-----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, EVhQd/6Jw1+R7AXvfzCI1Y08p5NUMXmSP4DXTapH7UAyh+6flyJFZ8xBaAvy32Im KWOK9PahMdLNJTzNLdKQVA== 0000950123-05-003246.txt : 20050316 0000950123-05-003246.hdr.sgml : 20050316 20050316163654 ACCESSION NUMBER: 0000950123-05-003246 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050316 DATE AS OF CHANGE: 20050316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAREY W P & CO LLC CENTRAL INDEX KEY: 0001025378 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133912578 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13779 FILM NUMBER: 05685946 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: 2ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 FORMER COMPANY: FORMER CONFORMED NAME: CAREY DIVERSIFIED LLC DATE OF NAME CHANGE: 19971017 FORMER COMPANY: FORMER CONFORMED NAME: CAREY DIVERSIFIED PROPERTIES LLC DATE OF NAME CHANGE: 19961017 10-K 1 y06523e10vk.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------- FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________. COMMISSION FILE NUMBER: 001-13779 --------------------------------- W. P. CAREY & CO. LLC (FORMERLY CAREY DIVERSIFIED LLC) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3912578 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 50 ROCKEFELLER PLAZA 10020 NEW YORK, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBERS: INVESTOR RELATIONS (212) 492-8920 (212) 492-1100 --------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT LISTED SHARES, NO PAR VALUE SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this report, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes[X] No[ ] As of June 30, 2004, the aggregate market value of the Registrants' Listed Shares held by non-affiliates was $780,110,765. As of March 10, 2005, there are 37,640,176 Listed Shares of Registrant outstanding. The Registrant incorporates by reference its definitive Proxy Statement with respect to its 2005 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into Part III of this Report. W. P. CAREY & CO. LLC PART I This Annual Report on Form 10-K contains certain forward-looking statements relating to W. P. Carey & Co. LLC. As used in this Annual Report on Form 10-K, the terms "the Company," "we," "us" and "our" include W. P. Carey & Co. LLC, its consolidated subsidiaries and predecessors, unless other indicated. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as "anticipate," "believe," "expect," "estimate," "intend," "could," "should," "would," "may," "seeks," "plans" or similar expressions. Do not unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees, and speak only as of the date they are made. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievement to be materially different from the results of operations or plan expressed or implied by such forward-looking statements. While we cannot predict all of the risks and uncertainties, they include but are not limited to, those described below in "Factors Affecting Future Operating Results." Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved. (In thousands except share and per share amounts) ITEM 1. BUSINESS. (a) GENERAL DEVELOPMENT OF BUSINESS Overview We are a real estate investment, management and advisory company that invests in commercial properties leased to companies domestically and internationally, and earns fees as the advisor to affiliated real estate investment trusts ("CPA(R) REITs") that each make similar investments. We own and manage commercial and industrial properties located in 34 states and Europe, net leased to more than 107 tenants. As of December 31, 2004, our portfolio consisted of 168 properties in the United States and 15 properties in Europe and totaled more than 19.4 million square feet. In addition, we manage over 765 net leased properties on behalf of the CPA(R) REITs: Corporate Property Associates 12 Incorporated ("CPA(R):12"), Corporate Property Associates 14 Incorporated ("CPA(R):14"), Corporate Property Associates 15 Incorporated ("CPA(R):15"), Corporate Property Associates 16 - Global Incorporated ("CPA(R):16 - Global") and Carey Institutional Properties Incorporated ("CIP(R)") until its merger into CPA(R):15 during 2004 (see "Significant Developments during 2004" below). We also hold ownership interests in the CPA(R) REITs (see Note 6 of the accompanying financial statements). Our core real estate investment strategy is to purchase properties leased to a diversified group of companies on a single tenant net lease basis. 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. We also generally seek to include in our leases: - Clauses providing for mandated rent increases or periodic rent increases tied to increases in the consumer price index ("CPI") or other indices in the jurisdiction in which the property is located or, when appropriate, increases tied to the volume of sales at the property; - Indemnification for environmental and other liabilities; and - Guarantees from parent companies. Under advisory agreements that we have with each of the CPA(R) REITs, we perform services related to the day-to-day management of the CPA(R) REITs and provide transaction-related services in connection with structuring and negotiating real estate acquisitions and mortgage financing. We earn an asset management fee at a per annum rate of 1/2 of 1% of average invested assets, as defined in the advisory agreement for each CPA(R) REIT and, based upon specific performance criteria for each CPA(R) REIT, may be entitled to receive a performance fee of 1/2 of 1% of average invested assets. (For CPA(R):16 - Global, the asset management fee is equal to 1% of average invested assets, with the payment of half of such fee dependent upon specific performance criteria for CPA(R):16 - Global). Fees for transaction-related services are only earned for completed transactions. We earn acquisition fees on CPA(R) REIT real estate purchases equal to 4.5% of the cost of the properties acquired, 2% of which is deferred and payable in annual installments over terms which range from 3 to 8 years and we may earn a 1% fee for certain refinancing of debt, subject to the approval of the independent directors of the applicable CPA(R) REIT. We are reimbursed for the cost of personnel provided for the administration of the CPA(R) REITs. We were formed as a limited liability company under the laws of Delaware on July 15, 1996. Since January 1, 1998, we have been consolidated with nine Corporate Property Associates limited partnerships and their successors and are the -1- W. P. CAREY & CO. LLC General Partner (indirectly, through our wholly-owned subsidiary Carey Asset Management Corp.) and owner of all of the limited partnership interests in each partnership. Our shares began trading on the New York Stock Exchange on January 21, 1998. As a limited liability company, we are not subject to federal income taxation as long as we satisfy certain requirements relating to our operations and pass through such tax liability to our shareholders; however, certain subsidiaries of our management services operations are subject to federal, state and local income taxes and certain subsidiaries may be subject to foreign taxes. Our principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020 and our telephone number is (212) 492-1100. Our website address is http://www.wpcarey.com. As of December 31, 2004, we employed 129 individuals through our wholly owned subsidiaries. Significant Developments During 2004 During 2004, we structured approximately $890,000 of acquisitions on behalf of the CPA(R) REITs. Excluding the merger (discussed below), we sold four properties on behalf of the CPA(R) REITs for $28,852 in 2004. CREDIT FACILITY. On May 27, 2004, we entered into a credit facility for a $175,000 revolving line of credit with J.P. Morgan Chase Bank and eight other banks. The line of credit, which matures in May 2007, provides us a one-time right to increase the amount available under the line of credit to $225,000. Advances are prepayable at any time. The revolving credit agreement has financial covenants that among other things, require us to maintain a minimum equity value and meet or exceed certain operating and coverage ratios. As of December 31, 2004, we had $102,000 outstanding under the revolving line of credit and were in compliance with all covenants. See the "Cash Resources" section within Management's Discussion and Analysis for further details. SEC INVESTIGATION. As previously reported, we and Carey Financial Corporation ("Carey Financial"), our wholly-owned broker-dealer subsidiary, are currently subject to an investigation by the United States Securities and Exchange Commission ("SEC") into payments made to third party broker dealers in connection with the distribution of REITs managed by us and other matters. Although no regulatory action has been initiated against us or Carey Financial in connection with the matters being investigated, it is possible that the SEC may pursue an action in the future. The potential timing of any such action and the nature of the relief or remedies the SEC may seek cannot be predicted at this time. If such an action is brought, it could materially affect us. See Item 3-Legal Proceedings for a discussion of this investigation. MERGER OF CIP(R) AND CPA(R):15. In August 2004, the shareholders of CIP(R) and CPA(R):15 approved a merger agreement whereby CPA(R):15 acquired CIP(R)'s business operations on September 1, 2004 in a merger ("Merger"). The Merger provided a liquidation option for CIP(R) shareholders and provided CPA(R):15 with the opportunity to acquire properties that are consistent with its investment objectives. CIP(R) shareholders had the option of exchanging CIP(R) shares for CPA(R):15 shares or redeeming CIP(R) shares for cash. Prior to the Merger, we acquired interests in 17 properties from CIP(R) in September 2004. The properties are primarily single tenant net-leased properties with remaining lease terms generally being eight years or less. These properties were purchased by us as their remaining lease terms did not strategically fit with CPA(R):15's goal of investing in long term investments but did fit with our investment objectives. The purchase price was $142,161, which was comprised of $115,158 in cash and our assumption of $27,003 in limited recourse mortgage notes payable. The purchase price was based on a third party valuation of CIP(R)'s properties, and in total represented approximately 20% of the total appraised value of the CIP(R) portfolio prior to the acquisition. Seven of the properties are encumbered with limited recourse mortgage financing at fixed rates of interest ranging from 7.5% to 10% and maturity dates ranging from December 2007 to June 2012. Annual cash flow from the interests acquired in the acquisition is projected to be $8,885 in 2005. Our revenues for 2004 were substantially increased by fees earned in connection with the Merger. In providing a liquidity event for CIP(R) shareholders, we received incentive fees, in accordance with our advisory agreement with CIP(R), of $23,681 and disposition fees of $22,679 including disposition fees in the amount of $4,265 that were not earned for financial reporting purposes but were applied as a reduction in the cost basis of the properties acquired by us. We also earned transaction fees of $11,493 on CPA(R):15's acquisition of $571,000 of real estate interests from CIP(R). In connection with the Merger and related activities, we exchanged our shares of CIP(R) in September, 2004 for 1,098,367 shares of CPA(R):15, at the established exchange ratio of 1.09 shares of CPA(R):15 for each CIP(R) share redeemed. CPA(R):16 - GLOBAL BEST EFFORTS OFFERING. Throughout 2004, we continued the CPA(R):16 - Global "best efforts" public offering of up to $1,100,000, which commenced in December 2003, in which we served as the advisor to CPA(R):16 - Global. During 2004, CPA(R):16 - Global raised $511,333 pursuant to its "best efforts" public offering. Further sales of -2- W. P. CAREY & CO. LLC shares in the CPA(R):16 - Global offering were temporarily discontinued on December 31, 2004 for an unspecified time period in order to bring into balance the rate of fundraising and the rate of investment, as CPA(R):16 - Global believed that it was prudent to cease taking in additional money until CPA(R):16 - Global has made additional real estate acquisitions. CPA(R):16 - Global subsequently withdrew its offering. Currently, we anticipate that CPA(R):16 - Global may recommence sales of its securities during the second quarter of 2005 pursuant to the second offering described below; however, the decision as to whether and when to recommence sales of interests in CPA(R):16 - Global is not dependent on achievement of any fixed amount of additional acquisitions and could be affected by other factors which may affect the marketing of such interests. In September, 2004, CPA(R):16 - Global filed a registration statement with the SEC for a second offering of shares of common stock that has not yet been declared effective. Once a decision is made to recommence sales of shares, the second offering, which will also be on a "best efforts" basis, will be for a maximum of 80,000,000 shares at a price of $10 per share and will register up to 40,000,000 shares for the Distribution Reinvestment and Share Purchase Plan. IMPAIRMENT CHARGES. During 2004, impairment charges were recorded due to several factors, including our decision to sell property at less than its carrying value, our determination that certain property has experienced an other than temporary decline in value and, for direct financing leases, our assessment that the unguaranteed residual value of the underlying property had declined. The table below summarizes the impairment charges recorded in 2004 for both assets held for use and assets held for sale:
2004 IMPAIRMENT PROPERTY CHARGES REASON -------- ----------- ------ Livonia, Michigan $ 7,500 Evaluation determined that property value has declined Memphis, Tennessee 2,337 Decline in unguaranteed residual value of property Winona, Minnesota 1,250 Loan loss related to sale of property Various properties 2,911 Decline in unguaranteed residual value of properties or decline in asset value Bay Minette, Alabama 550 Evaluation determined that property value has declined ------- Impairment charges from continuing operations $14,548 ======= Toledo, Ohio $ 4,700 Property sold for less than carrying value Frankenmuth, Michigan 1,000 Property to be sold for less than carrying value Various properties 1,850 Decided to sell property or property value has declined ------- Impairment charges from discontinued operations $ 7,550 =======
(b) FINANCIAL INFORMATION ABOUT SEGMENTS We operate in two operating segments, real estate operations, with investments in the United States and Europe, and management services operations. For the year ended December 31, 2004, no lessee represented 10% or more of our total lease revenues. The management services operations segment derives substantially all of its revenues from the affiliated CPA(R) REITs. (c) NARRATIVE DESCRIPTION OF BUSINESS Business Objectives and Strategy Our objective is to increase shareholder value and earnings through prudent management of our real estate assets and opportunistic investments and through the expansion of our management services business. We expect to evaluate a number of different opportunities in a variety of property types and geographic locations and to pursue opportunities based upon our analysis of the risk/return tradeoffs. We will continue to own properties as long as we believe ownership helps us to attain our objectives. We seek to: - Increase revenues from the management services business by increasing assets under management as the CPA(R) REITs acquire additional property and from organizing new investment entities; - Utilize core management skills (which include in-depth credit analysis, asset valuation and sophisticated structuring techniques) in our evaluation of new investment opportunities to maximize our investment returns; - Enhance the current portfolio of properties through follow-on transactions, dispositions and favorable lease modifications; -3- W. P. CAREY & CO. LLC - Utilize our size and access to capital to refinance existing debt, where appropriate; and - Increase the diversification of our portfolio through direct or indirect investments in real estate outside the United States. Investment Strategies In analyzing potential acquisitions we review many aspects of a transaction, including the tenant, the real estate and the lease, to determine whether a potential investment can be structured to satisfy our investment criteria. The aspects of a transaction that we evaluate and structure include the following: TENANT EVALUATION. We evaluate each potential tenant for its credit, management, position within its industry, operating history and profitability. We generally seek tenants that we believe will have stable or improving credit. By leasing properties to these tenants, we can generally charge rent that is higher than the rent charged to tenants with recognized credit and thereby enhance our 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 property subject to the lease 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 security deposit which may be in the form of a letter of credit or cash, or through a guarantee of lease obligations from the tenant's corporate parent. In evaluating a possible investment, the creditworthiness of a tenant generally will be a more significant factor than the value of the property absent the lease with such tenant. While we select tenants we believe are creditworthy, tenants are not required to meet any minimum rating established by a third party credit rating agency. Our standards for determining whether a particular tenant is creditworthy vary in accordance with a variety of factors relating to specific prospective tenants. The creditworthiness of a tenant is determined on a tenant-by-tenant basis. Therefore, general standards for creditworthiness cannot be applied. LEASES WITH INCREASING RENT. We seek to include a clause in each lease that provides for increases in rent over the term of the lease. These increases are generally tied to increases in indices such as the CPI, or mandated rental increases on specific dates, or in the case of retail stores, participation in gross sales above a stated level. 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. We believe that these properties provide better protection if a tenant files for bankruptcy, since leases on properties essential or important to the operations of a bankrupt tenant are less likely to be 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, we or the CPA(R) REITs can either continue operating the business conducted at the property or re-lease the property to another entity in the same industry as the tenant which can operate the property profitably. LEASE PROVISIONS THAT ENHANCE AND PROTECT VALUE. When available, we attempt to include provisions in our leases that require our consent to specified tenant activity or require the tenant to satisfy specific operating tests. These provisions could include, for example, operational and financial covenants of the tenant, prohibitions on a change in control of the tenant without our consent and indemnification from the tenant against environmental and other contingent liabilities. DIVERSIFICATION. We seek to diversify our portfolio and the portfolio of each of the CPA(R) REITs to avoid dependence on any one particular tenant or tenant industry, which also generally results in diversification by type of facility and geographic location. Diversification, to the extent achieved, helps reduce the adverse effect of a single under-performing investment or a downturn in any particular industry or geographic location. INVESTMENT COMMITTEE. We have an investment committee that provides services to both the CPA(R) REITs and us. As a transaction is structured, it is evaluated by the chairman of our 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 the investment criteria. For transactions that meet the investment criteria, the investment committee has sole discretion as to which CPA(R) REIT or if we will hold the investment. In cases where the investment committee determines that two or more entities among the CPA(R) REITs and us should hold the investment, the independent directors of each participating CPA(R) REIT (and our directors if we participate) must also approve the transaction. The investment committee is not directly involved in originating or negotiating potential investments, but instead functions as a separate and final step in the investment process. We place special emphasis on having experienced individuals serve on our investment committee and do not invest in a transaction directly or on behalf of the CPA(R) REITs unless the investment committee approves it. -4- W. P. CAREY & CO. LLC The following people serve on our investment committee: - George E. Stoddard, Chairman (1), 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 (1) previously served as Senior Vice President Head of Bond & Corporate Finance Department of the John Hancock Mutual Life Insurance Company. His responsibilities included overseeing fixed income investments for Hancock, its affiliates and outside clients. - Lawrence R. Klein (1) is the 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. - Ralph F. Verni (1) is a private investor and business consultant and formerly Chief Investment Officer of The New England Mutual Life Insurance Company. - Karsten von Koller (1) was formerly Chairman and Member of the Board of Managing Directors of Eurohypo AG, the leading commercial real estate financing company in Europe. (1) Investment committee member also serves as a director for us. Financing Strategies Consistent with our investment policies, we use leverage when available on favorable terms. We have a credit facility in place for a line of credit of up to $225,000, which we have used and intend to continue to use in connection with acquiring properties, funding build-to-suit projects and refinancing existing debt. The line of credit has a three-year term expiring in May 2007. As of December 31, 2004, we had $102,000 outstanding under the line of credit and approximately $190,700 in limited recourse property-level debt outstanding. We continually seek opportunities and consider alternative financing techniques to refinance debt, reduce interest expense or improve our capital structure. Substantially all of our mortgages are limited recourse and bear interest at fixed rates. We may seek to refinance maturing or recently paid-off mortgage debt with new property-level financing. There is no assurance that existing debt will be refinanced at lower rates of interest as such debt matures. Many of the loans restrict our ability to prepay a loan or provide for payment of premiums if paid prior to the scheduled maturity, but allow defeasance of the loan, that is, a deposit is made to service the loan commitment even if the underlying property is sold. A lender on limited recourse mortgage debt has recourse only to the property collateralizing such debt and not to any of our other assets, while full recourse financing would give a lender recourse to all of our assets. The use of limited recourse debt, therefore, will help us to limit the exposure of all of our assets to any one debt obligation. We believe that the strategy of combining equity and limited recourse mortgage debt will allow us to meet our short-term and long-term liquidity needs and will help to diversify our portfolio and, therefore, reduce concentration of risk in any particular lessee. Asset Management We believe 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. We monitor, on an ongoing basis, compliance by tenants with their lease obligations and other factors that could affect the financial performance of any of our 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. We review financial statements of tenants and undertake regular physical inspections of the condition and maintenance of properties. Additionally, we periodically analyze each tenant's financial condition, the industry in which each tenant operates and each tenant's relative strength in its industry. -5- W. P. CAREY & CO. LLC Competition We face competition for investments in commercial properties in general, and such properties net leased to major corporations in particular, from insurance companies, credit companies, pension funds, private individuals and investment companies. We also face 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. We believe that our management's experience in real estate, credit underwriting and transaction structuring should allow us to compete effectively for office and industrial properties. 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. Our leases often provide that the tenant is responsible for all environmental liability and for compliance with environmental regulations relating to the tenant's operations. We typically undertake an investigation of potential environmental risks when evaluating an acquisition. Phase I environmental assessments are performed by third party environmental consulting and engineering firms for all properties acquired. Where we believe them to be 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. We may acquire a property that 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. We normally require property sellers to indemnify the buyer fully against any environmental problem existing as of the date of purchase. Additionally, we often structure 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, we 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 statutory liability or preclude claims against us by governmental authorities or persons who are not a party to the arrangement. Contractual arrangements in leases may provide a basis for recovery from the tenant of any damages or costs for which we have 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, we are 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. We, with assistance from 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. We believe that the tenants are taking or will soon be taking all required remedial action with respect to any material environmental conditions at the properties. However, we 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 us, as applicable. 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 us, or that a material condition does not otherwise exist as to any of the properties. Factors Affecting Future Operating Results Future results may be affected by certain risks and uncertainties including the following: WE ARE CURRENTLY BEING INVESTIGATED BY THE SEC. We and Carey Financial, our wholly-owned broker-dealer subsidiary, are currently subject to an SEC investigation into payments made to third party broker dealers in connection with the distribution of REITs managed by us and other matters. Although no regulatory action has been initiated against us or Carey Financial in connection with the matters being investigated, it is possible that the SEC may pursue an action in the future. The potential timing of any such action and the nature of the relief or remedies the SEC may seek cannot be predicted at this time. If such an action is brought, it could materially affect us. See Item 3-Legal Proceedings for a discussion of this investigation. THE REVENUE STREAMS FROM THE INVESTMENT ADVISORY AGREEMENTS WITH THE CPA(R) REITS ARE SUBJECT TO LIMITATION OR CANCELLATION. The agreements under which we provide 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 our income will not be limited by the cap on fees payable under the agreements. The elimination of or any cap on fees could have a material adverse effect on our business, results of operations and financial condition. -6- W. P. CAREY & CO. LLC OUR CAPITAL RAISING ABILITY FOR THE CPA(R) REITS IS OVERLY RELIANT ON ONE SELECTED-DEALER. We are overly reliant on American Express Financial Advisors, Inc. to market our CPA(R) REIT offerings to investors. Any adverse change in that arrangement could severely limit our ability to increase assets under management and may prevent us from having funds available for new transactions. Certain payments made to American Express Financial Advisors, Inc. in connection with the distribution of our CPA(R) REIT offerings to investors are a subject of the SEC investigation described under Item 3-Legal Proceedings. OUR ADVISORY BUSINESS EXPOSES US TO MORE VOLATILITY IN EARNINGS THAN OUR REAL ESTATE INVESTMENT BUSINESS. The growth in revenue from the management services business is dependent in large part on future capital raising in existing or future managed entities and our ability to invest the money accordingly, which is subject to uncertainty and is subject to capital market and real estate market conditions. This uncertainty can create more volatility in our earnings because of the resulting increased volatility in transaction based fee revenue from the management services business as compared to revenue from ownership of real estate subject to triple net leases, which historically has been less volatile. In addition, revenues from the management services business, as well as the value of our holdings of CPA(R) REIT interests and dividend income from those interests, may be significantly affected by the results of operations of the CPA(R) REITs. Each of the CPA(R) REITs has invested substantially all of its assets (other than short-term investments) in triple net leased properties substantially similar to those we hold, and consequently the results of operations of, and cash available for distribution by, each of the CPA(R) REITs, is likely to be substantially affected by the same market conditions, and subject to the same risk factors, as the properties we own. Four of the prior thirteen CPA(R) funds reduced the rate of distributions to their investors as a result of adverse developments involving tenants. Each of the CPA(R) REITs we advise and manage may also incur significant debt. This significant debt load could restrict their ability to pay fees owed to us when due, due to either liquidity problems or restrictive covenants contained in their borrowing agreements. THE NET ASSET VALUE (NAV) OF THE CPA(R) REITS IS BASED ON INFORMATION THAT WE PROVIDE TO A THIRD PARTY. Our asset management and performance fees for CPA(R):12 and CPA(R):14, and beginning in 2006 for CPA(R):15, are based on a third party valuation and are used as the basis for determining these asset based fees payable to us. Any valuation includes the use of estimates and these valuations may be influenced by the information provided by us. THE INABILITY OF A TENANT IN A SINGLE TENANT PROPERTY TO PAY RENT WILL REDUCE OUR REVENUES. Most of our properties are occupied by a single tenant and, therefore, the success of our investments is materially dependent on the financial stability of these tenants. Lease payment defaults by tenants negatively impact our net income and reduce the amounts available for distributions to shareholders. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting the investment and re-leasing the property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. WE DEPEND ON MAJOR TENANTS. Revenues from several of our tenants and/or their guarantors constitute a significant percentage of our net leasing revenues. Our five largest tenants/guarantors, which occupy 15 properties, represented approximately 25% of total net leasing revenues in 2004. The default, financial distress or bankruptcy of any of the tenants of these properties could cause interruptions in the receipt of lease revenues from these tenants and/or result in vacancies in the respective properties, which would reduce our revenues at least until the affected property is re-leased, and could decrease the ultimate sale value of each such property. IF OUR TENANTS ARE HIGHLY LEVERAGED, THEY MAY HAVE A GREATER POSSIBILITY OF FILING FOR BANKRUPTCY. Of tenants that experience downturns in their operating results due to adverse changes to their business or economic conditions, those that are highly leveraged may have a higher possibility of filing for bankruptcy. In bankruptcy, a tenant has the option of vacating a property instead of paying rent. We have highly leveraged tenants at this time, and we may have additional highly leveraged tenants in the future. THE BANKRUPTCY OF TENANTS MAY CAUSE A REDUCTION IN REVENUE. Bankruptcy of a tenant could cause the loss of lease payments as well as an increase in the costs incurred to carry the property, with a concomitant reduction in our revenues. Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of continuing or terminating any unexpired lease. If the tenant terminates the lease, any claim we have for breach of the lease (excluding collateral securing the claim) will be treated as a general unsecured claim. The maximum claim will be capped at the amount owed for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year's lease payments or 15% of the remaining lease payments payable under the lease (but no more than three years' lease payments). In addition, due to the long-term nature of our leases and terms, which may provide an option to purchase a property by the tenant, a bankruptcy court could recharacterize a net lease transaction as a secured lending transaction. If that were to occur, we -7- W. P. CAREY & CO. LLC would not be treated as the owner of the property, but might have additional rights as a secured creditor. We have had tenants file for bankruptcy protection and are involved in litigation. OUR TENANTS GENERALLY DO NOT HAVE A RECOGNIZED CREDIT RATING, WHICH MAY CREATE A HIGHER RISK OF LEASE DEFAULTS AND THEREFORE LOWER REVENUES THAN IF OUR TENANTS HAD A RECOGNIZED CREDIT RATING. Generally, no credit rating agencies evaluate or rank the debt or the credit risk of our tenants, as we seek tenants that we believe will have improving credit profiles. Our long-term leases with certain of these tenants may therefore pose a higher risk of default. WE CAN BORROW A SIGNIFICANT AMOUNT OF FUNDS. We have incurred, and may continue to incur, indebtedness (collateralized and unsecured) in furtherance of our activities. Neither our operating agreement nor any policy statement formally adopted by our board of directors limits either the total amount of indebtedness or the specified percentage of indebtedness (based upon our total market capitalization) that 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 contains various covenants that limit the amount of secured and unsecured indebtedness we may incur. WE MAY NOT BE ABLE TO REFINANCE BALLOON PAYMENTS ON OUR MORTGAGE DEBTS. Some of our financing may require us to make a lump-sum or "balloon" payment at maturity. Our ability to make any balloon payment is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. A refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets. Scheduled balloon payments, including our pro rata share of mortgage obligations of equity investees, for the next five years are as follows: 2005 - $ 4,893 2006 - $24,192 2007 - $15,541(1) 2008 - $ 0 2009 - $26,755 (1) Does not include amounts that will be due upon maturity of credit facility. As of December 31, 2004, we had $102,000 drawn from the line of credit under our credit facility. Our ability to make balloon payments on debt 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. INTERNATIONAL INVESTMENTS INVOLVE ADDITIONAL RISKS. We have purchased and may continue to purchase property located outside the United States. These investments may be affected by factors peculiar to the laws of the jurisdiction in which the property is located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States. International investments could be subject to the following risks: - Changing governmental rules and policies; - Enactment of laws relating to the foreign ownership of property and laws relating to the ability of foreign entities to remove profits earned from activities within the country to the United States; - Fluctuations in the currency exchange rates; - Adverse market conditions caused by changes in national or local economic conditions; - Changes in relative interest rates; - Changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies; - Changes in real estate and other tax rates and other operating expenses in particular countries; - Changes in land use and zoning laws; and - More stringent environmental laws or changes in such laws. WE MAY INCUR COSTS TO FINISH BUILD-TO-SUIT PROPERTIES. We may sometimes acquire undeveloped or partially developed land parcels for the purpose of owning to-be-built facilities for a prospective tenant. Oftentimes, completion risk, cost overruns and on-time delivery are the obligations of the -8- W. P. CAREY & CO. LLC prospective tenant. To the extent that the tenant or the third-party developer experiences financial difficulty or other complications during the construction process we may be required to incur project costs to complete all or part of the project within a specified time frame. The incurrence of these costs or the non-occupancy by the tenant may reduce the project's and our portfolio returns. WE MAY HAVE DIFFICULTY RE-LEASING OR SELLING OUR PROPERTIES. Real estate investments are relatively illiquid compared to most financial assets and this illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. The net leases we may enter into or acquire may be for properties that are specially suited to the particular needs of the tenant. With these properties, if the current lease is terminated or not renewed, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant. In addition, in the event we are forced to sell the property, it may be difficult to sell to a party other than the tenant due to the special purpose for which the property may have been designed. These and other limitations, such as a property's location and/or local economic conditions, may affect our ability to re-lease or sell properties without adversely affecting returns to shareholders. Our own scheduled lease expirations, as a percentage of annualized rental revenues for the next five years, are as follows: 2005 - 2.7% 2006 - 5.2% 2007 - 7.0% 2008 - 6.5% 2009 - 11.7% OUR PARTICIPATION IN JOINT VENTURES CREATES ADDITIONAL RISK. We may participate in joint ventures or purchase properties jointly with other entities, some of which may be unaffiliated with us. There are additional risks involved in these types of transactions. These risks include the potential of our joint venture partner becoming bankrupt and the possibility of diverging or inconsistent economic or business interests of our partner and us. These diverging interests could result in, among other things, exposing us to liabilities of the joint venture in excess of our proportionate share of these liabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property. In addition, the fiduciary obligation that our board or we may owe to our partner in an affiliated transaction may make it more difficult for us to enforce our rights. WE DO NOT FULLY CONTROL THE MANAGEMENT OF OUR PROPERTIES. The tenants or managers of net lease properties are responsible for maintenance and other day-to-day management of the properties. Because our revenues are largely derived from rents and from management fees, which in turn are derived from rents collected by the CPA(R) REITs, our financial condition is dependent on the ability of net lease tenants to operate the properties successfully. If tenants are unable to operate the properties successfully, the tenants may not be able to pay their rent, which could adversely affect our financial condition. 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. These responsibilities and liabilities also exist for properties owned by the CPA(R) REITs and in the event they become liable for these costs, their ability to pay our fees could be materially affected. Some of these laws could impose the following on us: - 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; - Potential liability for common law claims by third parties based on damages and costs of environmental contaminants; and - Being sued by the CPA(R) REITs for inadequate due diligence. WE MAY BE UNABLE TO MAKE ACQUISITIONS ON AN ADVANTAGEOUS BASIS. A significant element of our business strategy is the enhancement of our portfolio and the CPA(R) REIT portfolios through acquisitions of 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 profitable for us or the CPA(R) REITs. If we are unable to consummate the acquisition of additional properties in the future, there can be no assurance that -9- W. P. CAREY & CO. LLC we will be able to maintain the cash available for distribution to our shareholders, either through net income on properties we own or through net income generated by the management services business. 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. The stock price could also be affected by factors other than changes in interest rates. WE FACE INTENSE COMPETITION. We face 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 other REITs. We also face 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. These institutions may accept greater risk or lower returns, allowing them to offer more attractive terms to prospective tenants. A CHANGE IN ACCOUNTING STANDARDS REGARDING OPERATING LEASES MAY MAKE THE LEASING OF FACILITIES IN THE FUTURE LESS ATTRACTIVE TO OUR POTENTIAL TENANTS, WHICH COULD REDUCE OVERALL DEMAND FOR OUR LEASING SERVICES. Under Statement of Financial Accounting Standard No. 13 "Accounting for Leases," if the present value of a company's minimum lease payments equal 90% or more of a property's fair value, the lease is classified as a capital lease, and the lease obligation is included as a liability on the company's balance sheet. However, if the present value of the minimum lease payments is less than 90% of the property's value, the lease is considered an operating lease, and the obligation does not appear on the company's balance sheet, but rather in the footnotes thereto. Thus, entering into an operating lease can appear to enhance a tenant's balance sheet. The SEC is currently conducting a study of off-balance-sheet financing, including leasing, and the Financial Accounting Standards Board has recently indicated that it is considering addressing the issue. If the accounting standards regarding the financial statement classification of operating leases are revised, then companies may be less willing to enter into new leases because the apparent benefits to their balance sheets could be reduced or eliminated. This in turn could make it more difficult for us to enter into new leases on terms we find favorable. 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 lease 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 our 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. -10- W. P. CAREY & CO. LLC Our business, results of operations or financial condition could be materially adversely affected by the above conditions. 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 described above list all material risks to us at any specific point in time. We have disclosed many of the important risk factors discussed above in our previous filings with the SEC. OUR GOVERNING DOCUMENTS AND CAPITAL STRUCTURE MAY DISCOURAGE A TAKEOVER. Our Amended and Restated Limited Liability Company Agreement provides for a classified board with staggered three-year terms. As a result, a majority of the board is not subject to reelection in any single year. In addition, William P. Carey, Chairman, is the beneficial owner of approximately 36% of the outstanding shares of the Company. The provisions of our Amended and Restated Limited Liability Company Agreement and the share ownership of Mr. Carey may discourage a tender offer for our shares or a hostile takeover, even though these may be attractive to shareholders. (d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS See Note 18 of the consolidated financial statements for financial data pertaining to our segment and geographic operations. (e) AVAILABLE INFORMATION All filings we make with the SEC, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, and any amendments, are available for free on our website as soon as reasonably practicable after they are filed or furnished to the SEC. Our website address is http://www.wpcarey.com. Our SEC filings are available to be read or copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free on the SEC's Internet site at http://www.sec.gov. The reference to our website address does not constitute incorporation by reference of the information contained on our website in this Report or other filings with the SEC, and the information contained on our website is not part of this document. -11- W. P. CAREY & CO. LLC ITEM 2. PROPERTIES.
RENT PER LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM MAXIMUM TERM - ------------------------------------ -------- --------- -------- ---------------- --------- --------- ------------ DR. PEPPER BOTTLING COMPANY OF TEXAS Irving and Houston, TX 100% 721,947 6.27 4,527,460 CPI June 2014 June 2029 CARREFOUR FRANCE, SAS (2) Cholet, Ploufragan, Colomiers, 22.5% interest Crepy en Vallois, Lens, Nimes, in foreign and Thuit Hebert, France partnership company owning 2,940,004 5.95 3,935,568 (3) INSEE (6) Dec. 2011 Dec. 2011 land and building Nimes Rue Soufflot 22.5% interest in a foreign partnership 388,265 6.05 528,525 Nov. 2012 Nov. 2012 owning land and --------- --------- buildings (10) Total: 3,328,269 4,464,093 DIETROIT DIESEL CORPORATION (2) Detroit, MI 100% 2,730,750 1.52 4,157,524 PPI June 2020 June 2040 BOUYGUES TELECOM SA (2) Tours, France 95% interest in a foreign partnership owning land and 107,618 14.94 1,527,859 (3) INSEE (6) Sept.2009 Sept. 2012 building (11) Illkirch, France 75% interest in a foreign partnership 107,639 30.36 2,450,094 (3) INSEE (6) July 2013 July 2013 owning building (11) --------- --------- Total: 215,257 3,977,953 GIBSON GREETINGS, INC. Berea, KY and Cincinnati, OH 100% 1,194,840 3.11 3,720,000 Stated Nov.2013 Nov 2023 ORBITAL SCIENCES CORPORATION (2) Chandler, AZ 100% 335,307 9.02 3,022,947 CPI Sept.2009 Sept.2029 FEDERAL EXPRESS CORPORATION College Station, TX 100% 12,080 5.66 68,400 Stated April 2007 April 2009 Corpus Christi, TX 100% 30,212 6.55 197,896 Stated May 2007 May 2012 Colliersville, TN (2) 40% interest in a limited liability company owning 394,400 17.03 2,687,088 CPI Aug. 2019 Aug. 2039 land and building (10) --------- --------- Total: 436,692 2,953,384 TITAN CORPORATION San Diego, CA 100% 166,403 17.20 2,862,068 CPI July 2007 July 2032 AMERICA WEST HOLDINGS CORPORATION (2) Tempe, AZ 74.59% tenancy in common interest in land and building (11) 225,114 16.90 2,837,889 CPI Apr. 2014 Apr. 2024 QUEBECOR PRINTING INC. (2) Doraville, GA 100% 432,559 3.52 1,522,498 CPI Dec. 2009 Dec. 2034 Olive Branch, MS 100% 285,500 4.16 1,186,578 Fixed June 2008 June 2033 --------- --------- Total: 718,059 2,709,076 SYBRON INTERNATIONAL CORPORATION Dubuque, IA; Portsmouth, NH; 100% 494,100 4.81 2,374,690 CPI Dec. 2013 Dec. 2038 Rochester, NY AUTOZONE, INC. (2, 5) 31 Locations : NC, TX, AL, GA, 100% 175,730 7.52 1,321,567 % Sales Feb. 2011 Feb. 2026 IL, LA, MO 11 Locations: FL, GA, NM, SC, TX 100% 54,000 9.71 524,388 % Sales Feb. 2013 Feb. 2038 12 Locations : FL, LA, MO, NC, TN 100% 72,500 5.11 370,636 % Sales Various Various --------- --------- Total: 302,230 2,216,591
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RENT PER LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM - ------------------------------------ ----------------- ---------- ----------- ---------------- -------- ---------- ----------- CHECKFREE HOLDINGS, INC. (2, 4) Norcross, GA 50% interest in a limited liability company owning 220,675 19.76 2,180,360 CPI Dec. 2015 Dec. 2030 land and building (10) LUCENT TECHNOLOGIES, INC. Charlotte, NC 100% 568,670 3.46 1,956,121 Stated Mar. 2007 Mar. 2020 LIVHO, INC. (7) Livonia, MI 100% 158,000 11.39 1,800,000 (7) Stated Dec. 2004 Jan. 2008 SYBRON DENTAL SPECIALTIES, INC. Glednora, CA Romulus, MI 100% 245,000 7.23 1,770,298 CPI Dec. 2018 Dec. 2043 UNISOURCE WORLDWIDE, INC. Anchorage, AK 100% 44,712 7.34 328,360 Stated Dec. 2009 Dec. 2029 Commerce, CA (2) 100% 411,561 3.46 1,422,080 Stated April 2010 April 2030 --------- --------- Total: 456,273 1,750,440 CSS INDUSTRIES, INC. Memphis, TN 100% 1,006,566 1.72 1,735,352 CPI Dec. 2010 Dec. 2015 BRODART CO. Williamsport, PA (2) 100% 521,240 3.30 1,720,686 CPI June 2008 June 2028 SICOR, INC. (2) San Diego, CA 50% in a limited partnership owning land and buildings (10) 144,311 23.16 1,671,410 CPI July 2009 July 2049 INFORMATION RESOURCES, INC.(2) Chicago, IL 33.33% interest in a limited partnership owning land and 252,000 19.57 1,643,604 CPI Oct. 2013 Oct. 2023 building (10) FISKARS,INC. (F/K/A ENVIROWORKS, INC.) (2) Apopka, FL 100% 374,829 4.33 1,621,463 CPI Mar. 2010 Mar. 2035 BE AEROSPACE, INC.(2) Lenexa, KS 100% 130,094 4.61 599,674 Stated Sept. 2017 Sept. 2037 Winston-Salem, NC 100% 274,216 2.66 728,320 Stated Sept. 2017 Sept. 2037 Dallas, TX 100% 22,680 5.04 114,224 Stated Sept. 2017 Sept. 2037 --------- --------- Total: 426,990 1,442,218 SPRINT SPECTRUM L. P. (2) Albuquerque, NM 100% 94,731 15.04 1,424,561 Stated May 2011 May 2021 AMERISURE INSURANCE (2) Charleston, SC 100% 134,985 10.24 1,382,256 Stated Dec. 2007 Dec. 2028 PANTIN, FRANCE - MULTI-TENANT (2) Various Tenants 75% interest in foreign partnership owning land and 69,211 25.54 1,325,747 (3) INSEE (6) Various Various building (11) BLOOMINGDALE, IL Various 100% 18,713 9.00 80,872 Various Various Varous United States Postal Service 100% 60,320 18.20 1,233,000 Various Various Various Vacant 36,967 - --------- --------- Total: 116,000 1,313,872 EAGLE HARDWARE & GARDEN, INC. (2, 5) Bellevue, WA 100% 127,360 10.25 1,305,334 CPI & % Aug. 2018 Aug. 2018 Sales AT&T CORPORATION Bridgeton, MO 100% 85,510 14.14 1,209,048 Stated June 2011 June 2021
-13- W. P. CAREY & CO. LLC
RENT PER LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM - ------------------------------------ -------------------- ---------- ---------- ---------------- -------- --------- ---------- HOLOGIC, INC. (2) 36% interest in a Danbury, CT jointly controlled 62,042 9.42 210,526 CPI Aug. 2022 Aug. 2042 Bedford, MA tenancy-in-common(10) 207,000 12.42 925,612 CPI Aug. 2022 Aug. 2042 --------- --------- Total: 269,042 1,136,138 CENDANT OPERATIONS, INC. (2, 8) Moorestown, NJ 100% 65,567 17.11 1,121,792 Stated Dec. 2004 Dec. 2004 BELLSOUTH TELECOMMUNICATIONS, INC. (2) Lafayette Parish, LA 100% 66,846 16.40 1,096,170 Stated Dec. 2009 Dec. 2039 OMNICOM GROUP, INC. 2 Venice, CA 100% 77,719 13.93 1,082,685 CPI Sept.2010 Sept. 2030 UNITED STATIONERS SUPPLY COMPANY New Orleans, LA; Memphis, TN; 100% 197,098 5.25 1,034,837 CPI Mar. 2010 Mar. 2030 San Antonio, TX ANTHONY'S MANUFACTURING COMPANY, INC. San Fernando, CA 100% 182,845 5.57 1,019,047 CPI/ May 2012 May 2012 Market SEARS LOGISTICS SERVICES, INC. Jacksonville, FL 100% 240,000 4.04 969,946 Stated Sept.2007 Sept. 2007 WAL-MART STORES, INC. West Mifflin, PA 100% 118,125 8.05 950,905 CPI Jan. 2007 Jan. 2037 SWAT-FAME, INC. City of Industry, CA 100% 233,205 3.96 923,477 CPI Dec. 2010 Dec. 2020 PRE FINISH METALS, INC. Walbridge, OH 100% 313,704 2.84 892,091 CPI June 2008 June 2028 FORGE RIVER ROAD, WEBSTER, TX (2) Lockheed Martin Corp. 100% 30,176 9.30 241,416 Stated Dec. 2007 July 2009 United Space Alliance 100% 59,905 8.70 585,120 Stated Feb. 2005 April 2011 Vacant 18,497 - --------- --------- Total: 108,578 826,536 NVR L. P. Thurmont, MD Farmington, NY 100% 179,741 4.57 820,797 CPI Mar. 2014 Mar. 2039 HIBBETT SPORTING GOODS, INC. (2) Birmingham, AL 100% 219,312 3.74 819,935 CPI Dec. 2014 Dec. 2029 LOCKHEED MARTIN CORPORATION King of Prussia, PA 100% 88,578 9.00 797,202 Stated July 2008 July 2013 AMS HOLDING GROUP College Station, TX 100% 52,552 14.56 765,101 Fixed Dec. 2009 Dec. 2016 EATON CORPORATION (F/K/A POWERARE CORPORATION) Raleigh, NC 100% 27,770 23.22 644,937 CPI July 2006 July 2031 EXEL COMMUNICATIONS, INC. (4) Reno, NV 100% 53,158 10.93 580,800 Stated Dec. 2006 Dec. 2016 WESTERN UNION FINANCIAL SERVICES, INC. Bridgeton, MO 100% 78,080 7.34 573,221 Stated Nov. 2006 Nov. 2011 SOCIETE DE TRAITEMENTS DSM FOOD SPECIALITIES 80% interest in foreign Joue les Tours Phalempin, France (2) partnership owning land and 69,493 5.44 302,638 (3) INSEE (6) May 2005 May 2005 building (11) 37,337 8.82 263,329 (3) INSEE (6) May 2008 May 2008 --------- --------- Total: 106,830 565,967 DS GROUP LIMITED Goshen, IN 100% 52,000 10.84 563,715 CPI Feb. 2010 Feb. 2035
-14- W. P. CAREY & CO. LLC
RENT PER LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM - ----------------------------------- ----------------- ---------- ----------- ---------------- -------- --------- ----------- TELLIT ASSURANCES (2) 75% interest in foreign Rouen, France partnership 36,791 20.06 553,654 (3) INSEE (6) Aug. 2010 Aug. 2010 owning land and building (11) FEATHERCRAFT LANE, WEBSTER, TX United Space Alliance 100% 88,200 5.73 505,020 Stated Sept.2006 Sept. 2016 Facilities Management Solutions 100% 3,600 8.40 30,240 Stated Dec. 2005 Dec. 2005 ---------- --------- Total: 91,800 535,260 BELLSOUTH ENTERTAINMENT, INC. Ft. Lauderdale, FL 100% 80,450 6.37 512,096 Fixed June 2009 June 2019 LEARNING CARE GROUP, INC. (F/K/A CHILDTIME CHILDCARE, INC.) (2) 12 Locations: AZ, CA, MI, TX 33.93% interest in limited partnership owning land and 83,912 16.59 472,307 CPI Jan. 2016 Jan. 2041 building (10) YALE SECURITY, INC. Lemont, IL 100% 113,133 4.06 459,000 Stated Mar. 2011 Mar. 2011 WINN-DIXIE STORES, INC. (5) Bay Minette, AL (9) 100% 34,887 3.68 128,470 % Sales June 2007 June 2037 Brewton, AL 100% 30,625 4.39 134,500 % Sales Oct. 2010 Oct. 2030 Montgomery, AL 100% 32,690 5.86 191,534 % Sales Mar. 2008 Mar. 2038 ---------- --------- Total: 98,202 454,504 AFFILIATED FOODS SW, INC. Hope, AR Mar. 2007 Mar. 2037 Little Rock, AR 100% 122,074 3.28 400,148 CPI Mar. 2007 Mar. 2022 Little Rock, AR Jan. 2009 Jan. 2024 BEAUMONT, TX Olmstead Kirk Paper Company 100% 5,760 6.76 38,934 Stated Dec. 2007 Dec. 2007 Petrocon Engineering, Inc. 42,880 8.40 360,192 Dec. 2011 Dec. 2014 ------ --------- Total: 48,640 399,126 LOCKHAVEN DRIVE, HOUSTON, TX Honeywell, Inc. 100% 119,320 2.03 242,400 Stated Sept.2005 Sept. 2005 Continental Airlines, Inc. 25,125 5.96 149,688 July 2008 July 2008 ---------- --------- Total: 144,445 392,088 KMART CORPORATION Citrus Heights, CA 100% 192,778 2.02 390,000 Stated/% May 2006 May 2026 Drayton Plains, MI Rent Mar. 2006 Mar 2026 CENTURY CENTER, HOUSTON, TX Various Tenants 100% 40,568 8.55 346,764 Stated Various Various Vacant 9,072 - ------ --------- Total: 49,640 346,764 FAURECIA EXHAUST SYSTEMS, INC. Toledo, OH 100% 61,000 5.51 336,000 CPI Nov. 2022 Nov. 2042 BROOMFIELD, CO Various Tenants 100% 81,158 4.09 332,138 Various Various Various Vacant 23,297 - ---------- --------- Total: 104,455 332,138 BAY AREA BOULEVARD, HOUSTON, TX Bike Barn Holding Company, Inc. 100% 6,216 10.42 64,800 Stated Aug.2010 Aug. 2015 Sears Roebuck and Co. 21,069 10.60 223,331 Sept.2005 Sept. 2015 ---------- --------- Total: 27,285 288,131 ALSTOM POWER, INC. Erlanger, KY 100% 118,200 2.43 287,226 Stated May 2013 May 2013 Vacant 631,500 - ---------- --------- Total: 749,700 287,226
-15- W. P. CAREY & CO. LLC
RENT PER LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE SHARE OF CURRENT INCREASE LEASE MAXIMUM LOCATION INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM - ------------------------------- ----------------------- ------- -------- ---------------- -------- ---------- ----------- TOOLING SYSTEMS, LLC(4) Frankenmuth, MI 100% 128,400 2.21 283,451 Stated Aug. 2012 Aug. 2017 DIRECTION REGIONAL DES AFFAIRES SANITAIRES ET SOCIALES Rouen, France(2) 75% interest in foreign partnership owning land and building (11) 25,618 14.42 276,987(3) INSEE(6) Mar. 2006 Mar. 2006 THE ROOF CENTER, INC. Manassas, VA 100% 60,446 4.58 276,750 Stated July 2009 July 2009 GAMES WORKSHOP, INC. Glen Burnie, MD 100% 45,300 6.10 276,155 CPI April 2006 April 2016 QWEST COMMUNICATIONS, INC.(2) Scottsdale, AZ 100% 4,460 60.60 270,270 Stated Feb. 2007 Feb. 2017 NORTHERN TUBE, INC. Pinconning, MI 100% 220,588 1.15 254,538 CPI July 2013 July 2023 PENBERTHY PRODUCTS, INC. Prophetstown, IL 100% 161,878 1.47 237,486 CPI April 2006 April 2026 VERIZON COMMUNICATIONS, INC. Milton, VT 100% 30,624 6.81 208,467 Stated Feb. 2013 Feb. 2023 XEROX CORPORATION/PHOTO CENTER Hot Springs, AR 100% 37,190 4.53 168,414 Stated May 2011 May 2021 KENYON INTERNATIONAL EMERGENCY SERVICES, INC. Houston, TX 100% 17,725 3.95 70,014 Stated Oct. 2009 Oct. 2019 SALISBURY, NC Shinn Systems, Inc. 100% 13,284 2.00 26,568 Fixed Nov. 2006 Nov. 2006 Vacant 298,681 - ------- ------- Total: 311,965 26,568 VACANT Cincinnati, OH (Property to be Sold) 597,996 Travelers Rest, SC 181,700 Denton, TX 90,140 Houston, TX 10,960 South Boston, VA (Property Sold) 43,387 Duffield, VA 15,444 ------- Total: 939,627
1. Share of Current Annual Rents is the product of the Square Footage, the Rent per Square Foot, and any ownership interest percentage as noted. 2. These properties are encumbered by mortgage notes payable. 3. Based on exchange rates at December 31, 2004. 4. Tenant has filed bankruptcy. 5. Current annual rent does not include percentage of sales rent, payable under the lease contract. 6. INSEE construction index, an index published quarterly by the French Government. 7. Rent to be reduced to $1,000,000/yr. effective January 1, 2005. For financial statement purposes, Livho, Inc. is consolidated as we have concluded that it is a variable interest entity. 8. Lease expired December 31, 2004 and property was vacant effective January 1, 2005. 9. Winn-Dixie has filed for Chapter 11 bankruptcy protection in February 2005. 10. Remaining interest in this property is owned by an affiliate(s). 11. Remaining interest in this property is owned by a non-affiliated third party. -16- W. P. CAREY & CO. LLC ITEM 3. LEGAL PROCEEDINGS. As of December 31, 2004, we were not involved in any material litigation. In March 2004, following a broker-dealer examination of Carey Financial, our wholly-owned broker-dealer subsidiary, by the staff of the SEC, Carey Financial received a letter from the staff of the SEC alleging certain infractions by Carey Financial of the Securities Act of 1933, the Securities Exchange Act of 1934, the rules and regulations thereunder and those of the National Association of Securities Dealers, Inc. ("NASD"). The staff alleged that in connection with a public offering of shares of CPA(R):15, Carey Financial and its retail distributors sold certain securities without an effective registration statement. Specifically, the staff alleged that the delivery of investor funds into escrow after completion of the first phase of the offering (the "Phase I Offering"), completed in the fourth quarter of 2002 but before a registration statement with respect to the second phase of the offering (the "Phase II Offering") became effective in the first quarter of 2003, constituted sales of securities in violation of Section 5 of the Securities Act of 1933. In addition, in the March 2004 letter the staff raised issues about whether actions taken in connection with the Phase II offering were adequately disclosed to investors in the Phase I Offering. In the event the Commission pursues these allegations, or if affected CPA(R):15 investors bring a similar private action, CPA(R):15 might be required to offer the affected investors the opportunity to receive a return of their investment. It cannot be determined at this time if, as a consequence of investor funds being returned by CPA(R):15, Carey Financial would be required to return to CPA(R):15 the commissions paid by CPA(R):15 on purchases actually rescinded. Further, as part of any action against us, the SEC could seek disgorgement of any such commissions or different or additional penalties or relief, including without limitation, injunctive relief and/or civil monetary penalties, irrespective of the outcome of any rescission offer. We cannot predict the potential effect such a rescission offer or SEC action may ultimately have on our operations or the operations of Carey Financial. There can be no assurance that the effect, if any, would not be material. The staff also alleged in the March 2004 letter that the prospectus delivered with respect to the Phase I Offering contained material misrepresentations and omissions in violation of Section 17 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that the prospectus failed to disclose that (i) the proceeds of the Phase I Offering would be used to advance commissions and expenses payable with respect to the Phase II Offering, and (ii) the payment of dividends to Phase II shareholders whose funds had been held in escrow pending effectiveness of the registration statement resulted in significantly higher annualized rates of return than were being earned by Phase I shareholders. Carey Financial has reimbursed CPA(R):15 for the interest cost of advancing the commissions that were later recovered by CPA(R):15 from the Phase II Offering proceeds. In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff") commenced an investigation into compliance with the registration requirements of the Securities Act of 1933 in connection with the public offerings of shares of CPA(R):15 during 2002 and 2003. In December 2004, the scope of the Enforcement Staff's inquiries broadened to include broker-dealer compensation arrangements in connection with CPA(R):15 and other REITs managed by us, as well as the disclosure of such arrangements. At that time we and Carey Financial received a subpoena from the Enforcement Staff seeking documents relating to payments by us, Carey Financial, and REITs managed by us to (or requests for payment received from) any broker-dealer, excluding selling commissions and selected dealer fees. We and Carey Financial subsequently received additional subpoenas and requests for information from the Enforcement Staff seeking, among other things, information relating to any revenue sharing agreements or payments (defined to include any payment to a broker-dealer, excluding selling commissions and selected dealer fees) made by us, Carey Financial or any REIT managed by us in connection with the distribution of REITs managed by us or the retention or maintenance of REIT assets. Other information sought by the SEC includes information concerning the accounting treatment and disclosure of any such payments, communications with third parties (including other REIT issuers) concerning revenue sharing, and documents concerning the calculation of underwriting compensation in connection with the REIT offerings under applicable NASD rules. In response to the Enforcement Staff's subpoenas and requests, we and Carey Financial have produced documents relating to payments made to certain broker-dealers both during and after the offering process, for certain of the REITs managed by us (including Corporate Property Associates 10 Incorporated, CIP(R), CPA(R):12, CPA(R):14, and CPA(R):15), in addition to selling commissions and selected dealer fees. The expenses associated with these payments, which were made during the period from early 2000 through the end of 2003, were borne by the REITs. We are continuing to gather information relating to these types of payments made to broker-dealers and supply it to the SEC. -17- W. P. CAREY & CO. LLC We and Carey Financial are cooperating fully with this investigation and are in the process of providing information to the Enforcement Staff in response to the subpoenas and requests. Although no regulatory action has been initiated against Carey Financial or us in connection with the matters being investigated, it is possible that the SEC may pursue an action against either us or Carey Financial in the future. The potential timing of any such action and the nature of the relief or remedies the SEC may seek cannot be predicted at this time. If such an action is brought, it could have a material adverse effect on us. 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, 2004 to a vote of security holders, through the solicitation of proxies or otherwise. -18- W. P. CAREY & CO. LLC PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Information with respect to Registrant's common equity is hereby incorporated by reference to page 51 of our Annual Report contained in Appendix A. Item 6. Selected Financial Data. Selected Financial Data are hereby incorporated by reference to page 2 of our Annual Report contained in Appendix A. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis are hereby incorporated by reference to pages 3 to 18 of our Annual Report contained in Appendix A. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. (In thousands) Market risk is the exposure to loss resulting from changes in interest, foreign currency exchange rates and equity prices. In pursuing our business plan, the primary risks to which we are exposed are interest rate risk and foreign currency exchange risk. Interest Rate Risk The value of our real estate is subject to fluctuations based on changes in interest rates, local and regional economic conditions and changes in the creditworthiness of lessees, all which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled. At December 31, 2004, $136,402 of our 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. Interest on fixed rate debt as of December 31, 2004 ranged from 6.11% to 10.125%. The interest rate on variable rate debt as of December 31, 2004 ranged from 3.5375% to 6.44%. 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 our leverage.
