturing building leased to IMO Industries Inc. 814,267 2,522,811 3,337,078 357,078 1/1/1998 40 yrs. Distribution facilities and warehouses leased to The Gap, Inc. 1,525,593 21,427,148 22,952,741 1,607,036 1/1/1998 40 yrs. Supermarkets leased to Winn-Dixie Stores, Inc. 855,196 6,762,374 7,617,570 507,177 1/1/1998 40 yrs. Warehouse and manufac- turing plant leased to Pre Finish Metals Incorporated 324,046 8,408,833 8,732,879 630,663 1/1/1998 40 yrs. Retail store leased to C. Parker and Y. Smith 16,452 80,937 97,389 6,070 1/1/1998 40 yrs. Retail stores leased to Eastside Appliance 25,444 185,541 210,985 13,915 1/1/1998 40 yrs. Warehouse and distribution center leased to B&G Contract Packaging, Inc. and Vital Records Company of Arkansas, Inc. 201,721 3,000,665 3,202,386 216,842 1/1/1998 40 yrs. Land leased to Unisource Worldwide, Inc. 4,573,360 4,573,360 1/1/1998 N/A Centralized telephone bureau leased to Excel Communications, Inc. 925,162 4,023,627 4,948,789 301,771 1/1/1998 40 yrs. Computer and telecommunications facility in Urbana, Illinois leased to Motorola, Inc. 405,372 2,448,986 2,854,358 150,468 1/1/1998 40 yrs. Office building in Beaumont, Texas leased to Petrocon Engineering, Inc. and Olmstead Kirk Paper Company 164,113 2,343,849 2,507,962 175,786 1/1/1998 40 yrs. </TABLE> -55-
57 W.P. CAREY & CO. LLC and SUBSIDIARIES SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2000 <TABLE> <CAPTION> INITIAL COST TO COMPANY ----------------------- COSTS INCREASE CAPITALIZED (DECREASE) IN PERSONAL SUBSEQUENT TO NET DESCRIPTION ENCUMBRANCES LAND BUILDINGS PROPERTY ACQUISITION (a) INVESTMENTS(b) ----------- ------------ ---- --------- --------- --------------- -------------- <S> <C> <C> <C> <C> <C> <C> Operating Method: Office, manufacturing and warehouse buildings leased to AMS Holding Group and Texas Digital Systems, Inc. 1,389,951 5,337,002 431,899 Warehouse and distribution center in Salisbury, North Carolina 246,949 5,034,911 1,363,829 Manufacturing and office buildings leased to Penn Virginia Corporation 652,668 4,080,613 70,774 Land leased to Exide Electronics Corporation 1,638,012 Motion picture theaters leased to Harcourt General, Inc. 1,382,736 1,527,425 5,709,495 (1,500,000) Warehouse/ office research facilities leased to Lockheed Martin Corporation 2,617,330 14,752,353 539,706 Warehouse and office facility leased to Bell South Entertainment, Inc. 5,809,155 1,173,108 3,368,141 241,350 68,958 Manufacturing and office facility leased to Yale Security, Inc. 345,323 3,913,657 60,394 Manufacturing facilities leased to AP Parts International, Inc. 3,746,975 447,170 12,337,106 180,613 Manufacturing facilities leased to Northern Tube, Inc. 31,725 1,691,580 Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. 2,051,769 5,321,776 106,221 Manufacturing facilities leased to Designer Ensembles, Inc. 263,618 4,046,406 (2,506,543) Land leased to AutoZone, Inc. 15,852,617 9,382,198 (147,949) Retail stores leased to Northern Auto, Inc. 3,202,467 2,711,994 (1,650,377) Retail stores leased to General Textiles, Inc. 129,173 313,107 <CAPTION> GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD (c) ---------------------------------------------------- LIFE ON WHICH DEPRECIATION IN LATEST ACCUMULATED STATEMENT OF PERSONAL DEPRECIATION DATE INCOME DESCRIPTION LAND BUILDINGS PROPERTY TOTAL (d) ACQUIRED IS COMPUTED ----------- ---- --------- -------- ----- ------------ -------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Operating Method: Office, manufacturing and warehouse buildings leased to AMS Holding Group and Texas Digital Systems, Inc. 1,389,951 5,768,901 7,158,852 406,096 1/1/1998 40 yrs. Warehouse and distribution center in Salisbury, North Carolina 246,949 6,398,740 6,645,689 449,874 1/1/1998 40 yrs. Manufacturing and office