-----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, Pk8RJ1qDefbZ3EewMSkH5ye4YqcUG6HsJihO2ZHJwDIhVj36AiOsQ0/6BjU67ZE8 2IKAgwbdj3W9GvRYqk0Ziw== 0000950123-05-006400.txt : 20050517 0000950123-05-006400.hdr.sgml : 20050517 20050516200724 ACCESSION NUMBER: 0000950123-05-006400 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050517 DATE AS OF CHANGE: 20050516 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13779 FILM NUMBER: 05836855 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/A 1 y09070e10vkza.txt AMENDMENT NO 1 TO FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------- FORM 10-K/A AMENDMENT NO. 1 [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 NEW YORK, NEW YORK 10020 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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. EXPLANATORY NOTE As previously disclosed in the Company's Form 8-K dated May 10, 2005, in the course of determining the Company's deferred tax provision for the first quarter of 2005 in connection with preparing the Company's financial statements for that quarter, the Company discovered that, as a result of a clerical error that was not detected during the year-end review process, the amount of deferred taxes of a subsidiary of the Company engaged in the development of a single property had been incorrectly entered in a calculation of the Company's consolidated estimated deferred taxes for the quarter and the year ended December 31, 2004. The error resulted in an overstatement of the Company's provision for income taxes of $1,990,000 and an understatement of income from continuing operations and net income for the quarterly and annual periods ended December 31, 2004. Additionally, this resulted in an overstatement of deferred taxes payable and an understatement of members' equity at December 31, 2004. No other periods were affected by this error. The Company has restated its 2004 financial statements to correct its calculation of deferred taxes. This Amendment No. 1 on Form 10-K/A ("Form 10-K/A") to our Annual Report on Form 10-K for the year ended December 31, 2004, initially filed with the Securities and Exchange Commission (the "SEC") on March 15, 2005 (the "Original Filing"), is being filed to reflect restatements made to correct the error described above of (i) the consolidated balance sheet at December 31, 2004 and (ii) the consolidated statements of income, partners' capital, and cash flows, for the year ended December 31, 2004, and the notes related thereto (the "Restatement"). For a more detailed description of the Restatement, see Note 2 to the accompanying audited consolidated financial statements and the section entitled "Restatement" in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-K/A. Additionally, the Company's management has determined that the Company had a material weakness in internal control over financial reporting as of December 31, 2004 relating solely to the lack of effective controls over the calculation and review of the Company's estimated deferred taxes. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The existence of a material weakness as of December 31, 2004 precludes management from concluding that the Company's internal control over financial reporting was effective as of year-end. As a result, management has restated its Report on Internal Control Over Financial Reporting to reflect the existence of such material weakness. PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, has issued an adverse opinion on internal control over financial reporting in this Form 10-K/A. This Form 10-K/A sets forth the Original Filing in its entirety, except for Exhibits 10.5, 10.6, 10.7, 10.8, and 21.1, which are incorporated by reference. However, this Form 10-K/A only amends and restates Items 6, 7, 8 and 9A of Part II and Item 15(a) of Part IV of the Original Filing, in each case as a result of, and solely to reflect, the Restatement. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. Item 7 has also been updated to show the segregation of lease revenues separately for those properties that are consolidated and those properties in which the Company has a minority interest. This update to Item 7 is unrelated to the Company's Restatement or assessment of internal control. In addition, pursuant to the rules of the SEC, Item 15(a) of Part IV of the Original Filing has been amended to contain currently dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The consent of the independent registered public accounting firm and the certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-K/A as Exhibits 23.1, 31.1, 31.2, 32.1 and 32.2, respectively. Except for the foregoing amended information, this Form 10-K/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events will be addressed in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005 which the Company is filing simultaneously with this report. We have not amended any Quarterly Reports on Form 10-Q as no quarterly periods other than the quarterly period ended December 31, 2004 were affected by the misstatement of deferred taxes. We have begun to implement changes in our procedures intended to improve both the preparation and review of the calculation of estimated deferred taxes as described in Item 9A. W. P. CAREY & CO. LLC PART I This Annual Report on Form 10-K/A contains certain forward-looking statements relating to W. P. Carey & Co. LLC. As used in this Annual Report on Form 10-K/A, 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 7 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 1 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 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 2 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 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 Decline in unguaranteed residual value of properties or Various properties 2,911 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: 3 - 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; - 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 4 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. 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. 5 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. 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 6 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. 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. 7 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 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. 8 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 9 - 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 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; 10 - 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 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. 11 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. 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 19 of the consolidated financial statements for financial data pertaining to our segment and geographic operations. 12 (e) AVAILABLE INFORMATION All filings we make with the SEC, including our Annual Report on Form 10-K, 10-K/A, 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. 13 ITEM 2. PROPERTIES.