2005 2006 2007 2008 2009 Thereafter Total Fair Value Fixed rate debt $ 11,885 $ 21,159 $ 23,526 $ 8,128 $ 35,045 $ 36,659 $ 136,402 $ 137,825 Weighted average interest rate 8.23% 7.22% 7.91% 7.69% 7.39% 7.23% Variable rate debt $ 2,470 $ 2,767 $ 105,061 $ 3,379 $ 3,577 $ 39,042 $ 156,296 $ 156,296
Annual interest expense would increase or decrease on variable rate debt by approximately $1,563 for each 1% increase or decrease in interest rates. A change in interest rates of 1% would impact the fair value of our fixed rate debt at December 31, 2004 by approximately $4,367. Foreign Currency Exchange Rate Risk We have foreign operations in France and as such are subject to risk from the effects of exchange rate movements of foreign currencies, which may affect future costs and cash flows. All of our foreign operations for the preceding year were conducted in the Euro. We are a net receiver of the foreign currency (we receive more cash then we pay out) and therefore we benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency. For the year ended December 31, 2004, we recognized $430 in foreign currency transaction gains in connection with the transfer of cash from foreign operating subsidiaries to the parent company. The cash received was subsequently converted into dollars. In addition, for the year ended December 31, 2004, we recognized net unrealized foreign currency gains of $790. The cumulative foreign currency translation adjustment reflects a gain of $515. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. -19- W. P. CAREY & CO. LLC Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases resulting from our foreign operations are as follows:
2005 2006 2007 2008 2009 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Minimum Rents (1) $ 8,548 $ 8,547 $ 8,476 $ 7,959 $ 7,192 $ 14,771 $ 55,493
Scheduled principal payments for mortgage notes payable for our foreign operations during each of the next five years following December 31, 2004 and thereafter are as follows:
2005 2006 2007 2008 2009 Thereafter Total ------- ------- ------- ------- ------- ---------- -------- Mortgage notes Payable (1) $ 2,470 $ 2,767 $ 3,061 $ 3,379 $ 3,578 $ 39,041 $ 54,296
(1) Based on the December 31, 2004 exchange rate for the Euro. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements and supplementary data are hereby incorporated by reference to pages 19 to 50 of our Annual Report contained in Appendix A: (i) Report of Independent Registered Public Accounting Firm (ii) Consolidated Balance Sheets as of December 31, 2004 and 2003 (iii) Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 (iv) Consolidated Statements of Members' Equity for the years ended December 31, 2002, 2003 and 2004 (v) Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 (vi) Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Our co-chief executive officers and chief financial officer have conducted a review of our disclosure controls and procedures as of December 31, 2004. Our disclosure controls and procedures include our controls and other procedures designed to ensure that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is accumulated and communicated to our management, including our co-chief executive officers and chief financial officer, to allow timely decisions regarding required disclosure and to ensure that such information is recorded, processed, summarized and reported, within the required time periods. Based upon this review, our co-chief executive officers and chief financial officer have concluded that our disclosure controls (as defined in Rule 13a-14(c) under the Exchange Act) are sufficiently effective to ensure that the information required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the required time periods. -20- MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, we used criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we concluded that, as of December 31, 2004, our internal control over financial reporting is effective based on those criteria. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm who also audited our consolidated financial statements included in Item 8, as stated in their report in Item 8. -21- W. P. CAREY & CO. LLC PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. This information will be contained in our definitive Proxy Statement with respect to our 2004 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year, and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION. This information will be contained in our definitive Proxy Statement with respect to our 2004 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year, and is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. This information will be contained in our definitive Proxy Statement with respect to our 2004 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year, and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. This information will be contained in our definitive Proxy Statement with respect to our 2004 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year, and is hereby incorporated by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. This information will be contained in our definitive Proxy Statement with respect to our 2004 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year, and is hereby incorporated by reference. -22- W. P. CAREY & CO. LLC PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) 1. Financial Statements: The following financial statements are filed as a part of this Report: Report of Independent Registered Public Accounting Firm. Consolidated Balance Sheets as of December 31, 2004 and 2003. Consolidated Statements of Income for the years ended December 31, 2004, 2003, and 2002. Consolidated Statements of Members' Equity for the years ended December 31, 2002, 2003, and 2004. Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002. Notes to Consolidated Financial Statements. The Consolidated Financial Statements are hereby incorporated by reference to pages 19 to 50 of our Annual Report contained in Appendix A. 2. Financial Statement Schedules: The following schedule is filed as a part of this Report: Report of Independent Registered Public Accounting Firm. Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2004. Notes to Schedule III. Schedule III and notes thereto are contained herein on pages 27 to 34 of this Form 10-K. 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. -23- W. P. CAREY & CO. LLC (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.
Exhibit Method of No. Description Filing - ------- ------------------------------------------------------------------- ----------------------------- 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) dated October 15, 1997 3.2 Bylaws of Carey Diversified LLC. Exhibit 3.2 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 4.1 Form of Listed Share Stock Certificate. Exhibit 4.1 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 10.1 Management Agreement Between Carey Management LLC Exhibit 10.1 to Registration and the Company. Statement on Form S-4 (No. 333-37901) dated October 15, 1997 10.2 Non-Employee Directors' Incentive Plan. Exhibit 10.2 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 10.3 1997 Share Incentive Plan. Exhibit 10.3 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 10.4 Non-Statutory Listed Share Option Agreement. Exhibit 10.5 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 10.5 Carey Asset Management Corp. 2005 Partnership Equity Filed herewith Unit Plan. 10.6 Third Amended and Restated Credit Agreement Filed herewith dated as of May 27, 2004. 10.7 Employment Agreement Dated April 7, 1997 between Filed herewith W.P. Carey & Co., Inc. and Gordon S. DuGan. 10.8 Employment Agreement dated April 7, 1997 between Filed herewith W.P. Carey & Co., Inc. and John J. Park. 21.1 List of Registrant Subsidiaries. Filed herewith 23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith 31.1 Certification of Chief Executive Officer pursuant to Section 302(a) Filed herewith of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302(a) Filed herewith Of the Sarbanes-Oxley Act of 2002.
-24- W. P. CAREY & CO. LLC
Exhibit Method of No. Description Filing - ------- ------------------------------------------------------------------- ----------------------------- 32.1 Chief Executive Officer's Certification Pursuant to Section 906 Filed herewith of the Sarbanes-Oxley Act of 2002. 32.2 Chief Financial Officer's Certification Pursuant to Section 906 Filed herewith of the Sarbanes-Oxley Act of 2002. 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) dated October 15, 1997 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) dated October 15, 1997 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) dated October 15, 1997 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) dated October 15, 1997 99.22 Listed Share Purchase Warrant. Exhibit 99.22 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997
-25- W. P. CAREY & CO. LLC 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 3/15/2005 BY: /s/ John J. Park - --------- --------------------------------------------- Date John J. Park Managing Director and Chief 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. 3/15/2005 BY: /s/ William P. Carey - --------- -------------------------------------------------------------- Date William P. Carey Chairman of the Board, Co-Chief Executive Officer and Director (Co-Principal Executive Officer) 3/15/2005 BY: /s/ Francis J. Carey - --------- -------------------------------------------------------------- Date Francis J. Carey Vice Chairman of the Board, Chairman of the Executive Committee and Director 3/15/2005 BY: /s/ Gordon F. DuGan - --------- -------------------------------------------------------------- Date Gordon F. DuGan President and Co-Chief Executive Officer and Director (Co-Principal Executive Officer) 3/15/2005 BY: /s/ George E. Stoddard - --------- -------------------------------------------------------------- Date George E. Stoddard Senior Executive Vice President and Director 3/15/2005 BY: /s/ Nathaniel S. Coolidge - --------- -------------------------------------------------------------- Date Nathaniel S. Coolidge Chairman of the Audit Committee and Director 3/15/2005 BY: /s/ Eberhard Faber IV - --------- -------------------------------------------------------------- Date Eberhard Faber IV Chairman of Nomination & Corporate Governance Committee and Director 3/15/2005 BY: /s/ Dr. Lawrence R. Klein - --------- -------------------------------------------------------------- Date Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director 3/15/2005 BY: /s/ Charles C. Townsend, Jr. - --------- -------------------------------------------------------------- Date Charles C. Townsend, Jr. Chairman of the Compensation Committee and Director 3/15/2005 BY: /s/ Ralph Verni - --------- -------------------------------------------------------------- Date Ralph Verni Director 3/15/2005 BY: /s/ Karsten von Koller - --------- -------------------------------------------------------------- Date Karsten von Koller Director 3/15/2005 BY: /s/ Reginald Winssinger - --------- -------------------------------------------------------------- Date Reginald Winssinger Director 3/15/2005 BY: /s/ John J. Park - --------- -------------------------------------------------------------- Date John J. Park Managing Director and Chief Financial Officer 3/15/2005 BY: /s/ Claude Fernandez - --------- -------------------------------------------------------------- Date Claude Fernandez Managing Director and Chief Accounting Officer -26- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of W. P. Carey & Co. LLC: Our audits of the consolidated financial statements, of management's assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated March 15, 2005 appearing in the 2004 Annual Report to Shareholders of W. P. Carey & Co. LLC (which report, consolidated financial statements and assessment are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York March 15, 2005 -27- W. P. CAREY & CO. LLC SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Initial Cost to Company Costs Capitalized ----------------------- Subsequent to Increase (decrease) in Description Encumbrances Land Buildings Acquisition (a) Net Investments (b) ----------- ------------ ---------- ----------- ----------------- ---------------------- Operating Method: Office, warehouse and manufacturing buildings leased to various tenants in Broomfield, Colorado $ 247,993 $ 2,538,263 $4,779,536 Distribution facilities and warehouses in Erlanger, Kentucky partially leased to Alstom Power, Inc. 1,525,593 21,427,148 255,329 141,235 Supermarkets leased to Winn-Dixie Stores, Inc. 855,196 6,762,374 (3,973,120) Warehouse and manufac- turing plant leased to Pre Finish Metals Incorporated 324,046 8,408,833 Land leased to Unisource Worldwide, Inc. 4,573,360 Centralized telephone bureau leased to Exel Communications, Inc. 925,162 4,023,627 101,983 Office building leased to Petrocon Engineering, Inc. and Olmstead Kirk Paper Company 164,113 2,343,849 504,941 Computer center leased to AT&T Corporation 269,700 5,099,964 4,165,742 (2,612) Office, manufacturing and warehouse buildings leased to AMS Holding Group 1,389,951 5,337,002 92,326 (1,039,757) Warehouse and distribution leased to Shinn Systems 246,949 5,034,911 1,363,829 Manufacturing and office buildings leased to Penn Virginia Coal Company 240,072 609,267 Land leased to Eaton Corporation (f/k/a Powerware Corporation) 1,638,012 (809,735) Warehouse/ office research facilities leased to Lockheed Martin Corporation 1,218,860 6,283,475 539,706 Warehouse/distribution facilities leased to Games Workshop, Inc. 293,801 1,912,271 79,682 Life on which Gross Amount at Depreciation in which Carried at Close of Period (e) Latest ------------------------------------------------------ Statement of Accumulated Date Income Description Land Buildings Total Depreciation (e) Acquired is Computed ----------- ---------- ----------- ----------- ---------------- --------- --------------- Operating Method: Office, warehouse and manufacturing buildings leased to various tenants in Broomfield, Colorado $3,827,529 $ 3,738,263 $ 7,565,792 $ 605,447 1/1/1998 40 yrs. Distribution facilities and warehouses in Erlanger, Kentucky partially leased to Alstom Power, Inc. 1,525,593 21,823,712 23,349,305 3,805,365 1/1/1998 40 yrs. Supermarkets leased to Winn-Dixie Stores, Inc. 406,674 3,237,776 3,644,450 670,948 1/1/1998 40 yrs. Warehouse and manufac- turing plant leased to Pre Finish Metals Incorporated 324,046 8,408,833 8,732,879 1,471,546 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 Exel Communications, Inc. 925,162 4,125,610 5,050,772 715,300 1/1/1998 40 yrs. Office building leased to Petrocon Engineering, Inc. and Olmstead Kirk Paper Company 164,113 2,848,790 3,012,903 503,172 1/1/1998 40 yrs. Computer center leased to AT&T Corporation 269,700 9,263,094 9,532,794 739,969 1/1/1998 40 yrs. Office, manufacturing and warehouse buildings leased to AMS Holding Group 1,107,855 4,671,667 5,779,522 790,101 1/1/1998 40 yrs. Warehouse and distribution leased to Shinn Systems 246,949 6,398,740 6,645,689 1,089,748 1/1/1998 40 yrs. Manufacturing and office buildings leased to Penn Virginia Coal Company 240,072 609,267 849,339 106,622 1/1/1998 40 yrs. Land leased to Eaton Corporation (f/k/a Powerware Corporation) 828,277 828,277 1/1/1998 N/A Warehouse/ office research facilities leased to Lockheed Martin Corporation 1,218,860 6,823,181 8,042,041 1,184,704 1/1/1998 40 yrs. Warehouse/distribution facilities leased to Games Workshop, Inc. 293,801 1,991,953 2,285,754 337,957 1/1/1998 40 yrs.
-28- W. P. CAREY & CO. LLC SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Initial Cost to Company Costs Capitalized ----------------------- Subsequent to Increase (decrease) in Description Encumbrances Land Buildings Acquisition(a) Net Investments(b) - ------------------------- ------------ --------- ------------ ----------------- --------------------- Operating Method: Warehouse and office facility leased to BellSouth Entertainment, Inc. 1,173,108 3,368,141 242,885 98,916 Manufacturing and office facility leased to Yale Security, Inc. 345,323 3,913,657 186,165 60,394 Manufacturing facilities leased to Northern Tube, Inc. 31,725 1,691,580 Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. 2,051,769 5,321,776 152,368 Manufacturing facilities in Traveler's Rest, SC 263,618 4,046,406 (2,506,543) Land leased to AutoZone, Inc. 11,350,339 9,382,198 (147,949) Office facility leased to Verizon Communications, Inc. 219,548 1,578,592 Land leased to Sybron Dental Specialities, Inc. 1,135,003 17,286 Office facility in Bloomingdale, IL leased to 4 lessees 1,074,640 11,452,967 324,192 Manufacturing and office facility leased to The Roof Centers, Inc. 459,593 1,351,737 Manufacturing facilities leased to Quebecor Printing Inc. 11,145,915 4,458,047 18,695,004 477,347 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 12,600,516 5,967,620 31,730,547 775,099 Engineering and Fabrication facility leased to Orbital Sciences Corporation 13,585,396 5,034,749 18,956,971 2,185,077 541,325 Life on which Depreciation Gross Amount at which Carried in Latest at Close of Period (e) Accumulated Statement of --------------------------------- Depreciation Date Income Description Land Buildings Total (e) Acquired is Computed - ------------------------- --------- ---------- --------- ------------ -------- -------------- Operating Method: Warehouse and office facility leased to BellSouth Entertainment, Inc. 1,173,108 3,709,942 4,883,050 626,763 1/1/1998 40 yrs. Manufacturing and office facility leased to Yale Security, Inc. 345,323 4,160,216 4,505,539 695,440 1/1/1998 40 yrs. Manufacturing facilities leased to Northern Tube, Inc. 31,725 1,691,580 1,723,305 296,027 1/1/1998 40 yrs. Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. 2,051,769 5,474,144 7,525,913 948,000 1/1/1998 40 yrs. Manufacturing facilities in Traveler's Rest, SC 263,618 1,539,863 1,803,481 457,467 1/1/1998 40 yrs. Land leased to AutoZone, Inc. 9,234,249 9,234,249 1/1/1998 N/A Office facility leased to Verizon Communications, Inc. 219,548 1,578,592 1,798,140 276,253 1/1/1998 40 yrs. Land leased to Sybron Dental Specialities, Inc. 1,152,289 1,152,289 1/1/1998 N/A Office facility in Bloomingdale, IL leased to 4 lessees 1,085,551 11,766,248 12,851,799 2,025,367 1/1/1998 40 yrs. Manufacturing and office facility leased to The Roof Centers, Inc. 459,593 1,351,737 1,811,330 236,554 1/1/1998 40 yrs. Manufacturing facilities leased to Quebecor Printing Inc. 4,458,047 19,172,351 23,630,398 3,323,889 1/1/1998 40 yrs. Distribution and office facilities leased to Federal Express Corporation 335,189 1,839,331 2,174,520 321,883 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 32,505,646 38,473,266 5,637,710 1/1/1998 40 yrs. Engineering and Fabrication facility leased to Orbital Sciences Corporation 5,034,749 21,683,373 26,718,122 3,684,005 1/1/1998 40 yrs.
29 W. P. CAREY & CO. LLC SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2004
Initial Cost to Company Costs Capitalized ----------------------- Subsequent to Increase (decrease)in Description Encumbrances Land Buildings Acquisition(a) Net Investments(b) - ------------------------- ------------ --------- ------------ ----------------- --------------------- Operating Method: Distribution facility leased to Kenyon International Emergency Services, Inc. 166,745 884,772 Retail store leased to Eagle Hardware and Garden, Inc. 9,809,802 4,125,000 11,811,641 393,206 Office building in Pantin, France leased to eleven lessees 13,222,810 2,674,914 8,113,120 2,211,580 Office facility in Rouen, France leased to Tellit Assurances 3,988,428 542,968 5,286,915 1,007,506 Portfolio of seven properties in Houston, Texas leased to 12 lessees 4,905,935 3,260,000 22,574,073 377,160 Office facility leased to America West Holdings Corporation. 16,919,104 2,274,782 26,701,663 Office facility leased to Sprint Spectrum L.P. 8,503,603 1,190,000 9,352,965 1,315,694 Office facility in Rouen, France leased to Direction Regional des Affaires Sanitaires et Sociales 1,497,610 303,061 2,109,731 268,173 Office facility leased to Cendant Operations, Inc. 5,777,939 351,445 5,980,736 527,368 42,917 Office facility leased to BellSouth Telecommunications, Inc. 4,813,186 720,000 7,708,458 119,092 Office buildings in Phalempine and Joue Les Tourse, France leased to DSM Food Specialties and Societe de Traitements 3,720,064 451,168 4,478,891 1,107,879 Office facility in Tours, France leased to Bouygues Telecom SA 10,063,942 1,033,532 9,737,359 4,640,780 Office facility in Illkirch, France leased to Bouygues Telecom SA 21,803,491 18,520,178 10,006,308 Manufacturing facility leased to Swat Fame, Inc. 3,789,019 13,163,763 1,090,044 317,639 Manufacturing facilities leased to BE Aerospace, 8,971,692 1,860,000 12,538,600 5,663 Life on which Gross Amount at which Carried Depreciation at Close of Period (e) in Latest --------------------------------- Accumulated Statement of Depreciation Date Income Description Land Buildings Total (e) Acquired is Computed - ------------------------- --------- ---------- ---------- ------------ ---------- ------------ Operating Method: Distribution facility leased to Kenyon International Emergency Services, Inc. 166,745 884,772 1,051,517 154,835 1/1/1998 40 yrs. Retail store leased to Eagle Hardware and Garden, Inc. 4,493,534 11,836,313 16,329,847 1,984,140 4/23/1998 40 yrs. Office building in Pantin, France leased to eleven lessees 1,597,493 11,402,121 12,999,614 1,865,389 5/27/1998 40 yrs. Office facility in Rouen, France leased to Tellit Assurances 663,150 6,174,239 6,837,389 967,526 6/10/1998 40 yrs. Portfolio of seven properties in Houston, Texas leased to 12 lessees 3,260,000 22,951,233 26,211,233 3,774,755 6/15/1998 40 yrs. Office facility leased to America West Holdings Corporation. 2,274,782 26,701,663 28,976,445 3,780,828 6/30/1998 40 yrs. Office facility leased to Sprint Spectrum L.P. 1,466,884 10,391,775 11,858,659 1,514,107 7/1/1998 40 yrs. Office facility in Rouen, France leased to Direction Regional des Affaires Sanitaires et Sociales 257,922 2,423,043 2,680,965 363,921 11/16/1998 40 yrs. Office facility leased to Cendant Operations, Inc. 351,445 6,551,021 6,902,466 1,028,376 2/19/1999 40 yrs. Office facility leased to BellSouth Telecommunications, Inc. 720,000 7,827,550 8,547,550 985,343 12/22/1999 40 yrs. Office buildings in Phalempine and Joue Les Tourse, France leased to DSM Food Specialties and Societe de Traitements 581,606 5,456,332 6,037,938 778,978 5/5/1999 40 yrs. Office facility in Tours, France leased to Bouygues Telecom SA 1,497,610 13,914,061 15,411,671 1,476,554 9/1/2000 40 yrs. Office facility in Illkirch, France leased to Bouygues Telecom SA 28,526,486 28,526,486 2,338,203 12/3/2001 40 yrs. Manufacturing facility leased to Swat Fame, Inc. 3,789,019 14,571,446 18,360,465 1,075,625 1/1/1998 40 yrs. Manufacturing facilities leased to BE Aerospace, 1,860,000 12,544,263 14,404,263 737,049 9/12/2002 40 yrs.
30 W. P. CAREY & CO. LLC SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Initial Cost to Company Costs Capitalized -------------------------- Subsequent to Increase (decrease)in Description Encumbrances Land Buildings Acquisition (a) Net Investments (b) ----------- ------------ ------------ ------------ ----------------- --------------------- Operating Method: Inc. Office buildings leased to Omnicom Group, Inc. (c) 4,594,898 2,032,029 10,151,780 Retail stores leased to Kmart Corporation (c) 1,039,313 4,788,318 Office building leased to Titan Corporation (c) 4,646,946 19,711,863 Warehouse/office leased to Hibbett Sporting Goods, Inc. (c) 4,860,520 1,255,668 7,703,604 Office/repair facility leased to Qwest Communications, Inc. (c) 1,579,242 586,369 45,954 Office buildings leased to Xerox Corporation/Photo Center and Affiliated Foods SW, Inc. (c) 850,212 2,938,815 Manufacturing/distribution facility leased to EnviroWorks, Inc. (c) 3,658,595 362,004 10,854,781 Warehouse leased to Sears Logistics Services, Inc. 974,500 6,979,507 Warehouse leased to Lucent Technologies, Inc. (c) 1,639,057 10,607,869 ------------ ----------- ------------ ----------- ----------- $177,373,027 $91,768,863 $406,473,049 $18,541,974 $13,494,682 ============ =========== ============ =========== =========== Life on which Depreciation in Gross Amount at which Carried Latest at Close of Period (e) Statement of --------------------------------------- Accumulated Date Income Description Land Buildings Total Depreciation (e) Acquired is Computed ----------- ----------- ------------ ------------ ---------------- -------- --------------- Operating Method: Inc. Office buildings leased to Omnicom Group, Inc. (c) 2,032,029 10,151,780 12,183,809 74,023 9/1/2004 40 yrs. Retail stores leased to Kmart Corporation (c) 1,039,313 4,788,318 5,827,631 34,915 9/1/2004 40 yrs. Office building leased to Titan Corporation (c) 4,646,946 19,711,863 24,358,809 143,732 9/1/2004 40 yrs. Warehouse/office leased to Hibbett Sporting Goods, Inc. (c) 1,255,668 7,703,604 8,959,272 56,172 9/1/2004 40 yrs. Office/repair facility leased to Qwest Communications, Inc. (c) 586,369 45,954 632,323 335 9/1/2004 40 yrs. Office buildings leased to Xerox Corporation/Photo Center and Affiliated Foods SW, Inc. (c) 850,212 2,938,815 3,789,027 21,429 9/1/2004 40 yrs. Manufacturing/distribution facility leased to EnviroWorks, Inc. (c) 362,004 10,854,781 11,216,785 79,150 9/1/2004 40 yrs. Warehouse leased to Sears Logistics Services, Inc. 974,500 6,979,507 7,954,007 50,892 9/1/2004 40 yrs. Warehouse leased to Lucent Technologies, Inc. (c) 1,639,057 10,607,869 12,246,926 77,349 9/1/2004 40 yrs. ----------- ------------ ------------ ----------- $93,925,850 $436,352,718 $530,278,568 $53,913,863 =========== ============ ============ ===========
31 W. P. CAREY & CO. LLC SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Initial Cost to Company Costs Capitalized ----------------------- Subsequent to Increase (Decrease) Description Encumbrances Land Buildings Acquisition (a) in Net Investment(b) ----------- ------------ ---------- ----------- ---------------- -------------------- Direct Financing Method: Office buildings and warehouses leased to Unisource Worldwide, Inc. $ 3,503,387 $ 331,910 $12,281,102 $ 37,871 Centralized Telephone Bureau leased to Western Union Financial Services, Inc. 842,233 4,762,302 (418,724) Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 3,495,507 34,016,822 (3,883,100) Warehouse and manufacturing buildings leased to CSS Industries, Inc. 1,051,005 14,036,912 (2,228,579) Manufacturing, distribution and office buildings leased to Brodart Co. 445,383 11,323,899 (5,305,413) Technology center leased to Faurecia Exhaust Systems, Inc. 223,585 2,684,424 (276,580) Office and research facility leased to Eaton Corporation (f/k/a Powerware Corporation) 2,844,120 (1,326,380) Manufacturing facility leased to Penberthy Products, Inc. 70,317 1,476,657 (367,656) Manufacturing facility and warehouse leased to DS Group Limited 238,532 3,339,449 (1,199,858) Retail stores leased to AutoZone, Inc. 16,416,402 (384,609) Retail store leased to Wal-Mart Stores, Inc. 1,839,303 6,535,144 (869,560) Manufacturing and office facilities leased to Sybron International Corporation 2,273,857 18,078,975 12,728 (635,702) Manufacturing and office facilities leased to Sybron Dental Specialties, Inc. 454,101 13,250,980 9,315 174,479 Manufacturing and office facilities leased to NVR L.P. 728,683 6,092,840 41,501 Office/warehouse facilities leased to United Stationers Supply Company 1,882,372 5,846,214 26,581 (1,156,540) Bottling and distribution facilities lease to Dr Pepper Bottling Company of Texas 27,598,638 (1,371,862) Gross Amount at which Carried at Close of Period ------------------------------ Description Total Date Acquired ----------- ------------------------------ ------------- Direct Financing Method: Office buildings and warehouses leased to Unisource Worldwide, Inc. $ 12,650,883 1/1/1998 Centralized Telephone Bureau leased to Western Union Financial Services, Inc. 5,185,811 1/1/1998 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 33,629,229 1/1/1998 Warehouse and manufacturing buildings leased to CSS Industries, Inc. 12,859,338 1/1/1998 Manufacturing, distribution and office buildings leased to Brodart Co. 6,463,869 1/1/1998 Technology center leased to Faurecia Exhaust Systems, Inc. 2,631,429 1/1/1998 Office and research facility leased to Eaton Corporation (f/k/a Powerware Corporation) 1,517,740 1/1/1998 Manufacturing facility leased to Penberthy Products, Inc. 1,179,318 1/1/1998 Manufacturing facility and warehouse leased to DS Group Limited 2,378,123 1/1/1998 Retail stores leased to AutoZone, Inc. 16,031,793 1/1/1998 Retail store leased to Wal-Mart Stores, Inc. 7,504,887 1/1/1998 Manufacturing and office facilities leased to Sybron International Corporation 19,729,858 1/1/1998 Manufacturing and office facilities leased to Sybron Dental Specialties, Inc. 13,888,875 1/1/1998 Manufacturing and office facilities leased to NVR L.P. 6,863,024 1/1/1998 Office/warehouse facilities leased to United Stationers Supply Company 6,598,627 1/1/1998 Bottling and distribution facilities lease to Dr Pepper Bottling Company of Texas 26,226,776 1/1/1998
32 W. P. CAREY & CO. LLC SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Gross Amount at which Carried at Close of Initial Cost to Company Costs Capitalized Period ------------------------- Subsequent to Increase (Decrease) ------------ Date Description Encumbrances Land Buildings Acquisition (a) in Net Investment (b) Total Acquired ----------- ------------ ----------- ------------ ----------------- -------------------- ------------ --------- Direct Financing Method: Office buildings leased to Amerisure Mutual Insurance Company (c) 9,821,824 1,965,093 11,884,907 5,919 1,448,829 15,304,748 9/1/2004 ------------ ----------- ------------ ----------------- ------------------- ------------ $ 13,325,211 $15,841,881 $192,469,787 $ 54,543 $ (17,721,883) $190,644,328 ============ =========== ============ ================= =================== ============
Initial Cost to Company --------------------------------------------- Costs Increase Capitalized (decrease) Personal Subsequent to in Net Description Land Buildings Property Acquisition (a) Investments (b) ----------- ---------- ----------- ----------- --------------- --------------- Operating real estate: Hotel located in: Livonia, Michigan $2,765,094 $11,086,650 $ 3,277,133 $ 6,494,138 $ (7,500,000) ---------- ----------- ----------- -------------- -------------- $2,765,094 $11,086,650 $ 3,277,133 $ 6,494,138) $ (7,500,000) ========== =========== =========== ============== ============== Life on which Gross Amount at which Carried Depreciation in at Close of Period (e) Latest Statement -------------------------------------------------- of Income Statement Personal Accumulated Date of Income is Description Land Buildings Property Total Depreciation (e) Acquired computed ----------- ------------ ----------- ---------- ----------- ---------------- -------- ------------------- Operating real estate: Hotel located in: Livonia, Michigan $ 2,765,094 $ 7,362,690 $5,995,231 $16,123,015 $ 6,982,836 1/1/1998 7-40 yrs. ------------ ----------- ---------- ----------- ---------------- $ 2,765,094 $ 7,362,690 $5,995,231 $16,123,015 $ 6,982,836 ============ =========== ========== =========== ================
33 W. P. CAREY & CO. LLC 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) impairment charges, (iv) changes in foreign currency exchange rates, and (v) an adjustment in connection with purchasing certain minority interests. (c) Property acquired in connection with merger transaction on September 1, 2004. (d) At December 31, 2004, the aggregate cost of real estate owned by the Company and its subsidiaries for Federal income tax purposes is approximately $709,744. (e)
Reconciliation of Real Estate Accounted for Under the Operating Method December 31, ----------------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Balance at beginning of year $445,738,136 $474,272,069 $459,243,153 Additions 87,599,638 2,126,915 15,232,049 Dispositions (5,548,193) (16,136,445) (2,582,356) Foreign currency translation adjustment 5,669,071 10,747,719 8,424,122 Reclassification from/to assets held for sale, operating real estate, net investment in direct financing lease and equity investments and under development 2,069,916 (24,712,122) (1,692,544) Impairment charge (5,250,000) (560,000) (4,352,355) ------------ ------------ ------------ Balance at end of year $530,278,568 $445,738,136 $474,272,069 ============ ============ ============
Reconciliation of Accumulated Depreciation December 31, ----------------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Balance at beginning of year $ 45,020,621 $ 41,716,083 $ 32,401,204 Depreciation expense 9,593,923 10,262,019 10,169,739 Depreciation expense from discontinued operations 200,046 271,922 312,176 Foreign currency translation adjustment 783,292 772,590 417,239 Reclassification from/to assets held for sale, operating real estate and net investment in direct financing lease (93,241) (6,245,358) (1,362,047) Dispositions (1,590,778) (1,756,635) (222,228) ------------ ------------ ------------ Balance at end of year $ 53,913,863 $ 45,020,621 $ 41,716,083 ============ ============ ============
Reconciliation for Operating Real Estate December 31, ----------------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Balance at beginning of year $ 21,952,052 $ 5,720,760 $ 8,066,244 Additions 1,670,963 22,900 384,974 Reclass from real estate accounted for under the operating method - 21,952,052 - Dispositions - (5,743,660) (2,730,458) Impairment charge (7,500,000) - - ------------ ------------ ------------ Balance at close of year $ 16,123,015 $ 21,952,052 $ 5,720,760 ============ ============ ============
Reconciliation of Accumulated Depreciation for Operating Real Estate December 31, ----------------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Balance at beginning of year $ 5,805,321 $ 1,664,817 $ 2,076,314 Depreciation expense 1,177,515 - 328,297 Depreciation expense from discontinued operations - 170,219 154,491 Dispositions - (1,835,036) (889,848) Reclassification from real estate accounted for under the operating method - 5,805,321 (4,437) ------------ ------------ ------------ Balance at end of year $ 6,982,836 $ 5,805,321 $ 1,664,817 ============ ============ ============
34 APPENDIX A TO FORM 10-K W. P. CAREY & CO. LLC 2004 ANNUAL REPORT MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, we used criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we concluded that, as of December 31, 2004, our internal control over financial reporting is effective based on those criteria. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm who also audited our consolidated financial statements included in Item 8, as stated in their report in Item 8. -1- SELECTED FINANCIAL DATA (In thousands except per share amounts)
2004 2003 2002 2001 2000 ---------- -------- -------- -------- ---------- Operating Data: Revenues (1) $ 227,774 $159,238 $152,404 $120,493 $ 101,469 Income (loss) from continuing operations (2) 69,048 62,562 44,138 31,079 (12,688) Basic earnings (loss) from continuing operations per share 1.85 1.71 1.24 .90 (.43) Diluted earnings (loss) from continuing operations per share 1.77 1.64 1.21 .89 (.43) Net income (loss) 63,851 62,878 46,588 35,761 (9,278) Basic earnings (loss) per share 1.71 1.72 1.31 1.04 (.31) Diluted earnings (loss) per share 1.64 1.65 1.28 1.02 (.31) Cash dividends paid 65,073 62,978 60,708 58,048 49,957 Cash provided by operating activities 98,849 67,295 75,896 58,877 58,222 Cash dividends declared per share 1.76 1.73 1.72 1.70 1.69 Payment of mortgage principal (3) 9,428 8,548 8,428 8,230 7,590 Balance Sheet Data: Real estate, net (4) $ 485,505 $421,543 $440,193 $435,629 $ 433,867 Net investment in direct financing leases 190,644 182,452 189,339 258,041 287,876 Total assets 1,013,539 906,505 893,524 915,883 904,242 Long-term obligations (5) 278,821 158,605 226,102 287,903 176,657
(1) Prior year amounts have been reclassified to conform to the current year presentation of excluding other interest income from revenues. (2) Includes gain on sale of real estate in 2002 and 2001 and a loss on sale of real estate in 2000. (3) Represents scheduled mortgage principal amortization paid. (4) Includes real estate accounted for under the operating method, operating real estate and real estate under construction, net of accumulated depreciation. (5) Represents mortgage and note obligations and deferred acquisition fee installments that are due after more than one year. -2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands except share and per share amounts) The following discussion and analysis of financial condition and results of operations of W. P. Carey & Co. LLC contain forward-looking statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2004. As used in this Annual Report on Form 10-K, the terms "the Company," "we," "us" and "our" include W. P. Carey and Co, LLC, its consolidated subsidiaries and predecessors, unless otherwise indicated. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as "anticipate," "believe," "expect," "estimate," "intend," "could," "should," "would," "may," "seeks," "plans" or similar expressions. Do not unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees, and speak only as of the date they are made. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievement to be materially different from the results of operations or plan expressed or implied by such forward-looking statements. While we cannot predict all of the risks and uncertainties, they include, but are not limited to, those described in Item 1 of this Annual Report on Form 10-K. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved. EXECUTIVE OVERVIEW Nature of Business As described in more detail in Item 1 of this Annual Report, we are a publicly traded limited liability company. Our stock is listed on the New York Stock Exchange. We operate in two operating segments, real estate operations, with investments in the United States and Europe, and management services operations. Within our management services operations, we are the advisor to the following affiliated publicly-owned, non-traded real estate investment trusts: Corporate Property Associates 12 Incorporated ("CPA(R):12"), Corporate Property Associates 14 Incorporated ("CPA(R):14"), Corporate Property Associates 15 Incorporated ("CPA(R):15"), Corporate Property Associates 16-Global Incorporated ("CPA(R):16 - - Global") and, until its merger into CPA(R):15 during 2004, Carey Institutional Properties Incorporated ("CIP(R)"), (collectively, the "CPA(R) REITs"). CPA(R):16-Global was formed in 2003. How We Earn Revenue Revenues from the management services operations are earned by providing services to the CPA(R) REITs in connection with structuring and negotiating acquisition and debt placement transactions (transaction fees) and providing on-going management of the portfolio (asset-based management and performance fees). Asset-based management and performance fees for the CPA(R) REITs are determined based on real estate assets under management. We may also earn incentive and disposition fees in connection with providing liquidity alternatives to CPA(R) REIT shareholders. As funds available to the CPA(R) REITs are invested in properties, the asset base for which we earn revenue increases. We may elect to collect performance fee revenue in cash or shares of the CPA(R) REITs at our option. The revenues and income of this business segment are subject to fluctuation because the volume and timing of transactions that are originated on behalf of the CPA(R) REITs are subject to various uncertainties including competition for net lease transactions, the requirement that each acquisition meet suitability standards and due diligence requirements including approval of each purchase of real estate by the investment committee and the ability to raise capital on behalf of the CPA(R) REITs. We typically start to evaluate liquidity alternatives for the CPA(R) REITs that we manage, 8 to 12 years after completion of the offering. Such events occur periodically and generally result in higher revenue being realized than in periods where there are no such events. Revenues from our real estate operations are earned primarily from leasing real estate. We acquire and own commercial and industrial properties that are then leased to companies domestically and internationally, primarily on a net lease basis. Revenue from this business segment is subject to fluctuation because of lease expirations, lease terminations, the timing of new lease transactions, tenant defaults and sales of property. How Management Evaluates Results of Operations Management evaluates our results with a primary focus on increasing and enhancing the value, quality and amount of the assets under management by our management services operations and seeking to increase value in our real estate operations through focusing efforts on underperforming assets through re-leasing efforts, including negotiation of lease renewals, or selectively selling such assets. The ability to increase assets under management by structuring acquisitions on behalf of the -3- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) CPA(R) REITs is affected, among other things, by the CPA(R) REITs ability to raise capital. During 2004, we managed CPA(R):16-Global's "best efforts" public offering. CPA(R):16-Global suspended this offering in December 2004 for an unspecified time and subsequently withdrew its offering. CPA(R):16-Global has filed a registration statement, which is not yet effective, for a second offering. (See "Significant Developments During 2004" section of Item 1 to this Annual Report.) Management's evaluation of operating results includes our ability to generate necessary cash flow in order to fund dividends to our shareholders. As a result, management's assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flow and to other noncash charges such as depreciation and impairment charges. In evaluating cash flow from operations, management includes equity distributions that are included in investing activities to the extent that the distributions in excess of equity income are the result of noncash charges such as depreciation and amortization. Management does not consider unrealized gains and losses from foreign currency when evaluating our ability to fund dividends. Management's evaluation of our potential for generating cash flow is based on long-term assessments of both our real estate portfolio and our assets under management. Our real estate operations consist of the investment in and the leasing of industrial and commercial real estate. Management's evaluation of the sources of lease revenues for the years ended December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002 -------- --------- -------- Per Statements of Income: Rental income $ 46,472 $ 43,992 $ 44,304 Interest income from direct financing leases 21,322 20,655 22,298 Adjustments: Share of lease revenues applicable to minority interests (1,597) (1,316) (766) Share of lease revenues from equity investments 12,426 8,786 7,434 -------- -------- -------- $ 78,623 $ 72,117 $ 73,270 ======== ======== ========
For the years ended December 31, 2004, 2003 and 2002, we earned net lease revenues (i.e., rental income and interest income from direct financing leases) from over 100 lessees. A summary of net lease revenues including all current lease obligors with more than $1,000 in 2004 annual revenues is as follows:
Years Ended December 31, ---------------------------------------------- 2004 % 2003 % 2002 % ------- --- ------- --- ------- --- Dr Pepper Bottling Company of Texas $ 4,334 6% $ 4,290 6% $ 4,405 6% Detroit Diesel Corporation 4,158 5 4,158 6 4,158 6 Bouygues Telecom, S.A. (a) (b) 3,619 5 3,193 4 2,952 4 Gibson Greetings, Inc., a wholly owned subsidiary of American Greetings, Inc. 3,578 5 3,593 5 4,149 6 Carrefour France, SA (b) (d) (g) 3,417 4 253 0 - - Federal Express Corporation (c) 2,933 4 2,903 4 2,876 4 America West Holdings Corp. 2,838 4 2,738 4 2,539 3 Orbital Sciences Corporation 2,747 4 2,655 4 2,655 4 Quebecor Printing Inc. 2,653 3 2,632 4 2,563 3 AutoZone, Inc. 2,362 3 2,393 3 2,411 3 Sybron International Corporation 2,286 3 2,083 3 2,164 3 CheckFree Holdings, Inc. (d) 2,180 3 2,128 3 2,108 3 Sybron Dental Specialties Inc. 1,770 2 1,613 2 1,613 2 Unisource Worldwide, Inc. 1,705 2 1,710 2 1,732 2 Information Resources, Inc. (d) 1,644 2 1,644 2 1,644 2 CSS Industries, Inc. 1,637 2 1,647 2 1,656 2 BE Aerospace, Inc. 1,585 2 1,620 2 433 1 Sprint Spectrum L.P. 1,425 2 1,425 2 1,425 2 Titan Corporation (e) 1,316 2 517 1 507 1 Eagle Hardware & Garden, Inc., a wholly 1,306 2 1,338 2 1,313 2
-4- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts)
Years Ended December 31, ---------------------------------------------- 2004 % 2003 % 2002 % ------- --- ------- --- ------- --- owned subsidiary of Lowe's Companies Inc. Brodart Co. 1,273 2 1,235 2 1,519 2 AT&T Corporation 1,259 2 1,259 2 1,259 2 United States Postal Service 1,233 2 1,233 2 1,233 2 BellSouth Telecommunications, Inc. 1,224 1 1,224 2 1,224 2 Hologic, Inc. (d) 1,136 1 1,136 2 382 1 Lockheed Martin Corporation 1,094 1 1,196 2 1,389 2 Cendant Operations, Inc. 1,093 1 1,075 1 1,075 1 Swat-Fame, Inc. 1,086 1 885 1 749 1 United Space Alliance 1,051 1 951 1 885 1 Anthony's Manufacturing Company, Inc. 1,019 1 1,019 1 1,019 1 Other (b) (f) 17,662 22 16,371 23 19,233 26 ------- --- ------- --- ------- --- $78,623 100% $72,117 100% $73,270 100% ======= === ======= === ======= ===
(a) Net of proportionate share applicable to our minority interest owners. (b) Revenue amounts are subject to fluctuations in foreign currency exchange rates. (c) Includes our 40% proportionate share of lease revenues from our equity ownership in one of the properties. (d) Represents our proportionate share of lease revenue from our equity investment. (e) Includes our 18.54% proportionate share of lease revenues from our equity ownership from the period January 1, 2004 through August 31, 2004, at which time we acquired the remaining 81.46% interest in the investment. (f) Includes proportionate share of lease revenues from our equity investments and net of proportionate share applicable to our minority interest owners. (g) The Carrefour France, SA interest was acquired in November 2003. Current Developments and Trends Competition for investments remains strong. If general economic conditions continue to improve, inflation and interest rates, at least for the short term, are expected to continue to rise as well. Rising interest rates are expected to have the following impact on our business: - Rising interest rates would likely cause a decline in the values of properties in our investment portfolio; - Rising interest rates would likely cause an increase in the Consumer Price Index ("CPI"), which over time will result in increased revenue and partially offset the impact of declining property values; - Rising interest rates would have an impact on debt costs as the line of credit under our credit facility is a variable rate obligation; - Rising interest rates are expected to enable us to achieve higher rates of return on new investments, which would be partially offset by increased debt costs on these new investments associated with increased interest rates; and - Rising interest rates could make other income-generating products more attractive to investors on a relative basis than our CPA(R) REITs. Our objective is to increase shareholder value and earnings through prudent management of both our real estate assets and the real estate assets of the CPA(R) REITs, through the expansion of our management services business and opportunistic investments. We expect to evaluate a number of different opportunities in a variety of property types and geographic locations and to pursue the most attractive opportunities based upon our analysis of the risk/return tradeoffs. We expect to continue investing in the international commercial real estate market, as we believe the international market provides for favorable opportunities relative to risk/return as compared to U.S. opportunities. In addition, financing terms are generally more favorable for international transactions. Financing terms for international transactions generally provide for lower interest rates and greater flexibility to finance the underlying property. These benefits are partially offset by shorter financing maturities. Investing in additional international properties is also expected to increase our exposure to fluctuations in foreign currency exchange rates (primarily the Euro). -5- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) For the year ended December 31, 2004, cash flows generated from operations and equity investments were sufficient to fund dividends paid and meet other obligations including paying scheduled mortgage principal payments and making distributions to minority interests which hold ownership interests in several of our properties. Such cash flows also provided partial funding for the purchase of interests in 17 properties from CIP(R) prior to the merger. Significant business developments that occurred during 2004 are detailed in the "Significant Developments During 2004" section of Item 1 to this Annual Report. RESULTS OF OPERATIONS We evaluate our results from operations by major business segment as follows: REAL ESTATE OPERATIONS. This business segment includes the operations of properties under operating lease, properties under direct financing leases, real estate under construction and development, assets held for sale and equity investments in ventures accounted for under the equity method which are engaged in these activities. Because of our legal structure, these operations are not generally subject to federal income taxes; however, they may be subject to certain state, local and foreign taxes. MANAGEMENT SERVICES OPERATIONS. This business segment includes management operations on a fee for services basis predominately from the CPA(R) REITs pursuant to the advisory agreements and to a lesser extent from third parties. This business line also includes interest on deferred fees and earnings from unconsolidated investments in the CPA(R) REITs accounted for under the equity method which were received in lieu of cash for certain fees. In connection with maintaining our status as a publicly traded partnership, these operations are performed in corporate subsidiaries and are subject to federal, state, local and foreign taxes as applicable. Our financial statements are prepared on a consolidated basis including these taxable operations and include a provision for current and deferred taxes on these operations. A summary of comparative results of these business segments is as follows:
REAL ESTATE OPERATIONS -------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 2004 2003 CHANGE 2003 2002 CHANGE -------- -------- -------- -------- -------- -------- Lease revenue $ 67,794 $ 62,847 $ 4,947 $ 62,847 $ 64,077 $ (1,230) Other operating income 5,798 5,233 565 5,233 1,258 3,975 -------- -------- -------- -------- -------- -------- Total revenue 73,592 68,080 5,512 68,080 65,335 2,745 Depreciation and amortization 10,841 9,474 1,367 9,474 10,213 (739) General and administrative expenses 3,561 1,893 1,668 1,893 1,456 437 Property expenses 5,651 5,854 (203) 5,854 5,281 573 Impairment charges and loan losses 7,048 1,480 5,568 1,480 20,510 (19,030) -------- -------- -------- -------- -------- -------- Operating expenses 27,101 18,701 8,400 18,701 37,460 (18,759) -------- -------- -------- -------- -------- -------- 46,491 49,379 (2,888) 49,379 27,875 21,504 Other interest income 270 248 22 248 542 (294) Minority interest in (income) loss (489) (168) (321) (168) 120 (288) Income (loss) from equity investments 3,665 3,149 516 3,149 (895) 4,044 Interest expense (14,803) (14,982) 179 (14,982) (15,893) 911 Gain on foreign currency transactions 1,222 48 1,174 48 - 48 Gain on sales of real estate and securities - - - - 12,415 (12,415) -------- -------- -------- -------- -------- -------- Income from continuing operations before income taxes 36,356 37,674 (1,318) 37,674 24,164 13,510 Provision for income taxes (1,437) (1,401) (36) (1,401) (1,496) 95 -------- -------- -------- -------- -------- -------- Income from continuing operations $ 34,919 $ 36,273 $ (1,354) $ 36,273 $ 22,668 $ 13,605 ======== ======== ======== ======== ======== ========
-6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) Lease Revenue 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, lease revenue (rental income and interest income from direct financing leases) increased by $4,947. The increase was primarily attributable to revenue earned from the properties acquired from CIP(R) in September 2004 of $3,559 and additional revenue from scheduled rent increases and new leases of $1,638. Annual contractual lease revenues from the interests acquired from CIP(R) are $11,321 for 2005. Our net leases generally have rent increases based on formulas indexed to increases in the CPI or other indices for the jurisdiction in which the property is located, sales overrides or other periodic increases, which are designed to increase lease revenues in the future. In February 2005, Winn-Dixie Stores, Inc., a lessee of WPC's Bay Minette, Alabama property, indicated that it intends to terminate its lease in connection with its reorganization in Chapter 11 bankruptcy. Annual lease revenue from the Bay Minette property is $128. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, lease revenue decreased by $1,230. Lease terminations and expirations in 2002 and 2003 reduced lease revenue by $2,535 in 2003. As the result of writedowns of direct financing leases in 2003 and 2002, the rates of return on several leases were revised, and interest income from direct financing leases for financial reporting purposes in 2003 decreased by approximately $1,460. Lease revenues were also negatively affected by the reclassification of our ownership interest in Learning Care Group, Inc. (formerly Childtime Childcare, Inc.) as an equity investment in August 2002, which decreased lease revenue by $256. These decreases were partially offset by revenue from a new lease with BE Aerospace, Inc. on properties purchased during the third quarter of 2002 which contributed revenue of $1,187, the positive effect of increases in average foreign currency exchange rate for the Euro of approximately $1,050, as well as new leases and several rent increases on existing leases of approximately $775. Other Operating Income 2004 VS. 2003 - Other operating income generally consists of lease termination payments and other non-rent related revenues including, but not limited to, settlements of claims against former lessees. We receive settlements in the ordinary course of business; however, the timing and amount of such settlements cannot always be estimated. For the comparable years ended December 31, 2004 and 2003, other operating income increased $565 primarily due to increased bankruptcy claim distributions and other settlement income received from former lessees in 2004. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, other operating income increased $3,975 primarily due to the same reasons as stated above. In 2003, we received a lease termination settlement of $ 2,250 from The Gap, Inc. Depreciation and Amortization 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, depreciation and amortization expense increased $1,367. The increase is primarily a result of depreciation and amortization expense recognized on the properties acquired from CIP(R), which represented $1,766, partially offset by a decrease in amortization of certain intangibles that became fully amortized in 2003. Annual depreciation and amortization expense for the properties acquired from CIP(R) is expected to be approximately $6,050. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, depreciation expense decreased $739. The decrease is primarily the result of certain intangibles becoming fully amortized in 2003, which resulted in a decrease of $1,356. This decrease was partially offset by additional depreciation of $228 related to the acquisition of the BE Aerospace -7- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) properties in 2002, and increases in depreciation for capital improvements on existing properties and the effect of increases in average foreign currency exchange rates. General and Administrative Expenses 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, general and administrative expenses increased $1,668 primarily due to an increase in fees for auditing and consulting services related to ongoing securities law compliance, including the Sarbanes-Oxley Act, and internal audit fees, as well as an increase in legal fees related to the ongoing SEC investigation described in Item 3 to this Annual Report. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, general and administrative expenses increased $437 primarily due to increases in fees for accounting, auditing and consulting services including internal audit fees. Impairment Charges and Loan Losses 2004, 2003 and 2002 - For the comparable years ended December 31, 2004 and 2003, impairment charges and loan losses increased $5,568. For the comparable years ended December 31, 2003 and 2002, impairment charges and loan losses decreased $19,030. Impairment charges were recorded due to several factors including our decision to sell property at less than its carrying value, our determination that the property has experienced an other than temporary decline in value and for direct financing leases our assessment that the unguaranteed residual value of the underlying property had declined. The table below summarizes the impairment charges recorded in 2004, 2003 and 2002 for both assets held for use and assets held for sale:
2004 2003 2002 IMPAIRMENT IMPAIRMENT IMPAIRMENT PROPERTY CHARGES CHARGES CHARGES REASON -------- ---------- ---------- ----------- ------ Meristar operating partnership units $ 4,596 Evaluation determined that investment value has declined Cincinnati, Ohio 4,588 Decline in unguaranteed residual value of property Williamsport, Pannsylvania 3,486 Decline in unguaranteed residual value of property Memphis, Tennessee $ 2,337 Decline in unguaranteed residual value of property Winona, Minnesota 1,250 Loan loss related to sale of property Various properties Decline in unguaranteed residual value of properties or 2,911 $ 1,480 7,840 decline in asset value Bay Minette, Alabama 550 _ _ Evaluation determined that property value has declined ------- ------- ------- Impairment charges from continuing operations $ 7,048 $ 1,480 $20,510 ======= ======= ======= Toledo, Ohio $ 4,700 Property sold for less than carrying value Winona, Minnesota $ 4,000 Property sold for less than carrying value Frankenmuth, Michigan 1,000 Property to be sold for less than carrying value Lancaster, Pennsylvania $ 1,430 Property sold for less than carrying value Various properties 1,850 1,530 4,901 Decided to sell property or property value has declined ------- ------- ------- Impairment charges from discontinued operations $ 7,550 $ 2,960 $ 8,901 ======= ======= =======
Income (Loss) from Equity Investments 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, income from equity investments increased $516, primarily due to income of $755 representing the full year impact from the acquisition of a 22.5% interest in eight Carrefour France, SA properties in France in November 2003, partially offset by a decrease in equity income in connection with acquiring a 50% interest in a general partnership and the remaining 81.46% interest in a limited partnership (both interests were acquired in connection with our acquisition of 17 properties from CIP(R)). We recorded a loss of $136 related to the 50% interest in the general partnership for financial reporting purposes because of non-cash charges relating to the amortization of the difference between the fair value of the interest acquired and its underlying cost basis. Our share of annual cash flow (contractual lease revenues, net of property-level debt service) from our interest in the general partnership is projected to be $712. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, income from equity investments increased $4,044, primarily due to the conversion of our ownership interest in MeriStar to publicly traded common stock in 2003. For the year ended December 31, 2002, we incurred a loss from the MeriStar investment of $3,019, which was included in equity income. We now account for our investment in common stock of MeriStar as an available-for-sale security and, -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) therefore record income as dividends are earned and no longer recognize our share of MeriStar's reported net income or loss. Equity income for 2003 was also affected by the acquisition, in December 2002, of a jointly controlled tenancy-in-common interest in the Hologic, Inc. properties, which contributed $530 and increases in the earnings of our equity investees. Interest Expense 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, interest expense decreased by $179. The decrease was partially due to a reduction in interest expense of $1,371 as a result of paying off mortgages on two properties in 2004 and five properties in 2003 and reductions in mortgage notes payable balances, all of which provide for scheduled mortgage principal payments. The decrease was partially offset by increases in interest expense of $615 related to the assumption of mortgages from our acquisition of 17 properties from CIP(R) and $458 related to additional borrowings and higher interest rates related to our credit facility. The average outstanding balance and interest rate on our credit facility, which incurs annual interest at a variable rate, increased by approximately $15,000 and 1.1%, respectively, for the comparable years. Annual debt service on mortgages assumed in our acquisition from CIP(R) is approximately $3,148. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, interest expense decreased by $911 primarily due to a decrease in interest of $1,323 on our credit facility arising from lower average outstanding balances during 2003, partially offset by an increase in mortgage interest expense of $308. The increase in mortgage interest was due primarily to new mortgage financing placed on two of our properties during the third and fourth quarters of 2002, which contributed $765, partially offset by decreases in interest expense on five mortgages that were paid off during 2003. The average outstanding balance on the credit facility decreased by approximately $38,000 for the comparable years but was not affected by fluctuations caused by changes in the interest rate, as rates were relatively stable throughout 2003. Income from Continuing Operations 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, income from continuing operations decreased $1,354, primarily due to an increase in impairment charges of $5,568 and increases in general and administrative expenses and depreciation and amortization, all of which are described above. These decreases were partially offset by an increase in total revenue of $5,512, which is described above and an increase in gain on foreign currency transactions of $1,174. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, income from continuing operations increased $13,605, primarily due to a decrease in impairment charges of $19,030 and increases in total revenue of $2,020, and equity income of $4,044. These were partially offset by a decrease in gain on sales of real estate of $12,415.