buildings leased to Penn Virginia Corporation 652,668 4,151,387 4,804,055 306,743 1/1/1998 40 yrs. Land leased to Exide Electronics Corporation 1,638,012 1,638,012 1/1/1998 N/A Motion picture theaters leased to Harcourt General, Inc. 1,527,425 4,209,495 5,736,920 428,211 1/1/1998 40 yrs. Warehouse/ office research facilities leased to Lockheed Martin Corporation 2,617,330 15,292,059 17,909,389 1,142,802 1/1/1998 40 yrs. Warehouse and office facility leased to Bell South Entertainment, Inc. 1,173,108 3,678,449 4,851,557 255,816 1/1/1998 40 yrs. Manufacturing and office facility leased to Yale Security, Inc. 345,323 3,974,051 4,319,374 294,350 1/1/1998 40 yrs. Manufacturing facilities leased to AP Parts International, Inc. 447,170 12,517,719 12,964,889 927,753 1/1/1998 40 yrs. Manufacturing facilities leased to Northern Tube, Inc. 31,725 1,691,580 1,723,305 126,869 1/1/1998 40 yrs. Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. 2,051,769 5,427,997 7,479,766 400,586 1/1/1998 40 yrs. Manufacturing facilities leased to Designer Ensembles, Inc. 263,618 1,539,863 1,803,481 303,481 1/1/1998 40 yrs. Land leased to AutoZone, Inc. 9,234,249 9,234,249 1/1/1998 N/A Retail stores leased to Northern Auto, Inc. 2,320,002 1,944,082 4,264,084 145,440 1/1/1998 40 yrs. Retail stores leased to General Textiles, Inc. 129,173 313,107 442,280 23,483 1/1/1998 40 yrs. </TABLE> -56-
58 W.P. CAREY & CO. LLC and SUBSIDIARIES SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2000 <TABLE> <CAPTION> INITIAL COST TO COMPANY ----------------------- COSTS INCREASE CAPITALIZED (DECREASE) IN PERSONAL SUBSEQUENT TO NET DESCRIPTION ENCUMBRANCES LAND BUILDINGS PROPERTY ACQUISITION (a) INVESTMENTS(b) ----------- ------------ ---- --------- --------- --------------- -------------- <S> <C> <C> <C> <C> <C> <C> Operating Method: Office facility leased to Bell Atlantic Corporation 219,548 1,578,592 Land leased to Sybron International Corporation 1,135,003 17,286 Office facility leased to United States Postal Service, General Services Administration and Comark, Inc. 1,074,640 11,452,967 154,728 Manufacturing facilities leased to Blue Tool, Inc. and Jet Equipment and Tools, Inc. 462,295 7,143,644 (2,677,000) Manufacturing and office facility leased to Allied Plywood Corp. 459,593 1,351,737 Manufacturing and office facility leased to StairPans of America, Inc. 139,004 1,758,648 Manufacturing facilities leased to Quebecor Printing Inc. 9,298,255 4,458,047 18,695,004 331,269 Land leased to High Voltage Engineering Corp. 1,954,882 Manufacturing facility leased to Wozniak Industries, Inc. 864,638 2,677,512 1,745 50,913 Distribution and office facilities leased to Federal Express Corporation 335,189 1,839,331 Land leased to Dr Pepper Bottling Company of Texas 9,795,193 Manufacturing facility leased to Detroit Diesel Corporation 18,893,810 5,967,620 31,730,547 537,905 Engineering and Fabrication facility leased to Orbital Sciences Corporation 14,669,047 5,034,749 18,956,971 2,185,077 375,669 Distribution facility leased to PepsiCo, Inc. 166,745 884,772 Land leased to Childtime Childcare, Inc. 452,589 1,673,925 324 <CAPTION> GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD (c) ---------------------------------------------------- LIFE ON WHICH DEPRECIATION IN LATEST ACCUMULATED STATEMENT OF PERSONAL DEPRECIATION DATE INCOME DESCRIPTION LAND BUILDINGS PROPERTY TOTAL (d) ACQUIRED IS COMPUTED ----------- ---- --------- -------- ----- ------------ -------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Operating Method: Office facility leased to Bell Atlantic Corporation 219,548 1,578,592 1,798,140 118,394 1/1/1998 40 yrs. Land leased to Sybron International Corporation 1,152,289 1,152,289 1/1/1998 N/A Office facility leased to United States Postal Service, General