SHARE OF RENT PER CURRENT LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE LOCATION INTEREST FOOTAGE FOOT 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, IL, LA, MO 100% 175,730 7.52 1,321,567 % Sales Feb. 2011 Feb. 2026 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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SHARE OF RENT PER CURRENT LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM LOCATION INTEREST FOOTAGE FOOT RENTS(1) FACTOR TERM TERM ------------- ---------------------- --------- -------- --------- -------- ---------- ---------- CHECKFREE HOLDINGS, INC. (2, 4) Norcross, GA 50% interest in a limited liability company owning land and building(10) 220,675 19.76 2,180,360 CPI Dec. 2015 Dec. 2030 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 building(10) 252,000 19.57 1,643,604 CPI Oct. 2013 Oct. 2023 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 building(11) 69,211 25.54 1,325,747(3) INSEE(6) Various Various BLOOMINGDALE, IL Various 100% 18,713 9.00 80,872 Various Various Various 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
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SHARE OF RENT PER CURRENT LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE LOCATION INTEREST FOOTAGE FOOT RENTS(1) FACTOR TERM MAXIMUM 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; San Antonio, TX 100% 197,098 5.25 1,034,837 CPI Mar. 2010 Mar. 2030 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 Joue les Tours Phalempin, France (2) foreign 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
16
SHARE OF RENT PER CURRENT LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE MAXIMUM LOCATION INTEREST FOOTAGE FOOT 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
17
SHARE OF RENT PER CURRENT LEASE OBLIGOR/ OWNERSHIP SQUARE SQUARE ANNUAL INCREASE LEASE LOCATION INTEREST FOOTAGE FOOT RENTS(1) FACTOR TERM MAXIMUM 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
18 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. 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. 19 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. 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. 20 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 set forth on page 50 of Appendix A. ITEM 6. SELECTED FINANCIAL DATA. Selected Financial Data are set forth on page 2 of Appendix A. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's Discussion and Analysis are set forth on pages 3 to 18 of 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 21 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. 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 set forth on pages 19 to 50 of 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. DISCLOSURE CONTROLS AND PROCEDURES (as restated) Our disclosure controls and procedures are 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 chief executive officer 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 specified in the SEC's rules and forms. Our chief executive officer and chief financial officer have conducted a review of our disclosure controls and procedures as of December 31, 2004. In connection with the restatement described in Note 2 to our consolidated financial statements, management determined that there was a material weakness in our internal control over financial reporting as of December 31, 2004 with respect to the calculation and review of estimated deferred taxes, as more fully described below in "Management's Report on Internal Control Over Financial Reporting." Based on the evaluation and solely because of such material weakness, the chief executive officer and the chief financial officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2004. 22 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (as restated) 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. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework." Subsequent to filing the Annual Report on Form 10-K with the SEC on March 15, 2005, management became aware of an error in the calculation of our provision for income taxes. As a result of the discovery of this error, management, after consultation with our Audit Committee, determined that the audited financial statements included in our 2004 Annual Report on Form 10-K for the year ended December 31, 2004 should be restated to correct the error. In view of this error, management concluded that as of December 31, 2004, we did not maintain effective controls over the calculation and review of the provision for income taxes. Specifically, the controls relating to the determination of certain deferred temporary differences did not detect that the temporary differences had been misclassified as a deferred tax liability rather than a deferred tax asset at December 31, 2004 and resulted in an overstatement of the provision for income taxes and the net deferred tax liability. This control deficiency resulted in the restatement of deferred taxes and the provision for income taxes in our consolidated financial statements as of December 31, 2004 and of the unaudited quarterly results as of and for the period ended December 31, 2004. Additionally, this control deficiency could result in a misstatement to deferred income taxes and the provision for income taxes that would result in a material misstatement to the annual or interim financial statements. Accordingly, management determined that this control deficiency constitutes a material weakness. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management had previously concluded that we maintained effective internal control over financial reporting as of December 31, 2004. In connection with the restatement described above, management has determined that the material weakness described above existed as of December 31, 2004. Accordingly, management has restated this report to include this material weakness. Because of this material weakness, management concluded that, as of December 31, 2004, we did not maintain effective internal control over financial reporting, based on criteria set forth in Internal Control-Integrated Framework. Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report in Item 8. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING We began to address our material weakness in internal control over financial reporting with respect to the calculation and review of estimated deferred taxes in May 2005 by implementing, in connection with the preparation of our first quarter financial statements, a more in-depth and comprehensive review of the calculation of the provision for income taxes, including review of this calculation by an additional level of management. We also commenced an assessment of other methods intended to improve both the preparation and review of this calculation. We expect to complete our assessment and implement additional procedures to address the material weakness during the second quarter of 2005. We believe that, once fully implemented, these remediation steps will be sufficient to address the material weakness discussed above. Except for the item discussed above, there were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 23 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. 24 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 set forth on pages 19 to 50 of 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 set forth on pages 31 to 37 of this Form 10-K/A. 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. 25 (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 Agreement of Carey Exhibit 3.1 to Registration Statement on Form S-4 Diversified LLC. (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 and the Company. Exhibit 10.1 to Registration 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 Unit Plan. Filed as Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2004 dated March 15, 2005 10.6 Third Amended and Restated Credit Agreement dated as of May 27, 2004. Filed as Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2004 dated March 15, 2005 10.7 Employment Agreement Dated April 7, 1997 between W.P. Carey & Co., Filed as Exhibit 10.7 to Registrant's Annual Inc. and Gordon S. DuGan. Report on Form 10-K for the year ended December 31, 2004 dated March 15, 2005 10.8 Employment Agreement dated April 7, 1997 between W.P. Carey & Co., Filed as Exhibit 10.8 to Registrant's Annual Inc. and John J. Park. Report on Form 10-K for the year ended December 31, 2004 dated March 15, 2005 21.1 List of Registrant Subsidiaries. Filed as Exhibit 21.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2004 dated March 15, 2005 23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith 31.1 Certification of Chief Executive Officer pursuant to Section 302(a) of Filed herewith the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302(a) Of Filed herewith the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer's Certification Pursuant to Section 906 of the Filed herewith Sarbanes-Oxley Act of 2002. 32.2 Chief Financial Officer's Certification Pursuant to Section 906 of the Filed herewith
26 Sarbanes-Oxley Act of 2002. 99.13 Amended and Restated Agreement of Limited Partnership of CPA(R): 1. Exhibit 99.13 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 99.16 Amended and Restated Agreement of Limited Partnership of CPA(R): 4. Exhibit 99.16 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 99.18 Amended and Restated Agreement of Limited Partnership of CPA(R): 6. Exhibit 99.18 to Registration Statement on Form S-4 (No. 333-37901) dated October 15, 1997 99.21 Amended and Restated Agreement of Limited Partnership of CPA(R): 9. Exhibit 99.21 to Registration 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
27 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 5/16/2005 BY: /s/ Claude Fernandez Date ------------------------------------ Claude Fernandez Managing Director and acting 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. 5/16/2005 BY: /s/ William P. Carey Date -------------------------------------------- William P. Carey Chairman of the Board and Director 5/16/2005 BY: /s/ Francis J. Carey Date -------------------------------------------- Francis J. Carey Chairman of the Executive Committee and Director 5/16/2005 BY: /s/ Gordon F. DuGan Date -------------------------------------------- Gordon F. DuGan President and Chief Executive Officer and Director (Principal Executive Officer) 5/16/2005 BY: /s/ George E. Stoddard Date -------------------------------------------- George E. Stoddard Senior Executive Vice President and Director 5/16/2005 BY: /s/ Nathaniel S. Coolidge Date -------------------------------------------- Nathaniel S. Coolidge Chairman of the Audit Committee and Director 5/16/2005 BY: /s/ Eberhard Faber IV Date -------------------------------------------- Eberhard Faber IV Chairman of Nomination & Corporate Governance Committee and Director 5/16/2005 BY: /s/ Dr. Lawrence R. Klein Date -------------------------------------------- Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director 5/16/2005 BY: /s/ Charles C. Townsend, Jr. Date -------------------------------------------- Charles C. Townsend, Jr. Chairman of the Compensation Committee and Director 5/16/2005 BY: /s/ Ralph Verni Date -------------------------------------------- Ralph Verni Director 5/16/2005 BY: /s/ Karsten von Koller Date -------------------------------------------- Karsten von Koller Director 5/16/2005 BY: /s/ Reginald Winssinger Date -------------------------------------------- Reginald Winssinger Director 5/16/2005 BY: /s/ Claude Fernandez Date -------------------------------------------- Claude Fernandez Managing Director and acting Chief Financial Officer
28 5/16/2005 BY: /s/ Michael D. Roberts Date -------------------------------------------- Michael D. Roberts Executive Director, Controller and acting Principal Accounting Officer
29 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 (except for the restatement described in Note 2 to the consolidated financial statements and the matter referenced in the penultimate paragraph of Management's Report on Internal Control Over Financial Reporting as to which the date is May 16, 2005) appearing in the 2004 Annual Report to Shareholders of W. P. Carey & Co. LLC (which report, consolidated financial statements and assessment are included in Appendix A to Form 10-K/A) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K/A. 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. /s/ PricewaterhouseCoopers LLP New York, New York March 15, 2005 30 W. P. CAREY & CO. LLC SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Costs Increase Initial Cost to Company Capitalized (decrease) in ------------------------ Subsequent to Net Description Encumbrances Land Buildings Acquisition (a) 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 manufacturing 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 which Carried at Close of Period (e) in Latest ------------------------------------------------------ Statement of Accumulated Date Income is Description Land Buildings Total Depreciation (e) Acquired 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 manufacturing 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.