MANAGEMENT SERVICES OPERATIONS -------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 2004 2003 CHANGE 2003 2002 CHANGE --------- -------- -------- -------- -------- ------- Management income from affiliates $ 106,362 $ 88,060 $ 18,302 $ 88,060 $ 84,255 $ 3,805 Incentive and subordinated disposition fees 42,095 - 42,095 - - - --------- -------- -------- -------- -------- ------- Total revenue 148,457 88,060 60,397 88,060 84,255 3,805 Depreciation and amortization 9,366 7,123 2,243 7,123 7,575 (452) General and administrative 47,424 41,802 5,622 41,802 41,133 669 --------- -------- -------- -------- -------- ------- Operating expenses 56,790 48,925 7,865 48,925 48,708 217 --------- -------- -------- -------- -------- ------- Income from continuing operations before other interest income, minority interest, equity income, interest expense and taxes 91,667 39,135 52,532 39,135 35,547 3,588 Other interest income 2,857 2,323 534 2,323 1,098 1,225 Minority interest in (income) loss (1,010) (202) (808) (202) - (202) Income from equity investments 1,643 859 784 859 452 407 Interest expense (35) - (35) - - - --------- -------- -------- -------- -------- ------- Income from continuing operations before taxes 95,122 42,115 53,007 42,115 37,097 5,018 Provision for income taxes (51,537) (17,715) (33,822) (17,715) (16,587) (1,128) --------- -------- -------- -------- -------- ------- Income from continuing operations $ 43,585 $ 24,400 $ 19,185 $ 24,400 $ 20,510 $ 3,890 ========= ======== ======== ======== ======== =======
-9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) Management Income from Affiliates 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, management income from affiliates increased $18,302 primarily due to increases in transaction fees of $10,687 and asset-based management and performance fees of $8,607. Transaction fees included fees from structuring acquisitions and financing on behalf of the CPA(R) REITs and $11,493 that we earned in connection with the merger between CIP(R) and CPA(R):15 ("Merger"). We structured $890,000 of acquisitions for the year ended December 31, 2004 as compared with $725,000 in 2003. The transaction fees do not include $7,535 from structuring acquisitions on behalf of CPA(R):16-Global as the fees are subject to subordination provisions that were not met as of December 31, 2004. Because CPA(R):16-Global's proportion of total acquisition volume is expected to increase in 2005 relative to the other CPA(R) REITs and its subordination provisions are not expected to be met during 2005, transaction based revenue for 2005 is likely to decrease. The increase in asset-based fees resulted from an approximately 41% increase in the asset base (including the asset base of the interests in properties we acquired from CIP(R) of the CPA(R) REITs since December 31, 2003. Annual asset-based fees related to the interests in properties we acquired from CIP(R) were approximately $1,422, and we will no longer receive these asset-based fees. There will be no effect on annual asset-based fees related to the properties involved in the Merger. Based on assets under management of the CPA(R) REITs as of December 31, 2004, annualized management and performance fees under the advisory agreements are approximately $47,680. The asset based fees that we earn increase or decrease in direct relation to increases and decreases in the values of the real estate asset bases of the CPA(R) REITs. If the real estate asset bases of the CPA(R) REITs continue to increase, asset management fees are projected to increase. Currently, we are evaluating a number of proposed transactions on behalf of the CPA(R) REITs. Acquisition activity is subject to fluctuations. We are facing increased competition for the acquisition of commercial and industrial properties. This competition is from insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs. We also face 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. A portion of the CPA(R) REIT transaction and management fees is based on each CPA(R) REIT meeting specific performance criteria and is earned only if the criteria are achieved. The performance criterion for CPA(R):16-Global has not yet been satisfied as of December 31, 2004, resulting in $7,535 in transaction fees and $819 in performance fees not being recognized. The performance criterion for CPA(R):16-Global is a cumulative preferred return of 6%. As of December 31, 2004, the cumulative distribution rate for CPA(R):16-Global is approximately 4.61%. Based on management's current assessment, CPA(R):16-Global is expected to meet the cumulative preferred return in 2006, at which time we will record and collect the cumulative unrecognized fees. There is no assurance that the preferred return will be achieved as projected. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, management income from affiliates increased $3,805 due to increases in asset-based management and performance fees of $15,853, partially offset by a decrease in transaction fees of $12,048. The increase in asset-based management and performance fees resulted from an increase in the asset base of the CPA(R) REITs during 2003 of approximately 30%. The decrease in transaction fees resulted from a decrease in structuring volume of acquisitions on behalf of the CPA(R) REITs of $256,000 for the comparable years. Incentive and Subordinated Disposition Fees 2004 VS. 2003 - In connection with the Merger, we earned incentive fees of $23,681 and subordinated disposition fees of $18,414 from CIP(R). Incentive and disposition fees are earned in connection with events which provide liquidity or alternatives to the CPA(R) REIT shareholders. While we anticipate that such events will occur again, no liquidity events are currently being planned and the timing of such events cannot be predicted with any certainty. Depreciation and Amortization 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, depreciation and amortization expense increased by $2,243 primarily due to accelerated amortization of certain intangible assets of $2,798 related to the management contract with CIP(R), which was terminated as a result of the Merger. This increase was partially offset by a reduction in amortization expense on certain intangibles assets that became fully amortized during 2003. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, depreciation and amortization expense decreased by $452 primarily due to certain intangibles assets that became fully amortized during 2003. General and Administrative 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, general and administrative expense increased by $5,622, primarily due to an increase in personnel costs of $3,903 and increases in fees for accounting, auditing and consulting services related to ongoing securities law compliance, including the Sarbanes-Oxley Act, as well as an increase in legal fees related to the ongoing SEC investigation. A portion of personnel costs is directly related to CPA(R) REIT fundraising and transaction activities. The increase in personnel costs was attributable to higher transaction volume of $165,000 during the comparable years and a $2,385 increase in personnel costs related to non-cash charges for compensation from share incentive plan awards to our officers and employees. Of the $2,385 increase, $2,155 reflects an increase in awards that fluctuate with changes in fair value because such awards are accounted for using variable plan accounting. These increases were partially offset by a decrease in capital raising activities. For the comparable years, there was a decrease in fund raising volume of approximately $41,000. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, general and administrative expense increased by $669, primarily due to increases in fees for accounting, auditing and consulting services including internal audit fees. Other Interest Income 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, other interest income increased $534, due to an increase in interest income earned on deferred acquisition fees. 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 properties acquired. A portion of the fees applicable to the CPA(R) REITs is deferred and payable in equal annual installments over periods ranging from three to eight years, subject to each CPA(R) REIT meeting its preferred return. Unpaid installments bear interest at annual rates ranging from 5% to 7%. 2003 VS. 2002 - For the comparable years ended December 31, 2004 and 2003, other interest income increased $1,225 due to the same factor as stated above. Income From Equity Investments 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, income from equity investments increased $784, primarily due to an increase in our ownership of shares in the CPA(R) REITs as a result of receiving restricted shares in consideration for performance fees. In general, the CPA(R) REITs, like other REITs, have the ability to distribute amounts in excess of their net income because of depreciation and amortization, which are both non-cash expenses. Based on current distribution rates, our annual dividends from the CPA(R) REITs for 2005 are projected to be $4,262. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, income from equity investments increased $407, due to the same factor as mentioned above. Provision for Income Taxes 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, the provision for income taxes increased $33,822 due to increased pre-tax earnings in 2004 as discussed above. Approximately 95% of our management revenue in 2004, which increased $60,397 as compared to 2003, was earned by a taxable, wholly owned subsidiary. The effective income tax rate for 2004 was 54% as compared to 42% in 2003. The increase is primarily due to increases in state and local taxes, and increases in permanent differences, such as certain stock based compensation, which are not deductible for income tax purposes, but are recorded as expenses for financial reporting purposes. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, the provision for income taxes increased by $1,128 to $17,715, of which $9,478 represented deferred taxes and the reclassification of $2,700 of tax benefits related to share incentive plans as a direct benefit to Partners' Capital. In 2003, approximately 91% of management revenues were earned by a taxable, wholly owned subsidiary, and income tax expense is most affected by its earnings. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) Income from Continuing Operations 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, income from continuing operations increased $19,185 primarily due to fees earned in connection with the Merger and increased management fees earned in connection with 2004 fundraising and acquisition activity on behalf of the CPA(R) REITs. These increases were primarily offset by an increase in the provision for income taxes. These variances are all described above. 2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, income from continuing operations increased $3,890 primarily due to an increase in management income from affiliates of $3,805, and to a lesser extent an increase in equity income of $407 and a decrease in depreciation and amortization expenses of $452. These were partially offset by an increase in the provision for income taxes of $1,128. OTHER In 2002, a wholly-owned indirect subsidiary of ours entered into a build-to-suit development management agreement with the Los Angeles United School District ("School District") with respect to the development and construction of a new high school. Income on the project is being recognized under the percentage of completion method of accounting. The School District and we are currently preparing for an arbitration proceeding relating to certain disagreements regarding the costs of the project and whether we are entitled to reimbursement for incurring these costs. Due to our disputes with the School District and the possibility that certain costs will not be reimbursed, we have revised our estimate of profit on the development project, and recognized a loss in development income of $1,303 for the year ended December 31, 2004 as compared with development income of $1,298 for the comparable year ended December 31, 2003. We currently project that we will recognize an overall profit under our development management agreement. In addition, during 2004 we incurred an impairment charge of $7,500 related to our hotel operations in Livonia, Michigan. The impairment charge was the result of decline in this property's value. FINANCIAL CONDITION Uses of Cash During the Year There has been no material change in our financial condition since December 31, 2003. Cash and cash equivalents totaled $16,715 as of December 31, 2004, a decrease of $7,644 from the December 31, 2003 balance. We believe that we will generate sufficient cash from operations and, if necessary, from the proceeds of limited recourse mortgage loans, unsecured indebtedness and the issuance of additional equity securities to meet our short-term and long-term liquidity needs. We assess our ability to access capital on an ongoing basis. Our use of cash during the year is described below. Operating Activities Cash flows from operating activities and distributions received from equity investments for the year ended December 31, 2004 of $105,782 were sufficient to fund dividends to shareholders of $65,073. During 2004, we received fees of $36,679 in connection with structuring acquisition transactions and fees of $24,215 from providing asset-based management services on behalf of the CPA(R) REITs. We also benefited from the Merger, which generated cash receipts for us of $23,681 related to incentive fees and $22,679 related to disposition fees. In January 2004, we received $5,978 from the annual installment of deferred acquisition fees. The next installment of deferred acquisition fees was paid in January 2005 and approximated $8,950. The installments are subject to certain subordination provisions. CPA(R):16-Global has not yet met the subordination provisions and is not expected to pay any deferred amounts in 2005. Our real estate operations provided cash flows (contractual lease revenues, net of property-level debt service) of approximately $47,800. Annual cash flow from operations is projected to continue to fund distributions; however, operating cash flow fluctuates on a quarterly basis due to the timing of certain compensation costs that are paid and receipt of the annual installment of deferred acquisition fees and interest thereon in the first quarter and the timing of the receipt of transaction-related fees. Investing Activities Our investing activities are generally comprised of real estate transactions (purchases and sales) and capitalized property related costs. During the year, we used $111,230 to purchase 17 properties from CIP(R) (see Item 1 "Significant Developments in 2004" for further details). Substantially all cash used for this purchase came from borrowings under our credit facility and fees received from the merger. In connection with this purchase, we also assumed existing limited recourse mortgages on the properties of $27,003. Other investing activities included $4,094 to fulfill obligations related to -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) the November 2003 purchase of our 22.5% interest in the eight Carrefour, S.A. properties in France and $1,596 of capital expenditures at several existing properties. In January 2004, we paid our annual installment of deferred acquisition fees of $524 to our former management company relating to 1998 and 1999 property acquisitions. The remaining obligation is $1,709. We intend to use cash from operations to fund the remaining obligation. Cash proceeds from investing activities in 2004 included the receipt of $7,185 in June 2004 related to the release of an escrow account in connection with a property sale in 2003 and $6,548 from the sales of seven properties. Over the past several years, we have pursued a strategy of selling our smaller properties as well as properties that do not generate significant cash flow and require more intensive asset management services. During 2004, we sold properties located in Toledo, Ohio; Kenbridge, Virginia; McMinnville, Tennessee; Panama City, Florida; Leeds, Alabama and Garland, Texas, all of which required intensive asset management services. As of December 31, 2004, we have classified four additional properties as held for sale. Financing Activities During 2004 we paid dividends of $65,073, an increase over prior year dividends paid. We entered into a new $225,000 credit facility in 2004 (see Cash Resources below). Gross borrowings under the new credit facility approximated $203,000 and were used primarily to fund the acquisition of 17 properties from CIP(R) ($70,000), pay taxes related to management fees earned in connection with the Merger ($25,000), pay down the prior credit facility ($30,000), which expired in 2004, and for several other purposes in the normal course of business, such as other loan payments and dividend payments. During 2004, we made repayments of $130,000 on outstanding credit facility balances. The majority of the repayments were made using cash received in the normal course of business, with the remainder coming from the new facility to pay down the prior facility and cash receipts of $11,000 from the sales of various properties. We also used $9,962 to satisfy the limited recourse mortgage financing on our Erlanger, Kentucky properties, and also paid down $9,428 on existing principal balances. In addition, we raised $6,649 from the issuance of shares primarily through our Distribution Reinvestment and Share Purchase Plan. In the case of limited recourse mortgage financing that does not fully amortize over its term or is currently due, we are responsible for the balloon payment only to the extent of our interest in the encumbered property because the holder has recourse only to the collateral. In the event that balloon payments come due, we may seek to refinance the loans, restructure the debt with the existing lenders or evaluate our ability to satisfy the obligation from our existing resources including our revolving line of credit. To the extent the remaining initial lease term on any property remains in place for a number of years beyond the balloon payment date, we believe that the ability to refinance balloon payment obligations is enhanced. We also evaluate all our 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. We believe we have sufficient resources to pay off the loans in the event they are not refinanced. In addition, approximately 72% of our outstanding mortgage debt has fixed rates of interest so that debt service obligations will not significantly increase from increases in interest rates. Cash Resources As of December 31, 2004, we have $16,715 in cash and cash equivalents, which can be used for working capital needs and other commitments and may be used for future real estate purchases. We entered into a new credit facility in May 2004, which is also available to meet working capital needs and other commitments. In addition, debt may be incurred on unleveraged properties with a carrying value of $370,381 as of December 31, 2004 and any proceeds may be used to finance future real estate purchases. In May 2004, we entered into a credit facility for a $175,000 revolving line of credit with J.P. Morgan Chase Bank and eight other banks. The line of credit, which matures in May 2007, provides us a one-time right to increase the amount available under the line of credit to $225,000. Advances are prepayable at any time. Advances from the line of credit bear interest at an annual rate indexed to either (i) the one, two, three or six-month London Inter-Bank Offered Rate, 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 a rate indexed to the Federal Funds Effective Rate. The revolving credit agreement has financial covenants that require us, among other things, to maintain a minimum equity value and to meet or exceed certain operating and coverage ratios. We are in compliance with these covenants as of December 31, 2004. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts)
DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------------- ----------------------- MAXIMUM OUTSTANDING MAXIMUM OUTSTANDING AVAILABLE BALANCE AVAILABLE BALANCE ---------- ----------- ---------- ----------- Credit Facility $ 225,000 $ 102,000 $ 225,000 $ 29,000
Cash Requirements During the next twelve months, cash requirements will include paying dividends to shareholders, scheduled mortgage principal payments, making distributions to minority partners as well as other normal recurring operating expenses. In addition, there is $4,893 in scheduled balloon payments on our share of limited recourse mortgage loans due during 2005. We may also seek to use our cash to purchase new properties or other investments to further diversify our portfolio and maintain cash balances sufficient to meet working capital needs. We may issue additional shares in connection with purchases of real estate when it is consistent with the objectives of the seller. We have budgeted capital expenditures of up to approximately $3,575 at various properties during 2005. The capital expenditures will primarily be for tenant and property improvements in order to enhance a property's cash flow or marketability for re-leasing or sale. This includes expected environmental remediation costs of $1,500 to be funded to prepare the Red Bank property for sale to a third party. We have received a grant from an agency of the State of Ohio, which will reimburse us for certain environmental costs at Red Bank. In addition, we have entered into an agreement to share certain other of the expected environmental costs with a third party which operated a business at the property prior to our ownership. Additionally, we have commenced negotiating a property improvement plan in connection with renewing the franchise license with Holiday Inn at the Livonia hotel. We currently estimate that we may spend less than $1,000 over the next two years if we intend to continue to operate the hotel under the Holiday Inn brand. We expect to meet our capital requirements to fund future property acquisitions, construction costs on build-to-suit transactions, any capital expenditures on existing properties and scheduled debt maturities on limited recourse mortgages through use of our cash reserves or unused amounts on its credit facility. OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS The table below summarizes our contractual obligations as of December 31, 2004 and the effect that such obligations are expected to have on our liquidity and cash flow in future periods.
Less than 3-5 More than Total 1 Year 1-3 Years Years 5 years Limited recourse mortgage notes payable (1) $251,156 $ 26,856 $ 71,342 $64,566 $88,392 Unsecured note payable (1) 110,720 - 110,720 - - Deferred acquisition fees (1) 1,931 627 1,159 145 - Development project (2) 2,000 2,000 - - - Operating leases (3) 8,086 646 1,513 1,535 4,392 -------- -------- -------- ------- ------- $373,893 $ 30,129 $184,734 $66,246 $92,784 ======== ======== ======== ======= =======
(1) Amounts are inclusive of principal and interest. (2) We have provided a guarantee of $2,000 related to the development project in Los Angeles. (3) Operating lease obligations consist primarily of our share of minimum rents payable under an office cost-sharing agreement. Amounts related to our foreign operations are based on the exchange rate of the Euro as of December 31, 2004. As of December 31, 2004, we have no material capital lease obligations, either individually or in the aggregate. We and Carey Financial Corporation ("Carey Financial"), our wholly-owned broker-dealer subsidiary, are currently subject to an SEC investigation into payments made to third party broker dealers in connection with the distribution of REITs managed by us and other matters. Although no regulatory action has been initiated against us or Carey Financial in connection with the matters being investigated, it is possible that the Commission may pursue an action in the future. The potential timing of any such action and the nature of the relief or remedies the Commission may seek cannot be predicted at -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) this time. If such an action is brought, it could materially affect our cash requirements. See Item 3 Legal Proceedings for a discussion of this investigation. In connection with the purchase of many of our properties, we required the sellers to perform environmental reviews. We believe, based on the results of such reviews, that our 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, our leases generally require tenants to indemnify us 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 us to extend leases until such time as a tenant has satisfied its environmental obligations. Certain of our leases allow us to require financial assurances from tenants such as performance bonds or letters of credit if the costs of remediating environmental conditions are, in our estimation, in excess of specified amounts. Accordingly, we believe that the ultimate resolution of environmental matters should not have a material adverse effect on our financial condition, liquidity or results of operations. CRITICAL ACCOUNTING ESTIMATES A summary of our significant accounting policies is described in note 1 to the consolidated financial statements. Many of these accounting policies require certain judgment and the use of certain estimates and assumptions when applying these policies in the preparation of our consolidated financial statements. On a quarterly basis, we evaluate these estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates are subject to change in the future if underlying assumptions or factors change. Certain accounting policies, while significant, may not require the use of estimates. Those accounting policies that require significant estimation and/or judgment are listed below. Classification of Real Estate Assets We classify our directly owned leased assets for financial reporting purposes as either real estate leased under the operating method or net investment in direct financing leases at the inception of a lease. This classification is based on several criteria, including, but not limited to, estimates of the remaining economic life of the leased assets and the calculation of the present value of future minimum rents. In determining the classification of a lease, we use estimates of remaining economic life provided by third party appraisals of the leased assets. The calculation of the present value of future minimum rents includes determining a lease's implicit interest rate, which requires an estimate of the residual value of leased assets as of the end of the non-cancelable lease term. Different estimates of residual value result in different implicit interest rates and could possibly affect the financial reporting classification of leased assets. The contractual terms of our leases are not necessarily different for operating and direct financing leases; however the classification is based on accounting pronouncements which are intended to indicate whether the risks and rewards of ownership are retained by the lessor or substantially transferred to the lessee. Management believes that it retains certain risks of ownership regardless of accounting classification. Assets classified as net investment in direct financing leases are not depreciated and, therefore, the classification of assets may have a significant impact on net income even though it has no effect on cash flows. Identification of Tangible and Intangible Assets in Connection with Real Estate Acquisitions In connection with the acquisition of properties, purchase costs are allocated to tangible and intangible assets and liabilities acquired based on their estimated fair values. The value of tangible assets, consisting of land, buildings and tenant improvements, is determined as if vacant. Intangible assets including the above-market value of leases, the value of in-place leases and the value of tenant relationships are recorded at their relative fair values. Below-market value of leases are also recorded at their relative fair values and are recorded as liabilities in the accompanying financial statements. The value attributed to tangible assets is determined in part using a discount cash flow model which is intended to approximate what a third party would pay to purchase the property as vacant and rent at current "market" rates. In applying the model, we assume that the disinterested party would sell the property at the end of a market lease term. Assumptions used in the model are property-specific as it is available; however, when certain necessary information is not available, we will use available regional and property-type information. Assumptions and estimates include a discount rate or internal -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) rate of return, marketing period necessary to put a lease in place, carrying costs during the marketing period, leasing commissions and tenant improvements allowances, market rents and growth factors of such rents, market lease term and a cap rate to be applied to an estimate of market rent at the end of the market lease term. Above-market and below-market lease intangibles are based on the difference between the market rent and the contractual rents and are discounted to a present value using an interest rate reflecting our current assessment of the risk associated with the lease acquired. We acquire properties subject to net leases and consider the credit of the lessee in negotiating the initial rent. The total amount of other intangibles is allocated to in-place lease values and tenant relationship intangible values based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with each tenant. Characteristics we consider in allocating these values include the nature and extent of the existing relationship with the tenant, prospects for developing new business with the tenant, the tenant's credit quality and the expectation of lease renewals, among other factors. Intangibles for above-market and below-market leases, in-place lease intangibles and tenant relationships are amortized over their estimated useful lives. In the event that a lease is terminated, the unamortized portion of each intangible, including market rate adjustments, in-place lease values and tenant relationship values, are charged to expense. Factors considered include the estimated carrying costs of the property during a hypothetical expected lease-up period, current market conditions and costs to execute similar leases. Estimated carrying costs include real estate taxes, insurance, other property operating costs and estimates of lost rentals at market rates during the hypothetical expected lease-up periods, based on assessments of specific market conditions. Estimated costs to execute leases include commissions and legal costs to the extent that such costs are not already incurred with a new lease that has been negotiated in connection with the purchase of the property. Impairments Impairment charges may be recognized on long-lived assets, including but not limited to, real estate, direct financing leases, assets held for sale, goodwill and equity investments. Estimates and judgments are used when evaluating whether these assets are impaired. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, we perform projections of undiscounted cash flows, and if such cash flows are insufficient, the assets are adjusted (i.e., written down) to their estimated fair value. An analysis of whether a real estate asset has been impaired requires us to make our best estimate of market rents, residual values and holding periods. In our evaluations, we generally obtain market information from outside sources; however, such information requires us to determine whether the information received is appropriate to the circumstances. As our investment objective is to hold properties on a long-term basis, holding periods used in the analyses generally range from five to ten years. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets can vary within a range of outcomes. We will consider the likelihood of possible outcomes in determining the best possible estimate of future cash flows. Because in most cases, each of our properties is leased to one tenant, we are more likely to incur significant writedowns when circumstances change because of the possibility that a property will be vacated in its entirety and, therefore, it is different from the risks related to leasing and managing multi-tenant properties. Events or changes in circumstances can result in further noncash writedowns and impact the gain or loss ultimately realized upon sale of the assets. We perform a review of our estimate of residual value of our direct financing leases at least annually to determine whether there has been an other than temporary decline in the current estimate of residual value of the underlying real estate assets (i.e., the estimate of what we could realize upon sale of the property at the end of the lease term). If the review indicates a decline in residual value, that is other than temporary, a loss is recognized and the accounting for the direct financing lease will be revised to reflect the decrease in the expected yield using the changed estimate, that is, a portion of the future cash flow from the lessee will be recognized as a return of principal rather than as revenue. While an evaluation of potential impairment of real estate accounted for under the operating method is determined by a change in circumstances, the evaluation of a direct financing lease can be affected by changes in long-term market conditions even though the obligations of the lessee are being met. Changes in circumstances include, but are not limited to, vacancy of a property not subject to a lease and termination of a lease. We may also assess properties for impairment because a lessee is experiencing financial difficulty and because management expects that there is a reasonable probability that the lease will be terminated in a bankruptcy organization or a property remains vacant for a period that exceeds the period anticipated in a prior impairment evaluation. -16- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) We accounted for our acquisition of business operations of Carey Management LLC in 2000 as a purchase. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. We evaluate goodwill for possible impairment at least annually using a two-step process. To identify any impairment, we first compare the estimated fair value of the reporting unit (management services segment) with our carrying amount, including goodwill. We calculate the estimated fair value of the management services segment by applying a multiple, based on comparable companies, to earnings. If the fair value of the management services segment exceeds its carrying amount, goodwill is considered not impaired and no further analysis is required. If the carrying amount of the management services unit exceeds its estimated fair value, then the second step is performed to measure the amount of the impairment charge. For the second step, we would determine the impairment charge by comparing the implied fair value of the goodwill with its carrying amount and record an impairment charge equal to the excess of the carrying amount over the fair value. The implied fair value of the goodwill is determined by allocating the estimated fair value of the management services segment to its assets and liabilities. The excess of the estimated fair value of the management services segment over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. We have performed our annual test for impairment of our management services segment, the reportable unit of measurement, and concluded that the goodwill is not impaired. Investments in unconsolidated joint ventures are accounted for under the equity method and are recorded initially at cost, as equity investments and subsequently adjusted for our proportionate share of earnings and cash contributions and distributions. On a periodic basis, we assess whether there are any indicators that the value of equity investments may be impaired and whether or not that impairment is other than temporary. To the extent impairment has occurred, the charge shall be measured as the excess of the carrying amount of the investment over the fair value of the investment. When we identify assets as held for sale, we discontinue depreciating the assets and estimate the sales price, net of selling costs, of such assets. If in our opinion, the net sales price of the assets, which have been identified for sale, is less than the net book value of the assets, an impairment charge is recognized and a valuation allowance is established. To the extent that a purchase and sale agreement has been entered into, the allowance is based on the negotiated sales price. To the extent that we have adopted a plan to sell an asset but have not entered into a sales agreement, we will make judgments of the net sales price based on current market information. Accordingly, the initial assessment may be greater or less than the purchase price subsequently committed to and may result in a further adjustment to the fair value of the property. If circumstances arise that previously were considered unlikely and, as a result, we decide not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used, (b) the fair value at the date of the subsequent decision not to sell, or (c) the current carrying value. Provision for Uncollected Amounts from Lessees On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and determine an appropriate allowance for uncollected amounts. Because our real estate operations have a limited number of lessees (fewer than 30 lessees represent more than 75% of annual rental income), we believe that it is necessary to evaluate the collectibility of these receivables based on the facts and circumstances of each situation rather than solely use statistical methods. We generally recognize a provision for uncollected rents and other tenant receivables that typically range between 0.5% and 2% of lease revenues (rental income and interest income from direct financings leases) and will measure our allowance against actual rent arrearages and adjust the percentage applied. For amounts in arrears, we make subjective judgments based on our knowledge of a lessee's circumstances and may reserve for the entire receivable amount from a lessee because there has been significant or continuing deterioration in the lessee's ability to meet its lease obligations. Based on actual experience during 2004, we did not record a provision, as it was determined that our current allowance for uncollectible accounts was sufficient. Determination of Certain Asset Based Management and Performance Fees We earn asset-based management and performance fees for providing property management, leasing, advisory and other services to the CPA(R) REIT's. For certain CPA(R) REIT's, these fees are based on third party annual valuations of the underlying real estate assets of the CPA(R) REIT. The valuation uses estimates, including but not limited to, market rents, -17- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED (In thousands except share and per share amounts) residual values and increases in the CPI and discount rates. Differences in the assumptions applied would affect the amount of revenue that we recognize. Additionally, a deferred compensation plan for certain officers is valued based on the results of the annual valuations. The effect of any changes in the annual valuations will affect both revenue and compensation expense and therefore the determination of net income. Income Taxes Significant judgment is required in developing our provision for income taxes, including (i) the determination of partnership-level state and local taxes and foreign taxes, and (ii) for our taxable subsidiaries, estimating deferred tax assets and liabilities and any valuation allowance that might be required against the deferred tax assets. A valuation allowance is required if it is more likely than not that a portion or all of the deferred tax assets will not be realized. We have not recorded a valuation allowance based on our current belief that operating income of the taxable subsidiaries will be sufficient to realize the benefit of these assets over time. For interim periods, income tax expense for taxable subsidiaries is determined, in part, by applying an effective tax rate, which takes into account statutory federal, state and local tax rates. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS 123R"), which requires that the fair value of all stock and other equity-based compensation be treated as an expense that is reflected in the income statement. Note 1 to the consolidated financial statements of this Annual Report on Form 10-K contains pro forma disclosures regarding the effect on net income and earnings per share as if we had applied the fair value method of accounting for stock-based compensation. Depending on the model used to calculate stock-based compensation expense in the future and other requirements of FAS 123R, the pro forma disclosure may not be indicative of the stock-based compensation expense that will be recognized in our future financial statements. FAS 123R is effective for periods beginning after June 15, 2005, and allows two different methods of transition. We expect to implement FAS 123R beginning with the third quarter of fiscal 2005, which begins on July 1, 2005. We are currently evaluating this new standard and models that may be used to calculate future stock-based compensation expense. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," ("FAS 148") which amends SFAS No. 123, Accounting for Stock Based Compensation. FAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation (i.e., recognition of a charge for issuance of stock options in the determination of income). However, FAS No. 148 does not permit the use of the original FAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation, description of transition method utilized and the effect of the method used on reported results. The annual disclosure provisions of FAS No. 148 have been adopted. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity" ("FAS 150"). FAS 150 establishes standards to classify as liabilities certain financial instruments that are mandatorily redeemable or include an obligation to repurchase and expands financial statement disclosure requirements. Such financial instruments will be measured at fair value with changes in fair value included in the determination of net income. FAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3"), which defers the classification and measurement provisions of FAS 150 indefinitely as they apply to mandatorily redeemable non-controlling interests associated with finite-lived entities. We have interests in five joint ventures that are consolidated and have minority interests that have finite lives and were considered mandatorily redeemable non-controlling interests prior to the issuance of FSP 150-3. As a result of the deferral provisions of FSP 150-3, these minority interests have not been reflected as liabilities. The carrying value of these minority interests approximates their estimated fair value as of December 31, 2004. We adopted FAS 150 in July 2003 and it did not have a significant impact on our consolidated financial statements. -18- Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of W. P. Carey & Co. LLC: We have completed an integrated audit of W. P. Carey & Co. LLC's 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of W. P. Carey & Co. LLC and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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. Internal control over financial reporting Also, in our opinion, management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP New York, New York March 15, 2005 -19- W. P. CAREY & CO. LLC CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
December 31, ------------------------------- 2004 2003 ---------- -------- ASSETS: Real estate leased to others: Accounted for under the operating method, net of accumulated depreciation of $53,914 and $45,021 at December 31, 2004 and 2003 $ 476,365 $400,717 Net investment in direct financing leases 190,644 182,452 ---------- -------- Real estate leased to others 667,009 583,169 Operating real estate, net of accumulated depreciation of $6,983 and $5,805 at December 31, 2004 and 2003 9,140 16,147 Real estate under construction and redevelopment - 4,679 Equity investments 110,379 82,800 Assets held for sale 12,802 13,609 Cash and cash equivalents 16,715 24,359 Due from affiliates 63,471 50,917 Goodwill 63,607 63,607 Intangible assets, net of accumulated amortization of $35,610 and $25,262 at December 31, 2004 and 2003 50,501 38,528 Other assets, net of accumulated amortization of $1,494 and $2,716 and reserve for uncollected rent of $2,601 and $2,600 at December 31, 2004 and 2003 19,915 28,690 ---------- -------- Total assets $1,013,539 $906,505 ========== ======== LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY: Liabilities : Mortgage notes payable $ 190,698 $180,193 Notes payable 102,000 29,000 Accrued interest 1,389 1,163 Dividends payable 16,626 15,987 Due to affiliates 2,033 20,444 Accounts payable and accrued expenses 19,838 16,249 Prepaid rental income and security deposits 4,881 4,267 Accrued income taxes 3,909 1,810 Deferred income taxes, net 40,349 29,532 Other liabilities 11,748 11,221 ---------- -------- Total liabilities 393,471 309,866 ---------- -------- Minority interest 1,407 1,852 ---------- -------- Commitments and contingencies Members' Equity: Listed shares, no par value, 37,523,462 and 36,745,027 shares issued and outstanding at December 31, 2004 and 2003 734,658 709,724 Dividends in excess of accumulated earnings (114,431) (112,570) Unearned compensation (5,366) (4,863) Accumulated other comprehensive income 3,800 2,496 ---------- -------- Total members' equity 618,661 594,787 ---------- -------- Total liabilities, minority interest and members' equity $1,013,539 $906,505 ========== ========
The accompanying notes are an integral part of the consolidated financial statements. -21- W. P. CAREY & CO. LLC CONSOLIDATED STATEMENTS of INCOME (In thousands except share and per share amounts)
For the years ended December 31, ----------------------------------------------- 2004 2003 2002 ----------- ----------- ----------- Revenues: Management income from affiliates $ 106,362 $ 88,060 $ 84,255 Incentive and subordinated disposition fees 42,095 - - Rental income 46,472 43,992 44,304 Interest income from direct financing leases 21,322 20,655 22,298 Other operating income 5,798 5,233 1,258 Revenues of other business operations 5,725 1,298 289 ----------- ----------- ----------- 227,774 159,238 152,404 ----------- ----------- ----------- Operating Expenses: Depreciation 11,311 10,432 9,767 Amortization 10,074 7,296 9,208 General and administrative 50,985 43,698 42,592 Property expenses 5,893 5,929 5,945 Impairment charge on real estate and investments and loan losses 14,548 1,480 20,510 Operating expenses of other business operations 6,261 - - ----------- ----------- ----------- 99,072 68,835 88,022 ----------- ----------- ----------- Income from continuing operations before other interest income, minority interest, equity investments, interest expense, gains and losses and income taxes 128,702 90,403 64,382 Other interest income 3,127 2,571 1,640 Minority interest in (income) loss (1,499) (370) 120 Income (loss) from equity investments 5,308 4,008 (443) Interest expense (14,838) (14,982) (15,893) Gain on foreign currency transactions and sale of securities 1,222 48 94 ----------- ----------- ----------- Income from continuing operations before income taxes and gain on sale of real estate 122,022 81,678 49,900 Provision for income taxes (52,974) (19,116) (18,083) ----------- ----------- ----------- Income from continuing operations before gain on sale of real estate 69,048 62,562 31,817 ----------- ----------- ----------- Discontinued operations: Income from operations of discontinued properties 2,263 2,038 8,657 Gain on sale of real estate 90 1,238 2,694 Impairment charges on properties held for sale (7,550) (2,960) (8,901) ----------- ----------- ----------- (Loss) income from discontinued operations (5,197) 316 2,450 ----------- ----------- ----------- Gain on sale of real estate - - 12,321 ----------- ----------- ----------- Net income $ 63,851 $ 62,878 $ 46,588 =========== =========== =========== Basic earnings (loss) per share: Income from continuing operations $ 1.85 $ 1.71 $ 1.24 (Loss) income from discontinued operations (.14) .01 .07 ----------- ----------- ----------- Net income $ 1.71 $ 1.72 $ 1.31 =========== =========== =========== Diluted earnings (loss) per share: Income from continuing operations $ 1.77 $ 1.64 $ 1.21 (Loss) income from discontinued operations (.13) .01 .07 ----------- ----------- ----------- Net income $ 1.64 $ 1.65 $ 1.28 =========== =========== =========== Weighted average shares outstanding: Basic 37,417,918 36,566,338 35,530,334 =========== =========== =========== Diluted 38,904,725 38,008,762 36,265,230 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. -22- W. P. CAREY & CO. LLC CONSOLIDATED STATEMENTS of MEMBERS' EQUITY For the years ended December 31, 2001, 2002 and 2003 (In thousands except share and per share amounts)
Dividends in Excess of Paid-in Accumulated Unearned Shares Capital Earnings Compensation ---------- -------- ----------- ------------ Balance at December 31, 2001 34,742,436 $664,751 $ (97,200) $ (4,454) ========== ======== =========== ============ Cash proceeds on issuance of shares, net 528,479 10,086 Shares issued in connection with services rendered 5,755 390 Shares issued in connection with prior acquisition 500,000 10,440 Shares and options issued under share incentive plans 170,768 3,913 (3,913) Forfeitures (3,328) (70) 70 Dividends declared (61,358) Tax benefit - share incentive plans 1,084 Amortization of unearned compensation 2,626 Net income 46,588 Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: ---------- -------- ----------- ------------ Balance at December 31, 2002 35,944,110 $690,594 $ (111,970) $ (5,671) ---------- -------- ----------- ------------ Cash proceeds on issuance of shares, net 412,012 7,789 Shares issued in connection with services rendered and properties acquired 5,846 160 Shares issued in connection with prior acquisition 400,000 8,909 Shares and options issued under share incentive plans 47,550 1,212 (2,827) Forfeitures (9,726) (132) 99 Dividends declared (63,478) Tax benefit - share incentive plans 2,700 Amortization of unearned compensation 3,536 Repurchase of shares (54,765) (1,508) Net income 62,878 Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: ---------- -------- ----------- ------------ Balance at December 31, 2003 36,745,027 $709,724 $ (112,570) $ (4,863) ---------- -------- ----------- ------------ Cash proceeds on issuance of shares, net 274,262 6,649 Shares issued in connection with services rendered 8,938 271 Shares issued in connection with prior acquisition 500,000 13,734 Shares and options issued under share incentive plans 118,683 3,538 (4,409) Forfeitures (32,869) (138) 138 Dividends declared (65,712) Tax benefit - share incentive plans 3,423 Amortization of unearned compensation 3,768 Repurchase and retirement of shares (90,579) (2,543) Net income 63,851 Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: ---------- -------- ----------- ------------ Balance at December 31, 2004 37,523,462 $734,658 $ (114,431) $ (5,366) ========== ======== =========== ============ Accumulated Other Comprehensive Comprehensive) Income (Loss) Income(Loss Total -------------- -------------- ----------- Balance at December 31, 2001 $ (3,432) $ 559,665 ============== =========== Cash proceeds on issuance of shares, net 10,086 Shares issued in connection with services rendered 390 Shares issued in connection with prior acquisition 10,440 Shares and options issued under share incentive plans Forfeitures Dividends declared (61,358) Tax benefit - share incentive plans 1,084 Amortization of unearned compensation 2,626 Net income $ 46,588 46,588 Other comprehensive income: Change in unrealized gains on marketable securities 12 Foreign currency translation adjustment 1,355 -------------- 1,367 1,367 1,367 -------------- Comprehensive income: $ 47,955 -------------- -------------- ----------- Balance at December 31, 2002 $ (2,065) $ 570,888 -------------- ----------- Cash proceeds on issuance of shares, net 7,789 Shares issued in connection with services rendered and properties acquired 160 Shares issued in connection with prior acquisition 8,909 Shares and options issued under share incentive plans (1,615) Forfeitures (33) Dividends declared (63,478) Tax benefit - share incentive plans 2,700 Amortization of unearned compensation 3,536 Repurchase of shares (1,508) Net income $ 62,878 62,878 Other comprehensive income: Change in unrealized gains on marketable securities 2,567 Foreign currency translation adjustment 1,994 -------------- 4,561 4,561 4,561 -------------- Comprehensive income: $ 67,439 -------------- -------------- ----------- Balance at December 31, 2003 $ 2,496 $ 594,787 -------------- ----------- Cash proceeds on issuance of shares, net 6,649 Shares issued in connection with services rendered 271 Shares issued in connection with prior acquisition 13,734 Shares and options issued under share incentive plans (871) Forfeitures Dividends declared (65,712) Tax benefit - share incentive plans 3,423 Amortization of unearned compensation 3,768 Repurchase and retirement of shares (2,543) Net income $ 63,851 63,851 Other comprehensive income: Change in unrealized gains on marketable securities 1,467 Foreign currency translation adjustment (163) -------------- 1,304 1,304 1,304 -------------- Comprehensive income: $ 65,155 -------------- -------------- ----------- Balance at December 31, 2004 $ 3,800 $ 618,661 ============== ===========
The accompanying notes are an integral part of the consolidated financial statements. -23- W. P. CAREY & CO. LLC CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, --------------------------------- (In thousands) 2004 2003 2002 --------- --------- --------- Cash flows from operating activities: Net income $ 63,851 $ 62,878 $ 46,588 Adjustments to reconcile net income to net cash provided by continuing operating activities: Loss (income) from discontinued operations, including impairment charges and gain on sale 5,197 (316) (2,450) Depreciation and amortization of intangibles assets and deferred financing costs 22,096 18,589 19,811 Equity income in excess of distributions (793) (23) (54) Loss (gain) on sales of real estate and securities, net - 578 (12,415) Minority interest in income (loss) 1,499 370 (120) Straight-line rent adjustments and amortization of deferred income and rent related intangibles 1,732 925 (719) Management income received in shares of affiliates (20,999) (18,599) (13,439) Unrealized gain on foreign currency transactions (790) (130) - Impairment charges on securities and real estate and loan losses 14,548 1,480 20,510 Deferred income tax provision 10,817 9,769 13,155 Realized gain on foreign currency transaction (430) (556) - Costs paid by issuance of shares 168 215 500 Increase (decrease) in accrued taxes payable 2,099 (3,475) 2,265 Tax benefit - share incentive plans 3,423 2,700 1,084 Amortization of unearned compensation 3,768 3,536 2,626 Deferred acquisition fees received 5,978 1,495 916 Increase in structuring fees receivable (14,860) (13,424) (18,529) Net changes in operating assets and liabilities (372) (655) 8,004 --------- --------- --------- Net cash provided by continuing operations 96,932 65,357 67,733 Net cash provided by discontinued operations 1,917 1,938 8,163 --------- --------- --------- Net cash provided by operating activities 98,849 67,295 75,896 --------- --------- --------- Cash flows from investing activities: Distributions received from equity investments in excess of equity income 6,933 3,503 5,560 Capital distributions from equity investment - 6,582 1,255 Purchases of real estate and contributions to equity investments (115,522) (8,184) (13,172) Additional capital expenditures (1,596) (2,843) (811) Payment of deferred acquisition fees to affiliate (524) (524) (524) Release of funds from escrow in connection with the sale of a property 7,185 - 9,366 Proceeds from sales of real estate and investments 6,548 24,395 50,247 Cash acquired on acquisition of subsidiary - 1,300 - --------- --------- --------- Net cash (used in) provided by investing activities (96,976) 24,229 51,921 --------- --------- --------- Cash flows from financing activities: Dividends paid (65,073) (62,978) (60,708) Payment of accrued preferred distributions - - (1,423) Contributions from minority interest - - 636 Distributions to minority interests (1,101) - - Payments of mortgage principal (9,428) (8,548) (8,428) Proceeds from mortgages and credit facility 170,000 82,683 79,200 Prepayments of mortgage principal and credit facility (106,962) (107,854) (134,316) Payment of financing costs (1,238) (391) (308) Proceeds from issuance of shares 6,649 7,789 10,086 Retirement of shares (2,543) - - --------- --------- --------- Net cash used in financing activities (9,696) (89,299) (115,261) --------- --------- --------- Effect of exchange rate changes on cash 179 830 (122) --------- --------- --------- Net (decrease) increase in cash and cash equivalents (7,644) 3,055 12,434 Cash and cash equivalents, beginning of year 24,359 21,304 8,870 --------- --------- --------- Cash and cash equivalents, end of year $ 16,715 $ 24,359 $ 21,304 ========= ========= =========
-24- W. P. CAREY & CO. LLC -Continued- CONSOLIDATED STATEMENTS of CASH FLOWS, Continued (In thousands except share and per share amounts) Noncash operating, investing and financing activities: A. In connection with the acquisition of Carey Management LLC in June 2000, the Company had an obligation to issue up to an additional 2,000,000 shares over four years if specified performance criteria were achieved. As of December 31, 2004, 1,900,000 shares have been issued and our obligation has been satisifed. Based on the performance criteria 500,000 shares were issued for the years ended December 31, 2003, 2001 and 2000 ($13,734, $10,440 and $8,145, respectively). For the year ended December 31, 2002, the Company met one criterion and 400,000 shares ($8,910) were issued. The amounts attributable to the 1,900,000 shares are included in goodwill. Accounts payable to affiliates as of December 31, 2003 includes $13,734 for shares that were issued in 2004. B. The Company issued 8,938, 5,846 and 5,755 restricted shares valued at $271 in 2004, $160 in 2003 and $134 in 2002, to certain directors, officers, and employees and affiliates in consideration of service rendered. Restricted shares and stock options valued at $3,538, $3,697 and $3,913 in 2004, 2003 and 2002, respectively, issued to officers and employees and was recorded as unearned compensation of which $138, $99 and $70, respectively, was forfeited in 2004, 2003 and 2002. Included in compensation expense for the years ended December 31, 2004, 2003 and 2002 were $3,768, $3,536 and $2,626, respectively, relating to equity awards from the Company's share incentive plans. C. During 2004, the Company acquired interests in 17 properties from Carey Institutional Properties Incorporated with a fair value of $142,161, for approximately $115,158 in cash and the assumption of approximately $27,003 in limited recourse mortgage notes payable. The fair value of the assumed mortgages was $27,756. D. As partial consideration for the sale of a property in 2003, the Company received notes receivable with a fair value of $2,250. During 2004, $7,185 was released from an escrow account from the sale of a property in 2003. During 2002, $9,366 was released from an escrow account from the sale of a property in 2001. E. In 2002, the Company contributed its tenancy-in-common interest in properties leased to Learning Care Group, Inc. to a limited partnership which is accounted for under the equity method. Assets and liabilities were contributed to the limited partnerships as follows: Land $ 1,674 Net investment in direct financing lease 2,413 Other assets, net 1 Mortgage payable (1,134) -------- Equity investment $ 2,954 ========
F. During 2001 the Company purchased an equity interest in an affiliate, W. P. Carey International LLC ("WPCI"), in consideration for issuing a promissory note of $1,000. The promissory note was satisfied in 2002 through the issuance of 54,765 shares of the Company to WPCI. In April 2003, the Company's ownership interest in WPCI increased from 10% to 100% at which time WPCI transferred the 54,765 shares back to the Company and WPCI redeemed the interests of William P. Carey, Chairman and Co-Chief Executive Officer of the Company, who had owned a 90% interest in WPCI. As a result of increasing its interest in WPCI to 100%, the Company acquired assets and liabilities of WPCI as follows: (see Note 3) Intangible assets (management contracts) 679 Equity investments 324 Due to affiliates (including $1,898 due to William P. Carey) (2,559) Other assets and liabilities, net 256 ------- Net cash acquired $ 1,300 =======
Supplemental Cash Flows Information:
2004 2003 2002 -------- -------- -------- Interest paid, net of amounts capitalized $ 13,901 $ 14,395 $ 16,400 ======== ======== ======== Income taxes paid $ 36,944 $ 9,074 $ 1,695 ======== ======== ======== Interest capitalized $ - $ 22 $ 216 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. -25- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share amounts) 1. Organization: W. P. Carey & Co. LLC (the "Company") is a real estate investment, management and advisory company that invests in commercial properties leased to companies domestically and internationally, and earns fees as the advisor to affiliated real estate investment trusts ("CPA(R) REITs") that each make similar investments. Under the advisory agreements with the CPA(R) REITs, the Company performs services related to the day-to-day management of the CPA(R) REITs and transaction-related services. The Company owns and manages commercial and industrial properties located in 34 states and Europe, net leased to more than 107 tenants. As of December 31, 2004, the Company's portfolio consisted of 168 properties in the United States and 15 properties in Europe and totaled more than 19.4 million square feet. In addition, the Company manages over 765 net leased properties on behalf of the CPA(R) REITs: Corporate Property Associates 12 Incorporated ("CPA(R):12"), Corporate Property Associates 14 Incorporated ("CPA(R):14"), Corporate Property Associates 15 Incorporated ("CPA(R):15"), Corporate Property Associates 16 - Global Incorporated ("CPA(R):16 - Global") and Carey Institutional Properties Incorporated ("CIP(R)") until its merger into CPA(R):15 during 2004. The Company commenced operations on January 1, 1998 by combining the limited partnership interests in nine CPA(R) Partnerships, at which time the Company listed on the New York Stock Exchange. On June 28, 2000, the Company acquired the net lease real estate management operations of Carey Management from William P. Carey ("Carey"), Chairman and Co-Chief Executive Officer of the Company, subsequent to receiving shareholder approval. The assets acquired included the advisory agreements with four affiliated 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 shares with an additional 2,000,000 shares issuable over four years if specified performance criteria were achieved through a period ended December 31, 2004 (of which 1,900,000 shares were issued representing an aggregate value of $41,229). The initial 8,000,000 shares issued were restricted from resale for a period of up to three years and the additional shares are subject to Section 144 regulations. The acquisition of the interests in Carey Management was accounted for as a purchase and was recorded at the fair value of the initial 8,000,000 shares issued. 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 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 purchase price was 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 (reclassified to goodwill on January 1, 2002), were determined pursuant to a third party valuation. The value of the advisory agreements and the management agreement were 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 value of additional shares issued under the acquisition agreement is recognized as additional purchase price and recorded as goodwill. Issuances based on performance criteria are valued based on the market price of the shares on the date when the performance criteria are achieved. 2. Summary of Significant Accounting Policies: BASIS OF CONSOLIDATION The consolidated financial statements include the Company, its wholly owned and majority owned controlled subsidiaries and a variable interest entity ("VIE") in which it is the primary beneficiary. All material inter-entity transactions have been eliminated. For acquisitions of an interest in an entity, the Company evaluates the entity to determine if the entity is deemed a VIE, and if the Company is deemed to be the primary beneficiary, in accordance with FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities" ("FIN 46(R)"). Entities that meet one or more of the criteria listed below are considered VIEs. - The Company's equity investment is not sufficient to allow the entity to finance its activities without additional third party financing; - The Company does not have the direct or indirect ability to make decisions about the entity's business; - The Company is not obligated to absorb the expected losses of the entity; - The Company does not have the right to receive the expected residual returns of the entity; and -26- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) - The Company's voting rights are not proportionate to its economic interests, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. The Company consolidates the entities that are VIEs and the Company is deemed to be the primary beneficiary of the VIE. For entities where the Company is not deemed to be the primary beneficiary or the entity is not deemed a VIE and the Company's ownership is 50% or less and has the ability to exercise significant influence as well as jointly-controlled tenancy-in-common interests are accounted for under the equity method, i.e. at cost, increased or decreased by the Company's share of earnings or losses, less distributions. The Company will reconsider its determination of whether an entity is a VIE and who the primary beneficiary is if certain events occur that are likely to cause a change in the original determinations. Beginning in 2004, the Company accounts for its interest in CPA(R):16 - Global under the equity method. For 2003, the accounts of CPA(R):16-Global, which was formed in June 2003, were included in the Company's consolidated financial statements, as the Company owned all of CPA(R):16 - Global's outstanding common stock. Effective December 12, 2003, CPA(R):16 - Global commenced a "best efforts" public offering for up to 1,100,000 shares. CPA(R):16- Global temporarly suspended this offering in December 2004 and subsequently withdrew it. The consolidated financial statements also include the accounts of Corporate Property Associates International Incorporated ("CPAI"), which was formed in July 2003. The Company owns all of CPAI's outstanding common stock. CPAI has filed a registration statement with the Securities and Exchange Commission ("SEC") for a public offering to sell up to 27,500,000 shares of common stock. 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. Actual results could differ from those estimates. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. PURCHASE PRICE ALLOCATION In connection with the Company's acquisition of properties, purchase costs are allocated to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The value of the tangible assets, consisting of land, buildings and tenant improvements, are determined as if vacant. Intangible assets including the above-market value of leases, the value of in-place leases and the value of tenant relationships are recorded at their relative fair values. Below-market value of leases are also recorded at their relative fair values and are recorded as liabilities in the accompanying financial statements. Above-market and below-market in-place lease values for owned properties are recorded based on the present value (using an interest rate reflecting the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the leases negotiated and in-place at the time of acquisition of the properties and (ii) management's estimate of fair market lease rates for the property or equivalent property, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease value is amortized as a reduction of rental income over the remaining non-cancelable term of each lease. The capitalized below-market lease value is amortized as an increase to rental income over the initial term and any fixed rate renewal periods in the respective leases. The total amount of other intangibles are allocated to in-place lease values and tenant relationship intangible values based on management's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with each tenant. Characteristics that are considered in allocating these values include the nature and extent of the existing relationship with the tenant, prospects for developing new business with the tenant, the tenant's credit quality and the expectation of lease renewals among other factors. Third party appraisals or management's estimates are used to determine these values. Intangibles for above-market and below-market leases, in-place lease intangibles and tenant relationships are amortized over their estimated useful lives. In the event that a lease is terminated the unamortized portion of each intangible, including market rate adjustments, in-place lease values and tenant relationship values, is charged to expense. -27- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) Factors considered in the analysis include the estimated carrying costs of the property during a hypothetical expected lease-up period, current market conditions and costs to execute similar leases. The Company also considers information obtained about a property in connection with its pre-acquisition due diligence. Estimated carrying costs include real estate taxes, insurance, other property operating costs and estimates of lost rentals at market rates during the hypothetical expected lease-up periods, based on management's assessment of specific market conditions. Estimated costs to execute leases including commissions and legal costs to the extent that such costs are not already incurred with a new lease that has been negotiated in connection with the purchase of the property are also considered. The value of in-place leases are amortized to expense over the remaining initial term of each lease. The value of tenant relationship intangibles are amortized to expense over the initial and expected renewal terms of the leases but no amortization periods for intangibles will exceed the remaining depreciable life of the building. 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 as incurred. REAL ESTATE UNDER CONSTRUCTION AND REDEVELOPMENT For properties under construction, operating expenses including interest charges and other property expenses, including real estate taxes, are capitalized rather than expensed and rentals received are recorded as a reduction of capitalized project (i.e., construction) costs. Interest is capitalized by applying the interest rate applicable to outstanding borrowings to the average amount of accumulated expenditures for properties under construction during the period. CASH EQUIVALENTS The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include money market funds. Substantially all of the Company's cash and cash equivalents at December 31, 2004 and 2003 were held in the custody of three financial institutions and which balances, at times, exceed federally insurable limits. The Company mitigates this risk by depositing funds with major financial institutions. DUE TO AFFILIATES Included in due to affiliates are deferred acquisition fees and amounts related to issuable shares for meeting the performance criteria in connection with the acquisition of Carey Management LLC ("Carey Management"). Deferred acquisition fees 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. The fees are payable in eight equal annual installments each January 1 following the first anniversary of the date a property was purchased. OTHER ASSETS AND LIABILITIES Included in other assets are accrued rents and interest receivable, deferred rent receivable, notes receivable, deferred charges, escrow balances held by lenders, restricted cash balances and marketable securities. Included in other liabilities are accrued interest, accounts payable and accrued expenses, security deposits and other amounts held on behalf of tenants, deferred rent, deferred revenue, including unamortized below-market rent intangibles, and minority interests that are subject to redemption. Deferred charges include costs incurred in connection with debt financing and refinancing and are amortized and included in interest expense over the terms of the related debt obligations using the effective interest method. Deferred rent receivable is primarily the aggregate difference for operating method leases between scheduled rents which vary during the lease term and rent recognized on a straight-line basis. Minority interests subject to redemption are recorded at fair value based on a cash flow model with changes in fair value reflected in the determination of net income. 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. -28- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) ACCUMULATED OTHER COMPREHENSIVE INCOME As of December 31, 2004 and 2003, accumulated other comprehensive income reflected in the members' equity is comprised of the following:
As of December 31, 2004 2003 ------- ------- Unrealized gains on marketable securities $ 3,285 $ 1,818 Foreign currency translation adjustment 515 678 ------- ------- Accumulated other comprehensive income $ 3,800 $ 2,496 ======= =======
REAL ESTATE LEASED TO OTHERS Certain of the Company's 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. Expenditures for maintenance and repairs including routine betterments are charged to operations as incurred. Significant renovations that increase the useful life of the properties are capitalized. For the year ended December 31, 2004, lessees were responsible for the direct payment of real estate taxes of approximately $7,119. The Company diversifies its real estate investments among various corporate tenants engaged in different industries, by property type and geographically. No lessee currently represents 10% or more of total leasing revenues. 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 ("CPI") or sales overrides. Rents from sales overrides (percentage rents) are recognized as reported by the lessees, that is, after the level of sales requiring a rental payment to the Company is reached. The leases are accounted for under either the direct financing or operating methods. Such methods are described below (see Notes 4 and 5): Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (see 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. On an ongoing basis, the Company assesses its ability to collect rent and other tenant-based receivables and determines an appropriate allowance for uncollected amounts. Because the real estate operations has a limited number of lessees, the Company believes that it is necessary to evaluate the collectibility of these receivables based on the facts and circumstances of each situation rather than solely use statistical methods. The Company generally recognizes a provision for uncollected rents and other tenant receivables that typically ranges between 0.5% and 2% of lease revenues (rental income and interest income from direct financings leases) and will measure its allowance against actual rent arrearages and adjust the percentage applied. For amounts in arrears, the Company makes subjective judgments based on its knowledge of a lessee's circumstances and may reserve for the entire receivable amount from a lessee because there has been significant or continuing deterioration in the lessee's ability to meet its lease obligations. REVENUE RECOGNITION 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 dispositions and the placement of mortgage financing obtained by publicly registered real estate investment trusts formed by the Company (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 (the "performance fees") may be collected in cash or shares of the CPA(R) REIT at the option of the Company. During 2004, 2003 and 2002, the Company elected to receive its earned performance fees in CPA(R) REIT shares. Performance fees of CIP(R) in the amount of $1,494 were received in cash in 2004. -29- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) 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 criteria of the CPA(R) REIT is achieved and contractual limitations are not exceeded. As of December 31, 2004, $800 of transaction fees are recorded as deferred revenue in other liabilities, as a limitation which provides that certain transaction fees cannot exceed 4.5% of the aggregate cost of properties of a CPA(R) REIT was exceeded. In addition, CPA(R):16-Global did not meet the preferred return criterion, as defined in the Advisory Agreements, and therefore, the Company's recognition of performance fees of $819 and deferred acquisition fees of $7,535 were not recognized and has been deferred until the preferred return criterion is met. 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, subject to limitations on a CPA(R) REIT's ability to incur offering costs. 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). IMPAIRMENTS 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 and certain intangible assets 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. The Company performs a review of its estimate of residual value of its direct financing leases at least annually to determine whether there has been an other than temporary decline in the Company's current estimate of residual value of the underlying real estate assets (i.e., the estimate of what the Company could realize upon sale of the property at the end of the lease term). If the review indicates a decline in residual value that is other than temporary, a loss is recognized and the accounting for the direct financing lease will be revised to reflect the decrease in the expected yield using the changed estimate, that is, a portion of the future cash flow from the lessee will be recognized as a return of principal rather than as revenue. The Company tests goodwill for impairment at least annually using a two-step process. To identify any impairment, the Company first compares the estimated fair value of the reporting unit (management services segment) with its carrying amount, including goodwill. The Company calculates the estimated fair value of the management services segment by applying a multiple, based on comparable companies, to earnings. If the fair value of the management services segment exceeds its carrying amount, goodwill is considered not impaired. If the carrying amount of the management services unit exceeds its estimated fair value, then the second step is performed to measure the amount of impairment loss. For the second step, the Company would compare the implied fair value of the goodwill with its carrying amount and record an impairment charge for the excess of the carrying amount over the fair value. The implied fair value of the goodwill is determined by allocating the estimated fair value of the management services segment to its assets and liabilities. The excess of the estimated fair value of the management services segment over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. In accordance with the requirements of Statement of Financial Accounting Standards ("FAS") No. 142, "Goodwill and Other Intangibles," the Company performed its annual tests for impairment of its management services segment, the reportable unit of measurement, and concluded that the goodwill is not impaired. Investments in unconsolidated joint ventures are accounted for under the equity method and are recorded initially at cost, and subsequently adjusted for our proportionate share of earnings and cash contributions and distributions. On a periodic basis, we assess whether there are any indicators that the value of equity investments may be impaired and whether or not that impairment is other than temporary. To the extent impairment has occurred, the charge shall be measured as the excess of the carrying amount of the investment over the fair value of the investment. When the Company identifies assets as held for sale, it discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. If in the Company's opinion, the net sales price of the assets, which have been identified for sale, is less than the net book value of the assets, an impairment charge is recognized and a valuation allowance is established. To the extent that a purchase and sale agreement has been entered into, the allowance is based -30- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) on the negotiated sales price. To the extent that the Company has adopted a plan to sell an asset but has not entered into a sales agreement, it will make judgments of the net sales price based on current market information. Accordingly, the initial assessment may be greater or less than the purchase price subsequently committed to and may result in a further adjustment to the fair value of the property. If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used, (b) the fair value at the date of the subsequent decision not to sell, or (c) the current carrying value. 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 for fixed plans 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. 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 their respective vesting periods. 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 over the applicable vesting periods. Grants of restricted stock and options of a subsidiary were awarded to certain of its officers. The awards are subject to redemption in 2012 and, therefore are being accounted for as a variable plan. The awards were initially recorded in unearned compensation and changes in fair value subsequent to the grant date are included in the determination of net income (see below). The unearned compensation is being amortized over the vesting periods. 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. The Company has elected to adopt the disclosure only provisions of FAS No. 123. If stock-based compensation cost had been recognized based upon fair value at the date of grant for options and restricted stock awarded under the Company's share incentive plans and amortized to expense over their respective vesting periods in accordance with the provisions of FAS No. 123, pro forma net income would have been as follows:
Year Ended December 31, ------------------------------------ 2004 2003 2002 ---------- ---------- ---------- Net income as reported $ 63,851 $ 62,878 $ 46,588 Add: Stock based compensation included in net income, as reported, net of related tax effects 2,264 2,282 1,709 Less: Stock based compensation determined under fair value based methods for all awards, net of related tax effects (2,853) (3,144) (2,887) ---------- ---------- ---------- Pro forma net income $ 63,262 $ 62,016 $ 45,410 ========== ========== ========== Earnings per common share as reported: Basic $ 1.71 $ 1.72 $ 1.31 Diluted $ 1.64 $ 1.65 $ 1.28 Pro forma earnings per common share: Basic $ 1.69 $ 1.70 $ 1.28 Diluted $ 1.63 $ 1.63 $ 1.25
The per share weighted average fair value of share options and warrants granted during 2004 under the Company's Incentive Plan were estimated to range from $1.96 to $2.47 using a Black-Scholes option pricing formula based on the date of grant. The more significant assumptions underlying the determination of the weighted average fair values included risk-free interest rates ranging from 3.63% to 3.92%, volatility factors ranging from 20.66% to 21.56%, dividend yields ranging from 7.79% to 8.19% and expected lives ranging from 7 to 7.13 years. -31- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) The per share weighted average fair value of share options and warrants granted during 2003 under the Company's Incentive Plan were estimated to range from $1.51 to $2.28 using a Black-Scholes option pricing formula based on the date of grant. The more significant assumptions underlying the determination of the weighted average fair values included risk-free interest rates ranging from 2.60% to 3.69%, volatility factors ranging from 21.35% to 21.89%, dividend yields ranging from 8.26% to 8.51% and expected lives ranging from 4.56 to 7.5 years. The per share weighted average fair value of share options and warrants granted during 2002 under the Company's Incentive Plan were estimated to be $1.26 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 1.73%, a volatility factor of 21.83%, a dividend yield of 8.59% and an expected life of 2.99 years. The Company's non-qualified deferred compensation plan provides that each participating officer's cash compensation in excess of designated amounts is deferred and he or she is awarded an interest that is intended to correspond to the per share value of a CPA(R) REIT designated at the time of such award. The value of the award is adjusted at least annually to reflect changes based on the underlying appraised value of a share of common stock of the CPA(R) REIT. The deferred compensation plan is a variable plan and changes in the fair value of the interests are included in the determination of net income. FOREIGN CURRENCY TRANSLATION The Company owns interests in several real estate investments in France. The functional currency for these investments is the Euro. The translation from the Euro 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. The cumulative translation adjustment as of December 31, 2004 and 2003 were gains of $515 and $678, respectively. Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. A change in the exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of that transaction. That increase or decrease in the expected functional currency cash flows is a foreign currency transaction gain or loss that generally will be included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date) whichever is later, realized upon settlement of a foreign currency transaction generally will be included in net income for the period in which the transaction is settled. Foreign currency transactions that are (i) designated as, and are effective as, economic hedges of a net investment and (ii) inter-company foreign currency transactions that are of a long-term nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transactions are consolidated or accounted for by the equity method in the Company's financial statements will not be included in determining net income but will be accounted for in the same manner as foreign currency translation adjustments and reported as a component of other comprehensive income as part of shareholder's equity. The contributions to the equity investments were funded in part through subordinated debt. Foreign currency intercompany transactions that are scheduled for settlement, consisting primarily of accrued interest and the translation to the reporting currency of intercompany subordinated debt with scheduled principal payments, are included in the determination of net income, and, for the years ended December 31, 2004 and 2003, the Company recognized unrealized gains of $790 and $130, respectively, from such transactions. In 2004 and 2003, the Company recognized realized gains of $430 and $556, respectively, on foreign currency transactions in connection with the transfer of cash from foreign operating subsidiaries to the parent company. INCOME TAXES The Company has elected to be treated as a partnership for federal income tax purposes. The Company's real estate operations are conducted through partnership or limited liability companies electing to be treated as partnerships for Federal income tax purposes. As partnerships, the Company and its partnership subsidiaries are generally not directly subject to tax and the taxable income or loss of these operations are included in the income tax returns of the members; accordingly, no provision for income tax expense or benefit is reflected in the accompanying financial statements. These operations are subject to certain state, local and foreign taxes. -32- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) The Company conducts its management services operations though a wholly owned taxable corporation. These operations are subject to federal, state, local and foreign taxes as applicable. The Company's financial statements are prepared on a consolidated basis including this taxable subsidiary and include a provision for current and deferred taxes on these operations. Deferred income taxes are provided for the corporate subsidiaries 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). ASSETS HELD FOR SALE Assets held for sale are accounted for at the lower of carrying value or fair value less costs to dispose. Assets are classified as held for sale when the Company has committed to a plan to actively market a property for sale and expects that a sale will be completed within one year. The results of operations and the related gain or loss on sale of properties classified as held for sale are included in discontinued operations (see Note 7). If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used, (b) the fair value at the date of the subsequent decision not to sell, or (c) the current carrying value. 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. 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 per share were calculated as follows:
For the year ended December 31, ---------------------------------- 2004 2003 2002 ---------- ---------- ---------- Net income $ 63,851 $ 62,878 $ 46,588 ========== ========== ========== Weighted average shares - basic 37,417,918 36,566,338 35,530,334 Effect of dilutive securities - stock options and warrants 1,486,807 1,442,424 734,896 ---------- ---------- ---------- Weighted average shares - diluted 38,904,725 38,008,762 36,265,230
RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS 123R"), which requires that the fair value of all stock and other equity-based compensation be treated as an expense that is reflected in the income statement. Depending on the model used to calculate stock-based compensation expense in the future and other requirements of FAS 123R, the pro forma disclosure may not be indicative of the stock-based compensation expense that will be recognized in our future financial statements. FAS 123R is effective for periods beginning after June 15, 2005, and allows two different methods of transition. We expect to implement FAS 123R beginning with the third quarter of fiscal 2005, which begins on July 1, 2005. We are currently evaluating this -33- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) new standard and models that may be used to calculate future stock-based compensation expense. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," ("FAS 148") which amends SFAS No. 123, Accounting for Stock Based Compensation. FAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation (i.e., recognition of a charge for issuance of stock options in the determination of income). However, FAS No. 148 does not permit the use of the original FAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of FAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation, description of transition method utilized and the effect of the method used on reported results. The annual disclosure provisions of FAS No. 148 have been adopted. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity" ("FAS 150"). FAS 150 establishes standards to classify as liabilities certain financial instruments that are mandatorily redeemable or include an obligation to repurchase and expands financial statement disclosure requirements. Such financial instruments will be measured at fair value with changes in fair value included in the determination of net income. FAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3"), which defers the classification and measurement provisions of FAS 150 indefinitely as they apply to mandatorily redeemable non-controlling interests associated with finite-lived entities. We have interests in five joint ventures that are consolidated and have minority interests that have finite lives and were considered mandatorily redeemable non-controlling interests prior to the issuance of FSP 150-3. As a result of the deferral provisions of FSP 150-3, these minority interests have not been reflected as liabilities. We adopted FAS 150 in July 2003 and it did not have a significant impact on our consolidated financial statements. 3. Transactions with Related Parties: The Company earns fees as the advisor ("Advisor") to CPA(R):12, CPA(R):14, CPA(R):15, CPA(R):16-Global and through September 1, 2004, CIP(R). Effective September 1, 2004, CIP(R) was merged into CPA(R):15. 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. The Company earns an asset management fee of 1/2 of 1% per annum of average invested assets, as defined in the advisory agreements, for each CPA(R) REIT and, based upon specific 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. Effective in 2005, the advisory agreement was amended to allow the Company to elect to receive restricted stock for any fee due from each CPA(R) REIT. For the years ended December 31, 2004, 2003 and 2002, asset-based fees and reimbursements earned were $61,193, $53,103 and 37,250, respectively. For the year ended December 31, 2004, CPA(R):16-Global did not meet the preferred return criterion (a non-compounded cumulative distribution return of 6%), as defined in the Advisory Agreements, and therefore, the Company's recognition of performance fees of $819 will only be recorded if the preferred return criterion is met. 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 ranging from three to eight years, subject to each CPA(R) REIT meeting its "preferred return." Unpaid installments bear interest at annual rates ranging from 5% 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 years ended December 31, 2004, 2003 and 2002, the Company earned transaction fees of $33,677, $34,957 and $47,005, respectively. CPA(R):16-Global has not met its preferred return and for year ended December 31, 2004, cumulative deferred acquisition fees of $7,535 and interest thereon of $171, were not recognized, and will be recognized if CPA(R):16-Global meets the preferred return criterion. -34- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) In July 2004, the boards of directors of CIP(R) and CPA(R):15 each approved a definitive agreement under which CPA(R):15 would acquire CIP(R)'s business in a stock-for-stock merger (the "Merger"). The Merger was approved by the shareholders of CIP(R) and CPA(R):15 in August 2004, and completed on September 1, 2004. In connection with providing a liquidity event for CIP(R) shareholders, CIP(R) paid the Company incentive fees of $23,681 and disposition fees of $22,679. Disposition fees relating to the interests in the properties acquired by the Company of $4,265 were not earned and have been applied, for financial reporting purposes, as a reduction in the cost basis of such interests. The Company also recognized transaction fees of $11,493 in connection with CPA(R):15's acquisition of properties in connection with the Merger. Prior to the Merger, the Company acquired interests in 17 properties from CIP(R) with a fair value of $142,161 for $115,158 in cash and the assumption of $27,003 in limited recourse mortgage notes payable, (the "Acquisition"). The amounts are inclusive of the Company's pro rata share of equity interests acquired in the transaction. The fair value of the assumed mortgages was $27,756. The purchase price of the properties was based on a third party valuation of each of CIP(R)'s properties. The properties are primarily single tenant net-leased properties, with remaining lease terms ranging from 19 months to over ten years. Seven of the properties are encumbered with limited recourse mortgage financing with fixed rates of interest ranging from 7.5% to 10% and maturity dates ranging from December 2007 to June 2012. The Company owns interests in entities, which range from 22.50% to 50%, a jointly-controlled 36% tenancy-in-common interest in two properties subject to a net lease with the remaining interests held by affiliates and owns common stock in each of the CPA(R) REITs. The Company has a significant influence in these investments, which are accounted for under the equity method of accounting. The Company is the general partner in a limited partnership that leases the Company's home office spaces and participates in an agreement with certain affiliates, including the CPA(R) REITs 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 $531, $529 and $545 in 2004, 2003 and 2002, respectively. The Company's share of minimum lease payments on the office lease as of December 31, 2004 is $7,137 through 2016. 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. The Company is obligated to pay deferred acquisition fees in equal annual installments over a period of no less than eight years. As of December 31, 2004 and 2003, unpaid deferred acquisition fees were $1,709 and $2,234, respectively, and bear interest at an annual rate of 6%. Installments of $524, were paid in 2004, 2003 and 2002. A person who serves as a director and an officer of the Company is the sole shareholder of Livho, Inc. ("Livho"), a lessee of the Company. Effective December 31, 2003, the Company consolidates the accounts of Livho in its consolidated financial statements in accordance with FIN 46(R). 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. Prior to April 1, 2003, the Company owned a 10% interest in W.P. Carey International LLC ("WPCI"), a company that structures net lease transactions on behalf of the CPA(R) REITs outside of the United States of America. The remaining 90% interest in WPCI was owned by Carey. The Company's Board of Directors approved a transaction, which resulted in the Company's acquisition of 100% of the ownership of WPCI through the redemption of Carey's interest on April 1, 2003. WPCI distributed 492,881 shares of the Company and $1,898 of cash to Carey, equivalent to his contributions to WPCI. The Company accounted for the acquisition as a purchase and reflected the assets acquired and liabilities assumed at their estimated fair value. Prior to the redemption, the Company accounted for its investment in WPCI under the equity method of accounting. As a result of this transaction, the Company through WPCI has acquired exclusive rights to structure net lease transactions outside of the United States of America on behalf of the CPA(R) REITs. The following consolidated pro forma financial information has been presented as if acquisition of interests in 16 properties from CIP(R) by the Company had occurred on January 1, 2004 and 2003 for the years ended December 31, -35- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) 2004 and 2003, respectively. No pro forma effect is given to a property acquired which is currently held for sale and included in discontinued operations. 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.
For the Year Ended December 31, ------------------------------ 2004 2003 -------------- ----------- (Unaudited) (Unaudited) Pro forma total revenues $ 234,870 $ 170,147 Pro forma net income 64,616 64,614 Pro forma earnings per share: Basic $ 1.73 $ 1.77 Diluted $ 1.66 $ 1.70
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:
December 31, -------------------- 2004 2003 -------- -------- Land $ 93,926 $ 77,170 Buildings and improvements 436,353 368,568 -------- -------- 530,279 445,738 Less: Accumulated depreciation 53,914 45,021 -------- -------- $476,365 $400,717 ======== ========
The scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases are as follows:
Year ended December 31, - ----------------------- 2005 $ 49,941 2006 47,513 2007 41,319 2008 35,727 2009 31,298 Thereafter through 2021 104,477
Contingent rentals (including percentage rents and CPI-based increases) were $2,137, $1,427 and $1,550 in 2004, 2003 and 2002, respectively. 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, -------------------- 2004 2003 -------- -------- Minimum lease payments receivable $158,864 $173,120 Unguaranteed residual value 162,724 179,869 -------- -------- 321,588 352,989 Less: Unearned income (130,944) (170,537) -------- -------- $190,644 $182,452 ======== ========
-36- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under noncancelable direct financing leases are as follows:
Year ended December 31, - ----------------------- 2005 $ 21,822 2006 20,381 2007 18,510 2008 16,636 2009 15,873 Thereafter through 2022 65,642
Contingent rentals (including percentage rents and CPI-based increases) were approximately $2,382, $2,189 and $2,710 in 2004, 2003 and 2002, respectively. 6. Equity Investments: The Company owns equity interests as a limited partner in two limited partnerships, four limited liability companies and a jointly-controlled 36% tenancy-in-common interest in two properties subject to a master lease with the remaining interests owned by affiliates and all of which net lease real estate on a single-tenant basis. In connection with the Acquisition, the Company increased its 18.54% interest in a limited partnership, which leases property to Titan Corporation, to 100%. The Company accounted for its 18.54% interest as an equity investment, and as a result of acquiring the controlling ownership interest as of September 1, 2004, the Company consolidates this interest as of such date. The Company also acquired CIP(R)'s 50% noncontrolling interest in a limited partnership, which leases property to Sicor, Inc., and is accounting for this interest under the equity method of accounting. The Company also owns common stock in four CPA(R) REITs with which it has advisory agreements. 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 CPA(R) REITs. The CPA(R) REITs are publicly registered and their audited consolidated financial statements are filed with the SEC in Annual Reports on Form 10-K. In connection with earning performance fees, the Company has elected to receive restricted shares of common stock in the CPA(R) REITs rather than cash in consideration for such fees. In connection with the Merger, the Company elected to receive 1,098,367 shares of common stock in CPA(R):15, in exchange for its CIP(R) shares, a portion of which are still restricted. As of December 31, 2004, the Company's ownership in the CPA(R) REITs is as follows:
% of outstanding Shares Shares --------- ---------------- CPA(R):12 1,242,519 3.91% CPA(R):14 2,465,236 3.57% CPA(R):15 2,129,361 1.69% CPA(R):16-Global 20,000 0.04%
Combined financial information of the affiliated equity investees is summarized as follows:
December 31, ------------ 2004 2003 ---------- ---------- Assets (primarily real estate) $5,189,736 $3,535,954 Liabilities (primarily mortgage notes payable) 2,372,468 1,719,459 ---------- ---------- Owner's equity $2,817,268 $1,816,495 ========== ========== Company's share of equity investees' net assets $ 110,379 $ 82,800 ========== ==========
-37- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts)
Year Ended December 31, ----------------------- 2004 2003 2002 -------- -------- -------- Revenue (primarily rental income and interest income from direct financing leases) $349,023 $263,719 $175,031 Expenses (primarily depreciation and property expenses) (145,194) (141,964) (68,237) Other interest income 7,927 6,204 4,832 Minority interest in income (12,986) (5,720) (3,286) Income from equity investments 38,439 30,650 12,354 Interest expense (130,302) (95,128) (65,136) Gain (loss) on sales 7,464 9,316 (92) -------- ------- -------- Income from continuing operations 114,371 67,077 55,466 (Loss) income from discontinued operations (483) (114) 1,753 Gain on sale of real estate 2,232 - 333 Impairment charge on real estate (5,150) (1,000) - -------- -------- -------- Net income $110,970 $ 65,963 $ 57,552 ======== ======== ======== Company's share of net income (loss) from equity investments $ 5,308 $ 4,008 $ (443) ======== ======== ========
Until January 1, 2003, the Company owned interests in the operating partnership ("OP units") of MeriStar Hospitality Corporation ("MeriStar"), a publicly traded real estate investment trust accounted as an equity investment. Effective January 1, 2003, the OP units were converted to shares of MeriStar common stock at which time the Company started accounting for its interest as an available-for-sale security. For the year ended December 31, 2002, MeriStar reported revenues of $865,693 expenses of $799,278 and a net loss of $161,248. The Company's share of the loss for 2002 was $3,019. 7. Assets Held for Sale and Discontinued Operations: In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), effective for financial statements issued for fiscal years beginning after December 15, 2001, the results of operations, impairments and gain or loss on sales of real estate for properties sold or held for sale are to be reflected in the consolidated statements of operations as "Discontinued Operations" for all periods presented. The provisions of FAS 144 are effective for disposal activities initiated by the Company's commitment to a plan of disposition after the date it is initially applied (January 1, 2002). Properties held for sale as of December 31, 2001 are not included in "Discontinued Operations". The results of operations and the related gain or loss on sale of properties sold in 2002 (see Note 14) that were held for sale as of December 31, 2001 are not included in "Discontinued Operations." Property sales and impairment charges in 2004, 2003 and 2002 that are included in "Discontinued Operations" are as follows: 2004 In July 2004, the Company sold its Leeds, Alabama and Toledo, Ohio properties for $4,625. The Company previously recognized an impairment charge on properties held for sale of $690 in 2003 to write down the Leeds property to the estimated net sales proceeds from the anticipated sale. The $4,700 impairment charge recorded in 2004 on the Toledo property is described in Note 13. The results of operations from the Leeds and Toledo properties are included in discontinued operations. In December 2004, the Company entered into an agreement with an auctioneer to sell its Frankenmuth, Michigan property, at auction. In March 2005, the Company sold this property to a third party for $1,700. The Company recognized an impairment charge of $1,000 to write down the property value to the estimated net sales proceeds anticipated from the sale (see Note 13). The property has been classified as held for sale as of December 31, 2004, and the results of its operations have been included in discontinued operations. During 2004, the Company sold properties in Kenbridge, Virginia; McMinnville, Tennessee; Panama City, Florida and Garland, Texas for $2,256 and recognized net gain on sales of $85. -38- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) 2003 During 2003, the Company sold properties in Broomall, Pennsylvania; Cuyahoga Falls, Ohio; Canton, Michigan; Alpena, Michigan; Apache Junction, Arizona and Schiller Park, Illinois for net sales proceeds of $12,986 and recognized net gain on sales of $807. In July 2003, the Company sold a property in Lancaster, Pennsylvania for $5,000 and recognized a loss on sale of $29. Prior to the sale, the property value was written down to reflect the estimated net sales proceeds and an impairment charge on properties held for sale of $1,430 was recognized and included in discontinued operations for the year ended December 31, 2003. In connection with the anticipated sale of the Company's McMinnville, Tennessee property the Company recognized an impairment charge on properties held for sale of $550 on the writedown of the property to its anticipated sales price, less estimated costs to sell, for the period ended December 31, 2003. The property was sold in July 2004. The Company incurred other charges of $690 during 2003 in connection with a property's decline in value and a $290 charge related to the early retirement of a mortgage obligation. 2002 In July 2002, the Company sold six properties leased to Saint-Gobain Corporation located in New Haven, Connecticut; Mickelton, NJ; Aurora, Ohio; Mantua, Ohio and Bristol, Rhode Island for $26,000 and recognized a gain on sale of $1,796. The sales proceeds were placed in an escrow account for the purposes of entering into a Section 1031 noncash exchange, which was completed as a result of purchasing replacement properties in September and December 2002. During 2002, the Company also sold properties in Petoskey, Michigan; Colville, Washington; McMinnville, Tennessee; College Station, Texas and Glendale, Arizona for an aggregate of $4,743 and recognized a net gain on sales of $568. Other Information: The effect of suspending depreciation expense as a result of the classification of certain properties as held for sale was $381, $259 and $116 for the years ended December 31, 2004, 2003 and 2002, respectively. As of December 31, 2004, the operations of ten properties, which have been sold during 2004 or are held for sale as of December 31, 2004, are included as "Discontinued Operations." Amounts reflected in Discontinued Operations for the years ended December 31, 2004, 2003 and 2002 are as follows:
Year Ended December 31, ------------------------------- 2004 2003 2002 ------- ------- ------- REVENUES: Rental income $ 1,248 $ 3,240 $ 6,070 Interest income from direct financing leases 42 665 3,705 Revenues of other business operations - 1,694 4,769 Other income 2,767 915 2,250 ------- ------- ------- 4,057 6,514 16,794 ------- ------- ------- EXPENSES: Depreciation and amortization 200 751 1,552 Property expenses 1,559 2,634 1,192 General and administrative - - 48 Provision for income taxes - state and local - 35 117 Operating expenses of other business operations 35 1,489 4,209 Impairment charge on real estate 7,550 2,960 8,901 ------- ------- ------- 9,344 7,869 16,019 ------- ------- ------- (Loss) income before other interest income, gains on sale and interest expense (5,287) (1,355) 775 Other interest income - 567 89
-39- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) Gains on sale of real estate 90 1,238 2,694 Interest expense - (134) (1,108) ------- ------- -------- (Loss) income from discontinued operations $(5,197) $ 316 $ 2,450 ======= ======= ========
In March 2005, the Company sold its Denton, Texas property for $2,000 which approximated the property's carrying value. The Property had been classified as held for sale as of December 31, 2004 in the accompanying financial statements. 8. Goodwill and Intangibles: In connection with its acquisition of properties, the Company has recorded above-market rent, in-place lease and tenant relationship intangibles of $22,321. Included in other liabilities allocated to the purchase cost of the Acquisition is a below-market rent intangible of $2,009. These intangibles are being amortized over periods ranging from 19 months to 27 1/2 years. Amortization of below-market and above-market rent intangibles are recorded as an adjustment to revenue. 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 costs allocated to trade names and advisory contracts with the CPA(R) REITs. Effective January 1, 2002, goodwill and indefinite-lived intangible assets are no longer amortized and workforce has been reclassified as goodwill. Intangibles are being amortized over their estimated useful lives, which range from 2 1/2 to 16 1/2 years. The Company performs an annual evaluation of testing for impairment of goodwill. Based on its evaluation, the Company concluded that its goodwill is not impaired. Goodwill and intangibles are summarized as follows:
DECEMBER 31, ------------------------- 2004 2003 ---------- ----------- Amortized intangibles: Management contracts $ 59,815 $ 59,815 Less: accumulated amortization (34,089) (25,262) ---------- ----------- 25,726 34,553 ---------- ----------- Lease intangibles In-place lease 13,630 - Tenant relationship 4,863 - Above-market rent 3,828 - Less: accumulated amortization (1,521) - ---------- ----------- 20,800 - ---------- ----------- Unamortized goodwill and indefinite-lived intangibles: Trade name 3,975 3,975 Goodwill 63,607 63,607 ---------- ----------- $ 114,108 $ 102,135 ========== =========== Below-market rent $ (2,009) $ - Less: accumulated amortization 45 - ---------- ----------- $ (1,964) $ - ========== ===========
Amortization of intangibles was $10,304, $7,277 and $9,194 for the years ended December 31, 2004, 2003 and 2002, respectively. The remaining unamortized management contract for CIP(R) was accelerated to expense as a result of the Merger. Scheduled net amortization of intangibles for each of the next five years is as follows: $9,648 in 2005, $9,406 in 2006, $7,295 in 2007, $4,211 in 2008 and $4,184 in 2009. -40- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) 9. Disclosures About Fair Value of Financial Instruments: The Company estimates that the fair value of mortgage notes payable and other notes payable was $294,121 and $210,000 at December 31, 2004 and 2003, respectively. The fair value of fixed rate debt instruments was evaluated using a discounted cash flow model with rates that take into account the credit of the tenants and interest rate risk. The carrying value of the combined debt was $292,698 and $209,193 at December 31, 2004 and 2003, respectively. 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. Marketable securities had a carrying value of $3,655 and $3,660 as of December 31,2004 and 2003, respectively, and a fair value of $6,940 and $5,479 as of December 31,2004 and 2003, respectively. The Company's other assets and liabilities, including minority interests, had fair values that approximated their carrying values at December 31, 2004 and 2003, respectively. 10. 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 $313,689 at December 31, 2004. The interest rates on the variable rate debt as of December 31, 2004 ranged from 3.5375% to 6.44% and mature from 2007 to 2016. The interest rates on the fixed rate debt as of December 31, 2004 ranged from 6.11% to 10.125%, and mature from 2005 to 2018. Scheduled principal payments for the mortgage notes and notes payable during each of the next five years following December 31, 2004 and thereafter are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt - ---------------------------- ---------- --------------- ------------------ 2005 $ 14,355 $ 11,885 $ 2,470 2006 23,926 21,159 2,767 2007 128,587 23,526 105,061(a) 2008 11,507 8,128 3,379 2009 38,622 35,045 3,577 Thereafter through 2018 75,701 36,659 39,042 ---------- --------------- ------------------ Total $ 292,698 $ 136,402 $ 156,296 ========== =============== ==================
(a) Includes maturity of credit facility in May 2007. On May 27, 2004, the Company entered into a credit facility for a $175,000 line of credit with J.P. Morgan Chase Bank and eight other banks. A prior line of credit of $185,000 matured in March 2004 and was extended on a short-term basis. The line of credit, which matures in May 2007, provides the Company a one-time right to increase the amount available under the line of credit up to $225,000. Advances from the line of credit bear interest at an annual rate indexed to either (i) the one, two, three or six-month London Inter-Bank Offered Rate, 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 a rate indexed to the Federal Funds Effective Rate. Advances are prepayable at any time. The revolving credit agreement has financial covenants that require, among other things, the Company to (i) maintain minimum equity value of $550,000 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. The Company is in compliance with these covenants. As of December 31, 2004, the Company had $102,000 drawn from the credit facility. At December 31, 2004 the average interest rate on advances on the line of credit was 3.5375%. At December 31, 2003 the average interest rate on advances on the prior line of credit was 2.34%. In addition, the Company pays 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. -41- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) 11. Dividends Payable: The Company declared a quarterly dividend of $.442 per share on December 13, 2004 payable on January 15, 2005 to shareholders of record as of December 31, 2004. 12. Commitments and Contingencies: As of December 31, 2004, the Company was not involved in any material litigation. In March 2004, following a broker-dealer examination of Carey Financial Corporation ("Carey Financial"), the Company's wholly-owned broker-dealer subsidiary, by the staff of the SEC, Carey Financial received a letter from the staff of the SEC alleging certain infractions by Carey Financial of the Securities Act of 1933, the Securities Exchange Act of 1934, the rules and regulations thereunder and those of the National Association of Securities Dealers, Inc. ("NASD"). The staff alleged that in connection with a public offering of shares of CPA(R):15, Carey Financial and its retail distributors sold certain securities without an effective registration statement. Specifically, the staff alleged that the delivery of investor funds into escrow after completion of the first phase of the offering (the "Phase I Offering"), completed in the fourth quarter of 2002 but before a registration statement with respect to the second phase of the offering (the "Phase II Offering") became effective in the first quarter of 2003, constituted sales of securities in violation of Section 5 of the Securities Act of 1933. In addition, in the March 2004 letter the staff raised issues about whether actions taken in connection with the Phase II offering were adequately disclosed to investors in the Phase I Offering. In the event the Commission pursues these allegations, or if affected CPA(R):15 investors bring a similar private action, CPA(R):15 might be required to offer the affected investors the opportunity to receive a return of their investment. It cannot be determined at this time if, as a consequence of investor funds being returned by CPA(R):15, Carey Financial would be required to return to CPA(R):15 the commissions paid by CPA(R):15 on purchases actually rescinded. Further, as part of any action against the Company, the SEC could seek disgorgement of any such commissions or different or additional penalties or relief, including without limitation, injunctive relief and/or civil monetary penalties, irrespective of the outcome of any rescission offer. The Company cannot predict the potential effect such a rescission offer or SEC action may ultimately have on the operations of Carey Financial or the Company. There can be no assurance that the effect, if any, would not be material. The staff also alleged in the March 2004 letter that the prospectus delivered with respect to the Phase I Offering contained material misrepresentations and omissions in violation of Section 17 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that the prospectus failed to disclose that (i) the proceeds of the Phase I Offering would be used to advance commissions and expenses payable with respect to the Phase II Offering, and (ii) the payment of dividends to Phase II shareholders whose funds had been held in escrow pending effectiveness of the registration statement resulted in significantly higher annualized rates of return than were being earned by Phase I shareholders. Carey Financial has reimbursed CPA(R):15 for the interest cost of advancing the commissions that were later recovered by CPA(R):15 from the Phase II Offering proceeds. In June 2004, the Division of Enforcement of the SEC (" Enforcement Staff") commenced an investigation into compliance with the registration requirements of the Securities Act of 1933 in connection with the public offerings of shares of CPA(R):15 during 2002 and 2003. In December 2004, the scope of the Enforcement Staff's inquiries broadened to include broker-dealer compensation arrangements in connection with CPA(R):15 and other REITs managed by the Company, as well as the disclosure of such arrangements. At that time the Company and Carey Financial received a subpoena from the Enforcement Staff seeking documents relating to payments by the Company, Carey Financial, and REITs managed by the Company to (or requests for payment received from) any broker-dealer, excluding selling commissions and selected dealer fees. The Company and Carey Financial subsequently received additional subpoenas and requests for information from the Enforcement Staff seeking, among other things, information relating to any revenue sharing agreements or payments (defined to include any payment to a broker-dealer, excluding selling commissions and selected dealer fees) made by the Company, Carey Financial or any Company-managed REIT in connection with the distribution of Company-managed REITs or the retention or maintenance of REIT assets. Other information sought by the SEC includes information concerning the accounting treatment and disclosure of any such payments, communications with third parties (including other REIT issuers) concerning revenue sharing, and documents concerning the calculation of underwriting compensation in connection with the REIT offerings under applicable NASD rules. -42- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) In response to the Enforcement Staff's subpoenas and requests, the Company and Carey Financial have produced documents relating to payments made to certain broker-dealers both during and after the offering process, for certain of the REITs managed by the Company (including Corporate Property Associates 10 Incorporated, CIP(R), CPA(R):12, CPA(R):14, and CPA(R):15), in addition to selling commissions and selected dealer fees. The expenses associated with these payments, which were made during the period from early 2000 through the end of 2003, were borne by the REITs. The Company is continuing to gather information relating to these types of payments made to broker-dealers and supply it to the SEC. The Company and Carey Financial are cooperating fully with this investigation and are in the process of providing information to the Enforcement Staff in response to the subpoenas and requests. Although no regulatory action has been initiated against the Company or Carey Financial in connection with the matters being investigated, it is possible that the SEC may pursue an action against either of them in the future. The potential timing of any such action and the nature of the relief or remedies the SEC may seek cannot be predicted at this time. If such an action is brought, it could have a material adverse effect on the Company. 13. Impairment Charges and Loan Losses: The Company incurred impairment charges of $22,098, $4,440 and $29,411 for the years ended December 31, 2004, 2003 and 2002, respectively, of which $7,550, $2,960 and $8,901 are included in Discontinued Operations for each respective year. 2004 In connection with the Company's annual review of the estimated residual values on its properties classified as net investments in direct financing leases, the Company determined that an other than temporary decline in estimated residual value had occurred at several properties due to market conditions, and the accounting for the direct financing leases was revised using the changed estimates. The resulting changes in estimates resulted in the recognition of impairment charges of $5,248 in 2004. The Company owns a property that is leased to Livho, Inc. ("Livho"), which operates the property as a Holiday Inn hotel in Livonia, Michigan. The Company has provided Livho with significant financial support over the past several years in order to support the hotel's operations. The Livonia hotel's financial performance has continued to perform below projections even after certain additional investments in the property were placed in service. The Company performed an impairment valuation of the Livonia property and has determined that the value of the Livonia property has undergone an other than temporary decline in value, and accordingly, has recognized an impairment charge of $7,500 for 2004. In February 2003, the Company sold its property in Winona, Minnesota to the lessee, Peerless Chain Company ("Peerless") for $8,550, consisting of cash of $6,300 and notes receivable with a fair value of $2,250, and recognized a gain on sale of $46. The Company also received a note receivable from Peerless of approximately $1,700 for unpaid rents which was previously included in the allowance for uncollected rents. The Company previously recognized an impairment charge of $4,000, in 2002, on the Peerless property, which was classified as held for sale in 2002. During 2004, installment payments due under the notes were not paid, however, the Company received a $1,000 settlement payment from the former lessee and has determined that the remaining amounts will not be recovered. The remaining balance on the notes of $1,250 has been written off as a loan loss. As a result of entering into a commitment to sell a property in Toledo, Ohio in June 2004, recognized an impairment charge on properties held for sale of $4,700, which is included in discontinued operations. The charge was based on the property's sales price, less estimated costs to sell. The property was sold in July 2004 for $4,175 and a gain on sale of $6 was recognized. The Company recognized impairment charges on other properties classified as held for sale as of December 31, 2004, or sold during 2004, of $2,850, which are included in discontinued operations, and an impairment charge of $550 on real estate held for use. -43- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) 2003 In addition to impairment charges totaling $1,208 related to the Company's annual review of the estimated residual values on its properties classified as net investments in direct financing leases, the Company recognized an impairment charge of $272 on its assessment of the recoverability of debentures received in connection with a bankruptcy settlement with a former lessee. The company recognized impairment charges on other properties held for sale as of December 31, 2003, or sold during 2003, of $2,960, which are included in discontinued operations. The impairments are discussed further in Note 7. 2002 The Company recorded impairment charges totaling $14,880 related to its annual review of the estimated residual values on its properties classified as net investments in direct financing leases. Prior to the Company converting its 708,269 units of the operating partnership ("OP units") of MeriStar Hospitality Corporation ("MeriStar"), a publicly traded real estate investment trust which primarily owns hotels, to 708,269 shares of common stock in 2003, the Company accounted for its investment as an available for sale marketable security. Because of a continued and prolonged weakness in the hospitality industry, and a substantial decrease in MeriStar's earnings, the Company concluded that the underlying value of its investment in the OP Units had undergone an other than temporary decline. Accordingly, the Company wrote down its equity investment in MeriStar by $4,596 in 2002, to reflect the investment at its estimated fair value. The Company recognized impairment charges of $4,900 on other properties, which were sold in either 2002 or 2003 or held for sale as of December 31, 2002. 14. Sales of Real Estate: The results of operations and the related gain or loss on properties, which were not held for sale as of December 31, 2001 and sold in 2004, 2003 and 2002, are included in "Discontinued Operations." (see Note 7) 2003 In December 2003, the Company sold a property in Oxnard, California for $7,500, and recognized a gain of $414. The Company placed proceeds of the sale in an escrow account with the intention of entering into a Section 1031 noncash exchange which, under the Internal Revenue Code, would allow the Company to acquire like-kind property, and defer a taxable gain until the new property is sold, upon satisfaction of certain conditions. During 2004, $7,185 was released from the escrow account, when an exchange was not completed. 2002 At December 31, 2001, the Company's 18.3 acre property in Los Angeles, California was classified as held for sale. In June 2002, the Company sold the property to the Los Angeles Unified School District (the "School District") for $24,000, less costs, and recognized a gain on sale of $11,160. Subsequent to the sale of the property, a subsidiary of the Company entered into a build-to-suit development management agreement with the School District with respect to the development and construction of a new high school on the property. The subsidiary, in turn, engaged a general contractor to undertake the construction project. Under the build-to-suit agreement, the subsidiary's role is that of a development manager pursuant to provisions of the California Education Code. Under the construction agreement with the general contractor, a subsidiary is acting as a conduit for the payments made by School District and is only obligated to make payments to the general contractor based on payments received, except for a maximum guarantee of up to $2,000 for nonpayment. The guarantee ends upon completion of construction. Due to the Company's continuing involvement with the development management agreement of the property, the recognition of gain on sale and the subsequent development management fee income on the build-to-suit project are being recognized using a blended profit margin under the percentage of completion method of accounting. The build-to-suit development agreement provides for fees of up to $4,700 and an early completion incentive fee of $2,000 if the -44- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) project is completed before September 1, 2004. Incentive fees, which are contingent, are not included in the percentage of completion calculation. In addition, approximately $2,000 of the gain on sale has been deferred and will be recognized only when the Company is released from its $2,000 guarantee commitment. The Company and the School District are currently preparing for an arbitration proceeding relating to certain disagreements regarding the costs of the project and whether the Company is entitled to reimbursement for incurring these costs. The recognition of income on the project is being recognized using a blended profit margin under the percentage of completion method of accounting. Due to its disputes with the District and a change in estimate of profit on the development project, the Company has recognized a loss in development income of $1,303 and income of $1,298, for the years ended December 31, 2004 and 2003, respectively. During 2002, the Company also sold properties in Fredericksburg, Virginia; Urbana, Illinois; Maumelle, Arkansas; Burnsville, Minnesota; and Casa Grande for an aggregate of $10,238 and recognized a net gain on sales of $1,151. 15. Stock Options, Restricted Stock and Warrants: In January 1998, the predecessor of Carey Management (see Note 2) 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 of 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. Both plans were approved by a vote of the shareholders. 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. Share options have been granted as follows: 513,171 in 2004 at exercise prices ranging from $22.59 to $35.16, 122,000 in 2003 at exercise prices ranging from $25.01 to $31.79 per share and 877,337 in 2002 at exercise prices ranging from $22.73 to $24.01 per share. The options granted under the Incentive Plan have a 10-year term and vest over periods ranging from three to ten years from the date of grant. The vesting of grants is accelerated upon a change in control of the Company and under certain other conditions. The Directors' Plan provides for similar terms as the Incentive Plan. Options granted under the Directors' Plan have a 10-year term and vest over three years from the date of grant. During 2004, 12,000 share options were granted at exercise prices ranging from $24.50 to $30.25 per share. No share options were granted in 2003 and 2002. Share option and warrant activity for the Company's Incentive Plan and Directors' Plan is as follows:
Year Ended December 31, --------------------------- 2004 2003 2002 --------------------------- --------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- -------------- --------- -------------- ---------- -------------- Outstanding at beginning of year 4,812,902 $ 20.95 4,979,862 $ 20.26 4,320,815 $ 19.88 Granted 525,171 $ 29.68 122,000 $ 26.24 877,337 $ 23.03 Exercised (146,121) $ 21.09 (251,113) $ 14.29 (192,617) $ 12.69 Forfeited (26,335) $ 24.18 (37,847) $ 19.14 (25,673) $ 19.17 --------- --------- ---------- Outstanding at end of year 5,165,617 $ 22.05 4,812,902 $ 21.20 4,979,862 $ 20.26 ========= ========= ========== Options exercisable at end of year 4,287,999 $ 20.97 4,108,073 $ 20.95 3,611,115 $ 20.31 ========= ========= ==========
-45- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) Stock options outstanding for the Company's Incentive Plan and Directors' Plan as of December 31, 2004 are as follows:
Options Outstanding ------------------- Options Exercisable Weighted ------------------- Options Average Weighted Options Weighted Range of Outstanding at Remaining Average Exercisable at Average Exercise Prices December 31, 2004 Contractual Life Exercise Price December 31, 2004 Exercise Price - ----------------- ----------------- ---------------- -------------- ----------------- -------------- $ 7.69 39,946 5.50 $ 7.69 39,946 $ 7.69 $ 16.25 to $35.16 5,125,671 5.40 $ 22.16 4,248,053 $ 21.09 --------- --------- 5,165,617 5.41 $ 22.05 4,287,999 $ 20.97 ========= =========
At December 31, 2003 and 2002, the range of exercise prices and weighted-average remaining contractual life of outstanding share options and warrants was $7.69 to $31.79 and 6.03 years, and $7.69 to $24.01 and 6.9 years, respectively. On June 30, 2003, WPCI granted an incentive award to certain officers of WPCI consisting of 1,500,000 restricted shares, representing an approximate 13% interest in WPCI, and 1,500,000 options for WPCI common stock with a combined fair value of $2,485 at that date. Both the options and restricted stock were issued in 2003 and are vesting ratably over five years. The options are exercisable at $1 per share for a period of ten years from the initial vesting date. The vested restricted stock and stock received upon the exercise of options of WPCI by minority interest holders may be redeemed commencing in 2012 or thereafter solely in exchange for shares of the Company. Any redemption will be subject to a third party valuation of WPCI. The fair value of the awards has been recorded as minority interest and included in other liabilities in the accompanying consolidated financial statements. The awards were also initially recorded in unearned compensation as a component of shareholders' equity. The awards are being accounted for as a variable plan in accordance with APB No. 25 because the number of Company shares to be issued upon a redemption will not be known until a redemption occurs. Subsequent changes in the fair value of the minority interest subsequent to the grant date are included in the determination of net income based on the vesting period and valued quarterly. As a result of an increase in fair value, $2,155 was incurred as compensation expense for the year ended December 31, 2004. The combined estimated fair value of the options and restricted stock as of December 31, 2004 and 2003 is $5,691 and $1,615, respectively. The unearned compensation is being amortized over the vesting periods and $1,094 and $577 and has been amortized into compensation expense for the years ended December 31, 2004 and 2003, respectively. The per share fair value of the 1,500,000 share options granted by WPCI during 2003 was estimated to be $1.593 using a Black-Scholes option pricing formula. The more significant assumptions underlying the determination of the average fair value included a risk-free interest rate of 4.42% and an expected life of 11 years. 16. Employee Incentive and Benefit Plans Compensation: During 2003, the Company adopted a non-qualified deferred compensation plan under which a portion of any participating officer's cash compensation in excess of designated amounts will be deferred and the officer will be awarded a Partnership Equity Plan Unit ("PEP Unit"). The value of each PEP Unit is intended to correspond to the value of a share of the CPA(R) REIT designated at the time of such award. Redemption will occur at the earlier of a liquidity event of the underlying CPA(R) REIT or twelve years from the date of award. The award is fully vested upon grant, and the Company may terminate the plan at any time. The value of each PEP Unit will be adjusted to reflect the underlying appraised value of the CPA(R) REIT. Additionally, each PEP Unit will be entitled to a distribution equal to the distribution rate of the CPA(R) REIT. All issuances of PEP Units, changes in the fair value of PEP Units and distributions paid are included in compensation expense of the Company. Compensation expense under this plan for the years ended December 31, 2004 and 2003 was $2,826 and $2,028, respectively. 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 compensation, limited to $31 annually per participant. For the years ended December 31, 2004, 2003 and -46- W.P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS(Continued) (In thousands except share and per share amounts) 2002, amounts expensed by the Company for contributions to the trust were $1,988, $1,926 and $1,677, respectively. Annual contributions represent an amount equivalent to 15% of each eligible participant's compensation for that period. 17. Income Taxes: The components of the Company's provision for income taxes for the years ended December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002 ---------- ---------- ---------- Federal: Current $ 26,330 $ 5,694 $ 2,436 Deferred 7,497 5,749 8,756 ---------- ---------- ---------- 33,827 11,443 11,192 ---------- ---------- ---------- State, local and foreign: Current 15,827 3,944 2,492 Deferred 3,320 3,729 4,399 ---------- ---------- ---------- 19,147 7,673 6,891 ---------- ---------- ---------- Total provision $ 52,974 $ 19,116 $ 18,083 ========== ========== ==========
Deferred income taxes as of December 31, 2004 and 2003 consist of the following:
2004 2003 ---------- ---------- Deferred tax assets: Unearned and deferred compensation $ 3,436 $ 2,063 Other liabilities - 1,121 ---------- ---------- 3,436 3,184 ---------- ---------- Deferred tax liabilities: Receivables from affiliates 22,939 19,067 Investments 18,974 12,894 Other 1,872 755 ---------- ---------- 43,785 32,716 ---------- ---------- Net deferred tax liability $ 40,349 $ 29,532 ========== ==========
