-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AKB5Q17wQFOAuskQQg9kg6cXTQQdasIZ6uF0Gdehgfa0AfqF0l2QIl9Z6K8aV+eN OR0cI9qFsOrCpuziXxeIjw== /in/edgar/work/20000814/0000950123-00-007616/0000950123-00-007616.txt : 20000921 0000950123-00-007616.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950123-00-007616 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAREY DIVERSIFIED LLC CENTRAL INDEX KEY: 0001025378 STANDARD INDUSTRIAL CLASSIFICATION: [6500 ] IRS NUMBER: 133912578 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13779 FILM NUMBER: 699135 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA STREET 2: 2ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA STREET 2: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 FORMER COMPANY: FORMER CONFORMED NAME: CAREY DIVERSIFIED PROPERTIES LLC DATE OF NAME CHANGE: 19961017 10-Q 1 e10-q.txt W.P. CAREY & CO. LLC 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q For the quarterly period ended JUNE 30, 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 AND THE PACIFIC STOCK EXCHANGE. WPC does not have any Securities registered pursuant to Section 12(b) of the Act. WPC (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. There are 33,704,979 Listed Shares, no par value outstanding at August 10, 2000. 2 W.P. CAREY & CO. LLC AND SUBSIDIARIES INDEX
Page No. -------- PART I - ------ Item 1. - Financial Information* Condensed Consolidated Balance Sheets, as of June 30, 2000 and December 31, 1999 2 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 3 Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 5-6 Notes to Condensed Consolidated Financial Statements 7-12 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 13-15 PART II - Other Information - ------- Item 3. - Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. - Submission of Matters to a Vote of Security Holders 16 Item 6. - Exhibits and Reports on Form 8-K 16 Signatures 17
*The summarized financial information contained herein is unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of such financial information have been included. -1- 3 W.P. CAREY & CO. LLC AND SUBSIDIARIES PART I Item 1. - FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
June 30, 2000 December 31, 1999 ---------------- --------------- (Unaudited) (Note) ASSETS: Real estate leased to others under the operating method, net of accumulated depreciation of $22,795 and $16,455 at June 30, 2000 and December 31, 1999 $498,144 $425,421 Net investment in direct financing leases 295,648 295,556 Operating real estate, net of accumulated depreciation of $1,129 and $832 at June 30, 2000 and December 31, 1999 6,703 6,753 Real estate leased to others under construction 3,499 69,176 Assets held for sale 1,863 3,091 Cash and cash equivalents 8,517 2,297 Due from affiliates 1,266 - Equity investments 33,676 32,167 Intangible assets, net of accumulated amortization of $353 88,479 - Other assets 22,506 21,798 ---------------- --------------- Total assets $960,301 $856,259 ================ =============== LIABILITIES: Mortgage notes payable $183,983 $188,248 Notes payable 159,196 129,103 Accrued interest 1,190 874 Due to affiliates 5,361 7,227 Dividends payable 14,236 10,718 Other liabilities 13,922 10,625 ---------------- --------------- Total liabilities 377,888 346,795 ---------------- --------------- Minority interest 495 (3,136) ---------------- --------------- Commitments and contingencies MEMBERS' EQUITY Listed Shares, no par value; 34,489,679 and 25,833,603 shares issued and outstanding at June 30, 2000 and December 31, 1999 660,151 526,130 Distributions in excess of accumulated earnings (56,977) (11,560) Deferred compensation (6,295) - Accumulated other comprehensive income (1,698) (910) ---------------- --------------- 595,181 513,660 Less, shares in treasury at cost, 782,700 and 62,300 shares at June 30, 2000 and December 31, 1999 (13,263) (1,060) ---------------- --------------- Total members' equity 581,918 512,600 ---------------- --------------- Total liabilities and members' equity $960,301 $856,259 ================ ===============
The accompanying notes are an integral part of the condensed consolidated financial statements. Note: The condensed consolidated balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements at that date. -2- 4 W.P. CAREY & CO. LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share and share amounts)
Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 ----------------- ---------------- ---------------- ----------------- Revenues: Rental income $ 13,079 $ 11,748 $ 25,822 $ 22,577 Interest income from direct financing leases 8,436 8,448 16,760 16,930 Advisory fee income 2,843 - 2,843 - Other income 630 83 1,482 387 Other interest income 170 294 205 435 Revenue of hotel operations 1,453 1,304 2,775 2,662 ----------------- ---------------- ---------------- ----------------- 26,611 21,877 49,887 42,991 ----------------- ---------------- ---------------- ----------------- Expenses: Interest 6,874 4,694 12,884 8,874 Depreciation and amortization 4,100 2,476 7,227 4,812 General and administrative 2,405 1,689 4,090 3,486 Property expenses 2,179 1,423 3,845 3,039 Writeoff of management contract on acquisition 38,000 - 38,000 - Writedown to fair value 331 158 331 158 Operating expenses of hotel operations 1,186 1,072 2,357 2,211 ----------------- ---------------- ---------------- ----------------- 55,075 11,512 68,734 22,580 ----------------- ---------------- ---------------- ----------------- (Loss) income before minority interest, equity investments, loss on sale and income taxes (28,464) 10,365 (18,847) 20,411 Minority interest in income (702) ( 815) (1,572) (1,561) ----------------- ---------------- ---------------- ----------------- (Loss) income before equity investments, loss on sale and income taxes (29,166) 9,550 (20,419) 18,850 Income from equity investments 108 245 1,330 827 ----------------- ---------------- ---------------- ----------------- (Loss) income before loss on sale and income taxes (29,058) 9,795 (19,089) 19,677 Loss on sale of real estate (18) - (134) - ----------------- ---------------- ---------------- ----------------- (Loss) income before income taxes (29,076) 9,795 (19,223) 19,677 Provision for income taxes (965) (175) (1,193) (230) ----------------- ---------------- ---------------- ----------------- Net (loss) income $(30,041) $ 9,620 $(20,416) $ 19,447 ================= ================ ================ ================= (Loss) earnings per share: Basic and diluted $(1.18) $ .38 $(.80) $ .76 =========== ========== ============ ============ Weighted average shares outstanding: Basic and diluted 25,425,965 25,576,774 25,525,951 25,496,916 ================= ================ ================ =================
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- 5 W.P. CAREY & CO. LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) (in thousands)
Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 --------------- --------------- -------------- -------------- Net (loss) income: $(30,041) $ 9,620 $(20,416) $19,447 --------------- --------------- -------------- -------------- Other comprehensive income: Change in unrealized appreciation of marketable securities (277) 266 (216) 31 Foreign currency translation adjustment 289 1,184 (572) 1,364 --------------- --------------- -------------- -------------- Other comprehensive (loss) income 12 1,450 (788) 1,395 --------------- --------------- -------------- -------------- Comprehensive (loss) income $(30,029) $11,070 $(21,204) $20,842 =============== =============== ============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements. -4- 6 W.P. CAREY & CO. LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) (in thousands)
Six Months Ended June 30, 2000 1999 -------------- ------------- Cash flows from operating activities: Net (loss) income $(20,416) $ 19,447 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,227 4,812 Amortization of deferred income (283) (715) Loss on sale of real estate 134 - Securities received in lieu of cash - (265) Minority interest in income 1,572 1,561 Straight-line rent adjustments (1,042) (797) Costs paid by issuance of shares 1,297 857 Equity income in excess of distributions received (27) - Writeoff of management contract on acquisition 38,000 - Provision for uncollected rents 362 300 Writedown to fair value 331 158 Net change in operating assets and liabilities, net of assets and liabilities acquired (1,408) (1,028) -------------- ------------- Net cash provided by operating activities 25,747 24,330 -------------- ------------- Cash flows from investing activities Purchases of real estate and equity investments (11,267) (41,940) Additional capital expenditures (866) (1,965) Proceeds from sale of property 982 74 Distributions from equity investments in excess of equity income - 371 Payment of disposition fees - (1,007) Payment of deferred acquisition fees (392) - Purchases of mortgage receivable and marketable securities - (3,676) Cash acquired on acquisition of business operations 212 - -------------- ------------- Net cash used in investing activities (11,331) (48,143) -------------- ------------- Cash flows from financing activities: Proceeds from issuance of shares - 652 Dividends paid (21,482) (21,111) Distributions to minority interest (1,172) (1,309) Payments of mortgage principal (3,421) (3,135) Proceeds from notes payable 30,094 37,000 Proceeds from mortgages payable - 15,000 Prepayments of mortgages - (3,954) Deferred financing costs - (388) Purchases of treasury stock (12,204) - Other 18 - -------------- ------------- Net cash (used in) provided by financing activities (8,167) 22,755 -------------- ------------- Effect of exchange rate changes on cash (29) - -------------- ------------- Net increase (decrease) in cash and cash equivalents 6,220 (1,058) Cash and cash equivalents, beginning of period 2,297 5,673 -------------- ------------- Cash and cash equivalents, end of period $ 8,517 $ 4,615 ============== =============