31 SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Costs Initial Cost to Company 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 1/1/1998 40 yrs. Land leased to AutoZone, Inc. 9,234,249 9,234,249 457,467 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.
32 SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2004
Costs Initial Cost to Company 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 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: 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.
33 SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Costs Increase Initial Cost to Company Capitalized (decrease) -------------------------- Subsequent to in Net Description Encumbrances Land Buildings Acquisition (a) 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 Gross Amount at which Carried in 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 =========== ============ ============ ===========
34 SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Costs Increase Initial Cost to Company Capitalized (Decrease) ----------------------- Subsequent to in Net Description Encumbrances Land Buildings Acquisition (a) 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
35 SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 2004
Gross Amount at which Costs Increase Carried at Initial Cost to Company Capitalized (Decrease) Close of ------------------------- Subsequent to in Net Period Date Description Encumbrances Land Buildings Acquisition (a) 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 ========== ========== ========== =========== ==========
36 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 ========== =========== ==========
37 APPENDIX A TO FORM 10-K W. P. CAREY & CO. LLC 38 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (as restated) 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. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework." Subsequent to filing the Annual Report on Form 10-K with the SEC on March 15, 2005, management became aware of an error in the calculation of our provision for income taxes. As a result of the discovery of this error, management, after consultation with our Audit Committee, determined that the audited financial statements included in our 2004 Annual Report on Form 10-K for the year ended December 31, 2004 should be restated to correct the error. In view of this error, management concluded that as of December 31, 2004, we did not maintain effective controls over the calculation and review of the provision for income taxes. Specifically, the controls relating to the determination of certain deferred temporary differences did not detect that the temporary differences had been misclassified as a deferred tax liability rather than a deferred tax asset at December 31, 2004 and resulted in an overstatement of the provision for income taxes and the net deferred tax liability. This control deficiency resulted in the restatement of deferred taxes and the provision for income taxes in our consolidated financial statements as of December 31, 2004 and of the unaudited quarterly results as of and for the period ended December 31, 2004. Additionally, this control deficiency could result in a misstatement to deferred income taxes and the provision for income taxes that would result in a material misstatement to the annual or interim financial statements. Accordingly, management determined that this control deficiency constitutes a material weakness. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management had previously concluded that we maintained effective internal control over financial reporting as of December 31, 2004. In connection with the restatement described above, management has determined that the material weakness described above existed as of December 31, 2004. Accordingly, management has restated this report to include this material weakness. Because of this material weakness, management concluded that, as of December 31, 2004, we did not maintain effective internal control over financial reporting, based on criteria set forth in Internal Control-Integrated Framework. Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report in Item 8. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING We began to address our material weakness in internal control over financial reporting with respect to the calculation and review of estimated deferred taxes in May 2005 by implementing, in connection with the preparation of our first quarter financial statements, a more in-depth and comprehensive review of the calculation of the provision for income taxes, including review of this calculation by an additional level of management. We also commenced an assessment of other methods intended to improve both the preparation and review of this calculation. We expect to complete our assessment and implement additional procedures to address the material weakness during the second quarter of 2005. We believe that, once fully implemented, these remediation steps will be sufficient to address the material weakness discussed above. Except for the item discussed above, there were no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 1 SELECTED FINANCIAL DATA (In thousands except per share amounts)
Restated 2004 (6) 2003 2002 2001 2000 ---------- -------- -------- -------- -------- Operating Data: Revenues (1) $ 227,774 $159,238 $152,404 $120,493 $101,469 Income (loss) from continuing operations (2) 71,038 62,562 44,138 31,079 (12,688) Basic earnings (loss) from continuing operations per share 1.90 1.71 1.24 .90 (.43) Diluted earnings (loss) from continuing operations per share 1.82 1.64 1.21 .89 (.43) Net income (loss) 65,841 62,878 46,588 35,761 (9,278) Basic earnings (loss) per share 1.76 1.72 1.31 1.04 (.31) Diluted earnings (loss) per share 1.69 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. (6) The information contained in the selected financial data has been restated for 2004. See Note 2 for discussion of the Restatement. The impact of the Restatement is as follows:
As Previously Reported Restated 2004 Adjustment 2004 ------------- ---------- -------- Operating Data: Income (loss) from continuing operations $69,048 $1,990 $71,038 Basic earnings (loss) from continuing operations per share 1.85 .05 1.90 Diluted earnings (loss) from continuing operations per share 1.77 .05 1.82 Net income (loss) 63,851 1,990 65,841 Basic earnings (loss) per share 1.71 .05 1.76 Diluted earnings (loss) per share 1.64 .05 1.69