The difference between the tax provision and the tax benefit recorded at the statutory rate at December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002 ---------- ---------- ---------- Pre-tax income from taxable subsidiaries $ 98,707 $ 41,820 $ 35,296 Federal provision at statutory tax rate (35%) 34,547 14,219 12,001 State and local taxes, net of federal benefit 11,695 3,950 3,617 Amortization of intangible assets 2,210 1,625 1,886 Other 3,215 (2,225) (517) ---------- ---------- ---------- Tax provision - taxable subsidiaries 51,667 17,569 16,987 Other state, local and foreign taxes 1,307 1,547 1,096 ---------- ---------- ---------- Total tax provision $ 52,974 $ 19,116 $ 18,083 ========== ========== ==========
-47- W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) 18. Segment Reporting: The Company evaluates its results from operations by major business segment as follows: REAL ESTATE OPERATIONS. This business segment includes the operations of properties under operating lease, properties under direct financing leases, real estate under construction and development, assets held for sale and equity investments in ventures accounted for under the equity method which are engaged in these activities. Because of the Company's and its subsidiaries legal structure, these operations are not generally subject to federal income taxes however, they may be subject to certain state, local and foreign taxes. MANAGEMENT SERVICES OPERATIONS. This business segment includes management operations on a fee for services basis predominately from the CPA(R) REITs pursuant to the Advisory Agreements and to a lesser extent from third parties. This business line also includes interest on deferred fees and earnings from unconsolidated investments in the CPA(R) REITs accounted for under the equity method which were received in-lieu of cash for certain fees. These operations are performed in corporate subsidiaries and are subject to federal, state, local and foreign taxes as applicable. The Company's financial statements are prepared on a consolidated basis including these taxable operations and include a provision for current and deferred taxes on these operations. A summary of comparative results of these business segments is as follows:
Year Ended: Management Real Estate Other (1) Total Company ---------- ----------- --------- ------------- Revenues: 2004 $ 148,457 $ 73,592 $ 5,725 $ 227,774 2003 88,060 68,080 3,098 159,238 2002 84,255 65,335 2,814 152,404 Operating expenses: 2004 $ (56,790) $ (27,101) $(15,181) $ (99,072) 2003 (48,925) (18,701) (1,209) (68,835) 2002 (48,708) (37,460) (1,854) (88,022) Interest expense: 2004 $ (35) $ (14,803) $ - $ (14,838) 2003 - (14,982) - (14,982) 2002 - (15,893) - (15,893) Other, net (2): 2004 $ 3,490 $ 4,668 $ - $ 8,158 2003 2,980 3,277 - 6,257 2002 1,550 12,182 - 13,732 Provision for income taxes: 2004 $ (51,537) $ (1,437) $ - $ (52,974) 2003 (17,715) (1,401) - (19,116) 2002 (16,587) (1,496) - (18,083) Income (loss) from continuing operations: 2004 $ 43,585 $ 34,919 $(9,456) $ 69,048 2003 24,400 36,273 1,889 62,562 2002 20,510 22,668 960 44,138 Total assets as of: December 31, 2004 $ 237,889 $ 766,184 $ 9,466 $ 1,013,539 December 31, 2003 200,674 688,848 16,983 906,505 Total long-lived assets as of: December 31, 2004 $ 83,018 $ 740,895 $ 9,140 $ 833,053 December 31, 2003 75,433 629,767 16,147 721,347
- 48 - W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) (1) Primarily consists of the Company's other business operations, which includes its hotel operations and the School District build-to-suit development project. The results of operations for the period ended December 31, 2004 include a loss in development income related to the build-to-suit project of $1,303. (2) Includes interest income, minority interest, income from equity investments and gains and losses on sales and foreign currency transactions. For 2004, geographic information for the real estate operations segment is as follows:
Domestic International (1) Total Real Estate -------- ----------------- ----------------- Revenues $ 65,910 $ 7,682 $ 73,592 Operating expenses (24,117) (2,984) (27,101) Interest expense (11,458) (3,345) (14,803) Other, net (2) 2,545 2,123 4,668 Provision for income taxes (806) (631) (1,437) Income from continuing operations 32,076 2,843 34,919 Total assets 696,378 69,806 766,184 Total long-lived assets 676,192 64,703 740,895
For 2003, geographic information for the real estate operations segment is as follows:
Domestic International (1) Total Real Estate -------- ----------------- ----------------- Revenues $ 61,678 $ 6,402 $ 68,080 Operating expenses (16,108) (2,593) (18,701) Interest expense (11,569) (3,413) (14,982) Other, net (2) 2,608 669 3,277 Provision for income taxes (893) (508) (1,401) Income from continuing operations 35,716 557 36,273 Total assets 619,367 69,481 688,848 Total long-lived assets 568,407 61,360 629,767
For 2002, geographic information for the real estate operations segment is as follows:
Domestic International (1) Total Real Estate -------- ---------------- ----------------- Revenues $ 60,037 $ 5,298 $ 65,335 Operating expenses (35,625) (1,835) (37,460) Interest expense (12,880) (3,013) (15,893) Other, net (2) 11,335 847 12,182 Provision for income taxes (1,066) (430) (1,496) Income from continuing operations 21,801 867 22,668
(1) The company's international operations consist of investments in France. (2) Includes interest income, minority interest, income from equity investments and gains and losses on sales and foreign currency transactions. - 49 - W. P. CAREY & CO. LLC NOTES to CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands except share and per share amounts) 19. Selected Quarterly Financial Data (unaudited):
Three Months Ended ----------------------------------- March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004 -------------- ------------- ------------------ ----------------- Revenues (2) $ 36,973 $ 53,359 $ 99,179 $ 38,263 Expenses (2) 20,878 22,555 30,689 24,950 Net income 11,092 15,480 35,154 2,125 Earnings per share - Basic .30 .41 .94 .06 Diluted .29 .40 .90 .05 Dividends declared per share .4360 .4380 .4400 .4420
Three Months Ended ----------------------------------- March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003 -------------- ------------- ------------------ ----------------- Revenues (1)(2) $ 44,869 $ 34,944 $ 43,055 $ 36,370 Expenses (1)(2) 18,962 16,065 17,848 15,960 Net income 17,273 12,974 14,047 18,584 Earnings per share - Basic .48 .35 .38 .51 Diluted .46 .34 .37 .48 Dividends declared per share .4320 .4330 .4340 .4350
(1) 2003 amounts have been reclassified to conform to the current year presentation of excluding interest income and interest expense from the revenues and expenses line items above, respectively. (2) Certain amounts from previous quarters have been reclassified to discontinued operations (see Note 7). -50- MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Listed Shares are listed on the New York Stock Exchange. As of December 31, 2004 there were 29,645 holders of record of the Shares of the Company. 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 declared per share in 2004 and 2003 are as follows: Cash Dividends Declared Per Share
2004 2003 -------- --------- First quarter $ .4360 $ .4320 Second quarter .4380 .4330 Third quarter .4400 .4340 Fourth quarter .4420 .4350 -------- --------- Total: $ 1.7560 $ 1.7340 ======== =========
Listed Shares The high, low and closing prices on the New York Stock Exchange for a Listed Share for each fiscal quarter of 2003 and 2004 were as follows (in dollars):
2003 High Low Close - -------------- ------ ------ ------ First Quarter $25.35 $24.15 $25.00 Second Quarter 30.50 24.81 29.94 Third Quarter 33.70 27.13 31.75 Fourth Quarter 33.14 29.10 30.52
2004 High Low Close - -------------- ------ ------ ------ First Quarter $30.99 $29.01 $30.95 Second Quarter 30.99 25.22 29.78 Third Quarter 31.00 29.00 29.86 Fourth Quarter 35.98 29.76 35.16
In accordance with the rules of the New York Stock Exchange ("NYSE"), each of William P. Carey and Gordon F. DuGan, our Co-Chief Executive Officers, have certified, without qualification, that he is not aware of any violation by the Company of the NYSE's corporate governance listing standards. Further, Messrs. Carey and DuGan have filed with the SEC, as Exhibit 31.1 to the Company's most recently filed Form 10-K, the Sarbanes-Oxley Act Section 302 certification regarding the quality of the Company's public disclosure. REPORT ON FORM 10-K The Company will supply to any shareholder, upon written request and without charge, a copy of the Annual Report on Form 10-K ("10-K") for the year ended December 31, 2004 as filed with the Securities and Exchange Commission ("SEC"). The 10-K may also be obtained through the SEC's EDGAR database at www.sec.gov. -51- EX-10.5 2 y06523exv10w5.txt PARTNERSHIP EQUITY UNIT PLAN Exhibit 10.5 CAREY ASSET MANAGEMENT CORP. 2005 PARTNERSHIP EQUITY UNIT PLAN I. Purposes The purposes of this 2005 Partnership Equity Unit Plan (the "Plan") are to provide employees of Carey Asset Management Corp. (the "Company") and/or its affiliates a tax advantaged incentive plan and to align the interests of employees of the Company with certain Corporate Property Associates real estate investment trusts (the "REITs"), for which the Company serves as manager. II. Definitions The following terms shall have the meanings shown: 2.1 "Committee" shall mean the Compensation Committee of W. P. Carey & Co. LLC. 2.2 "REIT Units" shall mean ownership interests of a REIT. 2.3 "Partnership Equity Plan (PEP) Unit" shall mean a right granted by the Committee pursuant to Section 4.1 to receive a payment as provided in the Plan, as of a specified date. PEP Units shall be designated for a particular REIT. 2.4 "Sale Value" shall mean the last appraised value for a REIT Unit, multiplied by the total number of vested PEP Units designated for such REIT and held by the awardee whose PEP Units have matured and become payable as provided in Section 4.4(a), as of the Payment Date specified in Section 4.4(a); provided, however, that if payment under the Plan is made in the form of REIT Units, as provided in Section 4.4(c), each REIT Unit paid to an awardee shall be deemed to be equal to each PEP Unit then payable. III. General 3.1 Administration. (a) The Plan shall be administered by the Committee. (b) The Committee shall have the authority in its sole discretion from time to time: (i) to designate the employees eligible to participate in the Plan; (ii) to award PEP Units to eligible employees and to determine the amount of any such award; (iii) to prescribe such terms, conditions, limitations and restrictions, not inconsistent with the Plan, applicable to any such award as the Committee shall deem appropriate; and (iv) to interpret the Plan, to adopt, amend and rescind rules and regulations relating to the Plan consistent with the terms of the Plan, and to make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan not inconsistent with the Plan. (c) All such actions pertaining to the Plan shall be final, conclusive and binding upon the awardee. Actions of the Committee with respect to the Plan may not adversely affect previously awarded PEP Units. The Committee shall not be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 3.2 Eligibility. The Committee may award PEP Units under the Plan to any key employee of the Company and/or its affiliates. IV. PEP Units 4.1 Award of PEP Units. The Committee may from time to time, subject to the provisions of the Plan, award PEP Units to eligible employees for services to the Company. 4.2 Award Agreements, Determinations and Vesting. The award of any PEP Units shall be evidenced by a written agreement executed by the Company and the awardee, or by a determination made by the Company. The provisions of such agreements or determinations need not be identical. Each PEP Unit shall be vested and non-forfeitable to an awardee on the date on which such PEP Unit is awarded. 4.3 Optional Terms and Conditions of PEP Units. To the extent not inconsistent with the Plan, the Committee may prescribe such terms and conditions applicable to any award of PEP Units as it may in its discretion determine. 4.4 Standard Terms and Conditions of PEP Units. Unless otherwise determined by the Committee pursuant to Section 4.3, each award of PEP Units shall be made on the following terms and conditions, in addition to such other terms, conditions, limitations and restrictions as the Committee, in its discretion, may determine to prescribe: (a) Payment Date. Subject to the remainder of Section 4.4, the date on which each PEP Unit designated for a particular REIT shall mature and become payable (the "Payment Date") shall be the date that is twelve (12) years after the date of award of such PEP Unit. Notwithstanding the preceding sentence, (i) prior to the eleventh (11th) anniversary of the date of award of such PEP Unit the awardee may elect to forego payment and defer payment until a specified date not less than five (5) years from the date such payment would otherwise have been made; provided, further such election may not take effect until at least 12 months after the date on which the election is made. (b) Amount of Payment. As promptly as practicable after the Payment Date, the Company shall pay to the awardee of vested PEP Units designated for a particular REIT which have matured, the Sale Value. In the case of a payment pursuant to the awardee's election described in clause (i) of Section 4.4(a), the Payment Date shall be deemed to be the date elected by the awardee pursuant to Section 4.4(a)(i). Upon payment therefor, the PEP Units shall terminate and no other payments shall be due to the awardee with respect thereto. 2 (c) Form of Payment. The payment for PEP Units may be made either in the form of cash, notes, REIT units, or other form of property, or a combination thereof, as determined in the discretion of the awardee, subject to approval of the REIT Board of Directors and the Committee. In the case of a payment made in the form of publicly traded REIT Units, the Company may satisfy its payment obligation by paying one REIT Unit for each vested PEP Unit payable. (d) Limitation on Distributions. Distributions to specified employees, as described in Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (the "Code"), may not be made earlier than six months after the date of separation from service, as determined by the regulations thereunder. In the case of a change in ownership or effective control of the Company, no distributions may be made earlier than the time period permitted after the date of such change in ownership to any awardee who is subject to such time period, as determined in Section 409A of the Code and the regulations thereunder. There shall be no acceleration of the time or schedule of any payments under the Plan, except as may be provided in regulations under Section 409A of the Code. 4.5 Transfer Restrictions. No PEP Unit shall be assignable or transferable by an awardee other than by will, or if the awardee dies intestate, by the laws of descent and distribution of the state of domicile of the awardee at the time of death. All PEP Units shall be payable during the lifetime of the awardee only to the awardee. Notwithstanding the foregoing, the Committee may recognize and establish procedures for administering a domestic relations or other family court order providing for the Plan to transfer all or a portion of an employee's PEP Units to or for the benefit of the employee's spouse, former spouse or children, provided that such order does not require the Plan to make payment prior to the time payment would otherwise be made to the employee. 4.6 Payments. Payments shall be made to awardees of each PEP Unit designated for a particular REIT in the same amount and as and when a dividend is paid by such REIT to a holder of a REIT Unit. V. Miscellaneous 5.1 Withholding Taxes. Any payments made to an awardee may be net of an amount sufficient to satisfy any federal, state, local or other withholding tax requirements. 5.2 Termination of Employment. An awardee's termination of employment shall not affect the awardee's rights with respect to an award of PEP Units previously granted. 5.3 No Rights as Shareholders. Receipt of awards of PEP Units under the Plan shall carry no rights as shareholders of the Company or of the REIT or as owners of the Company or any REIT with respect thereto. 5.4 Adjustments of REIT Units. In the event of any change or changes in the outstanding REIT Units, the Committee shall adjust the number of PEP Units designated for such REIT and subject to awards outstanding under the Plan in a manner which it determines is equitably required to prevent dilution or enlargement of the rights of awardees which would 3 otherwise result from any such transaction and any and all other matters deemed appropriate by the Committee. 5.5 Reorganization. In the event that the outstanding REIT Units shall be changed in number, class or character by reason of any change of value, dividend, combination, including any merger of related REITs, reclassification or other similar change, or shall be changed in value by reason of any distribution, the Committee may make such changes as it may deem equitable in outstanding PEP Units designated for such REIT and awarded pursuant to the Plan. 5.6 Amendment or Termination of the Plan. The Company may at any time terminate the Plan and may from time to time amend the Plan as it may deem advisable. The termination or amendment of the Plan shall not, without the consent of the awardee, affect such awardee's rights under an award previously granted except as provided under an award agreement or determination. 5.7 Unsecured and Unfunded Nature of Plan. The Plan constitutes a promise by the Company to make payments in the future. The Company's obligations under the Plan shall be unfunded and unsecured promises to pay. The Company shall not be obligated under any circumstance to fund its financial obligations under the Plan. To the extent that any awardee acquires a right to receive payments under the Plan, such right shall be no greater than the right, and each awardee shall at all times have the status, of a general unsecured creditor of the Company. The Plan is intended to constitute an unfunded plan for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended from time to time. 5.8 Non-alienation. Except as may be required by law, no awardee shall have the right to, directly or indirectly, alienate, assign, transfer, pledge, anticipate or encumber any amount that is or may be payable hereunder. This prohibition on alienation includes any such transfer in respect of any liability of an awardee for alimony or other payments for the support of a spouse, former spouse, child or other dependent, prior to actually being received by the awardee. The awardee's rights to payments under the Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the awardee or to the debts, contracts, liabilities, engagements, or torts of any awardee, or transfer by operation of law in the event of bankruptcy or insolvency of the awardee, or any legal process. 5.9 Effective Date. The effective date of the Plan shall be January 1, 2005, the date of adoption of the Plan by the Company. 4 EX-10.6 3 y06523exv10w6.txt THIRD AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10.6 ================================================================================ THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 27, 2004 among W.P. CAREY & CO. LLC, (F/K/A CAREY DIVERSIFIED LLC) CORPORATE PROPERTY ASSOCIATES, CORPORATE PROPERTY ASSOCIATES 4, A CALIFORNIA LIMITED PARTNERSHIP, CORPORATE PROPERTY ASSOCIATES 6- A CALIFORNIA LIMITED PARTNERSHIP, CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP, CAREY ASSET MANAGEMENT CORP., CALL LLC, CAREY TECHNOLOGY PROPERTIES II LLC, CD UP LP, and BROOMFIELD PROPERTIES CORP. The Lenders Party Hereto, JPMORGAN CHASE BANK, as Issuing Bank and Administrative Agent, PNC BANK, NATIONAL ASSOCIATION, THE BANK OF NEW YORK, and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Syndication Agents, BANK OF AMERICA, N.A., as Documentation Agent, and J.P. MORGAN SECURITIES INC., as Lead Arranger and Sole Book Runner ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I. Definitions..................................................... 2 SECTION 1.1. Defined Terms................................................ 2 SECTION 1.2. Classification of Loans and Borrowings....................... 31 SECTION 1.3. Terms Generally.............................................. 31 SECTION 1.4. Accounting Terms; GAAP....................................... 31 ARTICLE II. The Credits..................................................... 32 SECTION 2.1. Commitments.................................................. 32 SECTION 2.2. Loans and Borrowings......................................... 32 SECTION 2.3. Requests for Revolving Borrowings............................ 33 SECTION 2.4. Competitive Bid Procedure.................................... 34 SECTION 2.5. Extension of Maturity Date................................... 36 SECTION 2.6. Letters of Credit............................................ 36 SECTION 2.7. Funding of Borrowings........................................ 41 SECTION 2.8. Interest Elections........................................... 42 SECTION 2.9. Termination and Reduction of Commitments..................... 43 SECTION 2.10. Repayment of Loans; Evidence of Debt......................... 44 SECTION 2.11. Prepayment of Loans.......................................... 44 SECTION 2.12. Fees......................................................... 45 SECTION 2.13. Interest..................................................... 47 SECTION 2.14. Alternate Rate of Interest................................... 47 SECTION 2.15. Increased Costs.............................................. 48 SECTION 2.16. Break Funding Payments....................................... 49 SECTION 2.17. Taxes........................................................ 50 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs..................................................... 51 SECTION 2.19. Mitigation Obligations; Replacement of Lenders............... 53 SECTION 2.20. Increase in Commitment....................................... 53 ARTICLE III. Representations and Warranties.................................. 55 SECTION 3.1. Organization; Powers......................................... 55 SECTION 3.2. Authorization; Enforceability................................ 55 SECTION 3.3. Governmental Approvals; No Conflicts......................... 56 SECTION 3.4. Financial Condition; No Material Adverse Change.............. 56 SECTION 3.5. Properties................................................... 57 SECTION 3.6. Litigation and Environmental Matters......................... 57 SECTION 3.7. Compliance with Laws and Agreements.......................... 57 SECTION 3.8. Investment and Holding Company Status........................ 57 SECTION 3.9. Taxes........................................................ 57 SECTION 3.10. ERISA........................................................ 58 SECTION 3.11. Disclosure................................................... 58 SECTION 3.12. Insurance.................................................... 58 SECTION 3.13. Leases....................................................... 58 SECTION 3.14. SEC Reports.................................................. 58 SECTION 3.15. Representations and Warranties in Loan Documents............. 59 SECTION 3.16. Organizational Documents..................................... 59
-i- ARTICLE IV. Conditions...................................................... 59 SECTION 4.1. Closing Date................................................. 59 SECTION 4.2. Each Credit Event............................................ 61 ARTICLE V. Affirmative Covenants........................................... 62 SECTION 5.1. Financial Statements and Other Information................... 62 SECTION 5.2. Notices of Material Events................................... 65 SECTION 5.3. Existence; Conduct of Business............................... 66 SECTION 5.4. Payment of Obligations....................................... 66 SECTION 5.5. Maintenance of Properties; Insurance......................... 66 SECTION 5.6. Books and Records; Inspection Rights......................... 67 SECTION 5.7. Compliance with Laws......................................... 67 SECTION 5.8. Use of Proceeds and Letters of Credit........................ 67 SECTION 5.9. Company Status............................................... 68 SECTION 5.10. Additional Borrowers; Solvency of Borrowers.................. 68 SECTION 5.11. Further Assurances........................................... 68 SECTION 5.12. Distributions in the Ordinary Course......................... 68 SECTION 5.13. ERISA Compliance............................................. 69 ARTICLE VI. Negative Covenants.............................................. 69 SECTION 6.1. Indebtedness and Other Financial Covenants................... 69 SECTION 6.2. Liens........................................................ 71 SECTION 6.3. Fundamental Changes.......................................... 71 SECTION 6.4. Investments, Loans, Advances, Guarantees and Acquisitions.... 71 SECTION 6.5. Hedging Agreements........................................... 73 SECTION 6.6. ERISA........................................................ 73 SECTION 6.7. Margin Regulations; Securities Laws.......................... 74 SECTION 6.8. Transactions with Affiliates................................. 74 ARTICLE VII. Events of Default............................................... 74 SECTION 7.1. ............................................................. 74 ARTICLE VIII. The Agents...................................................... 77 SECTION 8.1. ............................................................. 77 ARTICLE IX. Miscellaneous................................................... 80 SECTION 9.1. Notices...................................................... 80 SECTION 9.2. Waivers; Amendments.......................................... 80 SECTION 9.3. Expenses; Indemnity; Damage Waiver........................... 82 SECTION 9.4. Successors and Assigns....................................... 83 SECTION 9.5. Survival..................................................... 86 SECTION 9.6. Counterparts; Integration; Effectiveness..................... 86 SECTION 9.7. Severability................................................. 87 SECTION 9.8. Right of Setoff.............................................. 87 SECTION 9.9. Governing Law; Jurisdiction; Consent to Service of Process... 87 SECTION 9.10. WAIVER OF JURY TRIAL......................................... 88 SECTION 9.11. Headings..................................................... 88 SECTION 9.12. Confidentiality.............................................. 88 SECTION 9.13. Interest Rate Limitation..................................... 89 SECTION 9.14. Amendment and Restatement.................................... 89 Section 9.15. No Bankruptcy Proceedings.................................... 90 Section 9.16. USA Patriot Act.............................................. 90
-ii- ARTICLE X. Multiple Borrowers.............................................. 91 ARTICLE XI. REIT Conversion................................................. 91
-iii- SCHEDULES: SCHEDULE 1 - Commitments SCHEDULE 1.1(A) - CPA REITs SCHEDULE 1.1(B) - Eligible Ground Leases SCHEDULE 3.2 - Ownership Structure SCHEDULE 3.2(A) - Limited Partnership Interests SCHEDULE 3.3 - Consents SCHEDULE 3.4 - Existing Indebtedness SCHEDULE 3.6 - Disclosed Matters SCHEDULE 3.13 - Company Leases SCHEDULE 4.1(F) - Transactions not in the Ordinary Course
EXHIBITS: EXHIBIT A - Form of Assignment and Acceptance EXHIBIT B - [Intentionally Omitted.] EXHIBIT C - Form of Borrowing Request EXHIBIT D-1 - Form of Note EXHIBIT D-2 - Form of Designated Bank Note EXHIBIT E-1 - Form of Opinion of Reed Smith LLP EXHIBIT E-2 - Form of Opinion of Colorado Counsel EXHIBIT F - Financial Calculation Schedule Pursuant to Section 5.1 EXHIBIT G - Form of Intercompany Note EXHIBIT H - Form of [Quarterly/Annual] Compliance Certificate to Accompany Reports EXHIBIT I - Form of Instrument of Adherence to Credit Agreement EXHIBIT J - Form of Designation Agreement
-iv- THIS THIRD AMENDED AND RESTATED CREDIT AGREEMENT (this "AGREEMENT") dated as of May 27, 2004, among W.P. Carey & Co. LLC (f/k/a Carey Diversified LLC), Corporate Property Associates, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 6- a California limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership, Carey Asset Management Corp., Call LLC, Carey Technology Properties II LLC, CD UP LP, and Broomfield Properties Corp., the Lenders party hereto, and JPMorgan Chase Bank, as administrative agent, (in such capacity, the "ADMINISTRATIVE AGENT") and as issuing bank (in such capacity, the "ISSUING BANK"), PNC Bank, National Association, The Bank of New York, and Wells Fargo Bank, National Association, as syndication agents (in such capacity, the "SYNDICATION AGENTS"), Bank of America, N.A., as documentation agent (in such capacity, the "DOCUMENTATION AGENT"), and J.P. Morgan Securities Inc., as Lead Arranger and Sole Book Runner (the "ARRANGER"). WHEREAS, pursuant to the Second Amended and Restated Credit Agreement dated as of March 23, 2001, as amended by Amendment No. 1 to Second Amended and Restated Credit Agreement dated as of March __, 2004 (the "EXISTING CREDIT AGREEMENT"), W.P. Carey & Co. LLC has commitments for $165,000,000 in revolving loans and letters of credit; WHEREAS, the parties hereto have agreed to amend and restate the Existing Credit Agreement so as to, among other things, (a) extend the maturity date, (b) increase the total commitment to $175,000,000 and provide the Borrowers with the right to request on two occasions increases to the commitment up to an aggregate of $225,000,000 in revolving loans and letters of credit, and (c) amend various provisions of the Existing Credit Agreement, including the financial covenants; and WHEREAS, the parties hereto intend that this Agreement and the documents executed in connection herewith not effect a novation of the obligations of the Company or any other obligor under the Existing Credit Agreement, but merely a restatement and, where applicable, an amendment of the terms governing such obligations; NOW, THEREFORE, in consideration of the mutual agreements contained herein, the Existing Credit Agreement is restated in its entirety, and the parties hereto agree as follows: -2- ARTICLE I. DEFINITIONS SECTION 1.1. DEFINED TERMS. As used in this Agreement, the following terms have the meanings specified below: "ABR," when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "ADJUSTED EBITDA" means, for any Person, for any period, EBITDA for such Person, for such period, as adjusted to eliminate free rent and the straight-lining of rents. "ADJUSTED LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "ADJUSTED MANAGEMENT EBITDA" means, for any period, the sum, without duplication of: (a) the sum of (i) EBITDA of the Company and its Subsidiaries generated from Management Contracts for such period (other than any non-cash performance fees earned by the Company or any of its Subsidiaries under any Management Contract) ("MANAGEMENT EBITDA") minus (ii) the excess (positive number only) of (1) any structuring fees earned under such Management Contracts over (2) thirty-five percent (35%) of total revenues during such period of the Company and its Subsidiaries from Management Contracts, plus (b) Total G&A Expense for such period, minus (c) Management G&A Expense for such period. "ADJUSTED PROPERTY EBITDA" means, for any period, the sum, without duplication, of: (a) the sum of (i) Adjusted EBITDA of the Company and its Subsidiaries for such period from Projects owned one hundred percent (100%) by, or ground-leased by, the Company or its Subsidiaries, plus (ii) the portion of Adjusted EBITDA of Joint Venture Holdings for such period allocable to the Company or its Subsidiaries in accordance with GAAP on account of the ownership interest(s) in the Joint Venture Holdings held by the Company and its Subsidiaries (with appropriate adjustments for minority interests), plus -3- (b) the Total G&A Expense for such period, minus (c) the Property G&A Expense for such period. "ADJUSTED TOTAL EBITDA" means, for any period, the sum of (i) Adjusted Management EBITDA for such period plus (ii) Adjusted Property EBITDA for such period. "ADJUSTED UNENCUMBERED TOTAL EBITDA" means, for any period, the sum of (i) the Adjusted Property EBITDA (to the extent applicable) derived from Unencumbered Eligible Projects for such period, plus (ii) 20% of Adjusted Management EBITDA for such period derived from Management Contracts that are not subject to any Liens. "ADMINISTRATIVE AGENT" means JPMorgan Chase Bank, in its capacity as administrative agent for the Lenders hereunder. "ADMINISTRATIVE QUESTIONNAIRE" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "AFFILIATE" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the greater of the Prime Rate in effect on such day and the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "APPLICABLE PERCENTAGE" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "APPLICABLE RATE" means, for any day, with respect to any ABR Loan or Eurodollar Revolving Loan, as the case may be: (i) in the event that Moody's or S&P shall have in effect a Debt Rating, the applicable rate per annum set forth below under the caption "ABR Spread" or "Eurodollar Spread", as the case may be, based upon such Debt Rating from Moody's and S&P, respectively, applicable on such date: -4-
Debt Ratings ABR Eurodollar (S&P/Moody's): Spread Spread - -------------- ------ ---------- Category 1 A-/A3 or better 0.0% 0.60% Category 2 BBB+/Baa1 0.0% 0.65% Category 3 BBB/Baa2 0.0% 0.775% Category 4 BBB-/Baa3 0.0% 0.90% Category 5 Lower than BBB-/Baa3 0.50% 1.25%
For purposes of the foregoing, (A) if the Debt Ratings established or deemed to have been established by Moody's and S&P shall fall within different Categories, the Applicable Rate shall be based on the higher of the two ratings unless one of the two ratings is two or more Categories lower than the other, in which case the Applicable Rate shall be determined by reference to the Category next below that of the higher of the two ratings, and (B) if the Debt Ratings established or deemed to have been established by Moody's and S&P shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Applicable Rate in accordance with this clause (i) shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such rating agency shall cease to be in the business of rating companies or corporate debt obligations, the Company and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation; or (ii) in the event that neither Moody's nor S&P shall have in effect a Debt Rating, the applicable rate per annum set forth below under the caption "ABR Spread" or "Eurodollar Spread", as the case may be, based upon the range into which the Leverage Ratio then falls in accordance with the following table: -5-
Leverage Ratio Eurodollar Spread ABR Spread - -------------- ----------------- ---------- less than 35% 1.10% 0.0% 35%-less than 45% 1.25% 0.0% 45%-55% (or higher) 1.45% 0.125%
Any change in the Applicable Rate determined in accordance with this clause (ii) shall be effective as of the financial reporting dates set forth in Section 5.1 or as of the date of any borrowing on which the Leverage Ratio changes. "ARRANGER" has the meaning set forth in the preamble. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.4), and accepted by the Administrative Agent, in the form of EXHIBIT A or any other form approved by the Administrative Agent. "AVAILABILITY PERIOD" means the period from and including the Closing Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments. "BOARD" means the Board of Governors of the Federal Reserve System of the United States of America. "BORROWER" means each of (i) the Company, (ii) Corporate Property Associates, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 6- a California limited partnership, each a California limited partnership, (iii) Corporate Property Associates 9, L.P., a Delaware limited partnership, and CD Up LP, each of which is a Delaware limited partnership, (iv) Carey Asset Management Corp., a Delaware corporation, (v) Call LLC and Carey Technology Properties II LLC, each a Delaware limited liability company, (vi) Broomfield Properties Corp., a Colorado corporation, and (vii) any entity which becomes a Borrower under this Agreement pursuant to Section 5.10 (individually each a "BORROWER" and collectively, the "BORROWERS"). "BORROWING" means (i) Revolving Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect (a "REVOLVING BORROWING") or (ii) a Competitive Loan or group of Competitive Loans made on the same date and as to which a single Interest Period is in effect (a "COMPETITIVE BORROWING"). "BORROWING REQUEST" means a request by the Company or the Company on behalf of any of the Borrowers for a Revolving Borrowing in accordance with Section 2.3, substantially in the form of EXHIBIT C. "BUSINESS DAY" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to -6- remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "CAPITAL LEASE OBLIGATIONS" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "CAPITAL LEASE" means any lease by a Person of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, the obligations under which are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP. "CASH AND CASH EQUIVALENTS" means unrestricted (i) cash, (ii) marketable direct obligations issued or unconditionally guaranteed by the United States government and backed by the full faith and credit of the United States government; and (iii) domestic and Eurodollar certificates of deposit and time deposits, bankers' acceptances and floating rate certificates of deposit issued by any commercial bank organized under the laws of the United States, any state thereof, the District of Columbia, any foreign bank, or its branches or agencies (fully protected against currency fluctuations), which, at the time of acquisition, are rated A-1 (or better) by S&P or P-1 (or better) by Moody's provided that the maturities of such Cash and Cash Equivalents shall not exceed one year. "CHANGE IN CONTROL" means (i) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934, as amended, and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) (other than the Company, any of its Subsidiaries, any trustee, fiduciary or other person or entity holding securities under any employee benefit plan of the Company or any of its Subsidiaries and other than any wholly owned direct or indirect subsidiary of the Company), of shares representing more than 20% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (ii) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Company by Persons who were neither (A) nominated by the board of directors of the Company nor (B) appointed by directors so nominated; or (iii) the acquisition of direct or indirect Control of the Company by any Person or group (other than any wholly owned direct or indirect subsidiary of the Company). "CHANGE IN LAW" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or to the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or -7- directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "CLASS", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Competitive Loans. "CLOSING DATE" means the date on which the conditions set forth in Section 4.1 are satisfied (or waived in accordance with Section 9.2). "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMBINED EQUITY VALUE" means Total Value less Total Outstanding Indebtedness. "COMMITMENT" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and to acquire participations in Letters of Credit hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a) increased pursuant to Section 2.20 or (b) reduced from time to time pursuant to Section 2.9 and (c) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.4. The initial amount of each Lender's Commitment is set forth on SCHEDULE 1, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is $175,000,000. "COMPANY" means W.P. Carey & Co. LLC, a Delaware limited liability company (f/k/a Carey Diversified LLC). "COMPANY INTERESTS" means a limited liability company interest in the Company. "COMPETITIVE BID" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.4. "COMPETITIVE BID RATE" means, with respect to any Competitive Bid, the Margin offered by the Lender making such Competitive Bid. "COMPETITIVE BID REQUEST" means a request by the Company or the Company on behalf of any of the Borrowers for Competitive Bids in accordance with Section 2.4. "COMPETITIVE LOAN" means a Loan made pursuant to Section 2.4. "CONSOLIDATED BUSINESSES" means the Company and its Subsidiaries, on a consolidated basis (without taking into account any non-wholly owned Person or entity). -8- "CONTINGENT OBLIGATION" as to any Person means, without duplication, (i) any contingent obligation of such Person required to be shown on such Person's balance sheet in accordance with GAAP, and (ii) any obligation required to be disclosed in the footnotes to such Person's financial statements in accordance with GAAP, guaranteeing partially or in whole any non-recourse Indebtedness, lease, dividend or other obligation, exclusive of contractual indemnities (including, without limitation, any indemnity or price-adjustment provision relating to the purchase or sale of securities or other assets) and guarantees of non-monetary obligations (other than guarantees of completion) which have not yet been called on or quantified, of such Person or of any other Person. The amount of any Contingent Obligation described in clause (ii) shall be deemed to be (a) with respect to a guaranty of interest or interest and principal, or operating income guaranty, the sum of all payments required to be made thereunder (which in the case of an operating income guaranty shall be deemed to be equal to the debt service for the note secured thereby), calculated at the interest rate applicable to such Indebtedness, through (i) in the case of an interest or interest and principal guaranty, the stated dated maturity of the obligation (and commencing on the date interest could first be payable thereunder), or (ii) in the case of an operating income guaranty, the date through which such guaranty will remain in effect, and (b) with respect to all guarantees not covered by the preceding clause (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such guaranty is made or, if not stated or determinable, the maximum reasonable anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as recorded on the balance sheet and on the footnotes to the most recent financial statements of the applicable Borrower required to be delivered pursuant hereto. Notwithstanding anything contained herein to the contrary, guarantees of completion and of Nonrecourse Carveouts shall not be deemed to be Contingent Obligations unless and until a claim for payment has been made thereunder, at which time any such guaranty of completion or of Nonrecourse Carveouts shall be deemed to be a Contingent Obligation in an amount equal to any such claim. Subject to the preceding sentence, (i) in the case of a joint and several guaranty given by such Person and another Person (but only to the extent such guaranty is recourse, directly or indirectly to the applicable Person), the amount of the guaranty shall be deemed to be 100% thereof unless and only to the extent that (X) such other Person has delivered Cash or Cash Equivalents to secure all or any part of such Person's guaranteed obligations or (Y) such other Person holds an Investment Grade Credit Rating from either Moody's or S&P, and (ii) in the case of a guaranty (whether or not joint and several) of an obligation otherwise constituting Indebtedness of such Person, the amount of such guaranty shall be deemed to be only that amount in excess of the amount of the obligation constituting Indebtedness of such Person. Notwithstanding anything contained herein to the contrary, "Contingent Obligations" shall not be deemed to include guarantees of loan commitments or of construction loans to the extent the same have not been drawn. "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "controlled" have meanings correlative thereto. -9- "CPA REIT" means a REIT managed or advised by the Company and listed on SCHEDULE 1.1(A) hereto (as updated from time to time by the Company). "CREDIT EVENT" has the meaning set forth in Section 4.2. "DEBT RATING" means either (a) if the Company has issued Index Debt, the debt rating assigned to such Index Debt or (b) if the Company has not issued Index Debt, the issuer or corporate credit rating assigned to the Company. "DEFAULT" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "DESIGNATED BANK" means a special purpose corporation that (i) shall have become a party to this Agreement pursuant to Section 9.4(h), and (ii) is not otherwise a Lender. "DESIGNATED BANK NOTES" means promissory notes of the Borrowers, substantially in the form of EXHIBIT D-2 hereto, evidencing the obligation of the Borrowers to repay Competitive Loans made by Designated Banks, as the same may be amended, supplemented, modified or restated from time to time, and "Designated Bank Note" means any one of such promissory notes issued under Section 9.4(h). "DESIGNATING LENDER" shall have the meaning set forth in Section 9.4(h). "DESIGNATION AGREEMENT" means a designation agreement in substantially the form of EXHIBIT J attached hereto, entered into by a Lender and a Designated Bank and accepted by the Administrative Agent. "DISCLOSED MATTERS" means the actions, suits and proceedings and the environmental matters disclosed in SCHEDULE 3.6. "DOLLARS" or "$" refers to lawful money of the United States of America. "EBITDA" means, for any Person for any period, the Net Income (Loss) of such Person for such period taken as a single accounting period, plus (a) the sum of the following amounts of such Person and its subsidiaries for such period determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) depreciation expense, (ii) amortization expense and other non-cash charges, (iii) interest expense, (iv) income tax expense, (v) extraordinary losses (and other losses on asset sales not otherwise included in extraordinary losses determined on a consolidated basis in conformity with GAAP), and (vi) minority interests in Unconsolidated Entities, less (b) the sum of the following amounts of such Person and its subsidiaries determined on a consolidated basis in conformity with GAAP to the extent included in the determination of such Net Income (Loss): (i) extraordinary gains (and in the case of the Company and its consolidated subsidiaries, other gains on asset sales not otherwise included in extraordinary gains determined on a consolidated basis in conformity with GAAP) and (ii) the applicable share of Net Income (Loss) of such -10- Person's Unconsolidated Entities; plus (c) the portion allocable to such Person of EBITDA of such Person's Unconsolidated Entities. "ELIGIBLE GROUND LEASE" means a ground lease that (a) has a minimum remaining term of thirty (30) years, including tenant controlled options, as of any date of determination, (b) has customary notice rights, default cure rights, bankruptcy new lease rights and other customary provisions for the benefit of a leasehold mortgagee or has equivalent protection for a leasehold permanent mortgagee by a subordination to such leasehold permanent mortgagee of the landlord's fee interest, and (c) is otherwise acceptable for non-recourse leasehold mortgage financing under customary prudent lending requirements. The Eligible Ground Leases as of the date of this Agreement are listed on SCHEDULE 1.1(B). "ELIGIBLE LEASE" means any Lease that is in full force and effect and that (A) is a Triple Net Lease or (B) is a Lease (other than a Lease specified in clause (A) above), in each case (i) under which no payment default has occurred and is continuing; (ii) under which no material default (other than a payment default) has occurred and is continuing; and (iii) under which the tenant is not subject to any bankruptcy, insolvency, reorganization or other similar proceedings. "ELIGIBLE PROJECT" means a Project (i) which is free of all title defects and material structural defects, as verified by an Officer's Certificate of the Company in form and substance satisfactory to the Administrative Agent, and (ii) which is free of Hazardous Materials except as would not materially affect the value of such Project, as verified by an Officer's Certificate of the Company in form and substance satisfactory to the Administrative Agent. "ENCUMBERED ELIGIBLE PROJECT" means an Eligible Project (a) (i) with respect to which either (A) the Company and/or one or more of the Subsidiaries collectively have an ownership (or ground leasehold) interest of one hundred percent (100%), or (B)(1) the Company and/or one or more of the Subsidiaries collectively have an ownership (or ground leasehold) interest (whether directly or through an interest in a Joint Venture) of more than fifty percent (50%), and (2) the Company and/or one or more of the Subsidiaries control the management of such Project and (b) all or a portion of which is encumbered by a Lien. As used in this definition only, the term "control" shall mean the authority, with sole discretion, to make major management decisions with respect to the Project, including with respect to sale, refinancing, capital improvements, leasing and the grant of Liens on such Project and to manage the day-to-day operations of such Project. "ENVIRONMENTAL LAWS" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material. "ENVIRONMENTAL LIABILITY" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, -11- penalties or indemnities), of the Company or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that, together with the Company, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Company or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Company or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Company or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Company or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Company or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "EURODOLLAR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "EVENT OF DEFAULT" has the meaning set forth in Article VII. "EXCLUDED TAXES" means, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of any Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of -12- America or any similar tax imposed by any other jurisdiction in which such Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by such Borrower under Section 2.19(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with Section 2.17(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from such Borrower with respect to such withholding tax pursuant to Section 2.17(a). "FACILITY FEE RATE" means the applicable rate per annum set forth below under the caption "Facility Fee Rate" based upon the Debt Ratings by Moody's and S&P, respectively, applicable on such date:
Debt Ratings Facility Fee (S&P/Moody's): Rate - -------------- ------------ Category 1 A-/A3 or better 0.15% Category 2 BBB+ / Baa1 0.15% Category 3 BBB / Baa2 0.175% Category 4 BBB- / Baa3 0.20% Category 5 Lower than BBB- / Baa3 0.25%
For purposes of the foregoing, (A) if the Debt Ratings established or deemed to have been established by Moody's and S&P shall fall within different Categories, the Facility Fee Rate shall be based on the higher of the two ratings unless one of the two ratings is two or more Categories lower than the other, in which case the Facility Fee Rate shall be determined by reference to the Category next below that of the higher of the two ratings, and (B) if the Debt Ratings established or deemed to have been established by Moody's and S&P shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Facility Fee Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such rating agency shall cease to be in the business of rating companies or corporate debt obligations, the Company and the Lenders shall -13- negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Facility Fee Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation. "FAIR MARKET VALUE" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. Fair Market Value shall be determined by an officer of the Company acting in good faith and shall be evidenced by an Officer's Certificate, except in the case of the determination of Fair Market Value of Permitted REIT Investments which are "restricted securities" as defined in the definition of REIT Investment Value having a Fair Market Value in excess of $5,000,000, in which case the determination of such Fair Market Value shall be, at the election of the Company, by (i) the board of directors of the Company acting in good faith and shall be evidenced by a resolution of the board of directors, or (ii) an appraisal of an independent third-party appraiser which shall be a Person regularly engaged in the valuation of securities of the same type as such Permitted REIT Investment. The Fair Market Value of any readily marketable securities shall be the number of such securities multiplied by the average Market Price per share or per unit of such securities during the five consecutive trading days immediately preceding the date of determination. The "Market Price" of any security on any trading day shall mean, with respect to any security which is listed on a national securities exchange, the last sale price regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if such security is not listed or admitted to trading on such exchange, on the principal national securities exchange on which such security is listed or admitted to trading, or, if such security is not listed or admitted to trading on any national securities exchange but is designated as a national market system security by the National Association of Securities Dealers, the last sale price, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, in either case as reported on the National Association of Securities Dealers Automated Quotation/National Market System, or if such security is not so designated as a national market systems security, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers or similar organization if the National Association of Securities Dealers is no longer reporting such information. With respect to operating partnership units of any REIT, such operating partnership units shall in no event have a value greater than the value of the number of shares of the REIT into which such operating partnership units are then convertible. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the -14- Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or controller of the Company. "FINANCIAL STATEMENTS" means financial statements presenting the consolidated and consolidating financial position of the Company and its Subsidiaries as at the date indicated and the results of their operations and cash flow for the period indicated in accordance with GAAP, subject to normal adjustments. "FIXED CHARGES" means, with respect to any period, the sum of (a) Total Interest Expense for such period and (b) the aggregate of all scheduled principal payments on Total Outstanding Indebtedness according to GAAP made or required to be made during such period by the Company and its Subsidiaries (with appropriate adjustments for minority interests) or allocable to the Company and its Subsidiaries on account of Joint Venture Holdings (but excluding balloon payments of principal due upon the stated maturity of any Indebtedness), and (c) the aggregate of all dividends payable on the Company's or any of its consolidated Subsidiaries' preferred equity interests (if any). "FOREIGN LENDER" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "GAAP" means generally accepted accounting principles in the United States of America. "GOVERNMENTAL AUTHORITY" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "GUARANTEE" of or by any Person (the "GUARANTOR") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account -15- party or applicant in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "HAZARDOUS MATERIALS" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "HEDGING AGREEMENT" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "IMPROVEMENTS" means all buildings, fixtures, structures, parking areas, landscaping and other improvements whether existing now or hereafter constructed, together with all machinery and mechanical, electrical, HVAC and plumbing systems presently located thereon and used to the operation thereof, excluding (a) any such items owned by utility service providers, (b) any such items owned by tenants or other third parties unaffiliated with the Company and (c) any items of personal property. "INDEBTEDNESS" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid (excluding current Taxes, water and sewer charges and assessments and current trade liabilities incurred in the ordinary course of business in accordance with customary terms), (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person (other than current trade liabilities incurred in the ordinary course of business in accordance with customary terms), (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others and other Contingent Obligations, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party or applicant in respect of letters of credit and letters of guaranty, (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances, (k) all obligations of such Person to purchase or redeem any shares of equity securities issued by such Person, including obligations under so-called forward equity purchase contracts to the extent such obligations are not payable solely in equity interests, (l) all obligations of such Person in respect of any forward contract, futures contract, swap or other agreement, the value of which is dependent upon interest rates or currency exchange rates, and (m) all obligations of such Person in respect of any so-called -16- "synthetic lease" (i.e., a lease of property which is treated as an operating lease under GAAP and as a loan for U.S. income tax purposes). The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "INDEMNIFIED TAXES" means Taxes other than Excluded Taxes. "INDEX DEBT" means senior, unsecured, long-term indebtedness for borrowed money of the Company that is not guaranteed by any other Person or subject to any other credit enhancement. "INTEREST ELECTION REQUEST" means a request by the Company to convert or continue a Revolving Borrowing in accordance with Section 2.8. "INTEREST PAYMENT DATE" means (a) with respect to any ABR Loan, the last Business Day of each March, June, September and December and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last Business Day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period. "INTEREST PERIOD" means with respect to any Eurodollar Borrowing the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Company may elect; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (ii) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period, (iii) the Interest Period for Eurodollar Revolving Borrowings may be shorter than one (1) month in order to consolidate two (2) or more Eurodollar Revolving Borrowings and (iv) the Interest Period for all Eurodollar Revolving Borrowings shall be one (1) month until the earlier of ninety (90) days after the Closing Date or the date on which the Arranger completes the syndication of the total Commitments, as evidenced by written notice from the Arranger to the Company as to such completion). For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. -17- "INVESTMENT GRADE CREDIT RATING" means a Debt Rating of BBB- or higher by S&P or Baa3 or higher by Moody's. "ISSUING BANK" means JPMorgan Chase Bank, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.6(i). The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "JOINT VENTURE" means a partnership, limited liability company, joint venture (including a tenancy-in-common ownership pursuant to a written agreement providing for substantially the same rights and obligations relating to such property that would be in a joint venture agreement), or corporation. "JOINT VENTURE HOLDING" means an interest in a Joint Venture held or owned by the Company (or one of its Subsidiaries) which is not wholly owned by the Company (or one of its Subsidiaries). "LC DISBURSEMENT" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC EXPOSURE" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Company at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "LEASE" means a lease, license, concession agreement or other agreement providing for the use or occupancy of any portion of any Project, including all amendments, supplements, modifications and assignments thereof and all side letters or side agreements relating thereto. "LENDER AFFILIATE" means, (a) with respect to any Lender, (i) an Affiliate of such Lender or (ii) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or an Affiliate of such Lender and (b) with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "LENDERS" means (a) the Persons listed on SCHEDULE 1 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance and (b) the Designated Banks; provided, however, that the term "Lender" shall exclude each Designated Bank when used in reference to a -18- Revolving Loan, the Commitments or terms relating to the Revolving Loans and the Commitments and shall further exclude each Designated Bank for all other purposes hereunder except that any Designated Bank which funds a Competitive Loan shall, subject to Section 9.4(h), have the rights (including, without limitation, the rights given to a Lender contained in Article IX) and obligations of a Lender associated with holding such Competitive Loan. "LETTER OF CREDIT" means any letter of credit issued pursuant to this Agreement. "LEVERAGE RATIO" as of any date means the ratio, expressed as a percentage, of the Total Outstanding Indebtedness as of such date to the Total Value as of such date. "LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the entity which is the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIEN" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset (excluding, in the case of assets consisting of Real Property owned by the Company, its Subsidiaries or a Joint Venture, the lien of a mortgage or deed of trust on the Real Property interest not owned by the Company, its Subsidiaries or the Joint Venture; provided, that the ownership or estate interest of the Company in such Real Property is not subordinate to such a lien and the Company's interest would not be adversely affected by such lien either through foreclosure thereof or otherwise (e.g., a mortgage on the leasehold interest of a Project owned in fee by a Subsidiary does not constitute a Lien)), (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. -19- "LISTED SHARES" means a limited liability interest in the Company representing a share of all the income, loss and capital of the Company. "LOANS" means the loans made by the Lenders to the Borrowers pursuant to this Agreement. "LOAN DOCUMENTS" means this Agreement, the Notes and all other instruments, agreements and written obligations between the Borrowers and any of the Lenders pursuant to or in connection with the transactions contemplated hereby. "MANAGEMENT CONTRACT" means a management contract or advisory agreement under which the Company or one of its Subsidiaries provides management and advisory services to a third party, consisting of management of properties or provision of advisory services on property acquisition and dispositions, equity and debt placements and related transactional matters. "MANAGEMENT G&A EXPENSE" means, for any period, the difference between (a) the Total G&A Expense for such period minus (b) the Property G&A Expense for such period. "MARGIN" means, with respect to any Competitive Loan, the marginal rate of interest, if any, to be added to or subtracted from the Adjusted LIBO Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid. "MARGIN STOCK" means "margin stock" or "margin securities" as such terms are defined in Regulation U and Regulation X of the Federal Reserve Board as in effect from time to time. "MARKETABLE SECURITIES" means short-term marketable securities, issued by any entity (other than an Affiliate of the Company) organized and existing under the laws of the United States of America, with a long-term unsecured indebtedness rating, at the time when any investment therein is made, with Moody's or S&P of Baa2/BBB or better, respectively. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole, (b) the ability of the Company to perform any of its material obligations under the Loan Documents or (c) the rights of or benefits available to the Lenders under the Loan Documents "MATERIAL INDEBTEDNESS" means Indebtedness (other than the Loans, Letters of Credit and Nonrecourse Indebtedness), or obligations in respect of one or more Hedging Agreements, of any one or more of the Company and its Subsidiaries in an aggregate principal amount exceeding $10,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Company or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the -20- Company or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "MATURITY DATE" means May 27, 2007, as such date may be extended pursuant to Section 2.5. "MOODY'S" means Moody's Investors Service, Inc. "MORTGAGE ASSET" means Indebtedness owed to the Company or a Subsidiary of the Company and secured by a mortgage or deed of trust on a fee interest or a leasehold interest in Real Property and all collateral security related thereto. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET ASSET VALUE" means the value of a security determined on a net asset value basis by an officer of the Company in good faith and evidenced by an Officer's Certificate, which determination shall be based on an appraisal of an independent third-party appraiser regularly engaged in the valuation of securities of the same type as the securities being valued. "NET INCOME (LOSS)" means, for any Person for any period, the aggregate of net income (or loss) of such Person and its subsidiaries for such period, determined on a consolidated basis in conformity with GAAP. "NET OFFERING PROCEEDS" means all cash or other assets received by the Company as a result of the sale of common shares, preferred shares, partnership interests, limited liability company interests, convertible securities or other ownership or equity interests in the Company, less customary costs and discounts of issuance paid by the Company. "NONRECOURSE CARVEOUTS" means the personal liability of an obligor under Indebtedness for fraud, misrepresentation, misapplication or misappropriation of cash, waste, environmental liability, bankruptcy filing or any other circumstances customarily excluded from non-recourse provisions and non-recourse financing of real estate. "NONRECOURSE INDEBTEDNESS" of any Person means all Indebtedness of such Person with respect to which recourse for payment is limited to specific assets encumbered by a Lien securing such Indebtedness; provided, however, that personal recourse of a holder of Indebtedness against any obligor with respect thereto for fraud, misrepresentation, misapplication or misappropriation of cash, waste, environmental liabilities, and other circumstances customarily excluded from nonrecourse provisions in nonrecourse financing of real estate shall not, by itself, prevent any Indebtedness from being characterized as Nonrecourse Indebtedness; provided, further, that if in connection therewith a personal recourse claim is established by judgment decree or award by any court of competent jurisdiction or arbitrator of competent jurisdiction and execution or enforcement thereof shall not be effectively stayed for 30 consecutive days and such Indebtedness shall not be paid -21- or otherwise satisfied within such 30-day period, then such Indebtedness in an amount equal to the personal recourse claim established by judgment or award shall not constitute Nonrecourse Indebtedness for purposes of this Agreement. "NOTE" means (a) a promissory note in the form attached hereto as EXHIBIT D-1 payable to a Lender, evidencing certain of the Obligations of the Borrowers to such Lender and executed by the Borrowers as set forth in Section 2.10(e), as the same may be amended, supplemented, modified or restated from time to time or (b) a Designated Bank Note, as the context may require. "Notes" means, collectively, all of such Notes outstanding at any given time. "OBLIGATIONS" means, collectively, the obligations of the Borrowers in respect of principal, interest, fees, indemnities, and all other amounts under or in connection with this Agreement or any of the other Loan Documents, including reimbursement obligations in respect of Letters of Credit, in each case whether such obligation arose before or after the commencement of any bankruptcy, insolvency, receivership or other similar proceeding and whether or not the obligation is undersecured or oversecured or deemed allowable, provable or accruing against any Borrower in any such proceeding, including interest calculated from the commencement of any such proceeding at the rate provided in Section 2.13(c). "OFFICER'S CERTIFICATE" means a certificate signed by the President, any Vice President or any Financial Officer of any Person, or such other officer as may be specified herein, and delivered to the Administrative Agent hereunder. "OTHER TAXES" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "PERMITTED ENCUMBRANCES" means: (a) liens imposed by law for taxes, assessments, governmental charges or levies that are not yet due or are being contested in compliance with Section 5.4; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.4, (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations or to secure the performance of bids, purchases, contracts (other than for the payment of borrowed money) and surety, appeal and performance bonds; -22- (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Company or any Subsidiary; and (f) statutory and common law landlord liens; provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "PERMITTED INVESTMENTS" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of not less than A-2 or P-2 from S&P or from Moody's, respectively; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) shares of so called "money market funds" registered with the SEC under the Investment Company Act of 1940, as amended, which maintain a level per share value, invest principally in marketable direct or guaranteed obligations of the United States of America and agencies and instrumentalities thereof and investments in commercial paper having, at such date, a rating of not less than A-1 or P-1 from S&P or from Moody's, respectively, and have total assets in excess of $50,000,000 provided that any such shares are moved to a qualifying money market fund within thirty (30) days after any Borrower or any Subsidiary has knowledge that any money market fund no longer has total assets in excess of that amount; and (e) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered -23- into with a financial institution satisfying the criteria described in clause (c) above. "PERMITTED REIT INVESTMENTS" means investments by the Company or any Subsidiary in publicly traded warrants, publicly traded equity securities and operating partnership units of publicly traded REITS (and excluding in any event investments in the securities of the CPA REITS). For purposes hereof, "publicly traded" shall mean that such investments are traded on a nationally-recognized market with widely distributed standard price quotations. "PERSON" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "PLAN" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Company or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by JP Morgan Chase Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "PROJECT" means any office, industrial/manufacturing facility, educational facility, retail facility, distribution/warehouse facility, assembly or production facility, hotel, day care center, storage facility, health care/hospital facility, restaurant, radio or TV station, broadcasting/communication facility (including any transmission facility), any combination of any of the foregoing, or any land to be developed into any one or more of the foregoing pursuant to a written agreement with respect to such land for a transaction involving a Lease, in each case owned, directly or indirectly, by any of the Consolidated Businesses. "PROPERTY" means any Real Property or personal property, plant, building, facility, structure, equipment, general intangible, receivable, or other asset owned or leased by any Consolidated Business or any Joint Venture in which the Company, directly or indirectly, has a Joint Venture Holding. "PROPERTY G&A EXPENSE" means, for any period, eight percent (8%) of the total gross revenues of the Company and its Subsidiaries for such period from (i) Projects in which the Company and its Subsidiaries collectively have an ownership interest of one hundred percent (100%) and (ii) Projects in which the Company or its Subsidiaries have a Joint Venture Holding; provided that the gross revenues for the Projects owned by Joint Ventures shall be limited to that portion of gross revenues of such Joint Ventures for such period allocable to the Company or its Subsidiaries based on their ownership interests in such Joint Ventures in accordance with GAAP (with appropriate adjustments for minority interests). -24- "REAL PROPERTY" means any present and future right, title and interest (including, without limitation, any leasehold estate) in (i) any plots, pieces or parcels of land, (ii) any Improvements of every nature whatsoever (the rights and interests described in clauses (i) and (ii) above being the "PREMISES"), (iii) all easements, rights of way, gores of land or any lands occupied by streets, ways, alleys, passages, sewer rights, water courses, water rights and powers, and public places adjoining such land, and any other interests in property constituting appurtenances to the Premises, or which hereafter shall in any way belong, relate or be appurtenant thereto, (iv) all hereditaments, gas, oil, minerals (with the right to extract, sever and remove such gas, oil and minerals), and easements, of every nature whatsoever, located in, on or benefiting the Premises and (v) all other rights and privileges thereunto belonging or appertaining and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the rights and interests described in clauses (iii) and (iv) above. "REGISTER" has the meaning set forth in Section 9.4. "REIT" means a domestic trust or corporation that qualifies as a real estate investment trust under the provisions of Sections 856, et seq. of the Code. "REIT INVESTMENT VALUE" means, as of any date, the sum of (i) 80% of the Fair Market Value as of the date of determination of Permitted REIT Investments consisting of warrants, REIT shares and operating partnership units that are unrestricted securities, plus (ii) 65% of the Fair Market Value as of the date of determination of Permitted REIT Investments consisting of warrants, REIT shares and operating partnership units that are restricted securities; provided, that the Fair Market Value of Permitted REIT Investments in excess of 15% of the outstanding equity securities of any REIT and its related operating partnership shall be excluded in determining REIT Investment Value. For purposes of this definition and the definition of Fair Market Value, the term "restricted securities" shall mean securities which constitute "restricted securities" or are held by an "affiliate" of the issuer of such securities, in each case in accordance with Rule 144 promulgated under the Securities Act of 1933, as amended, or are otherwise subject to any agreement, arrangement or other understanding in any way limiting or affecting the right of the holder of such securities to dispose of such securities. For purposes of this definition, the term "unrestricted securities" shall mean securities which are not "restricted securities." "RELATED PARTIES" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "REQUIRED LENDERS" means, at any time, Lenders having Revolving Credit Exposures and Unused Commitments representing at least 51% of the sum of the total Revolving Credit Exposures and Unused Commitments at such time; provided that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of -25- the Lenders shall be included in their respective Revolving Credit Exposures in determining the Required Lenders; and provided further, that, in the event any of the Lenders shall have failed to fund its Applicable Percentage of any Borrowing requested by the Borrowers which such Lender is obligated to fund under the terms of this Agreement and any such failure has not been cured as provided in Section 2.7, then for so long as such failure continues, "Required Lenders" means Lenders (excluding all Lenders whose failure to fund their respective Applicable Percentages of such Borrowings have not been so cured) having Revolving Credit Exposures and Unused Commitments representing at least 51% of the sum of the total Revolving Credit Exposures and Unused Commitments of such Lenders at such time. "RESTRICTED PAYMENT" is defined in Section 6.1(g). "REVOLVING CREDIT EXPOSURE" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans and its LC Exposure at such time. "REVOLVING LOAN" means a Loan made pursuant to Sections 2.2 and 2.3. "S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. "SECURED INDEBTEDNESS" means any Indebtedness secured by a Lien (excluding Indebtedness hereunder). "SOLVENT", when used with respect to any Person, means that at the time of determination: (i) the fair saleable value of its assets is in excess of the total amount of its liabilities (including, without limitation, contingent liabilities); and (ii) the present fair saleable value of its assets is greater than its probable liability on its existing debts as such debts become absolute and matured; and (iii) it is then able and expects to be able to pay its debts (including, without limitation, contingent debts and other commitments) as they mature; and (iv) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. "STATUTORY RESERVE RATE" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as -26- "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SUBSIDIARY" means, with respect to any Person (the "PARENT") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "SUBSIDIARY" means any direct or indirect subsidiary of the Company. "SUBSIDIARY PARTNERSHIPS" means each of Corporate Property Associates, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 6-a California limited partnership, and Corporate Property Associates 9, L.P., and the other Borrowers that are Subsidiaries and any of them a "SUBSIDIARY PARTNERSHIP". "TAXES" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "TENANT ALLOWANCE" means a cash allowance paid to a tenant by the landlord pursuant to a Lease. "TI WORK" means any construction or other "build-out" of tenant leasehold improvements to the space demised to such tenant under Leases (excluding such tenant's furniture, fixtures and equipment) performed pursuant to the terms of such Leases, whether or not such tenant improvement work is performed by or on behalf of the landlord or as part of a Tenant Allowance. "TOTAL G&A EXPENSE" means, for any period, the total general and administrative expenses of the Company and its Subsidiaries for such period as determined in accordance with GAAP. "TOTAL INTEREST EXPENSE" means, for any period, the sum, without duplication, of (i) interest expense of the Company and its Subsidiaries paid during such period (with appropriate adjustments for minority interests) and (ii) interest expense of the -27- Company and its Subsidiaries accrued and/or capitalized for such period (with appropriate adjustments for minority interests) and (iii) the portion of the interest expense of Joint Ventures allocable to the Company and its Subsidiaries in accordance with GAAP on account of ownership of Joint Venture Holdings and paid during such period and (iv) the portion of the interest expense of Joint Ventures allocable to the Company and its Subsidiaries in accordance with GAAP on account of ownership of Joint Venture Holdings and accrued and capitalized for such period, in each case including participating interest expense but excluding extraordinary interest expense, and net of amortization of deferred costs associated with new financings or refinancings of existing Indebtedness. "TOTAL OUTSTANDING INDEBTEDNESS" means, as of any date, the sum, without duplication, of (i) the amount of Indebtedness of the Company and its Subsidiaries set forth on the then most recent quarterly financial statements of the Company, prepared in accordance with GAAP, plus any additional Indebtedness incurred by the Company and its Subsidiaries since the time of such statements (with appropriate adjustments for minority interests) and (ii) the outstanding amount of Joint Venture Indebtedness allocable in accordance with GAAP on account of ownership of Joint Venture Holdings to any of the Company and its Subsidiaries as of the time of determination (with appropriate adjustments for minority interests) and (iii) the Contingent Obligations of the Company and its Subsidiaries and, to the extent allocable to the Company and its Subsidiaries in accordance with GAAP on account of ownership of Joint Venture Holdings, of the Joint Ventures (with appropriate adjustments for minority interests). "TOTAL SECURED OUTSTANDING INDEBTEDNESS" means, as of any date, the portion of Total Outstanding Indebtedness that is Secured Indebtedness. "TOTAL UNENCUMBERED VALUE" means, as of any date, the sum, without duplication, of each of the following items, to the extent that each such item (the Project, the Management Contract, Cash and Cash Equivalents, Permitted Investments, Marketable Securities or other underlying assets, as applicable) is not subject to any Lien and, in each case, with appropriate adjustments for minority interests to reflect the actual percentage interest to which the Company and its Subsidiaries is entitled: (i) in respect of Unencumbered Eligible Projects owned for at least four (4) fiscal quarters, Adjusted Property EBITDA for such Unencumbered Eligible Projects as of the first day of the fiscal quarter in which such date occurs for the previous four (4) consecutive fiscal quarters divided by .10, (ii) the investment (at cost without depreciation) in Unencumbered Eligible Projects owned for fewer than four (4) consecutive fiscal quarters which is allocable to the Company and its Subsidiaries (with appropriate adjustments for minority interests), (iii) the product of 5 multiplied by the lesser of (a) the Adjusted Management EBITDA for the previous four (4) consecutive fiscal quarters or (b) the product of 2 multiplied by Adjusted Management EBITDA for the previous two (2) consecutive fiscal quarters, which amount under this clause (iii) shall not exceed 20% of Total Unencumbered Value, and (iv) the difference between (A) the sum of (1) unrestricted Cash and Cash Equivalents which would be included on the Consolidated Businesses' consolidated balance sheet as of such date, plus (2) the Fair Market Value of all Permitted -28- Investments and Marketable Securities held by the Company and its Subsidiaries, minus (B) $20,000,000; provided, that (y) the aggregate investments in Unencumbered Eligible Projects which are not office, industrial/manufacturing, retail or distribution/warehouse shall not exceed (solely for purposes of this definition) 10% of the Total Unencumbered Value and (z) the aggregate investments in Unencumbered Eligible Projects which are not 100% owned (or leased under an Eligible Ground Lease) by a Borrower shall not exceed (solely for purposes of this definition) 15% of Total Unencumbered Value. "TOTAL UNSECURED OUTSTANDING INDEBTEDNESS" means, as of any date, the portion of Total Outstanding Indebtedness that is Unsecured Indebtedness. "TOTAL VALUE" means, as of any date, the sum, without duplication, of (i) in respect of Projects owned or ground-leased by the Company and its Subsidiaries for at least four (4) fiscal quarters, the Adjusted Property EBITDA for such Projects as of the first day of the fiscal quarter in which such date occurs for the previous four (4) consecutive fiscal quarters divided by .10; (ii) the investment (at cost without depreciation) in Projects owned or ground-leased by the Company and its Subsidiaries for fewer than four fiscal quarters (with appropriate adjustments for minority interests); (iii) the investment (at cost without depreciation) in Joint Venture Holdings for fewer than four fiscal quarters which is allocable to the Company and its Subsidiaries based on their ownership interests in the related Joint Ventures in accordance with GAAP (with appropriate adjustments for minority interests); (iv) unrestricted Cash and Cash Equivalents which would be included on the Consolidated Businesses' consolidated balance sheet as of such date (with appropriate adjustments for minority interests); (v) investments in notes secured by mortgages on the Real Property of any Person, at cost, less an amount equal to accrued amortization payments in respect thereof, which amount under this clause (v) shall be limited to 15% of Total Value; (vi) the REIT Investment Value, which amount under this clause (vi) shall be limited to a maximum of $50,000,000; (vii) the Fair Market Value of all Permitted Investments and Marketable Securities held by the Company and its Subsidiaries; (viii) the product of 5 multiplied by the lesser of (a) the Adjusted Management EBITDA for the previous four fiscal quarters or (b) the product of 2 multiplied by the Adjusted Management EBITDA for the previous two fiscal quarters, which amount under this clause (viii) shall be limited to 30% of Total Value; (ix) the book value of all loans made by the Company and its Subsidiaries to CPA REITs, which amount under this clause (ix) shall be limited to a maximum of $50,000,000, and (x) 85% of the Net Asset Value of all investments in the securities of the CPA REITs, which amount under this clause (x) shall be limited to 5% of Total Value. Notwithstanding the foregoing, (x) the aggregate investments by the Company and its consolidated Subsidiaries in Properties which are not office or industrial/manufacturing, retail or distribution/warehouse in nature shall not exceed (solely for purposes of this definition) ten percent (10%) of Total Value, (y) the aggregate investments by the Company and its consolidated Subsidiaries in Properties which are located outside the United States shall not exceed (solely for purposes of this definition) fifteen percent (15%) of Total Value, and (z) the sum of the aggregate investments by the Company and its consolidated Subsidiaries in the following items shall not exceed (solely for purposes of this definition) fifty percent -29- (50%) of Total Value: (A) the aggregate investments by the Company and its consolidated Subsidiaries described in the foregoing clauses (v), (vi), (viii), (ix), and (x), (B) the aggregate investments by the Company and its consolidated Subsidiaries in Properties which are not office or industrial/manufacturing, retail or distribution/warehouse in nature, and (C) the aggregate investments by the Company and its consolidated Subsidiaries in Properties which are located outside the United States. "TRANSACTIONS" means the execution, delivery and performance by the Borrowers of this Agreement, the borrowing of Loans, the use of the proceeds thereof, the issuance of Letters of Credit hereunder and the execution, delivery and performance by the Borrowers or the Subsidiaries (who may be parties to the Loan Documents) of the other Loan Documents, and the transactions contemplated by the Loan Documents. "TRIPLE NET LEASE" means a Lease representing all or substantially all of the rentable area of a Property where the tenant is responsible for real estate taxes and assessments, repairs and maintenance, insurance and other expenses relating to such Property, provided, that adequate insurance is maintained for such Property either by the tenant, the Company, a Subsidiary or a Joint Venture. Notwithstanding the foregoing, a Triple Net Lease may be subject to the landlord's express contractual obligations with respect to the payment of taxes, assessments, ground rents, utility charges, exterior maintenance and maintenance of all non-interior areas and any capital expenditures related thereto (such as roof, structure and parking) (the "CONTRACTUAL OBLIGATIONS") so long as the capital expenditures have been adequately accounted for in accordance with GAAP; provided, that the projected average annual Contractual Obligations shall not exceed 10% of the projected average gross annual rent under such Lease. For purposes of this definition, (a) the obligation of a landlord to make capital improvements or repairs as a condition to a tenant's occupancy (e.g., build to suit transactions) shall not be deemed to be an undertaking by such landlord of any tenant maintenance or repair obligations and (b) the improvements to be constructed by such landlord described in the immediately preceding clause (a) shall not be included as a capital expenditure. "TYPE", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "UNCONSOLIDATED ENTITY" means, with respect to any Person, at any date, any other Person in whom such Person holds an investment, which investment is accounted for in the financial statements of such Person on an equity basis of accounting and whose financial results would not be consolidated under GAAP with the financial results of such Person on the consolidated financial statements of such Person if such statements were prepared as of such date. "UNENCUMBERED ELIGIBLE PROJECT" means an Eligible Project (a) which is located in the United States, (b) with respect to which either (i) one or more of the -30- Borrowers collectively have an ownership interest of one hundred percent (100%) or a ground leasehold interest under an Eligible Ground Lease, or (ii)(A) one or more of the Borrowers collectively have an ownership interest (whether directly or through an interest in a Joint Venture) of more than fifty percent (50%), (B) one or more Affiliates of the Borrowers collectively have all of the remaining ownership interests (whether directly or through an interest in a Joint Venture) not owned by the Borrowers and (C) one or more of the Borrowers collectively control the management of such Project, and (c) which is not subject (nor are any equity interests therein owned by the Borrowers and their Subsidiaries subject) to any Liens or preferred equity interests, except for Permitted Encumbrances and buy-sell rights with respect to Joint Ventures on customary terms and conditions. As used in this definition only, the term "control" shall mean the authority, with sole discretion, to make major management decisions with respect to the applicable Project, including with respect to sale, financing, refinancing, capital improvements, leasing and the grant of Liens on such Project and to manage the day-to-day operations of such Project. "UNSECURED INDEBTEDNESS" means any Indebtedness not secured by a Lien, including any Indebtedness hereunder but excluding, to the extent otherwise includable therein, any Indebtedness in respect of Guarantees of Nonrecourse Carveouts. "UNSECURED INTEREST EXPENSE" means, for any period, the greater of (i) Total Interest Expense attributable to the Total Unsecured Outstanding Indebtedness for such period or (ii) the interest expense that would have been paid, accrued or capitalized on the Total Unsecured Outstanding Indebtedness for such period, assuming for such period an interest rate of 7%. "UNUSED COMMITMENT" means, as of any date, with respect to each Lender, its Commitment less its Revolving Credit Exposure. "UNUSED COMMITMENT FEE RATE" means the applicable rate per annum set forth below under the caption "Unused Commitment Fee Rate" for any Unused Commitment amounts based upon the range into which the Leverage Ratio then falls in accordance with the following table:
Unused Commitment Fee Leverage Ratio Rate - -------------- --------------------- less than 35% 0.15% > or = 35% - less than 45% 0.175% > or = 45% - 55% (or higher) 0.20%
Any change in the Unused Commitment Fee Rate shall be effective as of the financial reporting dates set forth in Section 5.1 or as of the date of any borrowing on which the Leverage Ratio changes. -31- "WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, at any date, any subsidiary of such Person of which 100% of the outstanding shares of capital stock or other equity interests having ordinary voting power is at the time, directly or indirectly, owned by such Person. "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part 1 of Subtitle E of Title IV of ERISA. SECTION 1.2. CLASSIFICATION OF LOANS AND BORROWINGS. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar Revolving Borrowing"). SECTION 1.3. TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof' and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.4. ACCOUNTING TERMS; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Company notifies the Administrative Agent that the Company requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Company that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such -32- notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II. THE CREDITS SECTION 2.1. COMMITMENTS. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrowers from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments at such time. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrowers may borrow, repay and reborrow Revolving Loans. No Loans may be borrowed or reborrowed after the end of the Availability Period. SECTION 2.2. LOANS AND BORROWINGS. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.4. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, (i) each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Revolving Loans as the Company or a Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be comprised entirely of Eurodollar Competitive Loans. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrowers to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $500,000 and not less than $1,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $500,000 and not less than $1,000,000; provided that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.6(e). Each Competitive Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $20,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of eight Eurodollar Revolving Borrowings outstanding. -33- (d) Notwithstanding any other provision of this Agreement, the Company and the other Borrowers shall not be entitled to request, or to elect to convert to or continue, any Eurodollar Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date, or if prohibited by Section 2.8(e). SECTION 2.3. REQUESTS FOR REVOLVING BORROWINGS. To request a Revolving Borrowing, the Company or the Company on behalf of any of the Borrowers shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; provided that any such notice of an ABR Revolving Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.6(e) may be given not later than 10:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request substantially in the form set forth in EXHIBIT C and signed by the Company. Each such request shall be accompanied by an Officer's Certificate as to pro forma financial covenant compliance required by Section 6.1(i). Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.2 and shall constitute a representation that the conditions in Section 4.1 and Section 4.2 have been satisfied on such date and will be satisfied on the date of such Borrowing: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Revolving Borrowing; (iv) in the case of a Eurodollar Revolving Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Company's or such Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.7. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Company and the Borrowers shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Revolving Loan to be made as part of the requested Borrowing. -34- SECTION 2.4. COMPETITIVE BID PROCEDURE. (a) Subject to the terms and conditions set forth herein, from time to time during the Availability Period the Company or the Company on behalf of any of the Borrowers may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; provided that (i) Moody's or S&P has established an Investment Grade Credit Rating which is in effect, (ii) upon giving effect to the borrowing of such Competitive Loans, the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans at any time would not exceed the total Commitments at such time and (iii) upon giving effect to the borrowing of such Competitive Loans, the sum of the total principal amount of the outstanding Competitive Loans does not exceed 50% of the total Commitments. To request Competitive Bids, the Company or a Borrower shall notify the Administrative Agent of such request by telephone, not later than 11:00 a.m., New York City time, four Business Days before the date of the proposed Borrowing; provided that a Competitive Bid Request shall not be made within 5 Business Days after the date of any previous Competitive Bid Request. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Company. Each such request shall be accompanied by an Officer's Certificate as to pro forma financial covenant compliance required by Section 6.1(i). Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.2 and shall constitute a representation that the conditions in Section 4.1 and Section 4.2 have been satisfied on such date and will be satisfied on the date of such Borrowing: (i) the aggregate amount of the requested Borrowing, which shall be not less than $20,000,000 or, if larger, an integral multiple of $1,000,000; (ii) the date of such Borrowing, which shall be a Business Day; (iii) the Interest Period to be applicable to such Borrowing, which shall be a period contemplated by the definition of the term "Interest Period"; and (iv) the location and number of the Company's or such Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.7. Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Company or to the Company on behalf of any of the Borrowers in response to a Competitive Bid Request. Each Competitive Bid by a -35- Lender must be in a form approved by the Administrative Agent and must be received by the Administrative Agent by telecopy, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially in the form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Competitive Loans to be funded pursuant to a Competitive Bid may, as provided in Section 9.4(h), be funded by a Lender's Designated Bank. A Lender making a Competitive Bid may, but shall not be required to, specify in its Competitive Bid whether the related Competitive Loans are intended to be funded by such Lender's Designated Bank, as provided in Section 9.4(h). Each Competitive Bid shall specify (i) the identity of the Lender and the contact person at such Lender for such Competitive Bid, (ii) the principal amount (which shall be a minimum of $5,000,000 and an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Company or by the Company on behalf of any of the Borrowers) of the Competitive Loan or Loans that the applicable Lender is willing to make, (iii) the Competitive Bid Rate or Rates at which such Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iv) the Interest Period applicable to each such Loan and the last day thereof. (c) The Administrative Agent shall promptly notify the Company or the Company in respect of any of the Borrowers by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Subject only to the provisions of this paragraph, the Company or the Company on behalf of any of the Borrowers may accept or reject any Competitive Bid. The Company or the Company on behalf of any of the Borrowers shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent, whether and to what extent it has decided to accept or reject each Competitive Bid, not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing; provided that (i) the failure of the Company to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) the Company shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Company rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Company shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, the Company may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) -36- above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) above the amounts shall be rounded to integral multiples of $1,000,000 in a manner determined by the Company. A notice given by the Company or the Company on behalf of any of the Borrowers pursuant to this paragraph shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. A Lender who is notified that it has been selected to make a Competitive Loan may designate its Designated Bank (if any) to fund such Competitive Loan on its behalf, as described in Section 9.4(h). Any Designated Bank which funds a Competitive Loan shall on and after the time of such funding become the obligee in respect of such Competitive Loan and be entitled to receive payment thereof when due. (f) If the entity which is the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Company or to the Company on behalf of any of the Borrowers at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. SECTION 2.5. EXTENSION OF MATURITY DATE. So long as no Default has occurred and is continuing, the Company may elect, at least 30 days but no more than 90 days prior to the Maturity Date, to extend the Maturity Date for one (1) year by providing written notice of such election to the Administrative Agent (which shall promptly notify each of the Lenders). If (i) on the date of such notice and the effective date of such extension, no Default exists and is continuing, (ii) the Borrowers pay to the Administrative Agent, for the pro rata benefit of the Lenders based on their Applicable Percentages, an extension fee equal to .20% of the then total Commitments, and (iii) the Company has given written notice to the Administrative Agent of such election to extend the Maturity Date within the time frame set forth in this Section 2.5, the Maturity Date shall be extended to May 27, 2008. SECTION 2.6. LETTERS OF CREDIT. (a) General. Subject to the terms and conditions set forth herein, the Company or the Company on behalf of any Borrower may request the issuance of Letters of Credit for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the period commencing on the Closing Date and ending on the date that is 30 days prior to the Maturity Date, provided that the amount of each Letter of Credit so requested shall be not less than $300,000. In the event of any inconsistency between the terms and conditions of this Agreement and -37- the terms and conditions of any form of letter of credit application or other agreement submitted by the Company or the Company on behalf of any of the Borrowers to, or entered into by the Company or a Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Company or the Company on behalf of any of the Borrowers shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (at least four (4) Business Days in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. Each such notice shall be accompanied by an Officer's Certificate as to pro forma financial covenant compliance required by Section 6.1(i). The Administrative Agent shall provide copies of such notice and Officer's Certificate to each Lender promptly after receipt thereof. If requested by the Issuing Bank, the Company or such Borrower also shall submit a letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Company or such Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $20,000,000 and (ii) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans shall not exceed the total Commitments at such time. (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is 30 days prior to the Maturity Date. (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC -38- Disbursement made by the Issuing Bank and not reimbursed by the Borrowers on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrowers for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit (subject to Section 2.6(c)) is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Notwithstanding anything to the contrary set forth herein, the aggregate amount to be paid by any Lender with respect to any drawing under a Letter of Credit (whether as a payment pursuant to this Section 2.6(d) or a Loan pursuant to Section 2.3) shall not exceed its Applicable Percentage of such drawing. (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrowers shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if the Company or the Company on behalf of any of the Borrowers shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Company or the Company on behalf of any of the Borrowers prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that the Company or the Company on behalf of any of the Borrowers receive such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Company or the Company on behalf of any of the Borrowers receives such notice, if such notice is not received prior to such time on the day of receipt; provided that the Company or the Company on behalf of any of the Borrowers may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.3 that such payment be financed with an ABR Revolving Borrowing in an equivalent amount and, to the extent so financed, the Borrowers' obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing. If the Borrowers fail to (or are not permitted to) finance such payment with an ABR Revolving Borrowing and fail to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrowers in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrowers, in the same manner as provided in Section 2.7 with respect to Loans made by such Lender (and Section 2.7 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrowers pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to -39- such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of ABR Revolving Loans as contemplated above) shall not constitute a Loan and shall not relieve the Borrowers of their obligation to reimburse such LC Disbursement. (f) Obligations Absolute. The Borrowers' obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be joint and several, absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrowers' obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing (and the agreement of the Borrowers in the first sentence of this Section 2.6(f)) shall not be construed to excuse the Issuing Bank from liability to the Borrowers to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrowers to the extent permitted by applicable law) suffered by the Borrowers that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. -40- (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Company or the Company on behalf of any of the Borrowers by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrowers of their obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement nor shall the Issuing Bank have any liability whatsoever to the Borrowers or the Lenders for any failure to give any such notice. (h) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrowers shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrowers reimburse such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; provided that, if the Borrowers fail to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraphs (d) or (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Company, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrowers shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. If any Event of Default shall occur and be continuing, on the Business Day that the Company or the Company on behalf of any of the Borrowers receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Lenders with LC Exposure representing at least 51% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph, the Borrowers shall deposit in an -41- account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to any of the Borrowers described in clause (h) or (i) of Article VII. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrowers under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrowers' risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrowers for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of the Lenders with LC Exposure representing at least 51% of the total LC Exposure), be applied to satisfy other obligations of the Borrowers under this Agreement. If the Borrowers are required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrowers within three Business Days after all Events of Default have been cured or waived. SECTION 2.7. FUNDING OF BORROWINGS. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrowers by promptly crediting the amounts so received, in like funds, to an account of the Company maintained with the Administrative Agent in New York City and designated by the Borrowers in the applicable Borrowing Request or Competitive Bid Request; provided that ABR Revolving Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.6(e) shall be remitted by the Administrative Agent to the Issuing Bank. (b) Unless the Administrative Agent shall have received written notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrowers a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrowers severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and -42- including the date such amount is made available to the Borrowers to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrowers, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing as of the date of such Borrowing. If any interest is paid by the Borrowers as described above for any period with respect to any amount funded by the Administrative Agent pursuant to this paragraph, the Borrowers shall not be required to pay interest on such amount pursuant to Section 2.13 in respect of such period. SECTION 2.8. INTEREST ELECTIONS. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrowers may elect to convert such Revolving Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrowers may elect different options with respect to different portions of the affected Revolving Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrowers shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.3 if the Borrowers were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrowers. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.2: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Revolving Borrowing; and -43- (iv) if the resulting Borrowing is a Eurodollar Revolving Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Revolving Borrowing but does not specify an Interest Period, then the Borrowers shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrowers fail to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrowers, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.9. TERMINATION AND REDUCTION OF COMMITMENTS. (a) Unless previously terminated, the Commitments shall terminate on the Maturity Date. (b) The Borrowers may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $500,000 and not less than $5,000,000, (ii) the Borrowers shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the sum of the Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the total Commitments and (iii) the Borrowers shall not reduce the total Commitments to an amount less than $100,000,000 unless the Commitments are terminated. (c) The Borrowers shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrowers pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrowers may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrowers (by notice to the Administrative Agent on or prior to the specified effective date) if such -44- condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. SECTION 2.10. REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrowers hereby unconditionally and jointly and severally promise to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan not later than the Maturity Date, and (ii) to the Administrative Agent for the account of each applicable Lender the then unpaid principal amount of each Competitive Loan on the last day of the Interest Period applicable to such Loan. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrowers to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrowers to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein, provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrowers to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it be evidenced by a Note. In such event, the Borrowers shall prepare, execute and deliver to such Lender a Note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns). Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after assignment pursuant to Section 9.4) be represented by one or more Notes in such form payable to the order of the payee named therein. SECTION 2.11. PREPAYMENT OF LOANS. (a) The Borrowers shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section; provided that, unless otherwise provided in a Competitive Bid, the Borrowers shall not have the right to prepay any Competitive Loan without the prior consent of the Lender thereof. (b) The Borrowers shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of -45- a Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment and (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.9, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.9. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.2. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. (c) If at any time from and after the Closing Date: (i) the Company merges or consolidates with another Person and the Company is not the surviving entity, or (ii) any Person and the Company or a Subsidiary merge into the Company or a Subsidiary in a transaction in which the Company or a Subsidiary is the surviving corporation and an Event of Default has occurred as a result thereof (the date either such event shall occur being the "PREPAYMENT DATE"), the Borrowers shall be required to prepay the Loans in their entirety as if the Prepayment Date were the Maturity Date and the Commitments thereupon shall be terminated. The Borrowers shall immediately make such prepayment together with the interest accrued to the date of the prepayment on the principal amount prepaid and shall return or cause to be returned all Letters of Credit to the Issuing Bank. In connection with the prepayment of any Loan prior to the maturity thereof, the Borrowers shall also pay any applicable expenses pursuant to Section 2.16. Each such prepayment shall be applied to prepay ratably the Loans of the Lenders. Amounts prepaid pursuant to this clause (c) may not be reborrowed. (d) The Borrowers shall prepay Loans to the extent required by Section 5.2(b). SECTION 2.12. FEES. (a) During the period from and including the Closing Date to but excluding the date on which such Commitment terminates, the Borrowers jointly and severally agree to pay to the Administrative Agent for the account of each Lender (i) in the event that neither Moody's nor S&P has established a Debt Rating which is in effect, an unused commitment fee equal to the Unused Commitment Fee Rate on the daily amount of the Unused Commitment of such Lender (the "UNUSED COMMITMENT FEE AMOUNT") or (ii) in the event Moody's or S&P has established a Debt Rating which is in effect, a facility fee equal to the Facility Fee Rate on the full amount of the Commitment of such Lender (the "FACILITY FEE AMOUNT"); provided that, if such Lender continues to have any Revolving Credit Exposure after its Commitment terminates, then the Facility Fee Amounts pursuant to clause (ii) above shall continue to accrue on the daily amount of such Lender's -46- Revolving Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Revolving Credit Exposure. Accrued Unused Commitment Fee Amounts pursuant to clause (i) above and Facility Fee amounts pursuant to clause (ii) above shall be payable quarterly in arrears on the last day of March, June, September and December of each year commencing on the first such date after the Closing Date, and on the date on which the Commitments terminate; provided that any fees pursuant to clause (i) or (ii) accruing after the date on which the Commitments terminate shall be payable on demand. All fees pursuant to clause (i) or (ii) shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrowers jointly and severally agree to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the same Applicable Rate as interest on Eurodollar Revolving Loans on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Closing Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate of 0.125% per annum on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Closing Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued from and including the Closing Date or the last day of the preceding March, June, September or December, as applicable, to and excluding the last Business Day of March, June, September and December of each year shall be payable on such last Business Day of such month, commencing on the first such date to occur after the Closing Date; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrowers jointly and severally agree to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Company and the Administrative Agent. (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of fees pursuant to paragraph (a) above and participation fees, to the Lenders. Fees paid shall not be refundable under any circumstances. -47- SECTION 2.13. INTEREST. (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest (i) in the case of a Eurodollar Revolving Loan, at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate, or (ii) in the case of a Competitive Loan, at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus (or minus, as applicable) the Margin applicable to such Loan. (c) Notwithstanding the foregoing, (i) if any principal of or interest on any Loan or any fee or other amount payable by the Borrowers hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (A) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (B) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section and (ii) for so long as an Event of Default has occurred and is continuing, the principal balance of all Loans and other Obligations shall bear interest at a rate per annum equal to 2% plus the rate otherwise applicable to such Loans and other Obligations (which for any amounts other than principal of and interest on Loans shall be the rate applicable to ABR Loans). (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error SECTION 2.14. ALTERNATE RATE OF INTEREST. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: -48- (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender that is required to make such Loan) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrowers and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any request by the Borrowers for a Eurodollar Competitive Borrowing shall be ineffective; provided that if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrowers for Eurodollar Competitive Borrowings may be made to Lenders that are not affected thereby. SECTION 2.15. INCREASED COSTS. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank; or (ii) impose on any Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrowers will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of -49- return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrowers will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrowers and shall be conclusive absent manifest error. The Borrowers shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Borrowers shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrowers of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof. (e) Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. SECTION 2.16. BREAK FUNDING PAYMENTS. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Revolving Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11 (b) and is revoked in accordance therewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto -50- as a result of a request by the Borrowers pursuant to Section 2.19, then, in any such event, the Borrowers shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Administrative Agent and shall be conclusive absent manifest error. The Borrowers shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. TAXES. (a) Any and all payments by or on account of any obligation of the Borrowers hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrowers shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, each Lender or the Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrowers shall make such deductions and (iii) the Borrowers shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrowers shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrowers shall indemnify the Administrative Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrowers hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrowers by a Lender or the Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive absent manifest error. -51- (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrowers to a Governmental Authority, the Borrowers shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) As a condition to becoming a Lender hereunder, any Foreign Lender (including any assignee), that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which any of the Borrowers is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrowers (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrowers as will permit such payments to be made without withholding or at a reduced rate. SECTION 2.18. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS. (a) The Borrowers shall make each payment required to be made by them hereunder (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be made directly to the Issuing Bank as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.3 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. -52- (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, except pursuant to Section 2.19, obtain payment in respect of any principal of or interest on any of its Revolving Loans or participations in LC Disbursements resulting to such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans and participations in LC Disbursements than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans and participations in LC Disbursements of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans and participations in LC Disbursements; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrowers pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrowers or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrowers consent to the foregoing and agree, to the extent they may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrowers rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrowers in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrowers prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrowers will not make such payment, the Administrative Agent may assume that the Borrowers have made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrowers have not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Sections 2.6(d) or (e), 2.7(b) or 2.18(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. -53- SECTION 2.19. MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS. (a) If any Lender requests compensation under Section 2.15, or if the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrowers hereby agree to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrowers may, at their sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.4), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrowers shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, the Issuing Bank), which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans) and participations in LC Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrowers to require such assignment and delegation cease to apply. SECTION 2.20. INCREASE IN COMMITMENT. Unless a Default has occurred and is continuing, and subject to the satisfaction of the conditions in Section 2.20(b), the Company, by written notice to the Administrative Agent (the "ADDITIONAL COMMITMENT NOTICE"), may request on up to two (2) occasions during the Availability Period and prior to May 27, 2006 that the total Commitments be increased by an amount not less than $20,000,000 per request and not more than $50,000,000 in the aggregate (such that the total Commitments after such increase shall never exceed $225,000,000); provided that for any such request (a) any Lender which is a party to this Agreement prior to such request for increase, at its sole discretion, may elect to increase its Commitment, but shall not have any obligation to so increase its -54- Commitment, and (b) in the event that the Lenders party to this Agreement prior to such request do not elect to increase their respective Commitments to cover the amount of the requested increase, the Arranger shall use commercially reasonable efforts to locate additional lenders reasonably acceptable to the Administrative Agent willing to hold commitments for the requested increase. In the event that lenders commit to any such increase, (i) the Commitments of the committed Lenders shall be increased accordingly, (ii) the Applicable Percentages of each of the Lenders shall be adjusted accordingly (or, in the case of a new lender not previously party hereto, added to SCHEDULE 1) and the Borrowers shall make such borrowings and repayments as shall be necessary to effect such reallocation of the Commitments, (iii) if requested by any Lender making an additional or new commitment, new Notes shall be issued, and (iv) other changes shall be made by way of supplement, amendment or restatement of any Loan Document as may be necessary or desirable to reflect the aggregate amount, if any, by which Lenders have agreed to increase their respective Commitments or any other lenders have agreed to make new commitments pursuant to this Section 2.20 without the consent of any Lender other than those Lenders increasing their Commitments. The fees payable by the Borrowers upon any such increase in Commitments shall be agreed upon by the Arranger and the Borrowers at the time of such increase. In the event of any such increase of the Commitments pursuant to this Section 2.20, the aggregate LC Exposure of the Lenders shall remain $20,000,000. Notwithstanding the foregoing, nothing in this Section 2.20 shall constitute or be deemed to constitute an agreement by any Lender to increase its Commitment hereunder. (b) Notwithstanding the foregoing, an increase in the aggregate amount of the Commitments shall be effective only if (i) no Default shall have occurred and be continuing on the date of the Additional Commitment Notice and the date such increase is to become effective; (ii) each of the representations and warranties made by each of the Borrowers in this Agreement and the other Loan Documents shall be true and complete on and as of the date of the Additional Commitment Notice and the date such increase is to become effective with the same force and effect as if made on and as of such date (or, if any such representation or warrant is expressly stated to have been made as of a specific date, as of such specific date); (iii) the Administrative Agent shall have received (x) such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the authorization of such increase and (y) a favorable written opinion (addressed to the Administrative Agent and the Lenders) of counsel for the Borrowers substantially in the form of EXHIBIT E-1, after giving effect to such increase; and (iv) the Company and its Subsidiaries shall be in compliance with Article VI. -55- ARTICLE III. REPRESENTATIONS AND WARRANTIES The Company and each Borrower jointly and severally represent and warrant to the Lenders, the Administrative Agent and the Issuing Bank that: SECTION 3.1. ORGANIZATION; POWERS. Each of the Company, its Affiliates and the other Borrowers is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. Neither the Company nor any of the Borrowers is a "foreign person" within the meaning of Section 1445 of the Code. SECTION 3.2. AUTHORIZATION; ENFORCEABILITY. (a) The Transactions have been duly authorized by all necessary limited liability company action of the Company and by all necessary partnership, limited liability company or corporate action of the Subsidiary Partnerships. Each of the Borrowers has the requisite power and authority to perform this Agreement and the other Loan Documents. This Agreement has been duly authorized, executed and delivered by the Borrowers and constitutes a legal, valid and binding obligation of the Borrowers, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. (b) SCHEDULE 3.2 contains a diagram indicating the ownership structure of the Company, and any other Person in which the Company holds a direct or indirect partnership, joint venture or other equity interest, indicating the nature of such interest with respect to each Person included in such diagram and accurately sets forth (1) the correct legal name of such Person, the jurisdiction of its incorporation or organization and, for each Borrower, the jurisdictions in which it is qualified to transact business as a foreign corporation, or otherwise, and (2) the authorized, issued and outstanding shares or interests of each class of securities of the Company. None of such issued and outstanding securities is subject to any vesting, redemption, or repurchase agreement, and there are no warrants or options outstanding with respect to such securities, except as noted on such Schedule. The outstanding capital stock of the Company is duly authorized, validly issued, fully paid and nonassessable. (c) The Company's limited partnership, limited liability company or corporate interest in each of the Subsidiary Partnerships is set forth on SCHEDULE 3.2(A). -56- SECTION 3.3. GOVERNMENTAL APPROVALS; No Conflicts. Except as specified on SCHEDULE 3.3, the Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate, and will not require any consent or approval under, any applicable law or regulation or the certificate of formation, limited liability company agreement, certificate of limited partnership, limited partnership agreement or other organizational documents of the Company or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon any of the Company or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Company or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 3.4. FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE. (a) The Company has heretofore furnished to the Lenders (i) its audited financial statements as of December 31, 2003, reported on by PricewaterhouseCoopers LLP, independent public accountants and (ii) its pro forma unaudited balance sheets and statements of income as of March 31, 2004, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations of the Company and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to (y) normal and recurring year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above and (z) any pro forma financial statements contained in such consolidated financial statements are not necessarily indicative of the consolidated financial position of the Company and its Subsidiaries, as of the respective dates thereof and the consolidated results of operations for the periods indicated. (b) Neither the Company nor any of its Subsidiaries has any Contingent Obligation or liability for any taxes, long-term leases or commitments, not reflected in its audited financial statements delivered to the Administrative Agent on or prior to the Closing Date or otherwise disclosed to the Administrative Agent and the Lenders in writing, which will have or is reasonably likely to have a Material Adverse Effect. (c) SCHEDULE 3.4 sets forth, as of the date hereof, all Indebtedness of the Company and its Subsidiaries and, except as set forth on SCHEDULE 3.4, there are no defaults in the payment of principal or interest on any such Indebtedness and no payments thereunder have been deferred or extended beyond their stated maturity and there has been no material change in the type or amount of such Indebtedness. (d) Since December 31, 2003, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Company and its Subsidiaries, taken as a whole. -57- SECTION 3.5. PROPERTIES. (a) Each of the Company and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. A Borrower is the owner of each of the Unencumbered Eligible Projects described in clause (b)(i) of the definition thereof. (b) Each of the Company and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Company and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.6. LITIGATION AND ENVIRONMENTAL MATTERS. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Company nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. SECTION 3.7. COMPLIANCE WITH LAWS AND AGREEMENTS. Each of the Company and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. SECTION 3.8. INVESTMENT AND HOLDING COMPANY STATUS. Neither the Company nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.9. TAXES. Each of the Company and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) -58- Taxes that are being contested in good faith by appropriate proceedings and for which the Company or such Subsidiary, as applicable, has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $250,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $250,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.11. DISCLOSURE. The Company has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the SEC Reports (as defined hereafter) and none of the reports, financial statements, certificates or other information furnished by or on behalf of the Company and the Subsidiaries to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary, in the aggregate, to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that, with respect to projected financial information, the Company represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. SECTION 3.12. INSURANCE. The insurance policies and programs in effect as of the Closing Date and thereafter with respect to the Property, assets and business of the Company and its Subsidiaries are in compliance with Section 5.5. SECTION 3.13. LEASES OTHER THAN ELIGIBLE LEASES. Except as set forth on SCHEDULE 3.13, each Lease pursuant to which the Company or any of its Subsidiaries or Joint Ventures is lessor of a Property (the "COMPANY LEASES") constitutes an Eligible Lease. SECTION 3.14. SEC REPORTS. As of the Closing Date, the Company has filed all forms, reports, statements (including proxy statements) and other documents (such filings by the Company are collectively referred to as the "SEC REPORTS"), required to be filed by it with the Securities and Exchange Commission. The SEC -59- Reports, including all SEC Reports filed after the Closing Date and on or prior to the date of this Agreement, (i) were or will be prepared in all material respects in accordance with the requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations of the Securities Exchange Commission thereunder applicable to such SEC Reports at the time of filing thereof and (ii) did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. SECTION 3.15. REPRESENTATIONS AND WARRANTIES IN LOAN DOCUMENTS. All representations and warranties made by the Company and each other Borrower in the Loan Documents are true and correct in all material respects as of the date of this Agreement and as of any date that the Borrowers are expressly obligated to confirm the same under this Agreement. SECTION 3.16. ORGANIZATIONAL DOCUMENTS. The documents delivered pursuant to Section 4.1 constitute, as of the Closing Date, true and correct copies of all of the organizational documents of the Company and the Subsidiary Partnerships. ARTICLE IV. CONDITIONS SECTION 4.1. CLOSING DATE. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.2): (a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement and all other Loan Documents to which it is a party, signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of each such Loan Document) that such party has signed a counterpart of this Agreement and all other Loan Documents required to be delivered to the Administrative Agent. (b) The Administrative Agent shall have received (i) a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Closing Date) of Reed Smith LLP, counsel for the Company and certain of the Subsidiary Partnerships, and (ii) a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Closing Date) of Colorado local counsel to Broomfield Properties Corp. (which counsel must be reasonably acceptable to the Administrative Agent), substantially in the forms of EXHIBIT E-1, and EXHIBIT E-2, respectively, and -60- covering such other matters relating to the Borrowers, this Agreement or the Transactions as the Required Lenders shall reasonably request. The Company hereby requests such counsel to deliver such opinions. (c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Company and its Affiliates, the authorization of the Transactions and any other legal matters relating to the Company and its Affiliates, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. (d) The Administrative Agent shall have received a certificate, dated the Closing Date and signed by the President, a Vice President or a Financial Officer of the Company, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.2. (e) No change in the business, assets, management, operations, financial condition or prospects of the Company, the other Borrowers or any of their respective Properties shall have occurred since December 31, 2003 which change, in the judgment of the Administrative Agent, will have or is reasonably likely to have a Material Adverse Effect. (f) Except as disclosed on SCHEDULE 4.1(F), since December 31, 2003, the Company has not and shall not have (i) entered into any (as determined in good faith by the Administrative Agent) commitment or transaction, including, without limitation, transactions for borrowings and capital expenditures, which are not in the ordinary course of the Company's business, (ii) declared or paid any dividends or other distributions, (iii) established compensation or employee benefit plans, or (iv) redeemed or issued any equity securities. (g) Since December 31, 2003, no agreement or license relating to the business, operations or employee relations of the Company or any of its Properties shall have been terminated, modified, revoked, breached or declared to be in default, the termination, modification, revocation, breach or default under which, in the reasonable judgment of the Administrative Agent, would result in a Material Adverse Effect. (h) The Administrative Agent shall have received evidence satisfactory to it in its sole discretion that the waivers or consents specified in SCHEDULE 3.3 have been duly obtained. (i) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Closing Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder. -61- (j) The Administrative Agent shall have received an Officer's Certificate duly executed by the President, a Vice President or a Financial Officer of the Company certifying as to pro forma compliance with the financial covenants in Section 6.1 as of the Closing Date (taking into account any Credit Event to occur on such date). (k) The Listed Shares shall be listed for trading on the New York Stock Exchange, Inc. (l) The Administrative Agent shall have received (i) all certificates and other information it shall reasonably request to verify that all Eligible Projects and Unencumbered Eligible Projects satisfy the requirements set forth in the definitions thereof and any other provisions of this Agreement and (ii) current certificates of insurance as to all of the insurance maintained by the Company and its Subsidiaries on the Properties from the insurer or an independent insurance broker or a schedule of insurance from the Company, identifying insurers, types of insurance, insurance limits, and policy terms, and such further information and certificates from the Company, its insurers and insurance brokers as the Administrative Agent may reasonably request. The Administrative Agent shall notify the Borrower and the Lenders of the Closing Date, and such notice shall be conclusive and binding. SECTION 4.2. EACH CREDIT EVENT. