W. P. Carey Annual Report 2000

Plain-text annual report

W. P. Carey & Co. LLC Annual Report 2000 Investing for the Long Run Financial Highlights I N T H O U S A N D S E X C E P T P E R S H A R E A N D S T O C K D A T A F O R T H E Y E A R E N D E D D E C E M B E R 3 1 Operations Total Revenues Net Income Funds From Operations (FFO) Per Share Funds From Operations (FFO) Dividend Pay-Out Ratio 2 0 0 0 120,251 (9,278) 68,044 2.28 1.69 74.1% $ $ $ $ $ Weighted Average Listed Shares Outstanding (Diluted) 29,652,698 A S O F D E C E M B E R 3 1 Balance Sheet Total Assets Shareholders’ Equity Stock Data 2 0 0 0 $ $ 904,242 562,073 Price Range (January 1, 2000 thru December 31, 2000) $15.88 - $18.31 Dividend Yield Range 9.23% - 10.64% Average Daily Trading Volume (January 1, 2000 thru December 31, 2000) Number of Shareholders 20,778 20,385 I N V E S T I N G F O R T H E L O N G R U N Properties owned by WPC Properties owned by CPA®REITs W . P . C A R E Y & C O . L L C ( N Y S E : W P C ) I S A fully integrated investment company and the nation’s dominant net lease ﬁrm, specializing in the triple net leasing of single tenant commercial and industrial properties throughout the United States. In addition to our extensive real estate holdings, we manage properties held by a group of companies, includ- ing the Corporate Property Associates (CPA®) series of private REITs, and Carey Institutional Properties. Through direct ownership or management, our portfolio consists of 409 properties in 41 states, the United Kingdom and France. Assets under ownership and management total over 45,000,000 square feet and exceed $2.6 billion. W. P. Carey & Co. shareholders beneﬁt from the steady revenues gener- ated by our net lease operations and growth from our asset management business. Our mission is to provide investors with stable income and consistent investment performance and to assist our tenant companies in achieving their business goals. Dear fellow shareholders I N L A S T Y E A R ’ S LLC (WPC). We have successfully com- report we cautioned that prudent asset bined the advisory business of W. P. allocation required investors to diversify, Carey & Co., Inc. with the investment putting some of the gains from high-risk portfolio of Carey Diversiﬁed LLC to investments into undervalued, income- oriented investments — the “stay rich” Wm. Polk Carey CHAIRMAN create an entirely new enterprise that takes diversiﬁcation to a new level. portion of their portfolios. Those who & The investment portfolio of net- heeded our warning were rewarded. The leased commercial properties. It con- solid performance of our business during tinuously generates stable, gradually rising a year of extreme market volatility bene- rents, with returns moderately leveraged ﬁted our long-term thinking investors. with non-recourse mortgages and built- In addition, last year’s combination of Francis J. Carey VICE CHAIRMAN in credit and inﬂation protections. the growing asset management business & The advisory business. It has been of W. P. Carey & Co., Inc. with the stable historically faster growing, generating fees income from Carey Diversiﬁed LLC’s for providing acquisition and manage- highly diversiﬁed portfolio of net leased ment services for four Carey-sponsored properties enhanced our performance. real estate investment trusts (REITs). Today, we are on target with our goal of Gordon F. DuGan PRESIDENT Three of these REITs are in the Corpor- creating sustainable long-term value for ate Property Associates series, intended our investors and recent market volatility has only primarily for individual investors (CPA®:10, CPA®:12 reinforced our core belief in making sound invest- and CPA®:14). The fourth, Carey Institutional Proper- ments and in the importance of diversiﬁcation. ties (CIP®), is attractive to institutional investors as well. That long-term investment philosophy continues The new WPC is clearly a winning combination to guide us as the newly formed W. P. Carey & Co. for our shareholders. It generated an immediate, and 2 THE NEW WPC IS CLEARLY A WINNING COMBINATION FOR OUR SHAREHOLDERS. IT GENERATED continuing, boost in revenue and AN IMMEDIATE, AND $2.28 per share in 2000, from cash ﬂow and provided signiﬁcant additional diversiﬁcation. It aligned the interests of property ownership and the advisory function within a CONTINUING, BOOST IN REVENUE AND CASH FLOW AND PROVIDED $2.07 per share in 1999. Addition- ally, the approximate six months of combined operations showed a boost in book revenues and FFO. single entity. And its increased size, SIGNIFICANT ADDITIONAL We prefer, however, in keeping ﬁnancial strength and marketplace presence will make it easier to pur- sue and ﬁnance attractive invest- DIVERSIFICATION. with our “long-run” investment phi- losophy, not to measure our per- formance on a quarter-to-quarter ment opportunities that may arise. or even on a year- to-year basis, but rather to view Strong Gain in Funds From Operations our results with a longer-term perspective. As a com- pany that makes long-term investments through real estate in businesses with solid prospects for future For the year 2000, the company turned in a solid growth, we seek to create sustainable long-term earnings performance. While Generally Accepted shareholder value. Accounting Principles (GAAP) require depreciation In keeping with our long-standing objective of of assets as a non-cash charge against earnings, that providing shareholders with consistent, gradually is more appropriate for production equipment and rising income, our board of directors increased the factories that gradually wear out or become obso- dividend to an annualized rate of $1.69 per share in lete than for commercial real estate, which tends 2000. As expected, our earnings amply covered dis- to become more valuable over time. Funds From tributions. Operations (FFO), a widely used measure of real Assets at year-end totaled $904,242,000, com- estate investment performance, adds depreciation pared with $856,259,000 a year earlier. Shareholders’ charges back into earnings. FFO increased 10% to equity rose from $512,600,000 to $562,073,000. 3 Portfolio Diversiﬁcation by Percentage Rent Contributor T O P T E N A N T S B A S E D O N O N G O I N G R E N TA L I N C O M E ties to fair value. Of course, these book write-downs will help future earnings growth. It is noteworthy that with- A N N U A L R E N T out the $11 million write-down, % O F T O TA L R E N T L E S S E E / L E A S E G U A R A N T O R Results on GAAP Basis Due to structural, non-recurring changes, WPC recorded a net loss for the year of $9,278,000, or $.31 per share, on revenues of $120,251,000. In 1999, net Dr Pepper / Seven Up Bottling Group 4.9% $ 4,318,931 4.5% Detroit Diesel Corp. 3,957,524 American Greetings Corporation 4.3% 3,720,000 3,108,797 earnings were $34,039,000, or 3.6% Livho Inc. $1.33 per share on revenues of $88,506,000. This book loss resulted from several non-cash charges to earn- ings, of which the largest was a non-recurring $38 million charge for the terminated management contract between Carey Diversi- ﬁed LLC and W. P. Carey & 3.2% Federal Express Corp. 2,827,023 3.0% Orbital Sciences Corp. 2,655,320 America West Holdings Corporation 2.9% Thermadyne Industries, Inc. 2.9% 2.8% Furon Company 2,538,805 2,525,163 2,414,800 2.7% Quebecor Printing USA 2,401,350 2.5% AutoZone, Inc. 2.5% The Gap, Inc. Sybron International Corporation 2.5% 2,216,594 2,205,385 2,163,816 42.3% TOTAL $ 37,053,508 operating income derived from real estate operations would have increased by 5%, reﬂecting the strong performance of our portfolio. After the write-down, income from real estate opera- tions was $23,113,000, com- pared with $32,522,000 in 1999. The advisory business, exclud- ing the charges for goodwill, intangibles and the management contract termination, contributed Co., Inc. The management contract was terminated $13,081,000 to operating income in the second half to reflect the new structure of the company as an of the year. internally managed entity after the merger. Other non-cash charges included nearly $6 million from An All-Weather Strategy the amortization of goodwill and intangible assets As we have noted, we have focused on creating a acquired in connection with the merger and just over business that performs well in good times as well as $11 million in write-downs of properties and securi- bad. During the dot.com boom, our stock suffered. 4 Portfolio Diversiﬁcation B Y P R O P E R T Y T Y P E B A S E D O N A N N U A L R E N T S During last year’s record house- hold net worth decline, our stock went up 20%. Our funds’ out- standing performance in all We leverage our properties mod- erately with property-speciﬁc, non-recourse debt to enhance our returns. phases of the business cycle has 38.5% Industrial / Manufacturing That approach, applied demonstrated the effectiveness 32.1% Office / Research through partnerships, REITs of W. P. Carey’s disciplined, 15.7% Distribution / Warehouse and a limited liability company, carefully structured “long-run” approach to investing in net leased commercial real estate. We focus on sale-leaseback or 9.4% Retail / Services 4.4% Hotel has beneﬁted investors and ten- ants alike since W. P. Carey & Co. was founded in 1973. Tenant companies have used the build-to-suit acquisitions involving a long-term net sale-leaseback or build-to-suit approach to unlock lease with a single corporate tenant. We are careful to the full value of company-owned real estate, to fund diversify our holdings geographically and by indus- growth or acquisitions, or to reduce debt and clean try and type of property. We prefer properties that up their balance sheets. are both intrinsically attractive and central to the ten- WPC, and its predecessor CDC, adopted the ant company’s operations. We structure the lease as an form of a limited liability company primarily because obligation of the parent corporation, and include rent of the added ﬂexibility it provides in terms of invest- escalation provisions to help offset inﬂation and pro- ments, operations and payouts. Unlike a REIT, which vide gradually rising returns. Exhaustive analysis by must distribute 90% of its taxable earnings, an LLC our independent investment committee often enables can retain a larger percentage of its earnings to fund us to discern an improving credit early, thereby future growth and build ﬁnancial strength. increasing the value of the resulting lease when the In 2000, WPC readily covered its distributions markets recognize the tenant’s ﬁnancial soundness. with a payout ratio of 74.1%, down from 80.7% in 5 Industry Diversiﬁcation B A S E D O N A N N U A L R E N T S the prior year and 83.3% in 1998. This ratio, which we expect to maintain in the 70% range, has led us to focus heavily on re- leasing properties early and sell- ing off some properties where provides an excellent cushion for R E N TA L I N C O M E leases are short in order to $ 11,523,354 increase average lease duration our dividend. Four Macro Trends Meanwhile, the more difﬁcult economic and business climate is affecting WPC’s business in sev- eral ways. We note four relevant macro trends. & A lower interest rate environ- ment. This is helpful for WPC. Lower market rates of interest increase the value of our lease stream, expand our opportuni- ties to reﬁnance advantageously, and reduce our interest expense. 