Services Administration and Comark, Inc. 1,074,640 11,607,695 12,682,335 863,043 1/1/1998 40 yrs. Manufacturing facilities leased to Blue Tool, Inc. and Jet Equipment and Tools, Inc. 462,295 4,466,644 4,928,939 1/1/1998 40 yrs. Manufacturing and office facility leased to Allied Plywood Corp. 459,593 1,351,737 1,811,330 101,380 1/1/1998 40 yrs. Manufacturing and office facility leased to StairPans of America, Inc. 139,004 1,758,648 1,897,652 131,899 1/1/1998 40 yrs. Manufacturing facilities leased to Quebecor Printing Inc. 4,458,047 19,026,273 23,484,320 1,406,654 1/1/1998 40 yrs. Land leased to High Voltage Engineering Corp. 1,954,882 1,954,882 1/1/1998 N/A Manufacturing facility leased to Wozniak Industries, Inc. 864,638 2,730,170 3,594,808 201,638 1/1/1998 40 yrs. Distribution and office facilities leased to Federal Express Corporation 335,189 1,839,331 2,174,520 137,950 1/1/1998 40 yrs. Land leased to Dr Pepper Bottling Company of Texas 9,795,193 9,795,193 1/1/1998 N/A Manufacturing facility leased to Detroit Diesel Corporation 5,967,620 32,268,452 38,236,072 2,387,139 1/1/1998 40 yrs. Engineering and Fabrication facility leased to Orbital Sciences Corporation 5,034,749 21,517,717 26,552,466 1,515,667 1/1/1998 40 yrs. Distribution facility leased to PepsiCo, Inc. 166,745 884,772 1,051,517 66,358 1/1/1998 40 yrs. Land leased to Childtime Childcare, Inc. 1,674,249 1,674,249 1/1/1998 N/A </TABLE> -57-
59 W.P. CAREY & CO. LLC and SUBSIDIARIES SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2000 <TABLE> <CAPTION> INITIAL COST TO COMPANY ----------------------- COSTS INCREASE CAPITALIZED (DECREASE) IN PERSONAL SUBSEQUENT TO NET DESCRIPTION ENCUMBRANCES LAND BUILDINGS PROPERTY ACQUISITION (a) INVESTMENTS(b) ----------- ------------ ---- --------- --------- --------------- -------------- <S> <C> <C> <C> <C> <C> <C> Operating Method: Hotel leased to Livho, Inc. 2,765,094 11,086,650 3,290,990 4,264,238 Retail store leased to Eagle Hardware and Garden, Inc. 10,666,799 4,125,000 11,811,641 393,206 Office building in Pantin, France leased to five lessees 6,516,781 2,674,914 8,113,120 (1,596,322) Office facility in Mont Saint Argany, France leased to Tellit Assurances 3,396,302 542,968 5,286,915 (1,047,458) Portfolio of seven properties in Houston, Texas leased to 15 lessees 9,762,236 3,260,000 22,574,073 18,616 Office facility leased to Sprint Spectrum L.P. 1,190,000 9,352,965 Office facility leased to Direction Regional des Affaires Sanitaires et Sociales 1,306,270 303,061 2,109,731 (531,072) Office facility leased to Cendant Operations, Inc. 6,000,000 351,445 5,980,736 527,368 Office facility leased to Bellsouth Telecommunications 720,000 7,708,458 119,092 Office building in Lille and Indre et Loire, France leased to Gist-Brocades France S.A. and Societe de Traitements 3,259,697 451,168 4,478,891 (694,395) Office facility leased to America West Holdings Corp. 18,274,256 2,274,782 26,701,663 Office facility in Tours, France leased to Bouygues Telecom, SA 10,397,336 ------------ ----------- ------------ ---------- ---------- ------------ $155,906,851 $87,548,136 $339,276,251 $3,290,990 $7,280,369 $(10,001,841) ============ =========== ============ ========== ========== ============ <CAPTION> GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD (c) ---------------------------------------------------- LIFE ON WHICH DEPRECIATION IN LATEST ACCUMULATED STATEMENT OF PERSONAL DEPRECIATION DATE INCOME DESCRIPTION LAND BUILDINGS PROPERTY TOTAL (d) ACQUIRED IS COMPUTED ----------- ---- --------- -------- ----- ------------ -------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Operating Method: Hotel leased to Livho, Inc. 2,765,094 14,852,839 3,789,039 21,406,972 2,350,837 1/1/1998 7-40 yrs. Retail store leased to Eagle Hardware and