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit (such Borrowing, issuance, amendment, renewal or extension referred to herein as a "CREDIT EVENT"), is subject to the satisfaction of the following conditions: (a) The representations and warranties set forth in this Agreement and the other Loan Documents shall be true and correct on and as of the date of such Credit Event. (b) At the time of and immediately after giving effect to such Credit Event, no Default shall have occurred and be continuing. (c) The Borrowers shall not have received written notice from the Required Lenders that an event has occurred since the date of this Agreement which has had, and continues to have, or is reasonable likely to have, a Material Adverse Effect. (d) The Administrative Agent shall have received an Officer's Certificate duly executed by the President, a Vice President or a Financial Officer of the Company as to the pro forma financial covenant compliance required by Section 6.1(i). (e) No law, regulation or order of any Governmental Authority shall prohibit, enjoin or restrain any Lender from making such Borrowing or participating -62- in the issuance, amendment, renewal or extension of such Letter of Credit, as reasonably determined by such Lender. Each Credit Event shall be deemed to constitute a representation and warranty by the Borrowers on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V. AFFIRMATIVE COVENANTS Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Company and each of the other Borrowers covenant and agree with the Lenders that: SECTION 5.1. FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company will furnish to the Administrative Agent and each Lender: (a) Quarterly Reports. (i) Company Quarterly Financial Reports. As soon as practicable, and in any event within forty-five (45) days after the end of each fiscal quarter in each fiscal year (other than the last fiscal quarter in each fiscal year), the Financial Statements of the Company and its subsidiaries on Form 10-Q as at the end of such period and a report setting forth in comparative form the corresponding figures for the corresponding period of the previous fiscal year, certified by a Financial Officer of the Company as fairly presenting the consolidated and, for so long as such statements are prepared in the ordinary course of business, consolidating, financial position of the Company and its Subsidiaries as at the date indicated and the results of their operations and cash flow for the period indicated in accordance with GAAP, subject to normal quarterly adjustments. (ii) Quarterly Compliance Certificates. Together with each delivery of any quarterly report pursuant to paragraph (a)(i) of this Section 5.1, an Officer's Certificate of the Company (the "QUARTERLY COMPLIANCE CERTIFICATES"), signed by a Financial Officer of the Company, substantially in the form of EXHIBIT H hereto, representing and certifying (1) that the Financial Officer of the Company signatory thereto has reviewed the terms of the Loan Documents, and has made, or caused to be made, under his/her supervision, a review in reasonable detail of the Transactions and consolidated and, for so long as such statements are prepared in the ordinary course of business, consolidating financial condition of the Company and its Subsidiaries during the fiscal quarter covered by such reports, that such review has not disclosed the existence during or at the end of such fiscal quarter, and that such officer does not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or event which constitutes a Default or mandatory prepayment event, or, if any such condition or event existed or exists, -63- specifying the nature and period of existence thereof and what action the Company or any of its Subsidiaries has taken, is taking and proposes to take with respect thereto, (2) the calculations (with such specificity as the Administrative Agent may reasonably request) for the period then ended which demonstrate compliance with the covenants and financial ratios set forth in Article VI and, when applicable, that no Event of Default described in Section 7.1 exists, (3) a schedule of the Company's outstanding Indebtedness, including the amount, maturity, interest rate and amortization requirements, as well as such other information regarding such Indebtedness as may be reasonably requested by the Administrative Agent, (4) a schedule of Adjusted Total EBITDA, (5) a schedule of Adjusted Unencumbered Total EBITDA, and (6) calculations, in the form of EXHIBIT F attached hereto, evidencing compliance with each of the financial covenants set forth in Article VI. (b) Annual Reports. (i) Company Financial Statements. As soon as practicable, and in any event within ninety (90) days after the end of each fiscal year, (i) the Financial Statements of the Company and its Subsidiaries on Form 10-K as at the end of such fiscal year and a report setting forth in comparative form the corresponding figures from the consolidated Financial Statements of the Company and its Subsidiaries for the prior fiscal year; (ii) a report with respect thereto of PricewaterhouseCoopers LLP or other independent certified public accountants acceptable to the Administrative Agent, which report shall be unqualified and shall state that such financial statements fairly present the consolidated and, for so long as such statements are prepared in the ordinary course of business, consolidating financial position of each of the Company and its Subsidiaries as at the dates indicated and the results of their operations and cash flow for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except for changes with which PricewaterhouseCoopers LLP or any such other independent certified public accountants, if applicable, shall concur and which shall have been disclosed in the notes to such financial statements) (which report shall be subject to the confidentiality limitations set forth herein); and (iii) in the event that the report referred to in clause (ii) above is qualified, a copy of the management letter or any similar report delivered to the Company or to any officer or employee thereof by such independent certified public accountants in connection with such financial statements. The Administrative Agent and each Lender (through the Administrative Agent) may, with the consent of the Company (which consent shall not be unreasonably withheld), communicate directly with such accountants, with any such communication to occur together with a representative of the Company, at the expense of the Administrative Agent (or the Lender requesting such communication), upon reasonable notice and at reasonable times during normal business hours. (ii) Annual Compliance Certificates. Together with each delivery of any annual report pursuant to clause (i) of this Section 5.1(b), an Officer's Certificate of the Company (the "ANNUAL COMPLIANCE CERTIFICATE" and, collectively with the Quarterly Compliance Certificate, the "COMPLIANCE CERTIFICATES"), signed by the Company's Financial Officer, substantially in the form of EXHIBIT H hereto, -64- representing and certifying (1) that the officer signatory thereto has reviewed the terms of the Loan Documents, and has made, or caused to be made under his/her supervision, a review in reasonable detail of the Transactions and consolidated and, for so long as such statements are prepared in the ordinary course of business, consolidating financial condition of the Company and its Subsidiaries, during the accounting period covered by such reports, that such review has not disclosed the existence during or at the end of such accounting period, and that such officer does not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or event which constitutes a Default or mandatory prepayment event, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company or any of its Subsidiaries has taken, is taking and proposes to take with respect thereto, (2) the calculations (with such specificity as the Administrative Agent may reasonably request) for the period then ended which demonstrate compliance with the covenants and financial ratios set forth in Article VI and, when applicable, that no Event of Default described in Section 7.1 exists, (3) a schedule of the Company's outstanding Indebtedness including the amount, maturity, interest rate and amortization requirements, as well as such other information regarding such Indebtedness as may be reasonably requested by the Administrative Agent, (4) a schedule of Adjusted Total EBITDA, (5) a schedule of Adjusted Unencumbered Total EBITDA, and (6) calculations, in the form of EXHIBIT F attached hereto, evidencing compliance with each of the financial covenants set forth in Article VI hereof. (c) Tenant Bankruptcy Reports. As soon as practicable, and in any event within ninety (90) days after the end of each fiscal year, a written report, in form reasonably satisfactory to the Administrative Agent, of all bankruptcy proceedings filed by or against any tenant of any of the Projects, which tenant occupies two percent (2%) or more of the gross leasable area in the Projects in the aggregate. The Company shall deliver to the Administrative Agent and the Lenders, promptly upon the Company's learning thereof, notice of any bankruptcy proceedings filed by or against, or the cessation of business or operations of, any tenant of any of the Projects which tenant occupies two percent (2%) or more of the gross leasable area in the Projects in the aggregate. (d) Concurrently with any delivery of financial statements under clause (b) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines). (e) Promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Company or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent may reasonably request including without limitation, tax returns, title reports, insurance certificates and environmental site assessments. (f) Within 45 days after the end of each fiscal quarter of the Company, a reasonably detailed description of each acquisition of any Real Property by the -65- Consolidated Businesses or any Joint Venture made during such preceding calendar quarter, all certified by a Financial Officer. SECTION 5.2. NOTICES OF MATERIAL EVENTS. (a) The Company will furnish to the Administrative Agent and each Lender prompt written notice of the following: (i) the occurrence of any Default; (ii) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Company or any Affiliate thereof that, if adversely determined, could reasonably be expected to result to a Material Adverse Effect; (iii) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Company and its Subsidiaries in an aggregate amount exceeding $250,000; and (iv) the receipt of any notice or the occurrence of any event that could reasonably be expected to result in an Environmental Liability of the Company and its Subsidiaries in an aggregate amount exceeding $1,000,000; and (v) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. (b) The Company shall deliver to the Administrative Agent and the Lenders written notice of each of the following events affecting the Company or its Subsidiaries not less than five (5) Business Days prior to the occurrence thereof: (i) a sale, transfer or other disposition of any Unencumbered Eligible Project, (ii) a sale, transfer or other disposition of other assets, in a single transaction or series of related transactions, for consideration in excess of $50,000,000, (iii) an acquisition of assets, in a single transaction or series of related transactions, for consideration in excess of $50,000,000, (iv) the grant of a Lien securing obligations greater than $20,000,000 with respect to any Unencumbered Eligible Project, and (v) the grant of a Lien with respect to other assets, in a single transaction or series of related transactions, in connection with Indebtedness aggregating an amount in excess of $50,000,000. In addition, simultaneously with delivery of any such notice, the Company shall deliver to the Administrative Agent a certificate of a Financial Officer certifying that the Company is in compliance with this Agreement and the other Loan Documents both on a historical basis and on a pro forma basis, exclusive of the property sold, transferred or encumbered and inclusive of the property to be acquired or the indebtedness to be incurred. To the extent such proposed transaction would result in a failure to comply with the financial covenants set forth herein, proceeds of such transaction (together with such additional amounts as may be required), in an amount, as determined by the Administrative Agent, equal to that which would be required to reduce the Obligations so that Company will be in compliance with the covenants set forth herein upon the consummation of the -66- contemplated transaction, shall be paid by the Borrowers and applied to prepay the Obligations. (c) The Company shall promptly notify the Administrative Agent and the Lenders upon obtaining knowledge of the bankruptcy or cessation of operations of any tenant to which greater than two percent (2%) of the Company's share of annual base rent is attributable. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Company setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.3. EXISTENCE; CONDUCT OF BUSINESS. The Company will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business. No Borrower will at any time cause or permit its certificate of formation, limited liability company agreement, certificate of limited partnership, partnership agreement, articles of incorporation, by-laws, or other charter documents, as the case may be, to be modified, amended or supplemented in any respect whatsoever, without, in each case, the express prior written consent or approval of the Administrative Agent, if such changes would materially adversely affect the rights of the Administrative Agent or the Lenders hereunder or under any of the other Loan Documents; provided that if such prior consent or approval is not required, such Borrower shall nonetheless notify the Administrative Agent in writing promptly after such event. SECTION 5.4. PAYMENT OF OBLIGATIONS. The Company will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Company or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.5. MAINTENANCE OF PROPERTIES; INSURANCE. (a) The Company will, and will cause each of its Subsidiaries to, keep and maintain (or cause to be kept and maintained) all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted. (b) The Company and its Subsidiaries will maintain, or will cause tenants of Projects to maintain, with financially sound and reputable insurers, insurance with respect to its properties and its business against general liability, property casualty and such casualties and contingencies as shall be commercially reasonable and in accordance with the customary and general practices of businesses having similar operations and real estate portfolios in similar geographic areas and in amounts, -67- containing such terms, in such forms and for such periods as may be reasonable and prudent for such businesses, including without limitation, insurance policies and programs sufficient to cover (i) the replacement value of the improvements at Projects owned by the Company and its Subsidiaries (less commercially reasonable deductible amounts) and (ii) liability risks associated with such ownership (less commercially reasonable deductible amounts). SECTION 5.6. BOOKS AND RECORDS; INSPECTION RIGHTS. The Company will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Company will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. SECTION 5.7. COMPLIANCE WITH LAWS. The Company will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, including all Environmental Laws, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.8. USE OF PROCEEDS AND LETTERS OF CREDIT. No Letters of Credit and no part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X. The proceeds of the Loans will be used only for the purposes of: (a) acquisition of Projects or Joint Venture Holdings; (b) renovation of Properties owned by the Company or its consolidated Subsidiaries; (c) funding of TI Work and Tenant Allowances; (d) financing expansions, renovations and new construction related to Properties owned by the Company or its consolidated Subsidiaries; (e) refinancing or repayment of existing or future Indebtedness for borrowed money; (f) working capital needs of the Company and other general corporate purposes; (g) investments in Mortgage Assets; (h) redemptions or purchases by the Company of Listed Shares; and -68- (i) making loans to and investments in CPA REITs; provided that such loans and investments do not exceed $50,000,000 in the aggregate. SECTION 5.9. COMPANY STATUS. The Company shall at all times (i) remain a publicly traded company with securities listed on the New York Stock Exchange; (ii) retain direct or indirect control of each of the Subsidiary Partnerships; and (iii) retain 100% ownership of all other Borrowers hereunder. SECTION 5.10. ADDITIONAL BORROWERS; SOLVENCY OF BORROWERS. (a) If, after the Closing Date, a Subsidiary that is not a Borrower acquires any Project that then or thereafter would qualify under the definition of Unencumbered Eligible Project if such Subsidiary were a Borrower or a Management Contract that is to be included in Total Unencumbered Value, then the Company shall cause such Subsidiary to become a Borrower under this Agreement and to execute and deliver an instrument of adherence to this Agreement in substantially the form of EXHIBIT I hereto. (b) The Company and the other Borrowers are Solvent. The Company and the other Borrowers each acknowledge that, subject to the indefeasible payment and performance in full of the Obligations, the rights of contribution among each of them are in accordance with applicable laws and in accordance with each such Person's benefits under the Loans and this Agreement. (c) Other than during the continuance of a Default, at the request of the Company following the delivery of the notice and certificate of a Financial Officer in accordance with Section 5.2(b), a Borrower shall be released by the Administrative Agent from its obligations as a borrower hereunder if and when all of the Projects owned or ground-leased by such Borrower shall cease (not thereby creating a Default) to be an Unencumbered Eligible Project; provided the foregoing shall never permit the release of the Company. SECTION 5.11. FURTHER ASSURANCES. The Company and the other Borrowers will cooperate with, and will cause each of the Subsidiaries to cooperate with, the Administrative Agent and the Lenders and execute such further instruments and documents as the Lenders or the Administrative Agent shall reasonably request to carry out to their reasonable satisfaction the transactions contemplated by this Agreement and the other Loan Documents. SECTION 5.12. DISTRIBUTIONS IN THE ORDINARY COURSE. In the ordinary course of business the Company causes all of its Subsidiaries to make transfers of net cash and cash equivalents upstream to the Company, and the Company shall continue to follow such ordinary course of business. The Company shall not make net transfers of cash and cash equivalents downstream to its Subsidiaries except in the ordinary course of business consistent with past practice. -69- SECTION 5.13. ERISA COMPLIANCE. The Borrowers shall, and shall cause each of the Subsidiaries and ERISA Affiliates to, establish, maintain and operate all Plans to comply in all material respects with the provisions of ERISA, the Code, all other applicable laws, and the regulations and interpretations thereunder and the respective requirements of the governing documents for such Plans. ARTICLE VI. NEGATIVE COVENANTS Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrowers covenant and agree with the Lenders that: SECTION 6.1. INDEBTEDNESS AND OTHER FINANCIAL COVENANTS (a) Indebtedness. As of the first day of each calendar quarter, (i) Total Outstanding Indebtedness shall not exceed fifty-five percent (55%) of Total Value, (ii) the sum, without duplication, of (A) Total Secured Outstanding Indebtedness plus (B) Indebtedness of the Subsidiaries which is permitted under clause (iv) of the second sentence of Section 6.1(g), shall not exceed forty percent (40%) of the Total Value, and (iii) Total Unsecured Outstanding Indebtedness shall not exceed fifty percent (50%) of the Total Unencumbered Value. (b) Minimum Combined Equity Value. The Combined Equity Value as of the last day of each fiscal quarter shall be not less than $550,000,000, plus an amount equal to eighty-five percent (85%) of the Fair Market Value of all Net Offering Proceeds received by the Company after the Closing Date. (c) Minimum Consolidated Interest Coverage Ratio. As of the first day of each calendar quarter for the immediately preceding calendar quarter, the ratio of (i) the sum of Adjusted Total EBITDA for such preceding calendar quarter, to (ii) Total Interest Expense for such quarter shall not be less than 2.25 to 1.0. (d) Minimum Unsecured Interest Coverage Ratio. As of the first day of each calendar quarter, the ratio of (i) Adjusted Unencumbered Total EBITDA for the preceding calendar quarter to (ii) Unsecured Interest Expense for the preceding calendar quarter shall not be less than 2.5 to 1.0. (e) Minimum Fixed Charge Coverage Ratio. As of the first day of each calendar quarter, the ratio of (i) Adjusted Total EBITDA for the preceding calendar quarter, to (ii) Fixed Charges for the preceding calendar quarter shall not be less than 2.0 to 1.0 -70- (f) Maximum Dividend Payout Ratio. The Company shall not make any Restricted Payment during any fiscal quarter, which, when added to all Restricted Payments made during such fiscal quarter and the three immediately preceding fiscal quarters, exceeds ninety percent (90%) of Adjusted Total EBITDA for the four preceding fiscal quarters. For purposes of this provision, "RESTRICTED PAYMENT" means (i) any dividend or other distribution on any equity securities of the Company (except dividends payable solely in equity securities of the Company or in rights to subscribe for or purchase equity securities of the Company) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any equity securities of the Company or (b) any option, warrant or other right to acquire equity securities of the Company. (g) Recourse Indebtedness. The Company will not create, incur, assume or permit to exist any Secured Indebtedness other than (i) Nonrecourse Indebtedness and (ii) Indebtedness that is recourse to the Company in an aggregate amount not to exceed $25,000,000 outstanding at any time. The Company will not permit any Subsidiary to, and no Subsidiary shall, create, incur, assume or permit to exist any Indebtedness other than (i) Indebtedness of any Subsidiary to the Company evidenced by a promissory note (an "INTERCOMPANY NOTE") in the form of EXHIBIT G hereto, (ii) Nonrecourse Indebtedness, (iii) Indebtedness of a Subsidiary (other than a Subsidiary Partnership) to a Subsidiary (other than a Subsidiary Partnership) and (iv) Indebtedness that is recourse to such Subsidiary, but only if such Subsidiary is not a Borrower, was formed solely to own a particular Project, and does not engage in any business other than the ownership of such Project. (h) Negative Pledge. From and after the date hereof, no Borrower shall enter into or permit to exist, and the Company will not permit any Subsidiary to enter into or permit to exist, and no Subsidiary shall enter into or permit to exist, any agreement (i) containing any provision prohibiting the creation or assumption of any Lien upon its properties (other than mechanics liens or judgment liens more than 30 days past due and other than with respect to prohibitions on liens set forth in a mortgage on a particular property), revenues or assets, whether now owned or hereafter acquired, or (ii) restricting the ability of the Company or any Borrower to amend or modify this Agreement or any other Loan Document, or (iii) restricting the ability of any Subsidiary to make or pay dividends or distributions to the Company. (i) Pro Forma Calculations. The Company shall comply with the financial ratios set forth in Section 6.1(a) as of the date of each Credit Event. The Company shall recalculate such financial ratios by adding the amount equal to the Indebtedness associated with such Credit Event to the Indebtedness reflected on the most recently available financial statements, and adding thereto any Indebtedness incurred since the date of such financial statement and adding thereto the value of such assets (determined at cost) -71- acquired with such Indebtedness to Total Value and, if applicable, Total Unencumbered Value. The Company shall deliver an Officer's Certificate, signed by the Financial Officer of the Company, certifying that the pro forma calculations as of the date of such Credit Event demonstrate the Company's compliance with the covenants and financial ratios set forth in Section 6.1(a). SECTION 6.2. LIENS. No Borrower shall and the Company will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Permitted Encumbrances; (b) Liens with respect to Capital Leases of equipment entered into in the ordinary course of business of the Company pursuant to which the aggregate Indebtedness under such Capital Leases does not exceed $50,000 for any Project; and (c) Liens securing Secured Indebtedness, the incurrence of which is not prohibited by Article VI. SECTION 6.3. FUNDAMENTAL CHANGES. (a) No Borrower shall, and the Company will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets, or all or substantially all of the stock of any of its Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except (i) in connection with the issuance, transfer, conversion or repurchase of limited liability company interests in the Company, (ii) if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing, any Person may merge into the Company or a Subsidiary in a transaction in which the Company or a Subsidiary is the surviving corporation, (iii) any Subsidiary may merge with any other Subsidiary; provided, that if any Subsidiary shall be merged with a Subsidiary Partnership, the surviving Subsidiary shall be the Subsidiary Partnership or shall become a Borrower under this Agreement, and (iv) the sale of stock of a Subsidiary (other than a Subsidiary Partnership), subject to the requirements set forth in Section 5.2(b). (b) No Borrower shall, and the Company will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Company and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto. SECTION 6.4. INVESTMENTS, LOANS, ADVANCES, GUARANTEES AND ACQUISITIONS. No Borrower shall, and the Company will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of indebtedness or other securities (including any option, -72- warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (a) Permitted Investments; (b) investments in Real Property (except as otherwise limited in this Section 6.4); (c) investments (including loans and advances) in or to the Subsidiaries (including the CPA REITs); (d) investments in Joint Ventures which are not Subsidiaries; (e) investments in notes secured by mortgages on any Real Property of any Person; (f) investments in Real Property under construction; (g) investments in Real Property consisting of undeveloped land; provided that the aggregate amount of investments in Real Property consisting of undeveloped land shall not exceed 5% of Total Value; (h) investments in Permitted REIT Investments; provided that the aggregate amount of investments in Permitted REIT Investments shall not exceed $50,000,000 (valued at historical cost); (i) investments in Marketable Securities; provided that the aggregate amount of investments in Marketable Securities shall not exceed $50,000,000; (j) investments in securities of tenants under Leases, including any capital stock, warrants, stock options or other equity securities of such tenants and any underlying security thereof, acquired in connection with or arising out of a leasing transaction with such tenant and any subsequent exercise of such warrant or stock options and the ownership of such underlying security thereof; (k) Guarantees by the Company or one of its Subsidiaries of the Indebtedness or other obligations of a wholly-owned Subsidiary, so long as the Indebtedness under such Guarantees is not otherwise prohibited by this Article VI (excluding this Section 6.4); -73- (l) loans and advances by the Company to employees for moving, travel and other business expenses and Guarantees by the Company of the obligations of Joint Ventures and third parties; provided that the aggregate outstanding amount of such loans, advances and Guarantees does not exceed $25,000,000 at any time; and (m) advances or distributions not prohibited by Section 5.12. Notwithstanding the foregoing, investments of the types set forth in clauses (d) through (f) (other than, in the case of clause (f), Real Property under construction that is being built to suit a tenant under an Eligible Lease) shall not exceed 15% of Total Value for such single type of investment, and the aggregate investments of the types set forth in clauses (d), (e), and (f) above (other than, in the case of clause (f), Real Property under construction that is being built to suit a tenant under an Eligible Lease) and (g) above shall not exceed 25% of Total Value. SECTION 6.5. HEDGING AGREEMENTS. No Borrower shall, and the Company will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Company or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. SECTION 6.6. ERISA. The Borrowers shall not, and shall not permit any of the Subsidiaries or ERISA Affiliates to: (a) engage in any prohibited transaction described in Sections 406 of ERISA or 4975 of the Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the United States Department of Labor, except to the extent engaging in such transaction would not have a Material Adverse Effect; (b) permit to exist any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Code), with respect to any Plan, whether or not waived; (c) fail to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Plan; (d) terminate any Plan which would result in any liability of any Borrower or any ERISA Affiliate under Title IV of ERISA; (e) fail to make any contribution or payment to any Multiemployer Plan which any Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto, except to the extent such failure would not have a Material Adverse Effect; -74- (f) fail to pay any required installment or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment; or (g) amend a Plan resulting in an increase in current liability for the plan year such that any Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the Code. SECTION 6.7. MARGIN REGULATIONS; SECURITIES LAWS. Neither the Company nor any of its Subsidiaries shall use all or any portion of the proceeds of any credit extended under this Agreement to purchase or carry Margin Stock. SECTION 6.8. TRANSACTIONS WITH AFFILIATES. Neither the Company nor any of its Subsidiaries shall directly or indirectly enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder or holders of more than five percent (5%) of any class of equity securities of the Company, or with any Affiliate of the Company which is not its Subsidiary, on terms that are determined by the board of directors of the Company to be less favorable to the Company or any of its Subsidiaries, as applicable, than those that might be obtained in an arm's length transaction at the time from Persons who are not such a holder or Affiliate. Nothing contained in this Section 6.8 shall prohibit (a) increases to compensation and benefits for officers and employees of the Company or any of its Subsidiaries which are customary in the industry or consistent with the past business practice of the Company or such Subsidiary, provided that no Default has occurred and is continuing; (b) payment of customary partners' indemnities; (c) performance of any obligations arising under the Loan Documents; and (d) any Restricted Payment permitted by Section 6.1(f). ARTICLE VII. EVENTS OF DEFAULT SECTION 7.1. If any of the following events ("EVENTS OF DEFAULT") shall occur: (a) any Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) any Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three Business Days; (c) any representation or warranty made or deemed made by or on behalf of the Company or any Subsidiary in or in connection with this Agreement or any other Loan Document or any amendment or modification -75- hereof or thereof or waiver hereunder or thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder, shall prove to have been incorrect when made or deemed made or furnished; (d) the Company or any Subsidiary shall fail to observe or perform any covenant, condition or agreement contained in Article V or in Article VI or any covenant, condition or agreement in any Loan Document that becomes effective upon an Event of Default; (e) the Company or any Subsidiary shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent to the Company (which notice will be given at the request of any Lender); (f) the Company or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to Secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness unless prohibited by this Agreement; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Company or any Subsidiary or any of their debts, or of a substantial part of any of their assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of any of their assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Company or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, -76- receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Company or any Subsidiary shall become unable, admit in writing or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $3,000,000 (excluding judgments entered in respect of Nonrecourse Indebtedness and judgments entered in respect of Indebtedness permitted under clause (iv) of the second sentence of Section 6.1(g)) shall be rendered against the Company, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Company or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in liability of the Company or any Subsidiary in an aggregate amount exceeding (i) $250,000 in any year or (ii) $500,000 for all periods; (m) a Change in Control shall occur; (n) an event shall occur which has a Material Adverse Effect; or (o) the Company shall merge or liquidate with or into any other Person and, as a result thereof and after giving effect thereto, (i) the Company is not the surviving Person or (ii) such merger or liquidation would effect an acquisition of or investment in any Person not otherwise permitted under the terms of this Agreement; then, and in every such event (other than an event with respect to any of the Borrowers described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrowers, take one or more of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be -77- declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrowers accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers, (iii) require cash collateral as contemplated by Section 2.6(j), and (iv) enforce any rights and exercise any rights and remedies available under any Loan Document or otherwise; and in the case of any event with respect to any of the Borrowers described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrowers accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers. ARTICLE VIII. THE AGENTS SECTION 8.1. Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Administrative Agent, the Documentation Agent and the Syndication Agents as its agents, in each agent's capacity as such agent, and authorizes the Administrative Agent, the Documentation Agent and the Syndication Agents to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent, the Documentation Agent and the Syndication Agents by the terms hereof, together with such actions and powers as are reasonably incidental thereto. The bank serving as the Administrative Agent, the Documentation Agent and the Syndication Agents, as the case may be, hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, the Documentation Agent or the Syndication Agents, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Company or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent, the Documentation Agent or the Syndication Agents hereunder. The Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent, the Documentation Agent or a Syndication Agent, as the case may be, is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances -78- as provided in Section 9.2), and (c) except as expressly set forth herein, the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Company or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, or any of its Affiliates in any capacity. The Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.2) or in the absence of its own gross negligence or willful misconduct. The Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrowers or a Lender, and the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be. The Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, may consult with legal counsel (who may be counsel for the Company), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any -79- such sub-agent and to the Related Parties of the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, and any such sub-agent of such Related Parties, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent, Documentation Agent or Syndication Agents, as the case may be. Subject to the appointment and acceptance of a successor Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, as provided in this paragraph, (a) the Administrative Agent, the Documentation Agent or a Syndication Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Company and (b) the Required Lenders may remove the Administrative Agent in the event of the Administrative Agent's gross negligence or willful misconduct. Upon any such resignation or removal, the Required Lenders shall have the right, in consultation with the Company (so long as no Event of Default has occurred and is continuing), to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, gives notice of its resignation, then the retiring Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, may, on behalf of the Lenders and the Issuing Bank, appoint a successor Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, which shall be a bank with an office in New York, New York, or an Affiliate of any such bank; provided that such successor Administrative Agent shall have total assets of not less than $10,000,000,000. Upon the acceptance of its appointment as Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, and the retiring Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, shall be discharged from its duties and obligations hereunder. The fees payable by the Company to a successor Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, shall be the same as those payable to its predecessor unless otherwise agreed between the Company and such successor. After the resignation of the Administrative Agent, Documentation Agent or a Syndication Agent, as the case may be, the provisions of this Article and Section 9.3 shall continue in effect for the benefit of such retiring Administrative Agent, Documentation Agent or Syndication Agent, as the case may be, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent, Documentation Agent or Syndication Agent, as the case may be. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Documentation Agent or the Syndication Agents, as the case may be, or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the -80- Documentation Agent or the Syndication Agents, as the case may be, or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX. MISCELLANEOUS SECTION 9.1. NOTICES. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be, in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Company or any Borrower, to it at W.P. Carey & Co. LLC, 50 Rockefeller Plaza, New York, New York 10020, Attention of John J. Park, Chief Financial Officer (Telecopy No. 212-977-3022); (b) if to the Administrative Agent, to JPMorgan Chase Bank, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention: Lillie Washington, Loan and Agency Services (Telecopy No. (713) 750-2892), with copies to JP Morgan Chase Bank, 270 Park Avenue, New York, New York 10017, Attention: Marc E. Costantino (Telecopy No. (212) 270-0213), and JP Morgan Chase Bank, 270 Park Avenue, New York 10017, Attention of William C. Veits, Esq. (Telecopy No (212) 270-1268); (c) if to the Issuing Bank, to JP Morgan Chase Bank, 1111 Fannin, 10th Floor, Houston, Texas 77002, Attention: Lillie Washington, Loan and Agency Services (Telecopy No. (713) 750-2892); and (d) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.2. WAIVERS; AMENDMENTS. (a) No failure or delay by the Administrative Agent, the Issuing Bank or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Bank and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Company or any -81- Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders or by the Borrowers and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) change the Commitment of any Lender without the written consent of such Lender (other than pursuant to an assignment under Section 9.4 or a reduction of Commitments under Section 2.9), (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby (other than extensions of the Maturity Date in accordance with Section 2.5), (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, or (v) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Documentation Agent, the Syndication Agents, or the Issuing Bank hereunder without, in addition, the prior written consent of the Administrative Agent, the Documentation Agent, the Syndication Agents, or the Issuing Bank, as the case may be; provided, further, (x) that SCHEDULE 3.13 may be amended by the Company without the consent of the Required Lenders, solely to update such schedule to include or exclude Leases listed therein which constitute or cease to constitute Eligible Leases, and (y) SCHEDULES 1.1(A), 3.2 and 4.1(F) may be amended by the Company without the consent of the Required Lenders solely to update the information contained therein. Notwithstanding the foregoing, no amendment, waiver or consent shall, unless in writing and signed by the Designating Lender on behalf of its Designated Bank affected thereby, (a) subject such Designated Bank to any additional obligations, (b) reduce the principal of, interest on, or other amounts due with respect to, the Designated Bank Note made payable to such Designated Bank, or (c) postpone any date fixed for any payment of principal of, or interest on, or other amounts due with respect to, the Designated Bank Note made payable to the Designated Bank. -82- SECTION 9.3. EXPENSES; INDEMNITY; DAMAGE WAIVER. (a) The Borrowers shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Administrative Agent, the Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. (b) The Borrowers shall indemnify the Administrative Agent, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "INDEMNITEE") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned, leased or operated by the Company or any of its Subsidiaries, or any Environmental Liability related in any way to the Company or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence or willful misconduct of such Indemnitee. (c) To the extent that any Borrower fails to pay any amount required to be paid by it to the Administrative Agent or the Issuing Bank under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent or the Issuing Bank, as the case may be, such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense -83- or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent or the Issuing Bank in its capacity as such. (d) To the extent permitted by applicable law, the Borrowers shall not assert, and hereby waive, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable promptly after written demand therefor. SECTION 9.4. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that the Borrowers may not assign or otherwise transfer any of their rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrowers without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender or a Lender Affiliate, each of the Borrowers (so long as no Event of Default has occurred and is continuing), the Administrative Agent and the Issuing Bank must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or a Lender Affiliate or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Company (so long as no Event of Default has occurred and is continuing) and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, except that this clause (iii) shall not apply to rights in respect of outstanding Competitive Loans, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an -84- Administrative Questionnaire. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement arising from and after the date of such assignment (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.3). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. If the consent of the Company or any of the other Borrowers is required pursuant to this Section 9.4, and the Company or such Borrower, as the case may be, does not respond to the Administrative Agent's request for consent within five Business Days of such request, the consent shall be deemed given. (c) The Administrative Agent shall maintain at one of its offices a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "REGISTER"). The entries in the Register shall be conclusive, and the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Company, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of or notice to the Borrowers, the Administrative Agent or the Issuing Bank, sell participations to one or more banks or other entities (a "PARTICIPANT") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the -85- Borrowers, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.2(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrowers agree that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.8 as though it were a Lender, provided such Participant agrees to be subject to Section 2.18(c) as though it were a Lender. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Company's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Company is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Company, to comply with Section 2.17(e) as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. (h) Any Lender (each, a "DESIGNATING LENDER") may at any time designate one Designated Bank to fund Competitive Loans on behalf of such Designating Lender subject to the terms of this Section 9.4(h) and the provisions in 9.4(b) and (e) shall not apply to such designation. No Lender may designate more than one (1) Designated Bank. The parties to each such designation shall execute and deliver to the Administrative Agent for its acceptance a Designation Agreement. Upon such receipt of an appropriately completed Designation Agreement executed by a Designating Lender and a designee representing that it is a Designated Bank, the Administrative Agent will accept such Designation Agreement and will give prompt notice thereof to the Company, whereupon, (i) the Borrowers shall execute and deliver to the Designating Bank a Designated Bank Note payable to the order of the Designated Bank, (ii) from and after the effective date specified in the Designation Agreement, the Designated Bank shall become a party to this Agreement with a right to make Competitive Loans on behalf of its Designating Lender pursuant to Section 2.4 after the Borrowers have accepted a Competitive Loan (or portion -86- thereof) of such Designating Lender, and (iii) the Designated Bank shall not be required to make payments with respect to any obligations in this Agreement except to the extent of excess cash flow of such Designated Bank which is not otherwise required to repay obligations of such Designated Bank which are then due and payable; provided, however, that regardless of such designation and assumption by the Designated Bank, the Designating Lender shall be and remain obligated to the Borrowers, the Administrative Agent, the Syndication Agents, the Documentation Agent and the other Lenders for each and every of the obligations of the Designating Lender and its related Designated Bank with respect to this Agreement, including, without limitation, any indemnification obligations hereunder and any sums otherwise payable to the Borrowers by the Designated Bank. Each Designating Lender shall serve as the administrative agent of the Designated Bank and shall on behalf of, and to the exclusion of, the Designated Bank: (i) receive any and all payments made for the benefit of the Designated Bank and (ii) give and receive all communications and notices and take all actions hereunder, including, without limitation, votes, approvals, waivers, consents and amendments under or relating to this Agreement and the other Loan Documents. Any such notice, communication, vote, approval, waiver, consent or amendment shall be signed by the Designating Lender as administrative agent for the Designated Bank and shall not be signed by the Designated Bank on its own behalf but shall be binding on the Designated Bank to the same extent as if actually signed by the Designated Bank. The Borrowers, the Administrative Agent, the Documentation Agent, the Syndication Agents and Lenders may rely thereon without any requirement that the Designated Bank sign or acknowledge the same. No Designated Bank may assign or transfer all or any portion of its interest hereunder or under any other Loan Document, other than assignments to the Designating Lender which originally designated such Designated Bank. SECTION 9.5. SURVIVAL. All covenants, agreements, representations and warranties made by the Borrowers herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.3 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.6. COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Agreement may be executed in counterparts (and by different parties hereto on different -87- counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns in accordance with Section 9.4. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.7. SEVERABILITY. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.8. RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of any or all of the Borrowers against any of and all the obligations of the Borrowers now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.9. GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner -88- provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrowers or their properties in the courts of any jurisdiction. (c) Each of the Borrowers hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.1. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. CONFIDENTIALITY. Each of the Administrative Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) -89- subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivatives transaction relating to the Borrower and its obligations, (g) with the consent of the Company, (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, the Issuing Bank or any Lender on a non-confidential basis from a source other than the Company, or (i) to the extent provided in Section 9.16. For the purposes of this Section, "INFORMATION" means all information received from the Company relating to the Company or its business, other than any such information that is available to the Administrative Agent, the Issuing Bank or any Lender on a non-confidential basis prior to disclosure by the Company. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 9.13. INTEREST RATE LIMITATION. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "CHARGES"), shall exceed the maximum lawful rate (the "MAXIMUM RATE") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.14. AMENDMENT AND RESTATEMENT. (a) The Borrowers, the Administrative Agent and the Lenders hereby agree that on the Closing Date, the terms and provisions of the Existing Credit Agreement shall be and hereby are amended and restated in their entirety by the terms and conditions of this Agreement and the terms and provisions of the Existing Credit Agreement, except as otherwise provided in the next paragraph, shall be superseded by this Agreement. Notwithstanding the amendment and restatement of the Existing Credit Agreement by this Agreement, the Company and all other obligors shall continue to be liable to the Administrative Agent and the Lenders with respect to agreements on the part of the Company and all other obligors, respectively, under the Existing Credit Agreement to pay all principal, interest, fees and other amounts that have accrued on or before the date hereof and to indemnify and hold harmless the Administrative Agent and the Lenders from and against all claims, demands, liabilities, damages, losses, costs, charges and expenses to which the Administrative -90- Agent and the Lenders may be subject arising in connection with the Existing Credit Agreement and as to which the Company or such obligors, as the case may be, have agreed under the Existing Credit Agreement to indemnify and hold harmless the Administrative Agent and the Lenders. This Agreement is given as a substitution of, and not as a payment of, the obligations of the Borrowers under the Existing Credit Agreement and is not intended to constitute a novation of the Existing Credit Agreement. Indebtedness (other than with respect to Competitive Loans) evidenced by the notes issued under the Existing Credit Agreement shall be allocated proportionally among the Lenders based on their respective Commitments in order that after giving effect thereto Lenders shall have outstanding loans representing their portion of the aggregate Commitment, as described on SCHEDULE 1 and the Lenders shall make appropriate payments to each other in order to accomplish such reallocation. On the Closing Date all outstanding principal of all Eurodollar Loans then outstanding under the Existing Credit Agreement shall be deemed to have been prepaid and, except as otherwise selected by the Borrowers by delivery of a Borrowing Notice on or prior to the Closing Date in accordance with the terms hereof, on the Closing Date all amounts outstanding and owing by the Company under the Existing Credit Agreement as of the Closing Date shall, solely for purposes of Section 2.16, constitute ABR Borrowings. Upon its receipt of a Note hereunder, each Lender will promptly return to the Borrowers, marked "Cancelled" or "Replaced", any notes of the Borrowers held by such Lender pursuant to the Existing Credit Agreement. All parties hereto acknowledge and agree that any Letters of Credit issued pursuant to the Existing Credit Agreement and outstanding on the Closing Date shall be deemed Letters of Credit under this Agreement and any LC Disbursements due and payable under the Existing Credit Agreement shall be LC Disbursements due and payable under this Agreement. By execution or acknowledgment of this Agreement all parties hereto agree that each of the other Loan Documents is hereby amended such that all references to the Existing Credit Agreement and the Loans thereunder shall be deemed to refer to this Agreement and the continuation of the Loans hereunder. Section 9.15. NO BANKRUPTCY PROCEEDINGS. Each of the Borrowers, the Administrative Agent, the Documentation Agent, the Syndication Agents and the Lenders hereby agrees that it will not institute against any Designated Bank or join any other Person in instituting against any Designated Bank any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding under any federal or state bankruptcy or similar law, until the later to occur of (i) one year and one day after the payment in full of the latest maturing commercial paper note issued by such Designated Bank and (ii) the Maturity Date. Section 9.16 USA PATRIOT ACT. Each Lender hereby notifies the Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies the Borrowers, which information includes the -91- name and address of the Borrowers and other information that will allow such Lender to identify the Borrowers in accordance with the Act. ARTICLE X. MULTIPLE BORROWERS Each Borrower agrees that the representations and warranties made by, and the liabilities, obligations and covenants of and applicable to, any and all of the Borrowers under this Agreement, shall be in every case (whether or not specifically so stated in each such case herein) joint and several in all circumstances. Each Borrower accepts, as co-debtor and not merely as surety, such joint and several liability with the other Borrowers and hereby waives any and all suretyship defenses that it might otherwise have hereunder. If and to the extent that any of the Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligation. Every notice by or to the Company shall be deemed also to constitute simultaneous notice by and to each other Borrower, every act or omission by any Borrower also shall be deemed an act or omission of each other Borrower and shall be binding upon each other Borrower. The Administrative Agent, the Lenders and the Issuing Bank shall be entitled to rely, and all of the Borrowers agree that the Administrative Agent, the Lenders and the Issuing Bank may so rely, on any notice given or action taken or not taken by the Company as being authorized by all of the Borrowers. The Issuing Bank and the Lenders are fully authorized by each Borrower to act and rely also upon the representations and warranties, covenants, notices, acts and omissions of each other Borrower. Without limiting the generality of the foregoing, each Borrower agrees that the obligations of such Borrower hereunder and under the other Loan Documents shall be enforceable against such Borrower notwithstanding that this Agreement or any other Loan Document may be unenforceable in any respect against any other Borrower or that any other Borrower may have commenced bankruptcy, reorganization, liquidation or similar proceedings. ARTICLE XI. REIT CONVERSION The Company has advised the Lenders that the Company is contemplating a transaction whereby the Company may become controlled by an entity which will elect to become taxable as a REIT for federal income tax purposes. The Lenders acknowledge that the Company may elect to pursue such a transaction and that such transaction may require amendments to the provisions contained herein relating to mergers or other business combinations and relating to the payment of dividends by the Company or the Subsidiaries. To the extent that any such contemplated transaction requires such amendments, the Lenders shall not unreasonably withhold or condition their consent to such amendments and shall not impose any fee for reviewing and approving any proposed REIT conversion requiring -92- only such amendments, although the Company acknowledges that it will pay the Lenders' costs and expenses, including attorneys fees and costs, in reviewing any such proposed transaction. Notwithstanding the foregoing paragraph, it is understood by the parties hereto that the Company has not made any request related to any particular transaction, or otherwise related to the foregoing, to the Lenders or submitted any plan or proposal with respect thereto to the Lenders. This Article shall not constitute the consent of the Lenders to such a contemplated transaction, nor the approval of such a transaction or the Lenders' agreement to modify, amend or waive any provision hereof or any other Loan Document. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. BORROWERS W.P. CAREY & CO. LLC, By: /s/ John J. Park ------------------------------------ Name: John J. Park Title: Managing Director CORPORATE PROPERTY ASSOCIATES, By: Carey Management LLC, a Delaware limited liability company, its general partner By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director CORPORATE PROPERTY ASSOCIATES 4 a California limited partnership, By: Carey Management LLC, a Delaware limited liability company, its general partner By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director Signature page to Credit Agreement CORPORATE PROPERTY ASSOCIATES 6- a California limited partnership, By: Carey Management LLC, a Delaware limited liability, company its general partner By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director CORPORATE PROPERTY ASSOCIATES 9, L.P., a Delaware limited partnership, By: Carey Management LLC, a Delaware limited liability company, its general partner By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director CD UP LP, a Delaware limited partnership By: Bill CD LLC, a Delaware limited liability company, its general partner By: W.P. Carey & Co. LLC, its managing member By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director Signature page to Credit Agreement CAREY ASSET MANAGEMENT CORP. By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director CALL LLC, a Delaware limited liability company By: W.P. Carey & Co. LLC, its managing member By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director CAREY TECHNOLOGY PROPERTIES II LLC, a Delaware limited liability company By: W.P. Carey & Co. LLC, its managing member By: /s/ John J. Park -------------------------------- Name: John J. Park Title: Managing Director BROOMFIELD PROPERTIES CORP. By: /s/ John J. Park ------------------------------------ Name: John J. Park Title: Managing Director Signature page to Credit Agreement LENDERS: JP MORGAN CHASE BANK, individually and as Issuing Bank and Administrative Agent By: /s/ Mark E. Constantino ------------------------------------ Name: Mark E. Constantino Title: Vice President Signature page to Credit Agreement THE BANK OF NEW YORK, individually and as Syndication Agent By: /s/ Brian P. Kelly ------------------------------------ Name: Brian P. Kelly Title: Vice President Signature page to Credit Agreement PNC BANK, NATIONAL ASSOCIATION, individually and as Syndication Agent By: /s/ Anthony A. Filorino ------------------------------------ Name: Anthony A. Filorino Title: Vice President Signature page to Credit Agreement WELLS FARGO BANK, NATIONAL ASSOCIATION, individually and as Syndication Agent By: /s/ Christopher B. Wilson ------------------------------------ Name: Christopher B. Wilson Title: Vice President Signature page to Credit Agreement BANK OF AMERICA, N.A., individually and as Documentation Agent By: /s/ Mark W. Lariviere ------------------------------------ Name: Mark W. Lariviere Title: Managing Director Signature page to Credit Agreement CITIZENS BANK OF RHODE ISLAND By: /s/ Craig E. Shermerhorn ------------------------------------ Name: Craig E. Shermerhorn Title: Vice President Signature page to Credit Agreement KBC BANK, N.V. By: /s/ Robert Snauffer ------------------------------------ Name: Robert Snauffer Title: First Vice President By: /s/ Declan Meagher ------------------------------------ Name: Declan Meagher Title: First Vice President Signature page to Credit Agreement MANUFACTURERS AND TRADERS TRUST COMPANY By: /s/ Jason W. Lipiec ------------------------------------ Name: Jason W. Lipiec Title: Vice President Signature page to Credit Agreement EUROHYPO AG, NEW YORK BRANCH By: /s/ Ray Potter ------------------------------------ Name: Ray Potter Title: Executive Director By: /s/ Jeff Page ------------------------------------ Name: Jeff Page Title: Vice President Signature page to Credit Agreement EX-10.7 4 y06523exv10w7.txt EMPLOYMENT AGREEMENT W.P. CAREY & CO., INC. EMPLOYMENT AGREEMENT THIS AGREEMENT, made the 7th day of April, 1997 between W.P. Carey & Co., Inc. (the "Company"), a New York corporation at 50 Rockefeller Plaza, New York, NY 10020, and Gordon S. DuGan ("Executive"). W I T N E S S E T H: WHEREAS, Executive has been an officer of the Company in which capacity his services have contributed materially to the successful operation of the Company's business; WHEREAS, the Company wishes to assure itself of the continued availability of Executive's services, and Executive is willing to give such assurance in return for the benefits described herein; NOW, THEREFORE, intending to be legally bound hereby, the Company hereby agrees to employ Executive, and Executive hereby agrees to be employed by the Company upon the following terms and conditions: 1. Office and Duties. Executive shall service the Company full time in such positions and have such titles, duties and power with the Company and its subsidiaries consistent with Executive's experience and abilities as may from time to time be determined by the board of directors of the Company (the "Board"), the Chairman of the Board or the Chief Executive Officer of the Company. Executive will use his reasonable best energies and abilities and will devote his full business time, except for vacation time and reasonable periods of absence due to sickness, personal injury or other disability, to the duties assigned to him and shall use his best efforts, judgment, skill and energy to perform such services faithfully and diligently to further the business interests of the Company, to improve and advance the business and interests of the Company, to increase shareholder value and otherwise promote the best interests of the Company's shareholders; provided that nothing contained herein shall preclude Executive from (i) serving on the board of directors of any business corporation with the consent of the Board (ii) serving on the board of, or working for, any charitable or community organization or (iii) pursuing his personal financial and legal affairs, so long as such activities, individually or collectively, do not interfere with the performance of executive's duties hereunder. 2. Term. This Agreement shall be for a term commencing as of the date hereof (the "Commencement Date") and ending on December 31, 2001 unless sooner terminated as hereinafter provided. Unless either party elects to terminate this Agreement at the end of the original or any renewal term by giving the other party notice of such election at least 90 days before the expiration of the then current term, this Agreement shall be deemed to have been renewed for an additional one year period commencing on the day after the expiration of the then current term. The period during which Executive is employed pursuant to this Agreement, including any extension thereof in accordance with the preceding sentence, shall be referred to as the "Employment Period." 3. Compensation. (a) Base Salary. During the Employment Period, Executive shall receive an annual base salary ("Base Salary") at the same rate as in effect on the date hereof, which shall be payable in accordance with the Company's generally applicable payroll practices and policies. The Executive Committee shall periodically review Executive's Base Salary in light of the salaries paid to other officers of the Company, the performance of Executive, and Executive's total compensation from the Company and the Company may, in its discretion, increase such Base Salary by an amount it determines to be appropriate. Any such increase shall not reduce or limit any other obligation of the Company hereunder. (b) Incentive Compensation. During the term of the Employment Period, Executive shall be eligible to participate in the Company's incentive compensation programs (including, without limitation, any program for the payment of commission income, disposition fees, and bonuses), as the same may be amended by the Company from time to time, at a level determined by the Company's Executive Committee. Without limiting the generality of the foregoing, Executive shall be entitled to draw, in approximately equal monthly installments, against such incentive compensation in an annual amount determined in accordance with the practices and policies of the Company. (c) 1997 Guarantees. Notwithstanding the foregoing, nothing herein is intended to supersede the compensation guarantees applicable to the Executive for 1997, contained in the letter agreement between the Company and Executive relating to the Executive's recommencement of employment with the Company. 4. Stock Option Grant. Effective as of January 1, 1997, Executive will receive the grant of an option pursuant to the Company's Stock Appreciation Rights Plan in respect of 5,000 shares of the Common Stock of the notional corporation described in such Stock Appreciation Rights Plan, subject to the terms and conditions of 2 such grant. Executive agrees and acknowledges that his rights and obligations in respect of such option shall be governed by the terms and conditions of the Stock Appreciation Rights Plan, including, without limitation, the provisions thereof relating to the proportionate dilution of his interest by the grant, after the effective date of his award, of awards to other employees under the Stock Appreciation Rights Plan or the Company's Partnership Equity Plan. 5. Partnership Equity Plan. Effective as of January 1, 1997, Executive has received an award pursuant to the Company's Partnership Equity Plan of 2,500 shares of the Common Stock of the notional corporation described therein. Executive agrees and acknowledges that his rights and obligations in respect of the Equivalent Shares, as defined in the Partnership Equity Plan, shall be governed by the terms and conditions of the Partnership Equity Plan, including, without limitation, the provisions thereof relating to the proportionate dilution of his interest by the grant, after the effective date of his award, of awards to other employees under the Stock Appreciation Rights Plan or the Partnership Equity Plan. 6. Benefits, Perquisites and Expenses. (a) Benefits. During the Employment Period, Executive shall be eligible to participate in each employee benefit plan sponsored or maintained by the Company, subject to the generally applicable provisions thereof. Nothing in this Agreement shall in any way limit the Company's right to amend or terminate any such plan in its discretion, so long as any such amendment does not impair the rights of Executive without treating similarly situated executives in a similar fashion. (b) Business Expenses. During the Employment Period, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may require and in accordance with the generally applicable policies and procedures of the Company. (c) Indemnification. The Company shall indemnify Executive and hold Executive harmless from and against any claim, loss or cause of action arising from or out of Executive's performance of services as an officer, director or Executive of the Company or any of its subsidiaries or in any other capacity in which Executive serves at the request of the Company on the same basis as it indemnifies its other officers. If, at any time, the Company has in effect any policy providing any indemnity to the Company or third parties with respect to the errors and omissions or other actions of officers or directors, the Company shall cause Executive's errors, omissions or other actions to be 3 covered under such policy on the same terms and conditions as apply generally to all other officers of the Company. 7. Termination of Employment. (a) Early Termination of the Employment Period. Notwithstanding Paragraph 2, the Employment Period shall end upon the earliest to occur of (i) a termination of Executive's employment on account of Executive's death, (ii) a Termination due to Disability, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v) a Termination for Good Reason or (vi) a Termination due to a Change of Control. (b) Benefits Payable Upon Termination. Following the end of the Employment Period pursuant to Paragraph 7(a), Executive (or, in the event of his death, his surviving spouse, if any, or his estate) shall be paid the type or types of compensation determined to be payable in accordance with the following table at the times established pursuant to Paragraph 7(c):