7.7% 7.4% Telecommunications 6,703,837 Consumer Products 13.3% Machinery / Equipment 10.1% Specialty Services 9.7% Retail 8.5% Electronics 6.9% Automotive 6.0% Paper / Printing Food / Beverage Processing Airfreight / Parcel Services Medical / Biotech / Pharmaceutical 5.1% 4.8% 4.4% 4.4% Hotel 3.1% Airline 2.8% Technology 2.1% Warehousing 1.3% Construction 1.2% Manufacturing 0.9% Supermarkets 0.1% Education 8,767,708 8,371,701 7,379,234 6,424,800 5,994,798 5,173,072 4,430,487 4,193,448 3,830,005 3,804,545 2,671,044 2,420,302 1,837,806 1,144,716 1,068,166 769,615 56,520 $ 86,565,158 and protect our earnings. & A tighter credit environment. This beneﬁts WPC directly in that our tenants cannot readily ﬁnd as attractive alternative ﬁnancing. Our advisory business beneﬁts even more because a tight credit market increases the demand for sale-leaseback ﬁnancing, increasing the ﬂow of potential investments for our REITs. The ﬁnancial strength of the merged company, coupled with our favorable track record Lower interest rates improve our returns, making our among investors, provides us with ready access to holdings more valuable over time. debt or equity capital, conferring a relative advantage & Falling corporate earnings. Declining proﬁts in pursuing attractive acquisitions. While tight credit eventually lead to layoffs and then a reduction in the markets and shrinking proﬁts could result in defaults, amount of space a company needs. That possibility we are monitoring our WPC and REIT portfolios 6 Three Year Reinvested Return 120 100 80 60 closely to minimize credit losses. & A drought in public offer- ings. In healthier times, the pub- lic market made tremendous amounts of money available. This is no longer the case, creat- ing opportunity for alternative 1.1 98 12.31 98 12.31 99 12.31 00 WPC Peer Group — WPC, NNN, LXP and O Morgan Stanley REIT Index ever — in property ownership, revenues and sources of capital. We have a “long-run” invest- ment strategy that has proven itself effective in all parts of the business cycle, a skilled and dis- ciplined staff to carry it out, and providers of capital such as NAREIT Index a proud legacy of integrity and W. P. Carey. success. At the same time, we are a new company, with a sharp A Positive Outlook focus on a bright future of growth, proﬁtability and Despite continuing uncertainty over the extent and rising shareholder value. duration of the slowdown in the U.S. economy, our We are grateful for, and count upon, the dedi- outlook is distinctly positive. We are well positioned cation of our talented staff, the goodwill of our clients to weather a downturn and to take advantage of and the strong support of our fellow investors as we emerging opportunities. We are diversiﬁed more than face the challenges of the year ahead. W M . P O L K C A R E Y Chairman F R A N C I S J . C A R E Y Vice Chairman G O R D O N F. D U G A N President 7 Investment Capital: Diversity = Availability I N R E A L E S T A T E I N V E S T M E N T , A C C E S S T O capital is critical to success. In today’s challenging economic climate, W. P. Carey & Co. is positioned to assure that the debt and equity capital needed to invest advantageously is readily available. Diversiﬁcation in its property acquisitions — geographically, by industry and by type of property — has always been an article of faith at W. P. Carey & Co. Now we have extended that approach by diversifying our sources of capital as well. The U.S. economic slowdown, accompanied by tightening of the credit markets, has generated expanded opportunities to acquire attractive properties at reasonable prices, while making it harder for many potential buyers to obtain the capital necessary to do so. By contrast, we can tap a variety of sources for both debt and equity capital. Equity Capital WPC has three sources of equity capital. In creating the Corporate Property Associates (CPA®) series of limited partnerships and real estate investment trusts over the years, for example, we have raised capital by obtaining private equity investments from individuals. Such investors remain an important source of the private equity that fuels those REITs’ growth, and in turn, the growth of WPC. Carey Institutional Properties, another REIT, has received private equity investments from institutions, such as foundations, pension plans and banks, as well as from individuals. The third source is the public equity markets. WPC, whose shares are traded on the New York Stock Exchange, can issue stock to raise funds. The size, ﬁnancial strength, superior track record and growing public recognition of WPC facilitates investor acceptance of such issues. 8 Debt Capital We use two sources of debt capital to fund property acquisitions for WPC and the REITs that we manage: mortgages and corporate credit facilities. As every homeowner knows, a mortgage typically provides the bulk of the funds nec- essary to acquire a property. In net leased commercial real estate, leverage provided by a mortgage is critical to improving returns and stretching invested equity. We use only non- recourse mortgages — that is, in case of default, the lender would have recourse only to the value of the speciﬁc property, not to other assets of WPC. To maximize our current returns while still building some equity in a given property, we typically obtain a 10- to 20-year mortgage that amortizes on a 25-year schedule. The lease payment, or rent, is structured to provide for periodic rent increases. Credit lines at the corporate level comprise our other source of debt capital. WPC I N V E S T I N G F O R T H E L O N G R U N CAPITAL FROM THESE SOURCES WILL ENABLE WPC recently renewed its credit facility with various lenders of $185 million adding such promi- TO INVEST AS MUCH AS nent banks as Wells Fargo, Citizens and National Australia Bank. Our current outstanding balance on our credit facilities is $110 million. Growing cash ﬂow, infusions of equity and $400 MILLION IN ACQUIRING occasional asset sales enable us to pay down this essentially short-term credit line debt. Capital Driving Growth Capital from these sources will enable WPC to invest as much as $400 million in acquir- PROPERTIES FOR ITS OWN ACCOUNT AND FOR ITS ing properties for its own account and for its REITs during the remainder of 2001. WPC REITS DURING THE will also take advantage of the current low interest rate environment to reﬁnance some properties, thereby improving returns and freeing up capital. REMAINDER OF 2001. WPC’s capital strength, careful attention to underwriting and lease-structuring, and conservative approach to borrowing result in a stock that is underleveraged and gener- ates more than enough cash to cover its distributions. The price stability and consistent returns that this approach affords make WPC stock a particularly attractive long-term investment in a time of economic uncertainty. 9 Financial Statement Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations Report of Independent Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Members’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Corporate Information 9 20 21 22 23 25 27 54 10 Management’s Discussion and Analysis of Financial Condition and Results of Operations Dollar amounts in thousands Overview The following discussion and analysis of ﬁnancial condition and results of operations of W. P. Carey & Co. LLC (“WPC”) (formerly Carey Diversiﬁed, LLC) should be read in conjunction with the consolidated ﬁnancial state- ments and notes thereto for the year ended December 31, 2000. The following discussion includes forward look- ing statements. Forward looking statements, which are based on certain assumptions, describe future plans, strategies and expectations of WPC. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievement of WPC to be materially different from the results of operations or plan expressed or implied by such forward looking statements. Accordingly, such information should not be regarded as representations by WPC that the results or conditions described in such statements or objec- tives and plans of WPC will be achieved. Effective June 29, 2000, Carey Diversiﬁed LLC acquired the net lease real estate management operations of Carey Management LLC by issuing 8,000,000 shares, and changed its name to W. P. Carey & Co. LLC. As a result of acquiring the operations of Carey Management, WPC acquired its workforce of approximately 95 employees, assumed the advisory contracts with four afﬁliated real estate investment trusts (“REITs”) and terminated the man- agement contract between Carey Diversiﬁed LLC and Carey Management LLC. Management believes that the acquisition will provide WPC with several potential advantages including, but not limited to, increased diversiﬁ- cation of revenue sources, reduced operating expenses through the elimination of management fees formerly paid to Carey Management, potentially increased earnings growth rate, the ability to offer a full range of ﬁnancial options to corporate property owners and lessees, a strengthened credit proﬁle and improved access to capital markets. WPC has substantially increased its asset base without increasing its long-term debt, and the acquisition may pro- vide WPC the ability to increase its debt capacity, if necessary. The net income of the management business of Carey Management has historically grown at a faster rate than the net income of WPC’s real estate operations, and Management believes that the prospects for an increase in the growth rate of earnings will be improved. Because the capital markets have indicated a strong preference for internally managed real estate companies, the ability of WPC to raise additional equity capital in the public markets should be enhanced. 11 Overview (continued) Public business enterprises are required to report ﬁnancial and descriptive information about their reportable operating segments. WPC’s management evaluates the performance of its portfolio as a whole, but allocates its resources between two operating segments: real estate operations with domestic and international investments and management services. Results of Operations Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 WPC reported a net loss of $9,278 and net income of $34,039 for the years ended December 31, 2000 and 1999, respectively. The results for 2000 and 1999 are not fully comparable, primarily due to the acquisition of the oper- ations of Carey Management. WPC incurred a charge of $38,000 on the termination of its management contract with Carey Management. Management believes that the termination of the management contract will provide sub- stantial beneﬁt to WPC. In addition to the $38,000 fair value attributed to the terminated management contract, a substantial portion of the other net assets acquired consists of intangible assets including goodwill. Intangible assets and goodwill are amortized over their estimated useful lives, and such amortization, a non-cash charge, was $5,958 in the current year. Results for 2000 include approximately six months of operations for the management services business. Prior to the acquisition, real estate operations contributed substantially all of WPC’s income. Excluding the charges for amortization and the writeoff of the management contract, the management business segment contributed income of $13,081. Income from real estate operations provided operating income (income before gains and losses on sales and extraordinary items) of $23,113 in 2000 as compared with $32,522 in 1999. The results for 2000 and 1999 include charges of $11,047 and $5,988, respectively, for writedowns of assets to estimated fair value. Excluding the effect of the writedowns, operating income from real estate operations for 2000 would have reﬂected a decrease of $4,350. The decrease in real estate operating income was primarily due to increases in interest expense and depreciation offset by increases in lease revenues (rental income and interest income from direct ﬁnancing leases) and other income. The increase in interest expense of $7,731 was primarily due