-5- 7 W.P. CAREY & CO. LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) - CONTINUED (in thousands) 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:
Intangible assets: Management contracts $ 97,135 Trade name 4,700 Workforce 4,900 Goodwill 20,097 -------- 126,832 Other assets and liabilities, net (2,414) Listed shares issued (124,630) ------- Net cash acquired $ 212 ========
B. During the six-month periods ended June 30, 2000 and 1999, the Company issued restricted shares of $2,345 and $1,980, respectively, to certain directors, officers and affiliates in consideration of services rendered. In connection with the acquisition of Carey Management, restricted shares and stock options valued at $6,295 have been recorded as deferred compensation. C. In connection with the acquisition of real estate interests in 2000 and 1999, the Company issued shares of $775 and $2,510, respectively. The accompanying notes are an integral part of the condensed consolidated financial statements. -6- 8 W.P. CAREY & CO. LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands, except share and per share amounts) Note 1: Basis of Presentation/Accounting Policies: The accompanying unaudited financial statements of W.P. Carey & Co. LLC ("the Company") (formerly Carey Diversified LLC) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. All significant inter-entity balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain 1999 amounts have been reclassified to conform to the 2000 financial statement presentation. The Company has adopted the provisions of Staff Accounting Bulletin No. 101 - Revenue Recognition ("SAB 101"). The adoption of SAB 101 has not had a material effect on the Company's financial position and results of operations. For the advisory business, all fees are recognized as earned. Transaction fees are earned upon consummation of a transaction and asset-based fees are earned when services are performed. Note 2. Acquisition of Business Operations: The Company acquired the net lease real estate advisory operations of Carey Management LLC ("Carey Management"), a subsidiary of W.P. Carey & Co., Inc., an affiliate, pursuant to receiving shareholder approval on June 28, 2000. The assets acquired include the Advisory Agreements with four affiliated publicly owned real estate investment trusts (the "CPA REITs"), the Company's Management Agreement, the stock of an affiliated broker-dealer, investments in the common stock of the CPA REITs, and certain office furniture, fixtures, equipment and employees required to carry on the business operations of Carey Management. The purchase price consists of the initial issuance of 8,000,000 Listed Shares ("shares"); an additional 2,000,000 shares will be issued over four years if specified performance criteria are achieved. The initial 8,000,000 shares issued are restricted for a period of up to three years. The total purchase price is approximately $131,300 including the initial issuance of 8,000,000 shares, estimated transaction costs of $2,300, the acquisition of a minority interest in the Company 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 acquisition of interests in Carey Management is accounted for as a purchase and recorded at the fair value of the initial 8,000,000 shares issued. The fair value of the shares is 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. 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 REITs, the Company's Management Agreement, the trade name, and workforce, have been 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. Goodwill of $20,097, representing the excess of the purchase price over the fair values of the identified tangible and intangible assets, has been recorded. 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. In connection with the merger, the Company granted approximately 450,000 restricted shares and 770,000 options to purchase shares to employees of the Company. The restricted shares vest ratably over four years, and the options are exercisable over a period of ten years, at prices ranging from $7.69 to $16.25 per share, and vest ratably over a period of three years. -7- 9 W.P. CAREY & CO. LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (dollars in thousands, except share and per share amounts) Approximately 105,000 restricted shares and 329,000 options, exercisable at $7.69, were issued in satisfaction of the interests of certain officers in a non-qualified deferred compensation plan of Carey Management that was terminated upon completion of the merger. The stock price used to record the 105,000 restricted shares is consistent with the stock price used to value the overall acquisition of assets. The fair value of the options of approximately $2,450 was determined independently using an option pricing model and stock prices as of the announcement date of the acquisition. The value of the remaining approximately 346,000 restricted shares and 