Accrued Earned Basic Employee Severance Compensation Benefits Benefit ------------ -------- --------- Termination Payable Payable Not due to Death Payable Termination due to Payable Payable Not Disability Payable Termination Payable Payable Not for Cause Payable Termination Payable Payable Payable Without Cause Termination Payable Payable Payable with Good Reason Termination due Payable Payable Payable to a Change of Control
4 (c) Timing of Payments. Earned Basic Compensation shall be paid in a single lump sum as soon as practicable, but in no event more than 30 days following the end of the Employment Period. Accrued Employee Benefits shall be payable in accordance with the terms of the plan, policy, practice, program, contract or agreement under which such benefits have accrued. Severance Benefits shall be paid at the same time as Executive would have received his base salary had he continued to be employed and for the period ending on the first to occur of (i) the first anniversary of Executive's termination of and (ii) the date on which Executive breaches any of the provisions of Paragraph 8. Notwithstanding the foregoing, the Company may elect, at any time and in its discretion, to pay Executive the present value of the remaining Severance Benefits payable hereunder in a single lump sum amount with such present value to be calculated using a discount rate equal to the one year Treasury bill rate as quoted in The Wall Street Journal (or in such other reliable publication as the Independent Committee, in its reasonable discretion, may determine to rely upon) on the first business day of such year on which such publication is published. (d) Definitions. For purposes of Paragraphs 7 and 8, capitalized terms have the following meanings; "Accrued Employee Benefits" means amounts which are vested or which Executive is otherwise entitled to receive under the terms of or in accordance with any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its subsidiaries, at or subsequent to the date of his termination without regard to the performance by Executive of further services or the resolution of a contingency. "Carey Affiliated Entities" means (i) the Carey Family, (ii) the employees of the Company and its affiliates, (iii) any Controlled Entity and (iv) we Carey Foundation. "Carey Family" means William P. Carey, his spouse and lineal descendants and his brothers and brothers-in-law, sisters and sisters-in-law and each of their lineal descendants. "Change of Control" shall mean a transaction as a result of which the Carey Affiliated Entities (i) cease to be the beneficial owners of at least 50 percent of the combined voting power of all the outstanding voting securities of the Company and (ii) are not otherwise in Effective Control of the Company, "Controlled Entity" means an entity (other than the Company) in which William P. Carey, the Company or any other Controlled Entity, directly of indirectly, owns a substantial equity interest and that is 5 (i) a corporation more than 50 percent of the value of the outstanding stock of which is owned directly or indirectly by the Carey Family and/or employees of the Company; (ii) a partnership more than 50 percent of the capital interest or profits interest in which is owned directly or indirectly by the Carey Family and/or employees of the Company; (iii) a limited liability company more than 50 percent of the ownership interests in which are owned directly or indirectly by the Carey Family and/or employees of the Company; or (iv) a trust in which the Carey Family and/or employees of the Company together have 50 percent or more of the voting power or beneficial ownership interest. The Controlled Entities as of September 30, 1996 are listed on Exhibit A attached hereto, Notwithstanding the foregoing, in no event shall the Carey Foundation be considered a Controlled Entity. "Controlling Shareholder(s)" means the person(s) who, at the relevant time, hold of record a majority of the shares of the common stock of the Company. "Earned Basic Compensation" means any salary or other compensation (including without limitation disposition fees) due and payable, but unpaid, for services rendered to the Company on or prior to the date on which the Employment Period ends. "Effective Control" means the power to elect a majority of the members of the Board, whether (i) by reason of the ownership of securities representing more than 50% of the securities entitled to vote for the election of directors (the "Voting Shares"), or (ii) pursuant to a shareholders agreement, irrevocable proxy or otherwise controlling the right to vote a majority of the Voting Shares. Notwithstanding the foregoing, if the company is merged with, into or otherwise combined with a Public Corporation or more than 50% of the assets of the Company are transferred to a Public Corporation, the Carey affiliated Entities shall be deemed to be in Effective Control of such Public Corporation a majority of the directors on the board of directors of such Public Corporation: (x) at the time of the merger, combination, sale or other transaction, were either 6 (1) officers of the Company or members of the Board or the board of directors of an affiliate of the Company immediately prior thereto or (2) nominated for election to the board of the Public Corporation by the members of the Board, the board of directors of a Carey Affiliated Entity or the persons who were the Controlling Shareholder(s) immediately prior to such transaction with the Public Corporation, or (y) at any time following any such transaction, were nominated for election or elected by any of the Board, the board of directors of a Carey Affiliated Entity or the persons who were the Controlling Shareholder(s) immediately prior to such transaction with the Public Corporation. "Independent Committee" shall mean the committee initially comprised of George Stoddard, Charles Townsend and Warren Wintrub and as it may thereafter be constituted from time to time in accordance with this provision. If any member of the initial Independent Committee (or any successor thereto appointed in accordance with this provision) ceases to a member of the Independent Committee for whatever reason, the successor to such person on the Independent Committee shall be appointed by the Controlling Shareholders from the members of the Board or the boards of directors of the Company's affiliates, subject to the approval of such appointment by the then remaining members of the Independent Committee, provided, however, that no member of the Independent Committee shall be a member of the Carey Family. The Controlling Shareholders shall have the right to remove any member of the Independent Committee from office at any time such person is no longer a member of the Board or of the board of directors of any of the Carey Affiliated Entities. "Public Corporation" means a company with at least one series of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended. "Severance Benefits" means monthly payments until the earliest of the following dates: (i) the first anniversary of Executive's termination of employment and (ii) the date the Company's obligation to pay Severance Benefits ceases as a result of Executive's breach any of the provisions of Paragraph 8; 7 in an amount equal to the sum of (x) the Executive's monthly base salary as in effect immediately prior to his termination of employment and (y) an amount equal to one-twelfth of any commissions, disposition fees, and other incentive payments (including bonuses) paid to, the Executive during the 12 month period ended as of the last calendar month ended immediately prior to such termination of employment; provided that with respect to any termination of employment occurring prior to the first anniversary of Executive's date of rehire by the Company, the amount described in subclause (y) shall be at least $250,000. The amount payable as Severance Benefits, however, shall be reduced by an amount equal to 75 percent of each dollar paid to the Executive for services, whether as an employee, consultant or otherwise, during the period Severance Benefits are payable. "Termination for Cause" means a termination of Executive's employment by the Company as a result of Executive's (i) dishonesty or disloyalty; (ii) refusal to perform his duties in good faith or otherwise fail to carry out the express and lawful instructions of the Chairman, Chief Executive Officer or the Board; (iii) gross negligence or wilful and intentional misconduct; (iv) engaging in conduct constituting a felony or other crime involving moral turpitude; (v) alcohol or drug addiction, provided that to the extent required thereunder, any termination as a result of such addiction may only occur after the Company shall have attempted to make reasonable accommodations (or shall have determined that no such reasonable accommodation is possible under the circumstances) pursuant to the Americans with Disabilities Act of 1990, as amended; (vi) breach of his fiduciary duties to the Company or its shareholders, including, without limitation, the Controlling Shareholder(s); or (vii) any other material violation by Executive of the terms and conditions of this Agreement or any agreement between the Company and such Executive. 8 Notwithstanding the foregoing, (x) in the case of subclause (i), (ii) or (vi) any determination as to whether an Executive has been disloyal or dishonest, refused to perform his duties or breached his fiduciary duties shall be made by the Independent Committee and (y) in the case of subcauses (iii) and (vii), the Company shall not have the right to terminate an Executive's employment in a Termination for Cause if the alleged action or omission by the Executive either (A) has not resulted and is not reasonably expected to result in material harm to the business, operations or reputation of the Company or (B) was undertaken or omitted by Executive in good faith after consultation with his supervisor and in a manner which was understood to be consistent with the course of action determined following such consultation, which in either case shall be determined by the Independent Committee prior to a Change of Control and (z) following any Change of Control, subclauses (i), (ii), and (vi) shall automatically be deleted from the definition of a Termination for Cause, without any further action by the Company or the Executive. In making any determination hereunder, the Independent Committee shall take into consideration the materiality and relevance to the Company of Executive's action or conduct, and such determination shall be final and binding on Executive and the Company. "Termination due to a Change of Control" means the Executive's voluntary termination of employment prior to the first anniversary of a Change of Control of the Company upon written notice delivered not less than ten business days prior to the effective date of Participant's termination of employment. "Termination due to Disability" means a termination of Executive's employment by the Company because Executive has been incapable of substantially fulfilling the positions, duties, responsibilities and obligations set forth in this Agreement because of physical, mental or emotional incapacity resulting from injury, sickness or disease for a period of (i) at least four consecutive months or (ii) more than six months in any twelve month period. Any question as to the existence, extent or potentiality of Executive's disability upon which Executive and the Company cannot agree shall be determined by a qualified, independent physician selected by the Independent Committee. The determination of any such physician shall be final and conclusive for all purposes of this Agreement. "Termination with Good Reason" means, prior to a Change of Control, any termination of Executive's employment on account of a material breach by the Company of any of its material obligations to Executive hereunder. Following a Change of Control, "Termination with Good Reason" shall mean a termination of employment by Executive within 90 days following (i) a material adverse change in Executive's duties and responsibilities as an Executive; (ii) a reduction in Executive's base salary (other than a proportionate adjustment applicable generally to similarly situated Company 9 Executives); or (iii) the relocation of Executive's principal place of business to a location more than thirty-five miles outside of Manhattan; provided that a termination following a Change of Control shall not be treated as a Termination with Good Reason if Executive shall have consented in writing to the occurrence of the event giving rise to the claim of Termination with Good Reason. A Termination for Good Reason must be effected by a written notice from Executive setting forth in detail the conduct alleged to be the basis for such termination, provided that, prior to the occurrence of a Change of Control, Executive shall not have the right to terminate his employment hereunder pursuant to a Termination with Good Reason (i) if, within the ten-business day period following receipt of Executive's written, notice, the Company shall have cured the conduct alleged to have caused the material breach and (ii) unless Executive actually terminates employment within 30 days following the end of the Company's cure period. Notwithstanding the foregoing, if the Company disputes whether a breach has occurred, or whether any breach is material, the Independent Committee shall decide, in good faith, whether the alleged conduct by the Company entitles Executive to quit pursuant to a Termination with Good Reason and the time period referred to in subclause (ii) in the immediately preceding sentence shall not end earlier than 10 days following the date on which the Independent Committee notifies Executive of its decision. Prior to the occurrence of a Change of Control, the determination by the Independent Committee as to Executive's eligibility for a "Termination with Good Reason" shall be final and binding on Executive and the Company. "Termination Without Cause" means any termination by the Company of Executive's employment with the Company other than (i) a Termination due to Disability, (ii) a Termination due to death or (iii) a Termination for Cause. (e) Full Discharge of Company Obligation. The amounts payable to Executive pursuant to this Paragraph 7 following termination of his employment (including amounts payable with respect to Accrued Employee Benefits) shall be in full and complete satisfaction of Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to Executive in connection with this Agreement or otherwise in connection with Executive's employment with the Company and its subsidiaries. Nothing contained in this paragraph shall be construed as limiting Executive's claims against the Company or any of its subsidiaries with respect to non-employment related torts. 10 8. Non-Competition, Confidential Information, Etc. (a) Noncompetition. During the term of this Agreement, as the same may be renewed and extended, and for a period of (i) 18 months following the termination of Executive's employment for any reason other than a Termination with Good Reason, a Termination Without Cause or a Termination due to Disability, or (ii) 12 months following the termination of Executive's employment due to the expiration of the term of this Agreement due to Executive's election not to renew the term hereof, a Termination with Good Reason or a Termination Without Cause, Executive shall not, without the written consent of the Company, directly or indirectly, as a stockholder owning beneficially or of record more than 5% of the outstanding shares of any class of stock of any issuer, or as an officer, director, employee, partner, consultant, joint venturer, proprietor, or otherwise, engage in or become interested in any Competing Business in the United States or in any other jurisdiction in which the Company is actively engaged in business or with respect to which, at the time of Executive's action (or, if Executive is not an employee of the Company at such time, the date his employment with the Company terminated), the Company had taken material steps toward becoming actively engaged in such business. For purpose of this Agreement, the term "Competing Business" shall mean any business which is engaged in (i) the business of structuring, obtaining the financing for, or otherwise implementing or facilitating long-term financing of corporate property using leasing arrangements ("Leasing Transactions") or (ii) any other business activity of a type and kind that, at the relevant time, is conducted by the Company and which accounts for ten percent (10%) or more of either the Company's gross revenues or net after tax income ("Other Material Activities"); provided that nothing in this Agreement shall preclude Executive from providing services to any Competing Business so long as such services do not relate, directly or indirectly, to Leasing Transactions or Other Material Activities. Without limiting the generality of the foregoing, Executive acknowledges and agrees that the Company is engaged in business in each state of the United States, and each possession of the United States. Notwithstanding the foregoing, following a Change of Control, (i) if Executive terminates his employment in a Termination for Good Reason or is terminated by his employer other than in a Termination for Cause, all restrictions imposed on Executive pursuant to this paragraph shall cease to be effective at the date of his termination of employment and (ii) the only activities that will be treated as Other Material Activities shall be those business activities, if any, that, immediately prior to the Change of Control were Other Material Activities, and at the time of the alleged 11 competitive activity, are Other Material Activities for the Company. The Company and Executive acknowledge and agree that the provisions of this Paragraph 8(a) are intended to protect the legitimate business interests of the Company and not to restrain the ability of Executive to obtain gainful employment. The Company agrees that this Paragraph 8(a) should not be interpreted to preclude Executive from raising capital or seeking to structure financial transactions in respect of investments of a type or nature not undertaken by the Company and its affiliates, even if such other investments compete for investment funds from the same sources of funds as the Company looks to for its transactions (e.g., this Paragraph 8(a) will not preclude Executive from participating in the structure, financing or implementation of a venture capital fund or mezzanine debt fund, even if the potential investors in such funds include some or all of the same persons or entities as would generally invest in a transaction sponsored or promoted by the Company). (b) Confidential Information. During the term of this Agreement and at all times thereafter, Executive shall not, without the written consent of the Company, use for his personal benefit, or disclose, communicate or divulge to, or use for any company other than the Company or its subsidiaries or affiliates, any Confidential Information (as defined below) that had been made known to Executive or learned or acquired by Executive while in the employ of Company or its subsidiaries or affiliates, unless such information has become public other than by reason of Executive's breach of this covenant. Confidential Information shall mean (i) information not in the public domain (or in the public domain as a result of a breach by Executive or another executive of the Company who is also bound by a similar confidentiality clause) regarding the business methods, business policies, procedures, techniques, research or developments projects or results, trade secrets, or other processes of or developed by the Company; (ii) any names and addresses of customers or clients or any data on or relating to past, present or prospective customers or clients not in the public domain (or in the public domain as a result of a breach by Executive or another executive of the Company who is also bound by a similar confidentiality clause); and (iii) any other material information not in the public domain (or in the public domain as a result of a breach by Executive or another executive of the Company who is also bound by a similar confidentiality clause) relating to or dealing with the business operations or activities of the Company which has been designated by the Company as confidential or which, if disclosed 12 to any third party, would result in a material adverse effect to the Company. (c) Company Property, Promptly following Executive's termination of employment, Executive shall return to the Company all property of the Company, and all copies thereof in Executive's possession or under his control. (d) Nonsolicitation of Employees. Executive agrees that for a period of two years after the termination of his employment with the Company, he will not and will not assist or encourage any other person to (i) employ, hire, engage or be associated (as a shareholder, partner, employee, consultant or in a similar capacity) with any employee or other person connected with the Company who rendered services as a professional, including, without limitation, all persons who provide direct and substantial services with respect to Leasing Transactions or Other Material Activities (the "Restricted Employees"), at the time of such termination or during any part of the six months (three months, in the case of any employee who was not also an officer of the Company) preceding such termination of employment, (ii) induce any Restricted Employees to leave the employ of the Company or any of its affiliates, or (iii) solicit the employment of any Restricted Employees on his own behalf or on behalf of any other business enterprise. (e) Injunctive Relief. Executive agrees and acknowledges that the remedies at law for any breach by him of the provisions of this Paragraph 8 will be inadequate and that the Company shall be entitled to obtain injunctive relief against him from a court of competent jurisdiction in the event of any such breach. If any such court of competent jurisdiction shall determine that the restrictions contained in this Paragraph 8 are unreasonable as to time or geographical area, such court shall reform said restrictions to the extent necessary in the opinion of such court to make them reasonable and enforceable. 9. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. 13 (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws of the State of New York notwithstanding any conflicting choice-of-law provisions. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement and the transactions contemplated herein shall be in writing and shall be deemed to have been given, when delivered in person or when deposited in the United States mail in a postpaid envelope by registered or certified mail, return receipt requested or by 24-hour courier Service. (d) Binding Effect. This Agreement shall be binding on, and shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company's stock, a merger, consolidation or reorganization involving the Company or a sale of the assets of the business of the Company in which Executive performs a majority of his services, unless the Company otherwise elects in writing to retain responsibility for the duties and obligations of the Company (and the benefits conveyed to the Company) under this Agreement. This Agreement shall also inure to the benefit of Executive's heirs, executors, administrators and legal representatives. (e) Assignment. Except as provided under Paragraph (d), neither this Agreement nor any of the rights of obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. (f) Execution in Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original as against the party whose signature appears thereon, and both of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event any of Paragraph 8(a), (b), (c) or (d) is not enforceable in accordance with its terms, Executive and the Company agree that such Paragraph shall be reformed to make such Paragraph enforceable in a manner which provides the Company the maximum rights permitted at law. 14 (h) Entire Agreement. Except to the extent that the letter agreement between the Company and Executive relating to his recommencement of employment is expressly incorporated herein, this Agreement contains the entire understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (i) Shareholder Rights. Whenever in this Agreement reference is made to the interests of the Company's shareholders and there exists or may exist a conflict in the interests of such shareholders, the Independent Committee shall determine the action or conduct that is in the interests of shareholders. (j) Paragraph Headings. The paragraph headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (k) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. (l) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or holiday. (m) Prevailing Parties. Following a Change of Control, any party which prevails in a lawsuit pertaining to the enforcement or interpretation of any provision of this Plan shall be entitled to recover all reasonable attorney's fees incurred by such party with respect to the lawsuit, in addition to any other remedies to which the party is entitled under the law, from the opposing party to such lawsuit. (n) Independent Committee. The terms of this Agreement shall be interpreted by the Independent Committee. The Independent Committee shall keep records of actions taken at its meetings. Two members of the Independent Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Independent Committee, shall be the acts of the Independent Committee. 15 When determining whether an Executive's employment may be terminated by the Company in a Termination for Cause or by the Executive in a Termination with Good Reason, the Independent Committee shall provide the Executive an opportunity to be heard on such issue, and shall render its decision in writing within 60 days of being presented with the question. Prior to the occurrence of a Change of Control, any action taken by the Independent Committee with respect to the interpretation of this Agreement shall be final, conclusive and binding. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered on the date first above written. W.P. CAREY & CO., INC. By /s/ W.P. Carey /s/ Gordon F. DuGan ---------------------- Executive 16 Exhibit A CONTROLLED ENTITIES Carey Corporate Property, Inc. Seventh Carey Corporate Property, Inc. Eighth Carey Corporate Property, Inc. Ninth Carey Corporate Property, Inc. Carey Fiduciary Advisors, Inc. Carey Property Advisors, L.P. Carey Financial Corporation W.P. Carey Advisors, Inc. Carey Fairview Corporation W.P. Carey Advisors, L.P. EX-10.8 5 y06523exv10w8.txt EMPLOYMENT AGREEMENT W.P. CAREY & CO., INC. EMPLOYMENT AGREEMENT THIS AGREEMENT, made the 7th day of April, 1997 between W.P. Carey & Co., Inc. (the "Company"), a New York corporation at 50 Rockefeller Plaza, New York, NY 10020, and John J. Park ("Executive"). WITNESSETH: WHEREAS, Executive has been an officer of the Company in which capacity his services have contributed materially to the successful operation of the Company's business; WHEREAS, the Company wishes to assure itself of the continued availability of Executive's services, and Executive is willing to give such assurance in return for the benefits described herein; NOW, THEREFORE, intending to be legally bound hereby, the Company hereby agrees to employ Executive, and Executive hereby agrees to be employed by the Company upon the following terms and conditions: 1. Office and Duties. Executive shall service the Company full time in such positions and have such titles, duties and power with the Company and its subsidiaries consistent with Executive's experience and abilities as may from time to time be determined by the board of directors of the Company (the "Board"), the Chairman of the Board or the Chief Executive Officer of the Company. Executive will use his reasonable best energies and abilities and will devote his full business time, except for vacation time and reasonable periods of absence due to sickness, personal injury or other disability, to the duties assigned to him and shall use his best efforts, judgment, skill and energy to perform such services faithfully and diligently to further the business interests of the Company, to improve and advance the business and interests of the Company, to increase shareholder value and otherwise promote the best interests of the Company's shareholders; provided that nothing contained herein shall preclude Executive from (i) serving on the board of directors of any business corporation with the consent of the Board, (ii) serving on the board of, or working for, any charitable or community organization or (iii) pursuing his personal financial and legal affairs, so long as such activities, Individually or collectively, do not interfere with the performance of Executive's duties hereunder. 2. Term. This Agreement shall be for a term commencing as of the date hereof (the "Commencement Date") and ending on December 31,2000 unless sooner terminated as hereinafter provided Unless either party elects to terminate this Agreement at the end of the original or any renewal term by giving the other party notice of such election at least 90 days before the expiration of the then current term, this Agreement shall be deemed to have been renewed for an additional one year period commencing on the day after the expiration of the then current term. The period during which Executive is employed pursuant to this Agreement, including any extension thereof in accordance with the preceding sentence, shall be referred to as the "Employment Period." 3. Compensation. (a) Base Salary. During the Employment Period, Executive shall receive an annual base salary ("Base Salary") at the same rate as in effect on the date hereof, which shall be payable in accordance with the Company's generally applicable payroll practices and policies. The Executive Committee shall periodically review Executive's Base Salary in light of the salaries paid to other officers of the Company, the performance of Executive, and Executive's total compensation from the Company and the Company may, in its discretion, increase such Base Salary by an amount it determines to be appropriate. Any such increase shall not reduce or limit any other obligation of the Company hereunder. (b) Incentive Compensation. During the term of the Employment Period, Executive shall be eligible to participate in the Company's incentive compensation programs (including, without limitation, any program for the payment of commission income, disposition fees, and bonuses), as the same may be amended by the Company from time to time, at a level determined by the Company's Executive Committee, Without limiting the generality of the foregoing, Executive shall be entitled to draw, in approximately equal monthly installments, against such incentive compensation in an annual amount determined in accordance with the practices and policies of the Company. 4. Stock Option Grant. Effective as of January 1,1997, Executive will receive the grant of an option pursuant to the Company's Stock Appreciation Rights Plan in respect of 2,000 shares of the Common Stock of the notional corporation described in such Stock Appreciation Rights Plan, subject to the terms and conditions of such grant. Executive agrees and acknowledges that his rights and obligations in respect of such option shall be governed by the terms and conditions of the Stock Appreciation 2 Rights Plan, including, without limitation, the provisions thereof relating to the proportionate dilution of his interest by the grant, after the effective date of his award, of awards to other employees wider the Stock Appreciation Rights Plan or the Company's Partnership Equity Plan. 5. Partnership Equity Plan. Effective as of January 1, 1995, Executive has received an award pursuant to the Company's Partnership Equity Plan of 1,500 shares of the Common Stock of the notional corporation described therein. Executive agrees and acknowledges that his rights and obligations in respect of the Equivalent Shares, as defined in the Partnership Equity Plan, shall be governed by the term and conditions of the Partnership Equity Plan, including, without limitation, the provisions thereof relating to the proportionate dilution of his interest by the grant, after the effective date of his award, of awards to other employees under the Stock Appreciation Rights Plan or the Partnership Equity Plan. 6. Benefits, Perquisites and Expenses. (a) Benefits. During the Employment Period, Executive shall be eligible to participate in each employee benefit plan sponsored or maintained by the Company, subject to the generally applicable provisions thereof. Nothing in this Agreement shall in any way limit the Company's right to amend or terminate any such plan in its discretion, so long as any such amendment does not impair the rights of Executive without treating similarly situated executives in a similar fashion. (b) Business Expenses. During the Employment Period, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may require and in accordance with the generally applicable policies and procedures of the Company. (c) Indemnification. The Company shall indemnify Executive and hold Executive harmless from and against any claim, loss or cause of action arising from or out of Executive's performance of services as an officer, director or Executive of the Company or any of its subsidiaries or in any other capacity in which Executive serves at the request of the Company on the same basis as it indemnifies its other officers. If, at any time, the Company has in effect any policy providing any indemnity to the Company or third parties with respect to the errors and omissions or other actions of officers or directors, the Company shall cause Executive's errors, omissions or other actions to be covered under such policy on the same terms and conditions as apply generally to all other officers of the Company. 3 7. Termination of Employment. (a) Early Termination of the Employment Period. Notwithstanding Paragraph 2, the Employment Period shall end upon the earliest to occur of (i) a termination of Executive's employment on account of Executive's death, (ii) a Termination due to Disability, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v) a Termination for Good Reason or (vi) a Termination due to a Change of Control. (b) Benefits Payable Upon Termination. Following the end of the Employment Period pursuant to Paragraph 7(a), Executive (or, in the event of his death, his surviving spouse, if any, or his estate) shall be paid the type or types of compensation determined to be payable in accordance with the following table at the times established pursuant to Paragraph 7(c);
Accrued Earned Basic Employee Severance Compensation Benefits Benefit ------------ -------- --------- Termination due Payable Payable Not to Death Payable Termination due to Payable Payable Not Disability Payable Termination Payable Payable Not for Cause Payable Termination Payable Payable Payable Without Cause Termination Payable Payable Payable with Good Reason Termination due to Payable Payable Payable a Change of Control
(c) Timing of Payments. Earned Basic Compensation shall be paid in a single lump sum as soon as practicable, but in no event more than 30 days following the end of the Employment Period. Accrued Employee Benefits shall be payable in accordance with the terms of the plan, policy, practice, program, contract or agreement 4 under which such benefits have accrued. Severance Benefits shall be paid at the same time as Executive would have received his base salary had he continued to be employed and for the period ending on the first to occur of (i) the first anniversary of Executive's termination of employment and (ii) the date on which Executive breaches any of the provisions of Paragraph 8. Notwithstanding the foregoing, the Company may elect, at any time and in its discretion, to pay Executive the present value of the remaining Severance Benefits payable hereunder in a single lump sum amount with such present value to be calculated using a discount rate equal to the one year Treasury bill rate as quoted in The Wall Street Journal (or in such other reliable publication as the Independent Committee, in its reasonable discretion, may determine to rely upon) on the first business day of such year on which such publication is published. (d) Definitions. For purposes of Paragraphs 7 and 8, capitalized terms have the following meanings: "Accrued Employee Benefits" means amounts which are vested or which Executive is otherwise entitled to receive under the terms of or in accordance with any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its subsidiaries, at or subsequent to the date of his termination without regard to the performance by Executive of further services or the resolution of a contingency. "Carey Affiliated Entities" means (i) the Carey Family, (ii) the employees of the Company and its affiliates, (iii) any Controlled Entity and (iv) the Carey Foundation. "Carey Family" means William P. Carey, his spouse and lineal descendants and his brothers and brothers-in-law, sisters and sisters-in-law and each of their lineal descendants. "Change of Control" shall mean a transaction as a result of which the Carey Affiliated Entities (i) cease to be the beneficial owners of at least 50 percent of the combined voting power of all the outstanding voting securities of the Company and (ii) are not otherwise in Effective Control of the Company. "Controlled Entity" means an entity (other than the Company) in which William P. Carey, the Company or any other Controlled Entity, directly of indirectly, owns a substantial equity interest and that is (i) a corporation more than 50 percent of the value of the outstanding stock of which is owned directly or indirectly by the Carey Family and/or employees of the Company; 5 (ii) a partnership more than 50 percent of the capital interest or profits interest in which is owned directly or indirectly by the Carey Family and/or employees of the Company; (iii) a limited liability company more than 50 percent of the ownership interests in which are owned directly or indirectly by the Carey Family and/or employees of the Company; or (iv) a trust in which the Carey Family and/or employees of the Company together have 50 percent or more of the voting power or beneficial ownership interest. The Controlled Entities as of September 30, 1996 are listed on Exhibit A attached hereto. Notwithstanding the foregoing, in no event shall the Carey Foundation be considered a Controlled Entity. "Controlling Shareholder(s)" means the person(s) who, at the relevant time, hold of record a majority of the shares of the common stock of the Company. "Earned Basic Compensation" means any salary or other compensation (including without limitation disposition fees) due and payable, but unpaid, for services rendered to the Company on or prior to the date on which the Employment Period ends. "Effective Control" means the power to elect a majority of the members of the Board, whether (i) by reason of the ownership of securities representing more than 50% of the securities entitled to vote for the election of directors (the "Voting Shares"), or (ii) pursuant to a shareholders agreement, irrevocable proxy or otherwise controlling the right to vote a majority of the Voting Shares. Notwithstanding the foregoing, if the Company is merged with, into or otherwise combined with a Public Corporation or more than 50% of the assets of the Company are transferred to a Public Corporation, the Carey Affiliated Entities shall be deemed to be in Effective Control of such Public Corporation if a majority of the directors on the board of directors of such Public Corporation: (x) at the time of the merger, combination, sale or other transaction, were either (1) officers of the Company or members of the Board or the board of directors of an affiliate of the Company immediately prior thereto or 6 (2) nominated for election to the board of the Public Corporation by the members of the Board, the board of directors of a Carey Affiliated Entity or the persons who were the Controlling Shareholder(s) immediately prior to such transaction with the Public Corporation, or (y) at any time following any such transaction, were nominated for election or elected by any of the Board, the board of directors of a Carey Affiliated Entity or the persons who were the Controlling Shareholder(s) immediately prior to such transaction with the Public Corporation. "Independent Committee" shall mean the committee initially comprised of George Stoddard, Charles Townsend and Warren Wintrub and as it may thereafter be constituted from time to time in accordance with this provision. If any member of the initial Independent Committee (or any successor thereto appointed in accordance with this provision) ceases to a member of the Independent Committee for whatever reason, the successor to such person on the Independent Committee shall be appointed by the Controlling Shareholders from the members of the Board or the boards of directors of the Company's affiliates, subject to the approval of such appointment by the then remaining members of the Independent Committee, provided, however, that no member of the Independent Committee shall be a member of the Carey Family. The Controlling Shareholders shall have the right to remove any member of the Independent Committee from office at any time such person is no longer a member of the Board or of the board of directors of any of the Carey Affiliated Entities. "Public Corporation" means a company with at least one series of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended. "Severance Benefits" means monthly payments until the earliest of the following dates: (i) the first anniversary of Executive's termination of employment and (ii) the date the Company's obligation to pay Severance Benefits ceases as a result of Executive's breach any of the provisions of Paragraph 8; in an amount equal to the sum of (x) the Executive's monthly base salary as in effect immediately prior to his termination of employment and (y) an amount equal to one-twelfth of any commissions, disposition fees, and other incentive payments (including bonuses) paid to the Executive during the 12 month period ended as of the last calendar 7 month ended immediately prior to such termination of employment;. The amount payable as Severance Benefits, however, shall be reduced by an amount equal to 75 percent of each dollar paid to the Executive for services, whether as an employee, consultant or otherwise, during the period Severance Benefits are payable. "Termination for Cause" means a termination of Executive's employment by the Company as a result of Executive's (i) dishonesty or disloyally; (ii) refusal to perform his duties in good faith or otherwise fail to carry out the express and lawful instructions of the Chairman, Chief Executive Officer or the Board; (iii) gross negligence or wilful and intentional misconduct; (iv) engaging in conduct constituting a felony or other crime involving moral turpitude; (v) alcohol or drug addiction, provided that, to the extent required thereunder, any termination as a result of such addiction may only occur after the Company shall have attempted to make reasonable accommodations (or shall have determined that no such reasonable accommodation is possible under the circumstances) pursuant to the Americans with Disabilities Act of 1990, as amended; (vi) breach of his fiduciary duties to the Company or its shareholders, including, without limitation, the Controlling Shareholder(s); or (vii) any other material violation by Executive of the terms and conditions of this Agreement or any agreement between the Company and such Executive. Notwithstanding the foregoing, (x) in the case of subclause (i), (ii) or (vi), any determination as to whether an Executive has been disloyal or dishonest, refused to perform his duties or breached his fiduciary duties shall be made by the Independent Committee and (y.) in the case of subclauses (iii) and (vii), the Company shall not have the right to terminate an Executive's employment in a Termination for Cause if the alleged action or omission by the Executive either (A) has not resulted and is not reasonably expected to result in material harm to the business, operations or reputation of the Company or (B) was undertaken or omitted by Executive in good faith after 8 consultation with his supervisor and in a manner which was understood to be consistent with the course of action determined following such consultation, which in either case shall be determined by the Independent Committee prior to a Change of Control and (z) following any Change of Control, subclauses (i), (ii), and (vi) shall automatically be deleted from the definition of a Termination for Cause, without any further action by the Company or the Executive, In making any determination hereunder, the Independent Committee shall take into consideration the materiality and relevance to the Company of Executive's action or conduct, and such determination shall be final and binding on Executive and the Company. "Termination due to a Change of Control" means the Executive's voluntary termination of employment prior to the first anniversary of a Change of Control of the Company upon written notice delivered not less than ten business days prior to the effective date of Participant's termination of employment. "Termination due to Disability" means a termination of Executive's employment by the Company because Executive has been incapable of substantially fulfilling the positions, duties, responsibilities and obligations set forth in this Agreement because of physical, mental or emotional incapacity resulting from injury, sickness or disease for a period of (i) at least four consecutive months or (ii) more than six months in any twelve month period. Any question as to the existence, extent or potentiality of Executive's disability upon which Executive and the Company cannot agree shall be determined by a qualified, independent physician selected by the Independent Committee. The determination of any such physician shall be final and conclusive for all purposes of this Agreement. "Termination with Good Reason" means, prior to a Change of Control, any termination of Executive's employment on account of a material breach by the Company of any of its material obligations to Executive hereunder. Following a Change of Control, "Termination with Good Reason" shall mean a termination of employment by Executive within 90 days following (i) a material adverse change in Executive's duties and responsibilities as an Executive; (ii) a reduction in Executive's base salary (other than a proportionate adjustment applicable generally to similarly situated Company Executives); or (iii) the relocation of Executive's principal place of business to a location more than thirty-five miles outside of Manhattan; provided that a termination following a Change of Control shall not be treated as a Termination with Good Reason if Executive shall have consented in writing to the occurrence of the event giving rise to the claim of Termination with Good Reason. A Termination for Good Reason must be effected by a written notice from Executive setting forth in detail the conduct alleged to be the basis for such termination, provided that, prior to the occurrence of a Change of Control, Executive shall not have the right to terminate his employment hereunder pursuant to a 9 Termination with Good Reason (i) if, within the ten-business day period following receipt of Executive's written notice, the Company shall have cured the conduct alleged to have caused the material breach and (ii) unless Executive actually terminates employment within 30 days following the end of the Company's cure period. Notwithstanding the foregoing, if the Company disputes whether a breach has occurred, or whether any breach is material, the Independent Committee shall decide, in good faith, whether the alleged conduct by the Company entitles Executive to quit pursuant to a Termination with Good Reason and the time period referred to in subclause (ii) in the immediately preceding sentence shall not end earlier than 10 days following the date on which the Independent Committee notifies Executive of its decision. Prior to the occurrence of a Change of Control, the determination by the Independent Committee as to Executive's eligibility for a "Termination with Good Reason" shall be final and binding on Executive and the Company. "Termination Without Cause" means any termination by the Company of Executive's employment with the Company other than (i) a Termination due to Disability, (ii) a Termination due to death or (iii) a Termination for Cause. (e) Full Discharge of Company Obligations. The amounts payable to Executive pursuant to this Paragraph 7 following termination of his employment (including amounts payable with respect to Accrued Employee Benefits) Shall be in full and complete satisfaction of Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to Executive in connection with this Agreement or otherwise in connection with Executive's employment with the Company and its subsidiaries. Nothing contained in this paragraph shall be construed as limiting Executive's claims against the Company or any of its subsidiaries with respect to non-employment related torts. 8. Non-Competition, Confidential Information, Etc. (a) Noncompetition. During the term of this Agreement, as the same may be renewed and extended, and for a period of (i) 18 months following the termination of Executive's employment for any reason other than a Termination with Good Reason, a Termination Without Cause or a Termination due to Disability, or 10 (ii) 12 months following the termination of Executive's employment due to the expiration of the term of this Agreement due to Executive's election not to renew the term hereof, a Termination with Good Reason or a Termination Without Cause, Executive shall not, without the written consent of the Company, directly or indirectly, as a stockholder owning beneficially or of record more than 5% of the outstanding shares of any class of stock of any issuer, or as an officer, director, employee, partner, consultant, joint venturer, proprietor, or otherwise, engage in or become interested in any Competing Business in the United States or in any other jurisdiction in which the Company is actively engaged in business or with respect to which, at the time of Executive's action (or, if Executive is not an employee of the Company at such time, the date his employment with the Company terminated), the Company had taken material steps toward becoming actively engaged in such business. For purpose of this Agreement, the term "Competing Business" shall mean any business which is engaged in (i) the business of structuring, obtaining the financing for, or otherwise implementing or facilitating long-term financing of corporate property using leasing arrangements ("Leasing Transactions") or (ii) any other business activity of a type and kind that, at the relevant time, is conducted by the Company and which accounts for ten percent (10%) or more of either the Company's gross revenues or net after tax income ("Other Material Activities"); provided that nothing in this Agreement shall preclude Executive from providing services to any Competing Business so long as such services do not relate, directly or indirectly, to Leasing Transactions or Other Material Activities. Without limiting the generality of the foregoing, Executive acknowledges and agrees that the Company is engaged in business in each state of the United States, and each possession of the United States. Notwithstanding the foregoing, following a Change of Control, (i) if Executive terminates his employment in a Termination for Good Reason or is terminated by his employer other than in a Termination for Cause, all restrictions imposed on Executive pursuant to this paragraph shall cease to be effective at the date of his termination of employment and (ii) the only activities that will be treated as Other Material Activities shall be those business activities, if any, that, immediately prior to the Change of Control were Other Material Activities, and at the time of the alleged competitive activity, are Other Material Activities for the Company. The Company and Executive acknowledge and agree that the provisions of this Paragraph 8(a) are intended to protect the legitimate business interests of the Company and not to restrain the ability of Executive to obtain gainful employment. The Company agrees that this Paragraph 8(a) should not be interpreted to preclude Executive from raising capital or seeking to structure financial transactions in respect of investments of a type or nature not undertaken by the Company and its affiliates, even if such other investments compete for investment funds from the same sources of funds as the Company looks to for its transactions (e.g., this Paragraph 8(a) will not preclude Executive from participating in 11 the structure, financing or implementation of a venture capital fund or mezzanine debt fund, even if the potential investors in such funds include some or all of the same persons or entities as would generally invest in a transaction sponsored or promoted by the Company). (b) Confidential Information. During the term of this Agreement and at all times thereafter, Executive shall not, without the written consent of the Company, use for his personal benefit, or disclose, communicate or divulge to, or use for any company other than the Company or its subsidiaries or affiliates, any Confidential Information (as defined below) that had been made known to Executive or learned or acquired by Executive while in the employ of Company or its subsidiaries or affiliates, unless such information has become public other than by reason of Executive's breach of this covenant. Confidential Information shall mean (i) information not in the public domain (or in the public domain as a result of a breach by Executive or another executive of the Company who is also bound by a similar confidentiality clause) regarding the business methods, business policies, procedures, techniques, research or developments projects or results, trade secrets, or other processes of or developed by the Company; (ii) any names and addresses of customers or clients or any data on or relating to past, present or prospective customers or clients not in the public domain (or in the public domain as a result of a breach by Executive or another executive of the Company who is also bound by a similar confidentiality clause); and (iii) any other material information not in the public domain (or in the public domain as a result of a breach by Executive or another executive of the Company who is also bound by a similar confidentiality clause) relating to or dealing with the business operations or activities of the Company which has been designated by the Company as confidential or which, if disclosed to any third party, would result in a material adverse effect to the Company. (c) Company Property. Promptly following Executive's termination of employment, Executive shall return to the Company all property of the Company, and all copies thereof in Executive's possession or under his control. (d) Nonsolicitation Employees. Executive agrees that for a period of two years after the termination of his employment with the Company, he will not and 12 will not assist or encourage any other person to (i) employ, hire, engage or be associated (as a shareholder, partner, employee, consultant or in a similar capacity) with any employee or other person connected with the Company who rendered services as a professional, including, without limitation, all persons who provide direct and substantial services with respect to Leasing Transactions or Other Material Activities (the "Restricted Employees"), at the time of such termination or during any part of the six months (three months, in the case of any employee who was not also an officer of the Company) preceding such termination of employment, (ii) induce any Restricted Employees to leave the employ of the Company or any of its affiliates, or (iii) solicit the employment of any Restricted Employees on his own behalf or on behalf of any other business enterprise. (e) Injunctive Relief. Executive agrees and acknowledges that the remedies at law for any breach by him of the provisions of this Paragraph 8 will be inadequate and that the Company shall be entitled to obtain injunctive relief against him from a court of competent jurisdiction in the event of any such breach. If any such court of competent jurisdiction shall determine that the restrictions contained in this Paragraph 8 are unreasonable as to time or geographical area, such court shall reform said restrictions to the extent necessary in the opinion of such court to make them reasonable and enforceable. 9. Miscellaneous. (a) Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws of the State of New York notwithstanding any conflicting choice-of-law provisions. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement and the transactions contemplated herein shall be in writing and shall be deemed to have been given when delivered in person or when deposited in the United States mail in a postpaid envelope by registered or certified mail, return receipt requested or by 24-hour courier service. 13 (d) Binding Effect. This Agreement shall be binding on, and shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company's stock, a merger, consolidation or reorganization involving the Company or a sale of the assets of the business of the Company in which Executive performs a majority of his services, unless the Company otherwise elects in writing to retain responsibility for the duties and obligations of the Company (and the benefits conveyed to the Company) under this Agreement. This Agreement shall also inure to the benefit of Executive's heirs, executors, administrators and legal representatives. (e) Assignment. Except as provided under Paragraph (d), neither this Agreement nor any of the rights of obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. (f) Execution in Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original as against the party whose signature appears thereon, and both of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event any of Paragraph 8(a), (b), (c) or (d) is not enforceable in accordance with its terms, Executive and the Company agree that such Paragraph shall be reformed to make such Paragraph enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Entire Agreement. This Agreement contains the entire understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. (i) Shareholder Rights. Whenever in this Agreement reference is made to the interests of the Company's shareholders and there exists or may exist a conflict in the 14 interests of such shareholders, the Independent Committee shall determine the action or conduct that is in the interests of shareholders. (j) Paragraph Headings. The paragraph headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (k) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. (l) Number of Days. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or holiday. (m) Prevailing Parties. Following a Change of Control, any party which prevails in a lawsuit pertaining to the enforcement or interpretation of any provision of this Plan shall be entitled to recover all reasonable attorney's fees incurred by such party with respect to the lawsuit, in addition to any other remedies to which the party is entitled under the law, from the opposing party to such lawsuit. (n) Independent Committee. The terms of this Agreement shall be interpreted by the Independent Committee. The Independent Committee shall keep records of actions taken at its meetings. Two members of the Independent Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Independent Committee, shall be the acts of the Independent Committee. When determining whether an Executive's employment may be terminated by the Company in a Termination for Cause or by the Executive in a Termination with Good Reason, the Independent Committee shall provide the Executive an opportunity to be heard on such issue, and shall render its decision in writing within 60 days of being presented with the question. Prior to the occurrence of a Change of Control, any action 15 taken by the Independent Committee with respect to the interpretation of this Agreement shall be final, conclusive and binding. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered on the date first above written. W.P. CAREY & CO., INC. BY /s/ W. P. Carey ---------------------- /s/ JOHN J. PARK ---------------------- EXECUTIVE 16 Exhibit A CONTROLLED ENTITIES Carey Corporate Property, Inc. Seventh Carey Corporate Property, Inc. Eighth Carey Corporate Property, Inc. Ninth Carey Corporate Property, Inc. Carey Fiduciary Advisors, Inc. Carey Property Advisors, L.P. Carey Financial Corporation W.P. Carey Advisors, Inc. Carey Fairview Corporation W.P. Carey Advisors, L.P. EX-21.1 6 y06523exv21w1.txt LIST OF REGISTRANT SUBSIDIARIES EXHIBIT 21.1 W. P. CAREY & CO. LLC SUBSIDIARIES OF REGISTRANT Corporate Property Associates, a California limited partnership doing business under the name Corporate Property Associates. Corporate Property Associates 4, a California limited partnership, doing business under the name Corporate Property Associates 4. Corporate Property Associates 6, a California limited partnership, doing business under the name Corporate Property Associates 6. Corporate Property Associates 9, L.P., a Delaware limited partnership, doing business as Corporate Property Associates 9. FLY LLC CALL LLC UP CD LLC BILL CD LLC CD UP LP Keystone Capital Company Polkinvest SPRL 308 Route 38 LLC AZO Driver (DE) LLC AZO Mechanic (DE) LLC AZO Navigator (DE) LLC AZO Valet (DE) LLC Phone Managing Member LLC Phone (LA) LLC AZO-A L.P. AZO-B L.P. AZO-C L.P. AZO-D L.P. Alpena Franchise Corp. Alpena License Corp. Petoskey Franchise Corp. Petoskey License Corp. CPA Burnhaven L.P. CPA Paper Inc. Paper LLC Cross LLC FON LLC Broomfield Properties Corp. UK WPC Management LLC Carey Technology Properties II LLC Carey Asset Management Corp. CAMRB Management, LLC. Carey Financial Corporation Carey Management LLC Emerald Development Company, Inc. WP Carey Development LLC 308 Route 38 Inc. Three Aircraft Seats (DE) LP Three Cabin Seats (DE) LLC Bone (DE) LLC Bone Manager, Inc. Red Bank Road LLC Corporate Property Associates International Incorporated Carey Management Services, Inc. QRS 11-41 (AL), LLC Quest-US West (AZ) QRS 11-68, LLC QRS 11-2 (AR), LLC Citrus Heights (CA) GP, LLC Torrey Pines, LLC Gena, LLC (CA) ADS, LLC QRS 11-12 (FL), LLC QRS 10-18 (FL), LLC Drayton Plains (MI), LLC QRS 11-14 (NC), LLC MMI (SC) QRS 11-11, LLC Denton (TX) QRS 10-2, LLC EX-23.1 7 y06523exv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-46083), Form S-3 (No. 333-81814), Form S-8 (No. 333-64549), Form S-8 (No. 333-56121) and Form S-8 (No. 333-90880) of W. P. Carey & Co. LLC of our report dated March 15, 2005 relating to the consolidated financial statements, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 15, 2005 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP NEW YORK, NEW YORK MARCH 16, 2005 EX-31.1 8 y06523exv31w1.txt CERTIFICATION Exhibit 31.1 W.P. CAREY & CO. LLC CERTIFICATIONS OF CO-CHIEF EXECUTIVE OFFICERS PURSUANT TO RULE 15d-14(a) We, William Polk Carey and Gordon F. DuGan, certify that: 1. We have reviewed this Annual Report on Form 10-K of W. P. Carey & Co. LLC (the "Registrant"); 2. Based on our knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on our knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and we are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and we have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date 3/15/2005 Date 3/15/2005 /s/ William Polk Carey /s/ Gordon F. DuGan ------------------------ --------------------------- William Polk Carey Gordon F. DuGan Chairman President (Co-Chief Executive Officer) (Co-Chief Executive Officer) EX-31.2 9 y06523exv31w2.txt CERTIFICATION Exhibit 31.2 W.P. CAREY & CO. LLC CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 15d-14(a) I, John J. Park, certify that: 1. I have reviewed this Annual Report on Form 10-K of W. P. Carey & Co. LLC (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date 3/15/2005 /s/ John J. Park ------------------------ John J. Park Chief Financial Officer EX-32.1 10 y06523exv32w1.txt CERTIFICATION Exhibit 32.1 W.P. CAREY & CO. LLC CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICERS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of W. P. Carey & Co. LLC (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, William Polk Carey, Co-Chief Executive Officer of the Company, and Gordon F. DuGan, Co-Chief Executive Officer of the Company, certify, to the best of our knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William Polk Carey /s/ Gordon F. DuGan ----------------------------- ------------------------------- William Polk Carey Gordon F. DuGan Chairman President (Co-Chief Executive Officer) (Co-Chief Executive Officer) 3/15/2005 3/15/2005 ---------------------------- ------------------------------- Date Date A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to W. P. Carey & Co. LLC and will be retained by W. P. Carey & Co. LLC and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 11 y06523exv32w2.txt CERTIFICATION Exhibit 32.2 W.P. CAREY & CO. LLC CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of W. P. Carey & Co. LLC (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John J. Park, Chief Financial Officer of the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John J. Park -------------------------- John J. Park Chief Financial Officer 3/15/2005 -------------------------- Date A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to W. P. Carey & Co. LLC and will be retained by W. P. Carey & Co. LLC and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----