to mortgage ﬁnancing obtained in 1999 and a change in the use of amounts drawn from the credit line. Limited recourse ﬁnancings included a new loan on the America West property, reﬁnancings of the Gap, Inc. and Orbital Sciences Corporation properties and obtaining mortgage debt in connection with the December 1999 purchase of the Bell South property. Interest expense from the line of credit increased because a substantial portion of the interest incurred in 1999 was on borrowings used 12 Results of Operations (continued) to fund construction of the America West and Federal Express projects, and was capitalized rather than expensed in accordance with generally accepted accounting principles. Subsequent to the completion of the projects, inter- est costs were expensed. The credit facility is a variable rate obligation and also was affected by increases in inter- est rates during 2000. The increase in depreciation of $3,051 was due to the completion of build-to-suit projects on properties leased to America West Airlines and Federal Express, the acquisition of the Bell South property, the expansion of the Orbital Sciences property and the renovation of a property in Moorestown, New Jersey in 1999 now leased to Cendant. The increase in lease revenues was primarily due to the completion of build-to-suit projects with Federal Express Corporation in February 2000 and America West Holdings Corp. in May 1999, new leases with Cendant Operations, Inc. and Bell South Telecommunications, Inc. in May and December 1999, respectively, and rent increases on var- ious leases in 2000 and 1999. Lease revenue increases were partially offset by the sale of fourteen properties in 2000, the sales of the KSG, Inc. and Hotel Corporation of America properties in 1999 pursuant to the exercise of purchase options by the lessees, and the termination of the Copeland Beverage Group, Inc. lease in December 1999. As a result of ﬁnancial difﬁculties, Copeland was placed in receivership and subsequently liquidated. Annual rent from the Copeland lease was $1,800. WPC drew $1,800 from a letter of credit that had been provided by Copeland which was used to cover property expenses for the period subsequent to the lease termination. Other income in the accompanying consolidated statements consists of income from real estate operations other than lease revenues. Other income increased by $1,418 in 2000. These items include, but are not limited to, bankruptcy distributions on claims against former tenants and termination agreements. The increase in other income in 2000 included bankruptcy distributions received from a former lessee and termination consideration. Hotel oper- ating income (hotel revenues less hotel expenses) increased from $1,113 to $1,324 primarily due to increases in occupancy and average room rates of 4%. Income from equity investments increased by $996 due to the improved performance of the operating part- nership of Meristar Hospitality Corporation, a publicly traded real estate investment trust, and an increase in income from the investment in a net lease with Checkfree Holdings Corp., which is owned with an afﬁliate. The increase in income from the Checkfree investment was due to recognition of a full year’s revenues on the property leased to Checkfree which was purchased in June 1999. Rent on the Checkfree lease also increased in connection with the completion of an expansion in 2000. General and administrative expenses increased due to the acquisition of the management operations, includ- ing the personnel and ofﬁce facilities necessary to render advisory and administrative services to the REITs. The 13 Results of Operations (continued) general and administrative expense of the real estate operations segment reﬂected a decrease. Management and performance fee expenses for periods subsequent to the merger have been terminated effective June 29, 2000, resulting in a decrease in property expenses for the year ended December 31, 2000. The provision for income taxes increased as a result of forming a wholly-owned subsidiary that is responsible for management operations and all administrative functions. Formation of the taxable subsidiary allows the Company to maintain its status as a publicly-traded partnership. Management monitors its real estate assets and securities on an on-going basis. In the event of certain cir- cumstances, including, but not limited to, lease terminations, vacating of a property by a lessee or nonpayment of rent or interest, Management evaluates whether the fair value of an asset is less than its carrying value. In these instances, when the estimate of fair value is less than the carrying value, a writedown is recorded for the difference. In 2000 and 1999, WPC recognized writedowns of $11,047 and $5,988, respectively. Earnings from the management business segment include transaction-based revenues that are directly related to the acquisition activity of the CPA® REITs. The ability of a CPA® REIT to acquire interests in real estate depends on its ability to raise capital and to leverage its properties with limited recourse mortgage debt. Accordingly, the growth of the management business segment will be affected by the amount of equity capital raised by CPA® REIT acquisition activity in 2001. Management expects the level of acquisition activity on behalf of the CPA® REITs for 2001 to approximate the annualized rate for 2000. WPC is in the process of preparing a “best efforts” public offering for a new CPA® REIT which is expected to commence before the end of 2001. An on-going “best efforts” offering of Corporate Property Associates 14 Incorporated is scheduled to conclude in the third quarter of 2001. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Income before the effects of non-recurring items consisting of the noncash writedown of investments, gains from sales and extraordinary items increased by $437 or 1% in 1999 as compared to 1998. This increase is primarily due to the growth of lease revenues, which was partially offset by increases in depreciation, interest and general and administrative expenses. Net income for the twelve months ended December 31, 1999 decreased by $4,425 as com- pared to 1998 primarily due to a noncash writedown to fair value of $4,830 of WPC’s investment in Meristar Hospitality. The noncash writedown was recognized because of continued weakness in the public market’s valua- tion of equity securities of real estate investment companies, including Meristar. The carrying value of the equity investment in Meristar subsequent to the writedown approximates WPC’s pro rata share of Meristar at Meristar’s reported net asset value. 14 Results of Operations (continued) Lease revenues, including rental income from operating leases and interest income from ﬁnancing leases, increased by approximately $3,300 for the year ended December 31, 1999 as compared to 1998. This increase rep- resents the excess of additional lease revenues of approximately $6,000 from completed build-to-suit construction projects and the effect of property acquisitions, over revenue decreases as compared with 1998 of approximately $2,700 due to sales of properties and lease terminations. During 1999, WPC completed construction of a new $37,000 ofﬁce building for America West in which WPC owns an approximate 75% interest, a $3,000 renovation for property leased to Cendant and a $1,800 expansion on the Orbital Sciences property. Annual rent on the America West and Cendant properties is $2,539 and $1,000, respectively. Additional annual rent from the Orbital Science expansion is $234. Approximately $2,500 of the increase in lease revenues was realized as a result of recognizing a full year’s rent in 1999 on properties acquired in 1998, including a property leased to Eagle Hardware and Garden Inc., a portfolio of seven properties acquired from J.A. Billipp Development Corporation and three properties located in France. Decreases in lease revenues in 1999 of approximately $2,700 resulted from the scheduled expiration of a lease with Hughes Markets in April 1998 and the sale of properties. Approximately $1,300 of the decrease in lease rev- enues was due to the termination of the lease with Hughes Markets for a dairy processing plant in Los Angeles, California. On April 30, 1998, WPC’s two-year extension term with Hughes Markets at above-market rental rates ended, and the new lease for the property with Copeland became effective. Annual rent of $1,800 from the lease with Copeland approximated the rent in effect before commencement of Hughes’ two-year extension term. In April 1998, WPC received a ﬁnal rent payment of $3,500 from Hughes. Loss of revenues from the sale of properties in 1999 and 1998 account for approximately $1,400 of the decrease in lease revenues. These properties were sold as a result of the exercise of purchase options by the lessees of the properties. Hotel operating income (hotel revenues less hotel expenses) decreased from $1,333 to $1,113 primarily due to a transfer of hotel operations in 1998. Income from hotels in 1998 included one month of operating income from a hotel in Livonia, Michigan, whose operations were transferred to an afﬁliated entity on February 1, 1998. Operating income from the hotels located in Alpena and Petoskey, Michigan was substantially unchanged. Other income increased by $250, primarily due to the receipt of payments in connection with the settlement of a dispute with the former tenant of a property in Broomﬁeld, Colorado. Pursuant to the settlement, WPC received $700 of unpaid rents, interest and penalties due from the former tenant. WPC also received proceeds of $265 from the settlement of a bankruptcy by a former tenant. Income from equity investments increased by 3% in 1999 as compared to 1998. 15 Results of Operations (continued) Interest expense increased primarily due to an increase in debt balances for the acquisition of additional prop- erties. Total debt, consisting of limited recourse mortgage debt and advances on the revolving line of credit, increased from approximately $271,000 in 1998 to $317,000 in 1999. The increase in interest expense from additional bor- rowings was substantially offset by the decrease in expense from lower principal balances on amortizing mortgage loans. WPC used draws on its $185,000 revolving line of credit to fund construction costs and acquisitions and to reﬁnance high rate debt on a transitional basis. Advances made on the revolving line of credit during 1999 were repaid from the proceeds of limited recourse mortgage loans and property sales. Depreciation and amortization expense increased by $2,786 in 1999 as compared to 1998 primarily due to the acquisition of properties in 1998 and the completion of construction on properties leased to America West and Cendant in 1999. General and administrative expenses increased by approximately $1,051 in 1999 as compared to 1998 pri- marily due to increases in professional fees. Professional fees increased due to the implementation of a new inte- grated accounting and asset management system and costs related to the evaluation and remediation of Year 2000 issues. A portion of the increase in professional fees was due to efforts to improve WPC’s tax reporting capabili- ties to shareholders. WPC revised its systems and procedures to provide accelerated reporting of tax information to shareholders and engaged an external processing agent to provide shareholders with internet access to their tax information. State and local income taxes have increased due to the growth of WPC’s portfolio of properties. Because of the long-term nature of WPC’s net leases, inﬂation and changing prices should not unfavorably affect revenues and net income or have an impact on the continuing operations of WPC’s properties. WPC’s leases usually have rent increases based on the consumer price index and other similar indexes and may have caps on such increases, or sales overrides, which should increase operating revenues in the future. The moderate increases in the consumer price index over the past several years will affect the rate of such future rent increases. Management believes that hotel operations will not be signiﬁcantly impacted by changing prices. Financial Condition WPC’s primary sources of capital to meet its short-term and long-term needs are cash generated from operations, limited recourse mortgage loans, unsecured indebtedness and the issuance of additional equity securities. During 2000, WPC issued 8,000,000 shares in connection with acquiring the business operations of Carey Management. WPC assesses its ability to obtain debt ﬁnancing on an ongoing basis. 