Garden, Inc. 4,493,534 11,836,313 16,329,847 800,509 4/23/1998 40 yrs. Office building in Pantin, France leased to five lessees 1,102,463 8,089,249 9,191,712 508,833 5/27/1998 40 yrs. Office facility in Mont Saint Argany, France leased to Tellit Assurances 457,655 4,324,770 4,782,425 244,694 6/10/1998 40 yrs. Portfolio of seven properties in Houston, Texas leased to 15 lessees 3,260,000 22,592,689 25,852,689 1,434,542 6/15/1998 40 yrs. Office facility leased to Sprint Spectrum L.P. 1,190,000 9,352,965 10,542,965 487,293 7/1/1998 40 yrs. Office facility leased to Direction Regional des Affaires Sanitaires et Sociales 177,997 1,703,723 1,881,720 85,316 11/16/1998 40 yrs. Office facility leased to Cendant Operations, Inc. 351,445 6,508,104 6,859,549 373,274 2/19/1999 40 yrs. Office facility leased to Bellsouth Telecommunications 720,000 7,827,550 8,547,550 202,588 12/22/1999 40 yrs. Office building in Lille and Indre et Loire, France leased to Gist-Brocades France S.A. and Societe de Traitements 401,378 3,834,286 4,235,664 161,607 5/5/1999 40 yrs. Office facility leased to America West Holdings Corp. 2,274,782 26,701,663 28,976,445 1,110,662 40 yrs. Office facility in Tours, France leased to Bouygues Telecom, SA 1,033,532 9,737,359 10,770,891 59,044 ----------- ------------ ---------- ------------ ----------- $86,133,752 $348,242,005 $3,789,039 $438,164,796 $24,159,252 =========== ============ ========== ============ =========== </TABLE> -58-
60 W.P. CAREY & CO. LLC and SUBSIDIARES SCHEDULE III-REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2000 <TABLE> <CAPTION> INITIAL COST TO COMPANY ----------------------- DESCRIPTION ENCUMBRANCES LAND BUILDINGS ----------- ------------ ---- --------- <S> <C> <C> <C> Direct Financing Method: Office buildings and warehouses leased to Unisource Worldwide, Inc. $5,414,040 $ 331,910 $12,281,102 Centralized Telephone Bureau leased to Western Union Financial Services, Inc. 842,233 4,762,302 Computer Center leased to AT&T Corporation 269,700 5,099,964 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 3,495,507 34,016,822 Warehouse and manufacturing buildings leased to CSS Industries, Inc./ Cleo, Inc. 1,051,005 14,036,912 Manufacturing, distribution and office buildings leased to Brodart Co. 2,485,046 445,383 11,323,899 Manufacturing facility leased to Duff-Norton Company, Inc. 726,981 8,263,635 Manufacturing facilities leased to Rochester Button Company, Inc. 43,753 1,235,328 Manufacturing facilities leased to Thermadyne Holdings Corp. 3,789,019 13,163,763 Office and research facility leased to Exide Electronics Corporation 2,844,120 Manufacturing facility leased to Penberthy Products, Inc. 70,317 1,476,657 Manufacturing facility and warehouse leased to DS Group Limited 238,532 3,339,449 Retail stores leased to AutoZone, Inc. 16,416,402 Manufacturing facility leased to Peerless Chain Company 1,307,590 11,026,975 Retail store leased to Wal-Mart Stores, Inc. 2,950,585 1,839,303 6,535,144 </TABLE> <TABLE> <CAPTION> GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD (c) ------------------- COSTS CAPITALIZED SUBSEQUENT TO INCREASE (DECREASE) DESCRIPTION ACQUISITION (a) IN NET INVESTMENT(b) TOTAL DATE ACQUIRED ----------- --------------- -------------------- ----- ------------- <S> <C> <C> <C> <C> Direct Financing Method: Office buildings and warehouses leased to Unisource Worldwide, Inc. $ 256,640 $12,869,652 1/1/1998 Centralized Telephone Bureau leased to Western Union Financial Services, Inc. (5,634) 5,598,901 1/1/1998 Computer Center leased to AT&T Corporation (2,612) 5,367,052 1/1/1998 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 2,747,252 40,259,581 1/1/1998 Warehouse and manufacturing buildings leased to CSS Industries, Inc./ Cleo, Inc. 265,876 15,353,793 1/1/1998 Manufacturing, distribution