443,000 options, exercisable at $16.25 per share, of $6,117 has been classified as deferred compensation in the accompanying condensed consolidated financial statements and will be charged to compensation expense over their respective vesting periods. The fair value of the restricted shares was determined based on the stock price as of the completion of the merger. Deferred compensation with respect to the options is based on the intrinsic value as of the date of completion of the merger. Upon completion of the merger the Company assumed the name of "W.P. Carey & Co. LLC". -8- 10 W.P. CAREY & CO. LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (dollars in thousands, except share and per share amounts) Note 3. Transactions with Related Parties: As described in Note 2, 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. For the periods from April 1, 2000 through June 28, 2000, and from January 1, 2000 through June 28, 2000, the Company incurred combined management and performance fees of $967 and $1,924, respectively, and general and administrative reimbursements of $456 and $857, respectively. For the three-month and six-month periods ended June 30, 1999, the Company incurred combined management and performance fees of $736 and $1,479, respectively, and general and administrative reimbursements of $372 and $729, respectively. As a result of the cancellation of the Management Agreement and acquisition of Carey Management's workforce, the Company will no longer incur management and performance fees and general and administrative reimbursements. As a result of acquiring the Advisory Agreements with the CPA REITs, the Company has engaged in a new business segment (see Note 6), advisory operations, and will earn fees as the Advisor to the four affiliated CPA REITs, Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional Properties Incorporated ("CIP(R)"), Corporate Property Associates 12 Incorporated ("CPA(R):12"), and Corporate Property Associates 14 Incorporated ("CPA(R):14"). Under the Advisory Agreements with the CPA REITs, the Company performs various services, including but not limited to the day-to-day management of the CPA REITs and transaction-related services primarily consisting of the identification, evaluation, and negotiation of property purchases and dispositions and placement of debt. 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 REIT and, based upon certain performance criteria for each REIT, may be entitled to receive a performance fee of 1/2 of 1% of Average Invested Assets. The Company may, at its option, elect to receive its performance fees in the common stock of the applicable CPA REIT. In connection with structuring and negotiating acquisitions and related mortgage financing for the CPA REITs, the Company earns fees equal to 4.5% of the cost of the properties acquired. For acquisitions made on behalf of CPA(R):12 and CPA(R):14, 2% of the fee is deferred and payable in equal installments over no less than eight years. Such deferred structuring and financing fees bear interest at annual rates ranging from 6% to 7%. The Company is reimbursed for the cost of personnel provided for the administration of the CPA REITs. For the period from the date of acquisition through June 30, 2000, the Company earned structuring and financing fees of $2,813 and general and administrative reimbursements of $30. As Advisor, the Company owns 20,000 shares of common stock in each CPA REIT and accounts for its investment in such common stock under the equity method of accounting. If certain costs of the CPA(R):14 public offering, exclusive of selling commissions, exceed 3.5% of the gross offering proceeds, the Company's broker-dealer subsidiary may be required to reimburse CPA(R):14 for such excess. Payment of asset management and performance fees by a CPA REIT may be limited, subject to satisfaction of certain guidelines which provide for deferral of such fees if certain annual operating expenses, as defined in the Advisory Agreements, exceed the greater of 2% of a CPA REIT's Average Invested Assets or 25% of its net income. The Company has guaranteed $7,995 of loan obligations of certain senior officers in connection with the transaction described in Note 2. The loans are collateralized by shares of the Company and the CPA REITs owned by the senior officers. Certain obligations to the affiliates of the former advisor have been retained, including deferred acquisition fees of $2,864, payable through January 2007, and a deferred fee of $1,423 which will only be paid when the Company achieves a closing price equal to or in excess of $23.11 for five consecutive days. These obligations are included in due to affiliates in the accompanying condensed consolidated financial statements. -9- 11 W.P. CAREY & CO. LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) (dollars in thousands, except share and per share amounts) Note 4. Lease Revenues: For the six months ended June 30, 2000 and 1999, the Company earned its net leasing revenues (i.e., rental income and interest income from direct financing leases) from more than 80 lessees. A summary of net leasing revenues is as follows:
2000 % 1999 % ---- - ---- - Federal Express Corporation $ 2,889 7% $ 127 - Dr Pepper Bottling Company of Texas 2,124 5 1,999 5% Gibson Greetings, Inc. 2,011 5 1,966 5 Detroit Diesel Corporation 1,829 4 1,829 5 Sybron International Corporation 1,813 4 1,813 5 Livho, Inc. 1,613 4 1,613 4 Orbital Sciences Corporation 1,328 3 1,116 3 America West Holdings Corp. 1,269 3 521 1 Quebecor Printing, Inc. 1,254 3 1,230 3 AutoZone, Inc. 1,236 3 1,179 3 Thermadyne Holdings Corporation 1,214 3 1,117 3 Furon Company 1,207 3 1,207 3 The Gap, Inc. 1,103 3 1,102 3 AP Parts International, Inc. 808 2 809 2 CSS Industries, Inc. 798 2 793 2 Brodart, Co. 760 2 760 2 Peerless Chain Company 732 2 732 2 Lockheed Martin Corporation 728 2 828 2 Red Bank Distribution, Inc. 700 2 700 2 Eagle Hardware & Garden, Inc. 692 2 675 2 Unisource Worldwide, Inc. 670 1 862 2 High Voltage Engineering Corporation 664 1 664 2 Bell South Telecommunication, Inc. 642 1 - - Duff-Norton Company, Inc. 582 1 582 1 Sprint Spectrum, L.P. 577 1 577 1 United States Postal Service 545 1 545 1 Cendant Operations, Inc. 537 1 - - DeVlieg Bullard, Inc. 477 1 477 1 Anthony's Manufacturing Company, Inc. 473 1 473 1 Wal-Mart Stores, Inc. 446 1 446 1 Material Science Corporation 414 1 414 1 Winn-Dixie Stores, Inc. 385 1 312 1 AT&T Corporation 380 1 380 1 Exide Electrics Corporation 286 1 286 1 Excel Communications, Inc. 266 1 266 1 Copeland Beverage Group, Inc. - - 900 2 Other 9,130 21 10,207 26 ----------- ------- ------------ -------- $42,582 100% $39,507 100% =========== ======= ============ ========
-10- 12 W.P. CAREY & CO. LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except share and per share amounts) Note 5. Equity Investments: The Company owns 780,269 units of the operating partnership of Meristar Hospitality Corporation ("Meristar"), a publicly traded real estate investment trust which primarily owns hotels. 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. Meristar's financial statements for the quarter ended March 31, 2000 reported total assets of $3,042,763 and shareholders' equity of $1,130,164 as of March 31, 2000 and revenues of $67,100 and a net loss of $(372) for the three months then ended. As of August 10, 2000, Meristar's quoted share price was $22 3/16, resulting in an aggregate value of the Company's units of approximately $17,312 if converted. The carrying value of the equity interest in Meristar operating partnership as of June 30, 2000 was $17,929. 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, an affiliate, owns the remaining controlling interests as a general partner in each partnership. The Company also owns a 50% interest in a limited liability company with Corporate Property Associates 14 ("CPA(R):14"), an affiliate owning a 50% interest, that purchased property in June 1999 and net leased it to a single tenant. Combined financial information of the two limited partnerships and the limited liability company is summarized as follows:
(In thousands) June 30, 2000 December 31, 1999 ------------------- ------------------- Assets (primarily real estate) $84,555 $77,792 Liabilities (primarily mortgage notes payable) 53,812 48,934 Partner's capital 30,743 28,858
Six Months Ended June 30, 2000 1999 -------------------------------------------- Revenues (primarily rental income) $ 4,788 $ 3,687 Expenses (primarily interest on mortgages and depreciation) (3,274) (2,273) ------------------- ------------------- Net income $ 1,514 $ 1,414 =================== ===================
-11- 13 W.P. CAREY & CO. LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share and per share amounts) Note 6. Segment Reporting: The Company operates in three business segments - real estate, hotel operations, and the advisory operations of four affiliated real estate investment trusts. The advisory operations were acquired in June 2000. The three segments are summarized as follows:
Six months ended June 30, Real Estate Hotel Advisory Total Company - ------------------------- ----------- ----- -------- ------------- Revenues: 2000 $44,269 $2,775 $2,843 $49,887 1999 40,329 2,662 - 42,991 Operating and interest expenses(1) (excluding depreciation and amortization): 2000 $20,584 $2,357 $ 566 $23,507 1999 15,557 2,211 - 17,768 Income from equity investments: 2000 $ 1,330 $ 1,330 1999 827 827 Net operating income(1): 2000 $16,435 $418 $1,924 $18,777 1999 19,226 451 - 19,677 Total assets: June 30, 2000 $861,566 $8,311 $90,424 $960,301 December 31, 1999 848,526 7,733 - 856,259
(1) Excludes the writeoff of an acquired management contract of $38,000 in 2000. Note 7. Pro Forma Financial Information: 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 six months ended June 30, 1999, and January 1, 2000 for the six months ended June 30, 2000. 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.