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/A, 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/A. 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 CPA(R) REITs is affected, among other 3 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 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 ------- ------- ------- Rental income from operating leases $46,472 $43,992 $44,304 Interest income from direct financing leases 21,322 20,655 22,298 ------- ------- ------- $67,794 $64,647 $66,602 ======= ======= =======
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 our direct ownership of real estate from the following lease obligations:
Years Ended December 31, --------------------------- 2004 2003 2002 ------- ------- ------- Bouygues Telecom, S.A. (a) (b) $ 4,436 $ 3,915 $ 3,221 Dr Pepper Bottling Company of Texas 4,334 4,290 4,405 Detroit Diesel Corporation 4,158 4,158 4,158 Gibson Greetings, Inc., a wholly owned subsidiary of American Greetings, Inc. 3,578 3,593 4,149 America West Holdings Corp. 2,838 2,738 2,539 Orbital Sciences Corporation 2,747 2,655 2,655 Quebecor Printing Inc. 2,653 2,632 2,563 AutoZone, Inc. 2,362 2,393 2,411 Sybron International Corporation 2,286 2,083 2,164 Sybron Dental Specialties Inc. 1,770 1,613 1,613 Unisource Worldwide, Inc. 1,705 1,710 1,732 CSS Industries, Inc. 1,637 1,647 1,656 BE Aerospace, Inc. 1,585 1,620 433 Sprint Spectrum L.P. 1,425 1,425 1,425 Eagle Hardware & Garden, Inc., a wholly 1,306 1,338 1,313 owned subsidiary of Lowe's Companies Inc. Brodart Co. 1,273 1,235 1,519 AT&T Corporation 1,259 1,259 1,259 United States Postal Service 1,233 1,233 1,233 BellSouth Telecommunications, Inc. 1,224 1,224 1,224 Lockheed Martin Corporation 1,094 1,196 1,389 Cendant Operations, Inc. 1,093 1,075 1,075 Swat-Fame, Inc. 1,086 885 749 United Space Alliance 1,051 951 885 Anthony's Manufacturing Company, Inc. 1,019 1,019 1,019 Other (a) (b) 18,642 16,760 19,813 ------- ------- ------- $67,794 $64,647 $66,602 ======= ======= =======
(a) Lease revenue applicable to minority interest in the consolidated amounts above total $1,597, $1,316 and $766 as of December 31, 2004, 2003 and 2002 respectively. (b) Includes amounts subject to fluctuations in foreign currency exchange rates. 4 We recognize income from equity investments of which lease revenues are a significant component. Our ownership interests range from 18.54% to 50%. For the year ended December 31, 2004, 2003 and 2002, our share of net lease revenues in the following lease obligations was as follows:
Years Ended December 31, ------------------------- 2004 2003 2002 ------- ------ ------ Carrefour France, SA (a) (b) $ 3,417 $ 253 $ -- Federal Express Corporation 2,668 2,639 2,610 CheckFree Holdings Corporation Inc. 2,180 2,128 2,108 Sicor, Inc. (c) 557 -- -- Information Resources, Inc. 1,644 1,644 1,644 Hologic, Inc. (d) 1,136 1,136 382 Childtime Childcare, Inc. 472 470 183 Titan Corporation 352 517 507 ------- ------ ------ $12,426 $8,787 $7,434 ======= ====== ======
(a) Revenue amounts are subject to fluctuations in foreign currency exchange rates. (b) We acquired our interest in this property during the fourth quarter of 2003. (c) Includes the CIP(R) real estate interests acquired in September 2004. (d) We acquired our interest in this property during the fourth quarter of 2002. 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). 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 5 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. RESTATEMENT OF FINANCIAL STATEMENTS As previously disclosed in our Form 8-K dated May 10, 2005, in the course of determining our deferred tax provision for the first quarter of 2005 in connection with preparing our financial statements for that quarter, we discovered that, as a result of a clerical error that was not detected during the year-end review process, the amount of deferred taxes of a subsidiary engaged in the development of a single property had been incorrectly entered in a calculation of our consolidated estimated deferred taxes for the quarter and the year ended December 31, 2004. The error resulted in an overstatement of our provision for income taxes of $1,990 and an understatement of income from continuing operations and net income for the quarterly and annual periods ended December 31, 2004. Additionally, this resulted in an overstatement of deferred taxes payable and an understatement of members' equity at December 31, 2004. No other periods were affected by this error. We have restated our 2004 financial statements to correct the calculation of deferred taxes. 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 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 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. 7 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 Evaluation determined that investment value has units $ 4,596 declined Decline in unguaranteed residual value of Cincinnati, Ohio 4,588 property Decline in unguaranteed residual value of Williamsport, Pennsylvania 3,486 property Decline in unguaranteed residual value of Memphis, Tennessee $2,337 property Winona, Minnesota 1,250 Loan loss related to sale of property Various properties Decline in unguaranteed residual value of 2,911 $1,480 7,840 properties or decline in asset value Evaluation determined that property value has Bay Minette, Alabama 550 -- -- 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- 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. 8 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, -------------------------------------------------------------- Restated 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 (49,547) (17,715) (31,832) (17,715) (16,587) (1,128) -------- -------- -------- -------- -------- ------- Income from continuing operations $ 45,575 $ 24,400 $ 21,175 $ 24,400 $ 20,510 $ 3,890 ======== ======== ======== ======== ======== =======
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 9 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. 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. 10 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 $31,832 (restated) 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 52% 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. Income from Continuing Operations 2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, income from continuing operations increased $21,175 (restated) 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 11 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 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. 12 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.