and office buildings leased to Brodart Co. 71,603 11,840,885 1/1/1998 Manufacturing facility leased to Duff-Norton Company, Inc. 54,698 9,045,314 1/1/1998 Manufacturing facilities leased to Rochester Button Company, Inc. 1,279,081 1/1/1998 Manufacturing facilities leased to Thermadyne Holdings Corp. 103,139 17,055,921 1/1/1998 Office and research facility leased to Exide Electronics Corporation 2,844,120 1/1/1998 Manufacturing facility leased to Penberthy Products, Inc. 1,546,974 1/1/1998 Manufacturing facility and warehouse leased to DS Group Limited 3,577,981 1/1/1998 Retail stores leased to AutoZone, Inc. (384,609) 16,031,793 1/1/1998 Manufacturing facility leased to Peerless Chain Company 21,775 75,175 12,431,515 1/1/1998 Retail store leased to Wal-Mart Stores, Inc. 8,374,447 1/1/1998 </TABLE> -59-
61 W.P. CAREY & CO. LLC and SUBSIDIARES SCHEDULE III-REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2000 <TABLE> <CAPTION> INITIAL COST TO COMPANY ----------------------- DESCRIPTION ENCUMBRANCES LAND BUILDINGS ----------- ------------ ---- --------- <S> <C> <C> <C> Direct Financing Method: Manufacturing and office facilities leased to Sybron International Corporation 2,727,958 31,329,955 Manufacturing and office facilities leased to NVR, Inc. 728,683 6,092,840 Manufacturing and generating facilities leased to High Voltage Engineering Corp. 973,328 9,166,104 Office/warehouse facilities leased to United Stationers Supply Company 1,882,372 5,846,214 Bottling and Distribution facilities lease to Dr Pepper Bottling Company of Texas 27,598,638 Land and industrial/ warehouse/office facilities leased to Furon Company 11,430,530 4,221,568 19,676,226 Office/warehouse facility leased to Red Bank Distribution, Inc. 4,114,192 1,629,715 9,396,770 Day care facilities leased to Childtime Childcare, Inc. 733,231 2,412,916 ----------- ------------- ------------ $27,127,624 $26,614,857 $257,342,137 =========== =========== ============ </TABLE> <TABLE> <CAPTION> GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD (c) ------------------- COSTS CAPITALIZED SUBSEQUENT TO INCREASE (DECREASE) DESCRIPTION ACQUISITION (a) IN NET INVESTMENT(b) TOTAL DATE ACQUIRED ----------- --------------- -------------------- ----- ------------- <S> <C> <C> <C> <C> Direct Financing Method: Manufacturing and office facilities leased to Sybron International Corporation 22,043 205,590 34,285,546 1/1/1998 Manufacturing and office facilities leased to NVR, Inc. 41,501 6,863,024 1/1/1998 Manufacturing and generating facilities leased to High Voltage Engineering Corp. 10,139,432 1/1/1998 Office/warehouse facilities leased to United Stationers Supply Company 26,581 47,182 7,802,349 1/1/1998 Bottling and Distribution facilities lease to Dr Pepper Bottling Company of Texas 227,500 27,826,138 1/1/1998 Land and industrial/ warehouse/office facilities leased to Furon Company 145,391 24,043,185 1/1/1998 Office/warehouse facility leased to Red Bank Distribution, Inc. 11,026,485 1/1/1998 Day care facilities leased to Childtime Childcare, Inc. 2,412,916 1/1/1998 -------- ---------- ------------ $ 70,399 $3,848,692 $287,876,085 ======== ========== ============ </TABLE> -60-
62 W.P. CAREY & CO. LLC and SUBSIDIARES SCHEDULE III-REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2000 <TABLE> <CAPTION> INITIAL COST TO COMPANY ----------------------- COSTS CAPITALIZED PERSONAL SUBSEQUENT TO DESCRIPTION ENCUMBRANCES LAND BUILDINGS PROPERTY ACQUISITION (a) ----------- ------------ ---- --------- -------- --------------- <S> <C> <C> <C> <C> <C> Operating real estate: Hotels located in: Alpena, Michigan $ 6,530,000 $114,241 $4,256,356 $618,066 $ 437,056 Petoskey, Michigan 6,530,000 98,326 1,446,757 290,668 682,241 ----------- -------- ---------- -------- ---------- $13,060,000 $212,567 $5,703,113 $908,734 $1,119,297 =========== ======== ========== ======== ========== </TABLE> <TABLE> <CAPTION> GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD (c) LIFE ON WHICH ---------------------------------------------------- DEPRECIATION IN LATEST STATEMENT OF PERSONAL ACCUMULATED DATE INCOME DESCRIPTION LAND BUILDINGS PROPERTY TOTAL DEPRECIATION (d) ACQUIRED IS COMPUTED ----------- ---- --------- -------- ----- ---------------- -------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> Operating real estate: Hotels located in: Alpena, Michigan $114,241 $4,370,052 $ 941,426 $5,425,719 $ 943,499 1/1/1998 7-40 yrs. Petoskey, Michigan 98,326 1,622,373 797,293 2,517,992 498,088 1/1/1998 7-40 yrs. -------- ---------- ---------- ---------- ---------- $212,567 $5,992,425 $1,738,719 $7,943,711 $1,441,587 ======== ========== ========== ========== ========== </TABLE> -61-
63 W.P. CAREY & CO. LLC and SUBSIDIARIES NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (a) Consists of the cost of improvements and acquisition costs subsequent to acquisition, including legal fees, appraisal fees, title costs, other related professional fees and purchases of furniture, fixtures, equipment and improvements at the hotel properties. (b) The increase (decrease) in net investment is primarily due to (i) the amortization of unearned income from net investment in direct financing leases producing a periodic rate of return which at times may be greater or less than lease payments received, (ii) sales of properties (iii) writedowns of properties to fair value, (iv) changes in foreign currency exchange rates, and (v) an adjustment in connection with purchasing certain minority interests. (c) At December 31, 2000, the aggregate cost of real estate owned by the Company and its subsidiaries for Federal income tax purposes is $692,871,991. <TABLE> <CAPTION> Reconciliation of Real Estate Accounted --------------------------------------- for Under the Operating Method ------------------------------ December 31, ------------ 2000 1999 ---- ---- <S> <C> <C> Balance at beginning of year $ 441,876,323 $ 397,929,165 Additions 22,239,038 54,283,955 Purchase adjustments 1,800,000 -- Sales (10,572,364) (8,703,822) Change in foreign currency translation adjustment (2,236,271) (1,632,975) Reclassification from/to assets held for sale, financing lease (8,207,979) -- Writedown to fair value (6,733,951) -- ------------- ------------- Balance at end of year $ 438,164,796 $ 441,876,323 ============= ============= </TABLE> <TABLE> <CAPTION> Reconciliation of Accumulated Depreciation ------------------------------------------ December 31, ------------ 2000 1999 ---- ---- <S> <C> <C> Balance at beginning of year $ 16,455,189 $ 7,617,500 Depreciation expense 12,763,126 9,887,829 Change in foreign currency translation adjustment (9,740) -- Reclassification from/to held for sale (3,119,596) -- Sales (1,929,729) (1,050,140) ------------ ------------ Balance at end of year $ 24,159,250 $ 16,455,189 ============ ============ </TABLE> <TABLE> <CAPTION> Reconciliation for Operating Real Estate ---------------------------------------- December 31, ------------ 2000 1999 ---- ---- <S> <C> <C> Balance at beginning of year $7,584,625 $7,313,478 Additions 359,086 271,147 ---------- ---------- Balance at close of year $7,943,711 $7,584,625 ========== ========== </TABLE> <TABLE> <CAPTION> Reconciliation of Accumulated ----------------------------- Depreciation for Operating Real Estate -------------------------------------- December 31, ------------ 2000 1999 ---- ---- <S> <C> <C> Balance at beginning of year $ 831,736 $ 300,218 Depreciation expense 609,851 531,518 ---------- ---------- Balance at end of year $1,441,587 $ 831,736 ========== ========== </TABLE> -62-