Six Months Ended June 30, 2000 1999 ------------- ------------- Pro forma total revenues $63,291 $66,489 Pro forma net income 17,804 29,341 Pro forma basic and diluted earnings per share $0.53 $0.86
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 LLC upon completion of the merger. The pro forma loss, including the $38,000 writeoff, for the six months ended June 30, 2000 and 1999 is $20,196 and $8,659, respectively. Pro forma basic and diluted loss per share, including the $38,000 writeoff, for the six months ended June 30, 2000 is $0.58. Pro forma basic and diluted loss per share for the six months ended June 30, 1999 is $0.26. -12- 14 W.P. CAREY & CO. LLC AND SUBSIDIARIES Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except share and per share amounts) The following information should be read in conjunction with W.P. Carey & Co. LLC's ("WPC") (formerly Carey Diversified LLC) condensed consolidated financial statements and notes thereto as of June 30, 2000 included in this quarterly report and Carey Diversified's Annual Report on Form 10-K for the year ended December 31, 1999. This quarterly report contains forward looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievement of WPC to be materially different from the results of operations or plans expressed or implied by such forward looking statements. Accordingly, such information should not be regarded as representations by WPC that the results or conditions described in such statements or the objectives and plans of WPC will be achieved. RESULTS OF OPERATIONS: Effective commencing June 29, 2000, Carey Diversified acquired the net lease real estate advisory operations of Carey Management LLC by issuing 8,000,000 shares and changed its name 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. Revenue from the advisory segment consists primarily of asset-based and transaction fees. The asset-based fees compensate WPC for services related to the day-to-day management of the REITs and include asset management fees of 1/2 of 1% of the Average Invested Assets of each REIT and an additional 1/2 of 1% subject to the satisfaction of certain performance criteria. Transaction and mortgage financing fees equal to 4.5% of the purchase price of properties are earned for originating purchases of real estate interests on behalf of the REITs. In connection with the acquisition of the advisory business, WPC acquired a broker-dealer, Carey Financial Corporation, which currently is marketing a public offering of up to 40,000,000 shares on a "best efforts" basis at $10 per share of one of the affiliated REITs, Corporate Property Associates 14 Incorporated ("CPA(R):14"), through a network of broker-dealers including American Express Financial Advisors. In connection with the CPA(R):14 offering, Carey Financial will earn a commission of 1/2 of 1% for shares sold. WPC will be reimbursed for the costs of personnel for both the CPA(R):14 marketing effort and the day-to-day administration of the REITs. For the period from the date of acquisition of the advisory business through June 30, 2000, WPC earned advisory fee income of $2,843, including $2,813 from originating real estate acquisitions of approximately $62,500. Because the effective date for the acquisition of the net lease advisory operations was June 29, 2000, revenue earned from asset-based fees for the current period is immaterial. The predecessor advisor earned combined asset management and performance fees of $3,828 and general and administrative expense reimbursement for the cost of personnel of $1,032 from the CPA REITs during the three-month period ended June 30, 2000. Such amounts are not included in WPC's results of operations. The asset-based fees and reimbursements may grow as the CPA REITS acquire additional properties. As of June 30, 2000, CPA(R):14 had approximately $88,000 available for investment. Asset-based fees for the other REITs are based on an annual independent valuation of their real estate assets. The termination of the management contract between Carey Management and Carey Diversified has resulted in a transition from an externally managed to an internally managed real estate company, and WPC will no longer incur management and performance fees for the period subsequent to the merger. Upon termination of the management contract with Carey Diversified, WPC's advisory business segment recognized noncash charges of $38,000 and $353 relating to the nonrecurring charge for termination of the contract and amortization of intangible assets, respectively. In connection with the merger, WPC formed a wholly-owned taxable subsidiary that will earn a substantial portion of the advisor revenues and incur expenses related to earning such revenues. This structure has been used to enable WPC to maintain its tax status as a publicly