16 Financial Condition (continued) Cash ﬂows from operations and distributions from equity investments for the year ended December 31, 2000 of $60,000 were sufﬁcient to fund dividends to shareholders of $49,957 and distributions to minority interests of $1,321. Cash ﬂow from operations for 2000 is not fully representative of future cash ﬂows. Cash ﬂows for 2000 only reﬂect six months of operations for the management business. A full year’s cash ﬂow from the management segment is expected to substantially beneﬁt cash ﬂow from operations. In connection with the acquisition, WPC also acquired Carey Management’s minority partner interest in the CPA® Partnerships. Annual distributions relat- ing to Carey Management’s minority partner interest had been approximately $2,045. Cash ﬂows from operations are expected to increase as a result of the expected growth of the management business segment. Cash ﬂow from operations should continue to fully fund distributions. Cash ﬂow from real estate operations will beneﬁt from the completion of the build-to-suit project in October 2000 for a property leased to Bouygues Télécom, S.A. in France which will provide annual cash flow of $445. Expansions of properties leased to Sprint and AT&T Corporation being funded by WPC in consideration for increases in rent and extensions of remaining lease terms are expected to be completed in April 2001 and July 2001, respectively, and will provide additional annual cash ﬂow of approximately $600. In connection with the sale of its 60% interest in the Federal Express properties in Colliersville, Tennessee to an afﬁliate and the concurrent place- ment of limited recourse mortgage debt on the properties, annual cash ﬂow will decrease by $5,091. Solely as a result of using $60,000 from the proceeds from the sale and the concurrent placement of debt on the Federal Express properties, annual interest on the line of credit will decrease by up to $4,500. Additionally, the sale of the Federal Express properties has reduced the concentration of risk in a single lessee. Prior to the sale of this interest, Federal Express represented more than 7% of lease revenues and total assets. WPC’s investing activities in 2000 primarily consisted of funding construction costs in connection with the completion of build-to-suit projects for the Federal Express and Bouygues Télécom properties of $18,417, the pur- chase of 11 acres of land adjacent to an existing WPC property in Broomﬁeld, Colorado for $922 in cash and $778 in stock, and capital improvements to existing properties of $2,078. WPC also completed a buyout of the joint ven- ture partner in the Cendant property for $527. WPC is seeking approvals which will allow WPC the ability to rede- velop the existing property and adjacent land in Broomﬁeld. WPC also has commenced a commercial redevelopment of its property in Los Angeles formerly leased to Copeland. Estimated costs for the Broomﬁeld and Copeland pro- jects are $115,000. Management is still evaluating its ﬁnancing alternatives for these construction costs but a signi- ﬁcant portion could be drawn from its line of credit to fund such costs, if necessary. 17 Financial Condition (continued) During 2000, WPC sold (a) its interest in Federal Express for $42,287, (b) fourteen small properties for $3,007 and (c) 18,540 shares of common stock of Titan Corporation for $324. WPC had previously converted warrants it received in 1991 in connection with structuring its net lease with Titan Corporation to Titan common stock. WPC continues to assess its real estate portfolio, and will continue to sell smaller properties when Management believes sufﬁcient value can be received. In addition to meeting its commitment to pay dividends to shareholders, WPC’s ﬁnancing activities in 2000 included paying down the line of credit by $35,000, using $13,944 to purchase back WPC stock on the open mar- ket at share prices ranging from $15.75 to $18.00 and making distributions to minority interests of $1,321. WPC obtained limited recourse mortgage ﬁnancing on the Cendant property and the Bouygues Télécom property of $6,000 and $10,397, respectively. WPC uses limited recourse mortgage notes for a substantial portion of its long- term ﬁnancing strategy because the cost of this ﬁnancing is attractive and the exposure of its assets is limited to the collateral designated for each loan. WPC maintains a revolving line of credit that provides for borrowings of up to $185,000. Advances from the line of credit bear interest at an annual rate indexed to the LIBOR Rate. The revolving credit agreement has ﬁnan- cial covenants that require the Company to (i) maintain minimum equity value of $400,000 plus 85% of amounts received by the Company as proceeds from the issuance of equity interests and (ii) meet or exceed certain operat- ing and coverage ratios. Such operating and coverage ratios include, but are not limited to, (a) ratios of earnings before interest, taxes, depreciation and amortization to ﬁxed charges for interest and (b) ratios of net operating income, as deﬁned, to interest expense. The Company is in compliance with these covenants. The current revolv- ing line of credit had initially been scheduled to mature in March 2001 and has been extended to March 2004. In the case of limited recourse mortgage ﬁnancing that does not fully amortize over its term or is currently due, WPC is responsible for the balloon payment only to the extent of its interest in the encumbered property because the holder has recourse only to the collateral. In the event that balloon payments come due, WPC may seek to reﬁ- nance the loans, restructure the debt with the existing lenders or evaluate its ability to satisfy the obligation from its existing resources including its revolving line of credit, to satisfy the mortgage debt. To the extent the remain- ing initial lease term on any property remains in place for a number of years beyond the balloon payment date, WPC believes that the ability to reﬁnance balloon payment obligations is enhanced. WPC also evaluates all its out- standing loans for opportunities to reﬁnance debt at lower interest rates that may occur as a result of decreasing interest rates or improvements in the credit rating of tenants. Scheduled balloon payments on limited recourse mort- gage notes approximate $12,981 in 2001 and $2,333 in 2002. 18 Financial Condition (continued) WPC expects to meet its capital requirements to fund future property acquisitions, construction costs on build- to-suit transactions, capital expenditures on existing properties and scheduled debt maturities through long-term secured and unsecured indebtedness and the possible issuance of additional equity securities. WPC’s remaining commitments on the expansions of the Sprint and AT&T properties total $4,931. Commitments for capital expen- ditures on the Livonia, Alpena and Petoskey, Michigan hotels are currently estimated to be approximately $801. In connection with the purchase of many of its properties, WPC required the sellers to perform environmental reviews. Management believes, based on the results of such reviews, that WPC’s properties were in substantial com- pliance with Federal and state environmental statutes at the time the properties were acquired. However, portions of certain properties have been subject to some degree of contamination, principally in connection with leakage from underground storage tanks, surface spills or historical on-site activities. In most instances where contamination has been identiﬁed, tenants are actively engaged in the remediation process and addressing identiﬁed conditions. Tenants are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. In addition, WPC’s leases generally require tenants to indemnify WPC from all liabilities and losses related to the leased properties with provisions of such indemniﬁcation speciﬁcally addressing environmental matters. The leases generally include provisions that allow for periodic environmental assessments, paid for by the tenant, and allow WPC to extend leases until such time as a tenant has satisﬁed its environmental obligations. Certain of the leases allow WPC to require ﬁnancial assurances from tenants such as performance bonds or letters of credit if the costs of remediating environmental conditions are, in the estimation of WPC, in excess of speciﬁed amounts. Accordingly, Management believes that the ultimate resolution of environmental matters will not have a material adverse effect on WPC’s ﬁnancial condition, liquidity or results of operations. 19 Report of Independent Accountants To the Board of Directors and Shareholders of W. P. Carey & Co. LLC and Subsidiaries: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of opera- tions, members’ 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, 2000 and 1999, and the results of their operations and their cash ﬂows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements, assessing the accounting prin- ciples used and signiﬁcant estimates made by management, and evaluating the overall ﬁnancial statement presen- tation. We believe that our audits provide a reasonable basis for our opinion. New York, New York February 22, 2001 20 W. P. Carey & Co. LLC Consolidated Balance Sheets In thousands except share amounts Assets Real estate leased to others: Accounted for under the operating method, net of accumulated depreciation of $24,159 and $16,455 at December 31, 2000 and 1999 Net investment in direct ﬁnancing leases Real estate leased to others Operating real estate, net of accumulated depreciation of $1,442 and $832 at December 31, 2000 and 1999 Real estate under construction and redevelopment Equity investments Assets held for sale Cash and cash equivalents Due from afﬁliates Intangible assets, net of accumulated amortization of $5,958 at December 31, 2000 Other assets, net of accumulated amortization of $1,971 and $1,125 at December 31, 2000 and 1999 and reserve for uncollected rent of $2,207 and $1,839 at December 31, 2000 and 1999 Total assets Liabilities, Minority Interest and Members’ Equity Liabilities: Mortgage notes payable Notes payable Accrued interest Dividends payable Due to afﬁliates Accrued taxes Other liabilities Total liabilities Minority interest Commitments and contingencies Members’ Equity: Listed shares, no par value, 33,604,716 and 25,833,603 shares issued and outstanding at December 31, 2000 and 1999 Distributions in excess of accumulated earnings Unearned compensation Accumulated other comprehensive loss Less, shares in treasury at cost, 62,300 shares at December 31, 1999 Total members’ equity Total liabilities, minority interest and members’ equity The accompanying notes are an integral part of the consolidated ﬁnancial statements. 