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 13 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 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 3 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 14 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 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. 15 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. 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 16 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, 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 3 to the consolidated financial statements of this Annual Report on Form 10-K/A 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 17 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. As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2004 financial statements. Internal control over financial reporting Also, we have audited management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that W.P. Carey & Co. LLC did not maintain effective internal control over financial reporting as of December 31, 2004, because the Company did not maintain effective controls over the calculation of deferred taxes, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (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. 19 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. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management's assessment. As of December 31, 2004, the Company did not maintain effective controls over the calculation and review of the provision for income taxes. Specifically, the controls relating to the determination of certain deferred temporary differences did not detect that the temporary differences had been misclassified as a deferred tax liability rather than a deferred tax asset at December 31, 2004 and resulted in an overstatement of the provision for income taxes and the net deferred tax liability. This control deficiency resulted in the restatement of deferred taxes and the provision for income taxes in the Company's consolidated financial statements as of December 31, 2004 and of the unaudited quarterly results as of and for the period ended December 31, 2004. Additionally, this control deficiency could result in a misstatement to deferred income taxes and the provision for income taxes that would result in a material misstatement to the annual or interim financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2004. In connection with the restatement of the Company's consolidated financial statements described in Note 2 to the consolidated financial statements, management has determined that the material weakness described above existed as of December 31, 2004. Accordingly, Management's Report on Internal Control Over Financial Reporting has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. In our opinion, management's assessment that W. P. Carey & Co. LLC did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control -- Integrated Framework issued by the COSO. Also, in our opinion, because of the effects of the material weakness described above on the achievement of the objectives of the control criteria, W.P. Carey & Co. LLC has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the COSO. /s/ PricewaterhouseCoopers LLP New York, New York March 15, 2005, except for the restatement described in Note 2 to the consolidated financial statements and the matter referenced in the penultimate paragraph of Management's Report on Internal Control Over Financial Reporting as to which the date is May 16, 2005. 20 W. P. CAREY & CO. LLC CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
December 31, ---------------------- Restated 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 38,359 29,532 Other liabilities 11,748 11,221 ---------- --------- Total liabilities 391,481 309,866 ---------- --------- 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 (112,441) (112,570) Unearned compensation (5,366) (4,863) Accumulated other comprehensive income 3,800 2,496 ---------- --------- Total members' equity 620,651 594,787 ---------- --------- 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, --------------------------------------- Restated 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 (50,984) (19,116) (18,083) ----------- ----------- ----------- Income from continuing operations before gain on sale of real estate 71,038 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 $ 65,841 $ 62,878 $ 46,588 =========== =========== =========== Basic earnings (loss) per share: Income from continuing operations $ 1.90 $ 1.71 $ 1.24 (Loss) income from discontinued operations (.14) .01 .07 ----------- ----------- ----------- Net income $ 1.76 $ 1.72 $ 1.31 =========== =========== =========== Diluted earnings (loss) per share: Income from continuing operations $ 1.82 $ 1.64 $ 1.21 (Loss) income from discontinued operations (.13) .01 .07 ----------- ----------- ----------- Net income $ 1.69 $ 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, 2002, 2003 and 2004 (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 65,841 Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: ---------- -------- --------- ------- Balance at December 31, 2004 (Restated) 37,523,462 $734,658 $(112,441) $(5,366) ========== ======== ========= =======
23
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 $65,841 65,841 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: $67,145 ------- ------- -------- Balance at December 31, 2004 (Restated) $ 3,800 $620,651 ======= ========
The accompanying notes are an integral part of the consolidated financial statements. 24 W. P. CAREY & CO. LLC CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, --------------------------------- Restated (In thousands) 2004 2003 2002 --------- --------- --------- Cash flows from operating activities: Net income $ 65,841 $ 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 8,827 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 ========= ========= =========