traded partnership for federal income tax purposes. -13- 15 W.P. CAREY & CO. LLC AND SUBSIDIARIES Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (in thousands, except share and per share amounts) Income from real estate operations was $6,051 and $15,525 for the three-month and six-month periods ended June 30, 2000 as compared with $9,388 and $18,996 for the three-month and six-month periods ended June 30, 1999. The decreases in real estate income were due to increases in depreciation and amortization, interest and property expenses and the provision for state and local income taxes and offset increases in lease revenues (rental income and interest income from direct financing leases) and other income. The increase in depreciation and amortization is primarily due to the completion of build-to-suit projects on properties leased to America West Airlines and Federal Express Corporation that went into service in 1999 and 2000, respectively, as well as the acquisition of the Bell South Corporation property, the expansion of the Orbital Sciences Corporation property and the renovation of a property in Moorestown, New Jersey now leased to Cendant Operations, Inc., all of which occurred during 1999. The increase in interest expense was due to the refinancing of the Gap, Inc., Orbital Sciences and AutoZone, Inc. properties in 1999, the mortgage financing of the Bell South property in connection with its purchase, and placement of limited recourse financing on the America West property subsequent to its purchase. In addition, interest expense from the $185,000 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. In addition, the credit facility is a variable rate obligation and has been affected by increases in the base LIBOR rates during the current year. The increase in property expenses was due to increased management and performance fees. As noted, the management and performance fees for periods subsequent to the merger have been terminated effective June 29, 2000. The provision for income taxes increased as a result of successful efforts by various states to tax partnerships at the partnership level rather than passing tax liabilities through to individual taxpayers. The increase in lease revenues was attributable to the new leases with Cendant, Bell South, America West and Federal Express, which contributed approximately $5,000 of lease revenues during the current six-month period and offset decreases from the sale of the KSG, Inc. and Hotel Corporation of America properties and termination of the Copeland Beverage Group leases in 1999 (which together contributed $1,785 of lease revenues during the prior year's six-month period). The increases in other income included the recognition of certain proceeds from the $1,800 Copeland letter of credit during the first quarter, sublease rentals of $310 at the Copeland property and $500 received in connection with an agreement to terminate the Sunds Defibrator Woodhandling, Inc. lease in May 2000. WPC subsequently sold the Sunds property. Annual rent from the Sunds property was $144. WPC is continuing to actively evaluate redevelopment plans for the former Copeland property, which consists of 18 acres in Los Angeles, California, and is monitoring developments in connection with the DeVlieg Bullard, Inc. bankruptcy, a lessee of properties in McMinnville, Tennessee and Frankenmuth, Michigan. The creditors committee of the DeVlieg bankruptcy has approved an asset sale of the division that occupies the Frankenmuth property and a new lease is being negotiated with the purchaser of the division. WPC has also reached an agreement in principle for a new lease at the McMinnville property and anticipates entering into a lease with an initial term of three years. Management believes that the annual rent from the two properties will be at least $700. Income from hotel operations for the comparable three-month and six-month periods has been relatively stable with moderate increases in both revenue and expenses. For the comparable six-month periods, the average occupancy rate was 50%. The hotel business is seasonal in nature with its most significant portion of revenues and earnings recognized during the third quarter, so that the current period's results from hotel operations are not expected to be indicative of results for the full year. -14- 16 W.P. CAREY & CO. LLC AND SUBSIDIARIES Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (in thousands, except share and per share amounts) FINANCIAL CONDITION: Cash flows from operations of $25,747 were sufficient to fund dividends to shareholders of $21,482 and distributions to minority interests of $1,172. In addition, WPC used $3,421 to make scheduled principal payments on its limited recourse debt. Investing activities included using $12,133 for capital