21 D E C E M B E R 3 1 1999 2000 $414,006 287,876 701,882 $425,421 295,556 720,977 6,502 13,359 47,224 2,573 10,165 7,945 94,183 6,753 69,176 32,167 3,091 2,297 — — 20,409 $904,242 21,798 $856,259 $196,094 94,066 2,655 14,182 15,308 2,688 16,374 341,367 802 644,749 (74,260) (5,291) (3,125) 562,073 — 562,073 $904,242 $188,248 129,103 874 10,718 7,227 1,205 9,420 346,795 (3,136) 526,130 (11,560) — (910) 513,660 (1,060) 512,600 $856,259 W. P. Carey & Co. LLC Consolidated Statements of Operations In thousands except share and per share amounts F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 1998 2000 1999 Revenues Rental income Interest income from direct ﬁnancing leases Management income from afﬁliates Other interest income Other income Revenues of hotel operations Expenses Interest Depreciation Amortization General and administrative Property expenses Termination of management contract Impairment of real estate and securities Operating expenses of hotel operations (Loss) income before income from equity investments, (loss) gain on sale, minority interest, income taxes and extraordinary item Income from equity investments (Loss) income before (loss) gain on sale, minority interest, income taxes and extraordinary item (Loss) gain on sale of real estate and securities, net (Loss) income before minority interest, income taxes and extraordinary item Minority interest in income (Loss) income before income taxes and extraordinary item Provision for income taxes (Loss) income before extraordinary item Extraordinary loss on early extinguishment of debt, net of minority interest of $79 Net (loss) income Basic and diluted (loss) earnings per share: (Loss) earnings before extraordinary item Extraordinary item Weighted average shares outstanding: Basic Diluted $ 52,086 33,572 25,271 452 2,626 6,244 120,251 26,571 13,508 7,801 16,487 5,644 38,000 11,047 4,920 123,978 (3,727) 2,882 (845) (2,752) (3,597) (1,517) (5,114) (4,164) (9,278) — $ (9,278) $ $ (.31) — (.31) $46,719 33,842 — 962 1,208 5,775 88,506 18,840 10,457 735 7,293 5,433 — 5,988 4,662 53,408 35,098 1,886 36,984 471 37,455 (2,664) 34,791 (752) 34,039 — $34,039 $ $ 1.33 — 1.33 $42,771 34,529 — 783 958 6,289 85,330 18,266 7,725 681 6,241 5,059 — 1,585 4,956 44,513 40,817 1,837 42,654 1,512 44,166 (4,662) 39,504 (419) 39,085 (621) $38,464 $ 1.57 (.02) $ 1.55 29,652,698 25,596,793 24,866,225 29,652,698 25,596,793 24,869,570 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, 2000, 1999 and 1998 In thousands except share amounts Shares Paid-in Capital Dividends in Excess of Accumulated Earnings Unearned Compen- sation Comprehen- sive Income (Loss) Accumulated Other Comprehen- sive Income (Loss) Treasury Shares Total Balance at January 1, 1998 23,959,101 $490,820 Cash proceeds on issuance of shares, net 384,708 6,191 Shares issued in connection with services rendered and properties acquired Dividends declared Comprehensive income: Net income Other comprehensive income: Change in unrealized appreciation (depreciation) of marketable securities Foreign currency translation adjustment 999,593 20,744 $(41,267) 38,464 $38,464 $490,820 6,191 20,744 (41,267) 38,464 (233) (486) (719) $37,745 $(719) (719) Balance at December 31, 1998 25,343,402 517,755 (2,803) (719) 514,233 Cash proceeds on issuance of shares, net 34,272 652 Shares issued in connection with services rendered and properties acquired Dividends declared 455,929 7,723 (42,796) 652 7,723 (42,796) Repurchase of shares (62,300) $(1,060) (1,060) Comprehensive income: Net income Other comprehensive income: Change in unrealized appreciation (depreciation) of marketable securities Foreign currency translation adjustment 34,039 $34,039 34,039 497 (688) (191) $33,848 (191) (191) Balance at December 31, 1999 25,771,303 $526,130 $(11,560) $(910) $(1,060) $512,600 23 W. P. Carey & Co. LLC Consolidated Statements of Members’ Equity (continued) For the years ended December 31, 2000, 1999 and 1998 In thousands except share amounts Shares Paid-in Capital Dividends in Excess of Accumulated Earnings Unearned Compen- sation Comprehen- sive Income (Loss) Accumulated Other Comprehen- sive Income (Loss) Treasury Shares Total Balance at December 31, 1999 25,771,303 526,130 (11,560) (910) (1,060) 512,600 3,169 124,630 — — (53,422) 860 (14,271) (14,271) 15,331 — Shares issued in connection with services rendered and properties acquired Shares issued in connection 226,290 3,169 with acquisition 8,104,673 124,630 Shares and options issued under share incentive plans Forfeitures Dividends declared Amortization of unearned compensation 347,100 (8,050) 6,311 (160) (53,422) $(6,311) 160 860 (15,331) Repurchase of shares (836,600) Cancellation of treasury shares Comprehensive loss: Net loss Other comprehensive income: Change in unrealized depreciation of marketable securities Foreign currency translation adjustment (9,278) $ (9,278) (9,278) (1,155) (1,060) (2,215) $(11,493) (2,215) (2,215) Balance at December 31, 2000 33,604,716 $644,749 $(74,260) $(5,291) $(3,125) — $562,073 The accompanying notes are an integral part of the consolidated ﬁnancial statements. 24 W. P. Carey & Co. LLC Consolidated Statements of Cash Flows In thousands F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 1998 2000 1999 Cash ﬂows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization Amortization of deferred income Extraordinary loss Loss (gain) on sales of real estate and securities, net Minority interest in income Straight-line rent adjustments and other noncash rent adjustments Management income received in shares of afﬁliates Writedown of real estate and securities to estimated fair value Structuring fees receivable Provision for uncollected rents Costs paid by issuance of shares Amortization of unearned compensation Termination of management contract Net changes in operating assets and liabilities, net of assets and liabilities acquired on acquisition Net cash provided by operating activities Cash ﬂows from investing activities: Purchases of real estate Additional capital expenditures Payment of deferred acquisition fees Proceeds from sales of real estate and securities Accrued disposition fees payable Purchases of mortgage receivable and marketable securities Sale of mortgage receivable Distributions received from equity investments in excess of equity income Capital distribution from equity investment Cash acquired on acquisition of business operations Net cash provided by (used in) investing activities Cash ﬂows from ﬁnancing activities: Dividends paid Payment of accrued preferred distributions Distributions paid to minority interest Redemption of subsidiary partnership unitholders Payments of mortgage principal Proceeds from mortgages and notes payable Prepayments of mortgages and notes payable Prepayment charges paid Deferred ﬁnancing costs Proceeds from issuance of shares Repurchase of shares Other Net cash (used in) provided by ﬁnancing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ (9,278) $ 34,039 $ 38,464 21,309 (566) — 2,752 1,517 (1,831) (2,747) 11,047 (6,351) 743 1,482 860 38,000 1,511 58,448 (21,497) (2,078) (392) 45,617 — — — 1,552 17,544 212 40,958 (49,957) — (1,321) — (7,590) 64,397 (83,037) — — — (13,944) (46) (91,498) (40) 7,868 2,297 $ 10,165 11,192 (1,397) — (471) 2,664 (1,646) — 5,988 — 328 1,647 — — (4,142) 48,202 (60,804) (3,784) — 9,631 (1,007) (3,676) 3,676 775 — — (55,189) (42,525) — (2,344) — (6,393) 74,251 (17,803) — (1,744) 652 (627) (75) 3,392 219 (3,376) 5,673 2,297 $ 8,406 (964) 621 (1,512) 4,662 (2,642) — 1,585 — 682 881 — — 1,761 51,944 (89,650) (5,156) — 21,567 1,007 (56) — 763 — — (71,525) (30,820) (4,422) (2,499) (8,789) (6,627) 157,823 (101,555) (700) (1,963) 7,304 — (1,084) 6,668 — (12,913) 18,586 5,673 $ The accompanying notes are an integral part of the consolidated ﬁnancial statements. 25 W. P. Carey & Co. LLC Consolidated Statements of Cash Flows (continued) Noncash operating, investing and ﬁnancing activities: A. The purchase of Carey Management consisted of the acquisition of certain assets and liabilities at fair value in exchange for the issuance of listed shares as follows: Intangible assets: Management contracts Trade name Workforce Goodwill Liability for 500,000 shares to be issued, net Other assets and liabilities, net Listed shares issued Net cash acquired $97,135 4,700 4,900 31,406 138,141 (9,050) (4,673) (124,630) $ 212 B. The Company issued 181,644, 203,166 and 215,424 restricted shares valued at $2,424, $3,311 and $4,367 in 2000, 1999 and 1998, respectively, to certain directors, ofﬁcers and afﬁliates in consideration of services ren- dered. In connection with the acquisition of Carey Management in 2000, restricted shares and stock options valued at $6,295 have been recorded as unearned compensation, of which $160 has subsequently been for- feited and $860 has been included in compensation expense. C. In connection with the acquisition of real estate interests in 2000, 1999 and 1998, the Company issued shares valued at $778, $4,412 and $16,377, respectively. The Company also assumed mortgage obligations of $6,098 and $13,593 in 1999 and 1998, respectively. D. In connection with the disposition of a property in Topeka, Kansas in 1999, the property was transferred to the purchaser in exchange for assumption of the mortgage obligation on the property and certain other assets and liabilities. The gain on sale was as follows: Land, buildings and personal property, net of accumulated depreciation Mortgage note payable Other Gain on sale $ (7,654) 8,107 (373) $ 80 E. Deferred acquisition fees payable to an afﬁliate at December 31, 2000, 1999 and 1998 are $4,330, $3,945 and $3,137, respectively. Supplemental Cash Flow Information: Cash paid for interest, net of amounts capitalized Income taxes paid 2000 $24,790 $ 1,437 1999 $20,055 $ 659 1998 $17,936 $ 353 The accompanying notes are an integral part of the consolidated ﬁnancial statements. 26 W. P. Carey & Co. LLC Notes to Consolidated Financial Statements All amounts in thousands except share and per share amounts 1. Organization W. P. Carey & Co. LLC (the “Company”) (formerly known as Carey Diversiﬁed LLC) commenced operations on January 1, 1998, pursuant to a consolidation transaction, when the Company acquired the majority ownership interests in the nine Corporate Property Associates (CPA®) Partnerships. The former General Partner interests in the CPA® Partnerships were retained by two special limited partners, William Polk Carey, formerly the Individual General Partner of the nine CPA® Partnerships, and Carey Management LLC (“Carey Management”). Limited partners in the CPA® Partnerships who did not elect to receive shares in the Company retained direct ownership interests in the applicable CPA® Partnerships as subsidiary partnership unitholders. In July 1998, the Company redeemed all subsidiary partnership units for $8,377. The exchange of CPA® Partnership limited partner interests for interests in Carey Diversiﬁed was accounted for as a purchase with the limited partner interests recorded at the fair value of the shares exchanged. The excess of fair value over the related historical cost basis of $189,932 was allocated principally to real estate leased to others under operating leases, net investment in direct ﬁnancing leases and equity investments. The exchange of the former General Partners’ interests for shares was accounted for at their historical cost basis. On June 28, 2000 the Company acquired the net lease real estate management operations of Carey Management subsequent to receiving shareholder approval. The assets acquired include the Advisory Agreements with four afﬁ- liated publicly owned real estate investment trusts (the “CPA® REITs”), the Company’s Management Agreement, the stock of an afﬁliated broker-dealer, investments in the common stock of the CPA® REITs, and certain ofﬁce