(In thousands except share and per share amounts) 25 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 satisfied. 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 4) 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. 26 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. Restatement: The consolidated financial statements for the year ended December 31, 2004 and the related quarterly financial data for the year ended December 31, 2004 included in this Annual Report on Form 10-K/A have been restated to reflect corrections to the Company's previously reported quarterly financial data and annual financial statements included in its Form 10-K for the year ended December 31, 2004. See Note 20, Quarterly Results (Unaudited) for the effect of the restatement on the quarterly period ended December 31, 2004. In connection with the preparation of the Company's financial statements for the first quarter of 2005, it was determined that certain deferred temporary differences had been misclassified as a deferred tax liability rather than a deferred tax asset at December 31, 2004 and resulted in an overstatement of its provision for income taxes and its net deferred tax liability by $1,990 and, therefore, understated its net income for the quarter and year ended December 31, 2004. 27 The following table sets forth the effects of the restatement adjustments discussed above on the Consolidated Statement of Income for the year ended December 31, 2004.
For the year ended December 31, 2004 ---------------------------------------------- As previously reported Restated 2004 Adjustment 2004 ---------------------- ---------- -------- Provision for income taxes $(52,974) $1,990 $(50,984) Income from continuing operations 69,048 1,990 71,038 Net income 63,851 1,990 $ 65,841 Basic earnings (loss) per share: Income from continuing operations 1.85 .05 1.90 Net income 1.71 .05 1.76 Diluted earnings (loss) per share: Income from continuing operations 1.77 .05 1.82 Net income 1.64 .05 1.69
The following table sets forth the effects of the restatement adjustments discussed above on the Consolidated Balance Sheet at December 31, 2004.
For the year ended December 31, 2004 ----------------------------------------------- As previously reported Restated 2004 Adjustment 2004 ---------------------- ---------- --------- Liabilities : Deferred income taxes, net $ 40,349 $(1,990) $ 38,359 Total liabilities 393,471 (1,990) 391,481 Members' Equity: Dividends in excess of accumulated earnings (114,431) 1,990 (112,441) Total members' equity 618,661 1,990 620,651
The effect of the restatement adjustments did not change cash flows from operating, investing or financing activities for the year ended December 31, 2004. 3. 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; 28 - 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 - 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 temporarily 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 29 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. 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. 30 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. 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: Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (see Note 6). 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 (see Note 5). 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 31 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. 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 32 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 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, ---------------------------- Restated 2004 2003 2002 -------- ------- ------- Net income as reported $65,841 $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 $65,252 $62,016 $45,410 ======= ======= ======= Earnings per common share as reported: Basic $ 1.76 $ 1.72 $ 1.31 Diluted $ 1.69 $ 1.65 $ 1.28 Pro forma earnings per common share: Basic $ 1.74 $ 1.70 $ 1.28 Diluted $ 1.68 $ 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. 33 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. 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. 34 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 18). 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 8). 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, --------------------------------------- Restated 2004 2003 2002 ----------- ----------- ----------- Net income $ 65,841 $ 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 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 35 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. 4. 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. 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 36 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, 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, ------------------------- Restated 2004 2003 ----------- ----------- (Unaudited) (Unaudited) Pro forma total revenues $234,870 $170,147 Pro forma net income 66,606 64,614 Pro forma earnings per share: Basic $ 1.78 $ 1.77 Diluted $ 1.71 $ 1.70
5. 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: 37
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. 6. 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 ========= =========
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. 7. 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 38 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 ========== ==========
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. 8. 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 39 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 15) 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 14. 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 14). 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. 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: 40
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 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. 9. 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) $ -- ======== ========
41 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. 10. 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. 11. 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 42 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. 12. 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. 13. 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. 43 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. 14. 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. 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 8. 44 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. 15. 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 8) 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 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. 16. Stock Options, Restricted Stock and Warrants: 45 In January 1998, the predecessor of Carey Management (see Note 1) 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 ========= ========= =========