expenditures, including $9,094 to complete construction of the Federal Express build-to-suit project which was placed in service in February 2000; $527 to buy out the minority interest of the joint venture partner in the Cendant property; $615 to fund construction of an additional building in the equity investment in a net lease with CheckFree Corporation; $921 (along with $778 of WPC shares) to purchase 11 acres of land adjacent to its existing 12 acre multi-tenant property in Broomfield, Colorado and $866 to fund improvements at other existing properties. The Company received $982 in connection with the sale of four properties including the Sunds properties. Management is evaluating the real estate portfolio and is actively seeking to sell many of its smaller properties. In January 2000, the initial installment of deferred acquisition fees for $392 relating to 1998 purchases was made to an affiliate of Carey Management. In connection with the Carey Management transaction, the deferred acquisition fees payable were reduced to $2,864 and will be paid over the next eight years. WPC has entered into a new lease with AT&T Corporation for its property in Bridgeton, Missouri and has made a commitment to fund an expansion for up to $400. Borrowings on the credit facility increased by $30,000 and include funds used for capital expenditures and purchases of approximately $12,200 of WPC's outstanding shares. Purchases of shares have been effected when the price is attractive relative to WPC's cost of capital. WPC issued 8,000,000 shares recorded at $124,630 in connection with the acquisition of Carey Management's business operations and contracts. Management believes that the acquisition will provide WPC with several potential advantages including, but not limited to, increased diversification of revenue sources, 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 may provide WPC the ability to increase its debt capacity, if necessary. The net income of the advisory business of Carey Management has historically grown at a faster rate than the net income of Carey Diversified and its predecessor partnerships, 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 to raise additional equity capital in the public markets should be enhanced. -15- 17 W.P. CAREY & CO. LLC AND SUBSIDIARIES PART II Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (in thousands) $156,908 of the Company'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 June 30, 2000 ranged from 7.63% to 7.85%.
2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Fixed rate debt $3,670 $ 10,464 $9,158 $9,640 $26,838 $97,138 $156,908 $184,817 Average interest rate 7.85% 7.63% 7.63% 7.67% 7.79% 7.82% Variable rate debt $3,285 $168,938 $ 661 $ 690 $ 723 $11,974 $186,271 $186,271
As of June 30, 2000, the Company had no other material exposure to market risk. Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An annual shareholders meeting was held on June 28, 2000, at which time a vote was held to elect four Class II directors for the company. The vote was held through the solicitation of proxies. The following directors were elected for a three year term:
Total Shares Shares Shares Name Of Director Voting Voting Yes Voting No ---------------- ---------- ---------- --------- William P. Carey 21,293,886 20,906,372 387,514 Lawrence R. Klein 21,293,886 20,918,559 375,327 Charles C. Townsend 21,293,886 20,924,150 369,736 Donald E. Nickelson 21,293,886 20,939,886 354,000
Shareholders approved the acquisition of the net lease real estate advisory business of W.P. Carey & Co. Inc. and its affiliates by Carey Diversified. The proposal was approved by 14,127,041 of 15,144,157 voting shares, with 668,122 voting against and 348,994 abstaining. Shareholders further approved a proposal to amend the 1997 Listed Share Incentive Plan to increase the number of shares eligible for issuance from 700,000 to 2,600,000 shares. This proposal was approved by 13,301,198 of 15,144,157 voting shares, with 1,329,139 voting against and 513,820 abstaining. Item 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: During the quarter ended June 30, 2000 the Company was not required to file any reports on Form 8-K. -16- 18 W.P. CAREY & CO. LLC AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. W.P. CAREY & CO. LLC 8/11/00 By: /s/ John J. Park --------- --------------------------------- Date John J. Park Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) 8/11/00 By: /s/ Claude Fernandez --------- --------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) -17- EX-27 2 ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 8,517 0 0 0 0 8,517 827,918 23,924 960,301 34,709 343,179 0 0 0 581,918 960,301 0 49,887 0 0 17,519 38,331 12,884 (19,223) (1,193) (20,416) 0 0 0 (20,416) (.80) (.80)
-----END PRIVACY-ENHANCED MESSAGE-----