fur- niture, ﬁxtures, equipment and employees required to carry on the business operations of Carey Management. The purchase price consisted of the initial issuance of 8,000,000 Listed Shares (“shares”) with an additional 2,000,000 shares issuable over four years if speciﬁed performance criteria are achieved (of which 500,000 shares will be issued based on meeting performance criteria as of December 31, 2000 and valued at $9,050, based on the quoted price of the Company’s shares at December 31, 2000). The initial 8,000,000 shares issued are restricted from resale for a period of up to three years. The total initial purchase price was approximately $131,300 including the issuance of 8,000,000 shares, transaction costs of $2,605, the acquisition of Carey Management’s special limited partnership minority interests in the CPA® Partnerships and the value of restricted shares and options issued in respect of the 27 1. Organization (continued) interests of certain ofﬁcers in a non-qualiﬁed deferred compensation plan of Carey Management. The Company has guaranteed loans of $7,995 to these ofﬁcers in connection with their acquisition of equity interests in the Company. The acquisition of interests in Carey Management was accounted for as a purchase and is recorded at the fair value of the initial 8,000,000 shares issued and an additional 500,000 shares issuable based on meeting certain per- formance criteria as of December 31, 2000. For ﬁnancial reporting purposes, the value of the 500,000 shares is recorded as additional purchase price. The fair value of the initial shares was based upon the average market price for a reasonable period before and after the date the terms of the acquisition were announced, including a discount to reﬂect the restrictions on their disposition. Any subsequent issuances based on performance criteria are valued based on the market price of the shares on the date when the performance criteria are achieved. The purchase price has been allocated to the assets and liabilities acquired based upon their fair market values. Intangible assets acquired, including the Advisory Agreements with the CPA® REITs, the Company’s Management Agreement, the trade name, and workforce, were determined pursuant to an independent valuation. The value of the Advisory Agreements and the Management Agreement have been computed based on a discounted cash ﬂow analysis of the projected fees. The excess of the purchase price over the fair values of the identiﬁed tangible and intangible assets, has been recorded as goodwill. The acquisition of the Company’s Management Agreement has been accounted for as a contract termination and the fair value of the Agreement of $38,000 was expensed as of the date of the merger. Effective January 1, 2001, the Company has acquired all remaining minority interests in the CPA® Partnerships. An independent valuation is being completed which will determine the shares to be issued for the acquisition of the remaining minority interests. Concurrent with the purchase of the remaining interests in the CPA® Partnerships, certain CPA® Partnerships were merged so that as of January 1, 2001, the four remaining CPA® Partnerships will be wholly-owned subsidiaries. With the reduction in the number of Partnerships and the elimination of the minor- ity interest owners in such Partnerships, the Company expects to achieve certain operating efﬁciencies. 2. Summary of Signiﬁcant Accounting Policies Basis of Consolidation The consolidated ﬁnancial statements include the Company and its wholly-owned and majority-owned subsidiaries including the CPA® Partnerships. All material inter-entity transactions have been eliminated. 28 2. Summary of Signiﬁcant Accounting Policies (continued) Use of Estimates The preparation of ﬁnancial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. The most signiﬁcant estimates relate to the assessment of recoverability of real estate and intangible assets and goodwill. Actual results could differ from those estimates. Real Estate Leased to Others Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Company diversiﬁes its real estate investments among various corporate tenants engaged in different industries and by property type. No lessee currently represents 10% or more of total leasing revenues. The leases are accounted for under either the direct ﬁnancing or operating methods. Such methods are described below (also see Notes 4 and 5): Direct ﬁnancing method — Leases accounted for under the direct ﬁnancing method are recorded at their net invest- ment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a con- stant periodic rate of return on the Company’s net investment in the lease. Operating method — Real estate is recorded at cost less accumulated depreciation, minimum rental revenue is recognized on a straight-line basis over the term of the related leases and expenses (including depreciation) are charged to operations as incurred. Substantially all of the Company’s leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides. Certain of the Company’s leases provide for additional rental revenue by way of percentage rents to be paid based upon the level of sales to be achieved by the lessee. These percentage rents are recorded once the required sales level is achieved and are included in the accompanying consolidated ﬁnancial statements in rental income and interest income from direct ﬁnancing leases. 29 2. Summary of Signiﬁcant Accounting Policies (continued) Operating Real Estate Land and buildings and personal property are carried at cost less accumulated depreciation. Renewals and improve- ments are capitalized, while replacements, maintenance and repairs that do not improve or extend the lives of the respective assets are expensed currently. Real Estate Under Construction and Redevelopment For properties under construction, interest charges are capitalized rather than expensed and rentals received are recorded as a reduction of capitalized project (i.e., construction) costs. The amount of interest capitalized is determined by applying the interest rate applicable to outstanding bor- rowings on the line of credit to the average amount of accumulated expenditures for properties under construction during the period. Equity Investments The Company’s interests in entities in which the Company’s ownership is 50% or less and the Company exerts sig- niﬁcant inﬂuence are accounted for under the equity method, i.e. at cost, increased or decreased by the Company’s pro rata share of earnings or losses, less distributions. Assets Held for Sale Assets held for sale are accounted for at the lower of carrying value or fair value, less costs to dispose. The Company recognizes gains and losses on the sale of properties when among other criteria, the parties are bound by the terms of the contract, all consideration has been exchanged and all conditions precedent to closing have been performed. At the time the sale is consummated, a gain or loss is recognized as the difference between the sale price less any closing costs and the carrying value of the property. Intangible Assets Goodwill represents the excess of the purchase price of the net lease real estate management operations over the fair value of net assets acquired. Other intangible assets represent cost allocated to trade names, advisory contracts with the CPA® REITs and the acquired workforce. Intangible assets are being amortized over their estimated use- ful lives which range from 21/2 to 16 1/2 years. 30 2. Summary of Signiﬁcant Accounting Policies (continued) Intangible assets as of December 31, 2000 are as follows: Management contracts Workforce Trade name Goodwill Less accumulated amortization Long-Lived Assets $ 59,135 4,900 4,700 31,406 100,141 5,958 $ 94,183 When events or changes in circumstances indicate that the carrying amount may not be recoverable, the Company assesses the recoverability of its long-lived assets, including residual interests of real estate assets and investments, based on projections of undiscounted cash ﬂows, without interest charges, over the life of such assets. In the event that such cash ﬂows are insufﬁcient, the assets are adjusted to their estimated fair value. Depreciation Depreciation is computed using the straight-line method over the estimated useful lives of the properties (gener- ally forty years) and for furniture, ﬁxtures and equipment (generally up to seven years). Foreign Currency Translation The Company consolidates its real estate investments in France. The functional currency for these investments is the French Franc. The translation from the French Franc to U. S. dollars is performed for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains and losses resulting from such translation are reported as a component of other comprehensive income as part of members’ equity. Cash Equivalents The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classiﬁed as cash equivalents include commercial paper and money market funds. Substantially all of the Company’s cash and cash equivalents at December 31, 2000 and 1999 were held in the custody of four ﬁnancial institutions and which 31 2. Summary of Signiﬁcant Accounting Policies (continued) balances, at times, exceed federally insurable limits. The Company mitigates this risk by depositing funds with major ﬁnancial institutions. Other Assets and Liabilities Included in other assets are accrued rents and interest receivable, deferred rent receivable, deferred charges and marketable securities. Included in other liabilities are accrued interest, accounts payable and accrued expenses and deferred income taxes. Deferred charges include costs incurred in connection with debt ﬁnancing and reﬁnancing and are amortized over the terms of the related debt obligations. Deferred rent receivable is the aggregate differ- ence for operating method leases between scheduled rents which vary during the lease term and rent recognized on a straight-line basis. Also included in deferred rent receivable are lease restructuring fees received which are recognized over the remainder of the initial lease terms. Marketable securities are classiﬁed as available-for-sale securities and reported at fair value with the Company’s interest in unrealized gains and losses on these securities reported as a component of other comprehensive income until realized. Such marketable securities had a cost basis of $1,362 and $2,065 and reﬂected a fair value of $470 and $2,329 at December 31, 2000 and 1999, respectively. Due to Afﬁliates Included in due to afﬁliates are deferred acquisition fees which are payable for services provided by Carey Management prior to the termination of the Management Contract, relating to the identiﬁcation, evaluation, negotiation, ﬁnancing and purchase of properties and additional shares for meeting performance criteria related to the acquisition of the net lease real estate management operations. The fees are payable in eight annual installments each January 1 following the ﬁrst anniversary of the date a property was purchased, with each installment equal to .25% of the purchase price of the property. Revenue Recognition In connection with the acquisition of Carey Management described in Note 1, the Company earns transaction and asset-based fees. Structuring and ﬁnancing fees are earned for investment banking services provided in connec- tion with the analysis, negotiation and structuring of transactions, including acquisitions and the placement of mort- gage ﬁnancing obtained by the CPA® 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 32 2. Summary of Signiﬁcant Accounting Policies (continued) CPA® REIT for administrative services provided for operation of such CPA® REIT. Receipt of the incentive fee portion of the