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 46 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. 17. 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 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. 18. 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:
Restated 2004 2003 2002 -------- ------- ------- Federal: Current $26,330 $ 5,694 $ 2,436 Deferred 6,118 5,749 8,756 ------- ------- ------- 32,448 11,443 11,192 ------- ------- ------- State, local and foreign: Current 15,827 3,944 2,492 Deferred 2,709 3,729 4,399 ------- ------- ------- 18,536 7,673 6,891 ------- ------- ------- Total provision $50,984 $19,116 $18,083 ======= ======= =======
Deferred income taxes as of December 31, 2004 and 2003 consist of the following:
Restated 2004 2003 -------- ------- Deferred tax assets: Unearned and deferred compensation $ 3,436 $ 2,063 Other liabilities 850 1,121 ------- ------- 4,286 3,184 ------- ------- Deferred tax liabilities: Receivables from affiliates 22,939 19,067 Investments 18,974 12,894 Other 732 755 ------- ------- 42,645 32,716 ------- ------- Net deferred tax liability $38,359 $29,532 ======= =======
47 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:
Restated 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 1,225 (2,225) (517) ------- ------- ------- Tax provision - taxable subsidiaries 49,677 17,569 16,987 Other state, local and foreign taxes 1,307 1,547 1,096 ------- ------- ------- Total tax provision $50,984 $19,116 $18,083 ======= ======= =======
19. 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 (restated)(3) $(49,547) $ (1,437) $ -- $ (50,984) 2003 (17,715) (1,401) -- (19,116) 2002 (16,587) (1,496) -- (18,083) Income (loss) from continuing operations: 2004 (restated)(3) $ 45,575 $ 34,919 $ (9,456) $ 71,038 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 (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. (3) See Note 2 for discussion of the restatement. 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 20. Selected Quarterly Financial Data (unaudited):
Three Months Ended ----------------------------------------------------------------------- Restated(3) 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 4,115 Earnings per share - Basic .30 .41 .94 .11 Diluted .29 .40 .90 .10 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 8). (3) See Note 2 for discussion of the restatement. 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"), Gordon F. DuGan, our Chief Executive Officer, has certified, without qualification, that he is not aware of any violation by the Company of the NYSE's corporate governance listing standards. Further, Mr. DuGan has filed with the SEC, as Exhibit 31.1 to the Company's most recently filed Form 10-K/A, the Sarbanes-Oxley Act Section 302 certification regarding the quality of the Company's public disclosure. 50 REPORT ON FORM 10-K/A The Company will supply to any shareholder, upon written request and without charge, a copy of the Annual Report on Form 10-K/A for the year ended December 31, 2004 as filed with the Securities and Exchange Commission ("SEC"). The 10-K/A may also be obtained through the SEC's EDGAR database at www.sec.gov. 51 EX-23.1 2 y09070exv23w1.txt EX-23.1: 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 (except for the restatement described in Note 2 to the consolidated financial statements and the matter referenced in the penultimate paragraph of Management's Report on Internal Control Over Financial Reporting as to which the date is May 16, 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 included in Appendix A to Form 10-K/A. We also consent to the inclusion of our report dated March 15, 2005 relating to the financial statement schedule, which appears in this Form 10-K/A. /s/ PricewaterhouseCoopers LLP New York, New York March 16, 2005, except for the restatement described in Note 2 to the consolidated financial statements and the matter referenced in the penultimate paragraph of Management's Report on Internal Control Over Financial Reporting as to which the date is May 16, 2005. EX-31.1 3 y09070exv31w1.txt EX-31.1: CERTIFICATION Exhibit 31.1 W.P. CAREY & CO. LLC CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 15d-14(a) I, Gordon F. DuGan, certify that: 1. I have reviewed this Annual Report on Form 10-K/A 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 officer 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 officer 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 5/16/2005 /s/ Gordon F. DuGan - ------------------------------------- Gordon F. DuGan President and Chief Executive Officer EX-31.2 4 y09070exv31w2.txt EX-31.2: CERTIFICATION Exhibit 31.2 W.P. CAREY & CO. LLC CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 15d-14(a) I, Claude Fernandez, certify that: 1. I have reviewed this Annual Report on Form 10-K/A 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 officer 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 officer 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 5/16/2005 /s/ Claude Fernandez - ------------------------------------- Claude Fernandez acting Chief Financial Officer EX-32.1 5 y09070exv32w1.txt EX-32.1: CERTIFICATION Exhibit 32.1 W.P. CAREY & CO. LLC CERTIFICATION OF CHIEF EXECUTIVE 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/A for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gordon F. DuGan, Chief Executive 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/ Gordon F. DuGan - ------------------------------------- Gordon F. DuGan President and Chief Executive Officer 5/16/2005 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. EX-32.2 6 y09070exv32w2.txt EX-32.2: 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/A for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Claude Fernandez, acting 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/ Claude Fernandez - ------------------------------------- Claude Fernandez acting Chief Financial Officer 5/16/2005 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-----