management fee, however, is subordinated to the achievement of speciﬁed cumulative return require- ments by the shareholders of the CPA® REITs. The incentive portion of management fees may be collected in cash or shares of the CPA® REIT at the option of the Company. During 2000, the Company elected to receive its earned incentive fees in CPA® REIT shares. All fees are recognized as earned. Transaction fees are earned upon the consummation of a transaction and management fees are earned when services are performed. Fees subject to subordination are recognized only when the contingencies affecting the payment of such fees are resolved, that is, when the performance criterion or crite- ria of the CPA® REIT is achieved. The Company also receives reimbursement of certain marketing costs in con- nection with the sponsorship of a CPA® REIT that is conducting a “best efforts” public offering. Reimbursement income is recorded as the expenses are incurred (see Note 3). Income Taxes The Company is a limited liability company and has elected partnership status for federal income tax purposes. The Company is not liable for Federal income taxes as each member recognizes his or her proportionate share of income or loss in his or her tax return. Certain wholly-owned subsidiaries are not eligible for partnership status and, accordingly, all tax liabilities incurred by these subsidiaries do not pass through to the members. Accordingly, the provision for Federal income taxes is based on the results of those consolidated subsidiaries that do not pass through any share of income or loss to members. The Company is subject to certain state and local taxes. Deferred income taxes are provided for based on earnings reported. The provision for income taxes differs from the amounts currently payable because of temporary differences in the recognition of certain income and expense items for ﬁnancial reporting and tax reporting purposes. Income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and ﬁnancial bases of assets and liabilities (see Note 17). Earnings Per Share The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS excludes dilution and is com- puted 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 33 2. Summary of Signiﬁcant Accounting Policies (continued) shares were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount. Basic and diluted earnings (loss) per share were calculated as follows: Year Ended December 31, 2000 Basic and diluted net loss Year Ended December 31, 1999 Basic and diluted net income Year Ended December 31, 1998 Basic and Diluted Weighted Shares Outstanding Net (Loss) Income Per Share Amount $ (9,278) 29,652,698 $(.31) $34,039 25,596,793 $1.33 Basic earnings before extraordinary item $39,085 24,866,225 Extraordinary item Basic net income Effect of dilutive securities — options for shares (621) $38,464 24,866,225 3,345 Diluted earnings before extraordinary item $39,085 24,869,570 Extraordinary item Diluted net income (621) $38,464 24,869,570 $1.57 (.02) $1.55 $1.57 (.02) $1.55 For the years ended 2000 and 1999, 4,143,254 and 3,199,280 share options, respectively, were not reﬂected because such options were anti-dilutive, either because of the exercise price of the options or because the Company incurred a net loss. The Company repurchased 836,600 of its shares outstanding during 2000 in connection with an announce- ment in December 1999 that it would purchase up to 1,000,000 shares. Stock Based Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB No. 25”). Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price of the Company’s shares at the date of grant over the exercise price of the option granted. 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 trans- 34 2. Summary of Signiﬁcant Accounting Policies (continued) ferability and a risk of forfeiture. The forfeiture provisions on the awards expire annually, over periods of four and three years for the shares and stock options, respectively. Shares and stock options subject to forfeiture provisions have been recorded as unearned compensation and are presented as a separate component of members’ equity. Compensation cost for stock options and restricted stock, if any, is recognized ratably over the vesting period of three and four years, respectively. Compensation cost for share plans was $860 in 2000. No compensation cost was recognized in 1999 and 1998 in connection with the Company’s share plans. The Company provides additional pro forma disclosures as required (see Note 15). All transactions with non-employees in which the Company issues stock as consideration for services received are accounted for based on the fair value of the stock issued or services received, whichever is more reliably determinable. Reclassiﬁcation Certain prior year amounts have been reclassiﬁed to conform to the current year ﬁnancial statement presentation. 3. Transactions with Related Parties For the years ended 2000, 1999 and 1998, the Company incurred combined management and performance fees of $1,924, $3,025 and $2,201, respectively, and general and administrative costs of $861, $1,457, and $1,540, respectively. As described in Note 1, the Company’s Management Agreement with Carey Management was cancelled effec- tive with the acquisition of the business operations of Carey Management. The Company is now internally man- aged and, as a result of the cancellation of the Management Agreement and acquisition of Carey Management’s workforce as of the date of the acquisition, no longer incurs management and performance fees nor reimburses a manager for general and administrative reimbursements, primarily consisting of the manager’s cost of providing administration to the operation of the Company. As a result of acquiring the Advisory Agreements with the CPA® REITs, the Company has engaged in a new business segment, advisory operations, and earns fees as the Advisor to the four afﬁliated CPA® REITs as described in Note 2. Under the Advisory Agreements with the CPA® REITs, the Company performs various services, including but not limited to the day-to-day management of the CPA® REITs and transaction-related services. In addition, the Company’s broker-dealer subsidiary earns fees in connection with the on-going “best efforts” public offering of CPA®:14. The Company earns an asset management fee of 1/2 of 1% per annum of Average Invested Assets, as deﬁned in the Agreements, for each CPA® REIT and, based upon certain performance criteria for each REIT, may 35 3. Transactions with Related Parties (continued) be entitled to receive performance fees, calculated on the same basis as the asset management fee, and is reimbursed for certain costs, primarily the cost of personnel. For the year ended December 31, 2000, asset-based fees and reim- bursements earned were $10,377. In connection with structuring and negotiating acquisitions and related mortgage ﬁnancing for the CPA® REITs, the Advisory Agreements provide for transaction fees based on the cost of the properties acquired. A portion of the fees are payable in equal annual installments over no less than eight years, subject to certain limitations. Such unpaid amounts bear interest at annual rates ranging from 6% to 7%. The Company may also earn fees related to the dis- position of properties, subject to subordination provisions and will only be recognized as such subordination provi- sions are achieved. For the year ended December 31, 2000, the Company earned transaction fees of $14,894. In connection with the acquisition of the CPA® Partnerships described in Note 1, the former Corporate General Partners of eight of the CPA® Partnerships satisﬁed provisions for receiving a subordinated preferred return from the Partnerships totaling $4,422 based upon the cumulative proceeds from the sale of the assets of each Partnership from inception through the date of the consolidation. Payment was based on achieving a speciﬁed cumulative return to limited partners. For the partnership that has not yet achieved the speciﬁed cumulative return, its subordinated preferred return of $1,423 is included in due to afﬁliates, and will be paid if the Company achieves a closing price equal to or in excess of $23.11 for ﬁve consecutive trading days. Prior to the termination of the Management Agreement, Carey Management performed certain services for the Company and earned transaction fees in connection with the purchase and disposition of properties. Transaction fees paid to Carey Management and afﬁliates were $1,832 and $4,510 in 1999 and 1998, respectively. The Company is also obligated to pay deferred acquisition fees in equal annual installments over a period of no less than eight years. As of December 31, 2000 and 1999, unpaid deferred acquisition fees were $3,802 and $3,945, respectively, and bear interest at an annual rate of 6%. An installment of $392 was paid in January 2000. The Company is a participant in an agreement with certain afﬁliates for the purpose of leasing ofﬁce space used for the administration of the Company and other afﬁliated real estate entities and sharing the associated costs. Pursuant to the terms of the agreement, the Company’s share of rental, occupancy and leasehold improvement costs is based on gross revenues. Expenses incurred were $348, $545, and $558 in 2000, 1999 and 1998, respectively. An independent director of the Company has an ownership interest in companies that own the minority inter- est in the Company’s French majority-owned subsidiaries. The director’s ownership interest is subject to the same terms as all other ownership interests in the subsidiary companies. An ofﬁcer of the Company is the sole share- holder of Livho, Inc., a lessee of the Company (see Note 8). 36 4. Real Estate Leased to Others Accounted for Under the Operating Method Real estate leased to others, at cost, and accounted for under the operating method is summarized as follows: Land Buildings and improvements Less: Accumulated depreciation D E C E M B E R 3 1 1999 2000 $ 86,134 $ 91,447 352,031 438,165 24,159 350,429 441,876 16,455 $414,006 $425,421 The scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to $45,214 in 2001, $43,909 in 2002, $39,909 in 2003, $36,189 in 2004, $33,136 in 2005, and aggregate $335,527 through 2019. Contingent rentals were $621, $563 and $614 in 2000, 1999 and 1998 respectively. 5. Net Investment in Direct Financing Leases Net investment in direct ﬁnancing leases is summarized as follows: Minimum lease payments receivable Unguaranteed residual value Less: Unearned income D E C E M B E R 3 1 1999 2000 $348,316 $365,558 284,843 633,159 345,283 293,550 659,108 363,552 $287,876 $295,556 The scheduled future minimum rents, exclusive of renewals, under noncancellable direct ﬁnancing leases amount to $30,679 in 2001, $30,154 in 2002, $30,168 in 2003, $30,157 in 2004, $30,240 in 2005, and aggregate $348,316 through 2018. Contingent rentals were approximately $1,491, $995 and $320 in 2000, 1999 and 1998, respectively. 6. Mortgage Notes Payable and Notes Payable Mortgage notes payable, substantially all of which are limited recourse obligations, are collateralized by the assign- ment of various leases and by real property with a carrying value of approximately $325,066. As of December 31, 37 2000, mortgage notes payable have interest rates varying from 4.56% to 9.82% per annum and mature from 2001 to 2015. Certain of the mortgage notes payable are prepayable, subject to prepayment charges. Scheduled principal payments for the mortgage notes during each of the next ﬁve years following December 31, 2000 and thereafter are as follows: Y E A R E N D I N G D E C E M B E R 3 1 , 2001 2002 2003 2004 2005 Thereafter Total $ 22,719 12,345 10,708 27,659 8,627 114,036 $196,094 The Company has a line of credit of $185,000 pursuant to a revolving credit agreement with The Chase Manhattan Bank in which nine lenders participate. The revolving credit agreement had an initial term of three years through March 20, 2001 and has been extended for an additional three years through March 2004. As of December 31, 2000, the Company had $94,000 drawn from the line of credit. Additional advances of $16,000 have been drawn from the line of credit since December 31, 2000. Advances, which are prepayable at any time, bear interest at an annual rate of either (i) the one, two, three or six-month LIBOR, as deﬁned, plus a spread which ranges from 0.6% to 1.45% depending on leverage or corpo- rate credit rating or (ii) the greater of the bank’s Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a spread of up to .125% depending upon the Company’s leverage. At December 31, 2000 and 1999, the average interest rate on advances on the line of credit was 7.86% and 7.8%, respectively. In addition, the Company will pay a fee (a) ranging between 0.15% and 0.20% per annum of the unused portion of the credit facility, depending on the Company’s leverage, if no minimum credit rating for the Company is in effect or (b) equal to .15% of the total commitment amount, if the Company has obtained a certain minimum credit rating. 38 6. Mortgage Notes Payable and Notes Payable (continued) The revolving credit agreement has ﬁnancial covenants that require the Company to (i) maintain minimum equity value of $400,000 plus 85% of amounts received by the Company as proceeds from the issuance of equity interests and (ii) meet or exceed certain operating and coverage ratios. Such operating and coverage ratios include, but are not limited to, (a) ratios of earnings before interest, taxes, depreciation and amortization to ﬁxed charges for interest and (b) ratios of net operating income, as deﬁned, to interest expense. The Company has always been in compliance with the ﬁnancial covenants. 7. Dividends Payable The Company declared a quarterly dividend of $.4225 per share on December 22, 2000 payable to shareholders of record as of December 29, 2000. The dividend was paid in January 2001. 39 8. Lease Revenues For the years ended December 31, 2000, 1999 and 1998, the Company earned its net leasing revenues (i.e., rental income and interest income from direct ﬁnancing leases) from over 75 lessees. A summary of net leasing revenues including all current lease obligors with more than $1,000 in annual revenues is as follows: 2000 % Y E A R S E N D E D D E C E M B E R 3 1 1998 % 1999 % $ $ Federal Express Corporation Dr Pepper Bottling Company of Texas Gibson Greetings, Inc. Detroit Diesel Corporation Sybron International Corporation Livho, Inc. Orbital Sciences Corporation Quebecor Printing, Inc. America West Holdings Corp Thermadyne Holdings Corp Furon Company AutoZone, Inc. The Gap, Inc. Lockheed Martin Corporation Unisource Worldwide, Inc. Bell South Telecommunications, Inc. AP Parts International, Inc. CSS Industries, Inc. Brodart, Co. Red Bank Distribution, Inc. Peerless Chain Company United States Postal Service High Voltage Engineering Corp. Eagle Hardware & Garden, Inc. Duff-Norton Company, Inc. Sprint Spectrum, Inc. Cendant Operations, Inc. Other $ 5,659 4,283 4,046 3,795 3,627 3,226 2,655 2,586 2,539 2,477 2,415 2,378 2,205 2,056 1,725 1,711 1,617 1,598 1,519 1,475 1,463 1,425 1,329 1,288 1,164 1,154 1,075 23,168 7 5 5 4 4 4 3 3 3 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 1 1 1 25 4,123 3,954 3,658 3,627 3,226 2,311 2,552 1,839 2,243 2,415 2,331 2,205 2,740 1,726 247 — 5 5 5 4 4 3 3 2 3 3 3 3 3 2 175 — 2 2 2 2 2 2 2 2 1 1 634 — 34 1,617 1,588 1,519 1,401 1,463 1,396 1,329 1,387 1,164 1,154 2,234 2,415 2,469 2,199 1,621 1,714 3,998 3,870 3,658 3,311 2,958 2,154 2,523 254 — 5 5 5 4 4 3 3 — — 3 3 3 3 2 2 — — 2 2 2 2 2 1 2 — — 2 — — — — 40 1,783 1,580 1,432 1,401 1,463 1,090 1,187 1,164 26,537 30,822 $85,658 100 $80,561 100 $77,300 100 40 9. Gains and Losses on Sale of Real Estate and Securities Signiﬁcant sales of properties are summarized as follows: 2000 In 1998, the Company acquired land in Colliersville, Tennessee and entered into a build-to-suit commitment to con- struct four ofﬁce buildings to be occupied by Federal Express Corporation (“Federal Express”) at a cost of up to $77,000. In February 2000, a net lease with Federal Express with an initial lease term of 20 years commenced at an annual rent of $6,360. In order to mitigate the concentration of risk in a single lease, the Company agreed to sell a 60% majority interest in the subsidiary that owns the Federal Express property to an afﬁliate, Corporate Property Associates 14 Incorporated (“CPA®:14”), at a purchase price based on an independent appraisal. Based on such independent appraisal, the Company received $42,287 and recognized a loss of $2,262 in connection with the sale. During 2000, the Company sold ten properties formerly leased to The Kobacker Stores, Inc. and a property formerly leased to AutoZone, Inc. located in Pensacola, Florida. In connection with the sales, the Company received $2,672, net of costs, and incurred combined losses on the sales of $755. The Company also sold two properties, located in Silver City, New Mexico and Carthage, New York, for $700, and recognized a net loss of $20. The Company recognized a gain of $257 on the sale of its 18,540 shares of common stock of Titan Corporation. The Company had previously exercised warrants that were granted in connection with structuring its net lease with Titan Corporation in 1991. 1999 On September 30, 1999, the Company sold its property in Topeka, Kansas, leased to Hotel Corporation of America (“Hotel Corp.”) for $8,107 pursuant to Hotel Corp.’s exercise of its purchase option. In connection with the sale, the Company realized an $80 gain. In December 1996, KSG, Inc. (“KSG”) notiﬁed the Company that it was exercising its option to purchase the property it leased in Hazelwood, Missouri. In January 1999, the Company and KSG entered into an agreement to establish a minimum and maximum exercise price of $9,000 and $11,500 and agreed to defer the exercise price determination until a dispute regarding an interpretation of the purchase option provisions of the lease was resolved. The court ruled in favor of the Company in 1999, and the Company sold the property to KSG for $11,000 plus an allowance of $100 for legal costs. In connection with the sale, the Company realized a $391 gain. 41 9. Gains and Losses on Sale of Real Estate and Securities (continued) 1998 In April 1998 Simplicity Manufacturing, Inc. purchased its leased property in Port Washington, Wisconsin for $9,684 pursuant to the exercise of its purchase option. A loss of $291 was recognized on the sale. In December 1998, NVR, Inc. purchased its leased property in Pittsburgh, Pennsylvania for $12,193 pursuant to a purchase option exercised in 1998. A gain of $1,754 was recognized on the sale. 10. Extraordinary Gains and Losses on Extinguishment of Debt In connection with the prepayment of high interest loans collateralized by properties leased to Dr Pepper Bottling Company of Texas, Orbital Sciences Corporation and Simplicity Manufacturing, Inc., the Company incurred $700 in prepayment charges resulting in an extraordinary loss on the extinguishment of debt of $621, net of $79 attrib- utable to minority interests in 1998. 11. Impairment of Real Estate and Securities Signiﬁcant writedowns of properties and securities to estimated fair value based on assessment of recoverability are summarized as follows: 2000 The Company incurred impairment losses of $11,047 in 2000 in connection with the writedown of real estate inter- ests and other long-lived assets to estimated fair value based on the following circumstances: The Company owns a property in Garland, Texas leased to Varo, Inc. (“Varo”). Although the lease ends in October 2002 and Varo continues to meet its lease obligations, the property is vacant. As a result, the Company is actively remarketing the property. The property has been written down to its estimated fair value and a writedown of $2,238 has been recognized. The Company owns a property in Traveler’s Rest, South Carolina formerly leased to Swiss-M-Tex L.P. (“M-Tex”). Based on M-Tex’s weak ﬁnancial condition and its inability to meet its lease obligations, the lease was terminated in 2000. The property has been written down to its estimated fair value and a writedown of $2,657 has been recognized. DeVlieg Bullard, Inc., the former lessee of properties in Frankenmuth, Michigan and McMinnville, Tennessee disafﬁrmed its master lease for the two properties in connection with its petition of voluntary bankruptcy. The two properties are currently occupied under short-term license agreements and the Company expects to enter into leases 42 11. Impairment of Real Estate and Securities (continued) with the current occupants. The McMinnville property has been written down to its estimated fair value and a writedown of $2,677 has been recognized. The Company owns a property in Burnsville, Minnesota leased to General Cinema Corporation (“General Cinema”). During 2000, General Cinema ﬁled a petition of voluntary bankruptcy. Because General Cinema had vacated the property prior to the ﬁling of its petition, the Company anticipates that the lease will be disafﬁrmed. Accordingly, the property has been written down to its estimated fair value and a writedown of $1,500 has been recognized. The lease obligations of General Cinema are guaranteed by Harcourt General, Inc. The Company also recognized writedowns of $1,514 on its assessments of the recoverability of a redeemable preferred limited partnership interest that was acquired in connection with the sale of a property in 1995 and deben- tures received in connection with a bankruptcy settlement with a former lessee and $461 in connection with other properties held for sale. 1999 The Company owned a property in Carthage, New York which was leased to Sunds Deﬁbrator, Inc. (“Sunds”). During 1999, the Company accepted offers to sell the property for $300 and to receive a lease termination payment of $500, payable at the time of sale. In connection with the proposed sale, the Company recognized a noncash charge of $1,000 on the writedown of the property to the anticipated sales price. Annual rent for the property was $144. The initial term of the Sunds lease was scheduled to expire in 2005. The property was subsequently sold in 2000. As described in Note 12, the Company recognized a noncash charge of $4,830 on the writedown of the Company’s equity interest in Meristar Hospitality Corporation. 1998 The Company owns a property in Urbana, Illinois leased to Motorola, Inc. (“Motorola”). During 1998, Motorola notiﬁed the Company of its intention to exercise its option to purchase the property. Based on the appraisal pre- pared for the Company and the expectation that the appraisal would be the basis for the exercise price, the Company recognized a writedown of $1,575 to an amount representing the fair value of the property, less costs to sell. An additional writedown of $158 was recognized in 1999. The purchase option was not exercised. 43 12. Equity Investments The Company owns 780,269 units of the operating partnership of Meristar Hospitality Corporation (“Meristar”), a publicly traded real estate investment trust which primarily owns hotels. The Company has the right to convert its units in the operating partnership to shares of common stock in Meristar at any time on a one-for-one basis. The exchange of units for common stock would be a taxable transaction in the year of exchange. The Company’s inter- est in the Meristar operating partnership is being accounted for under the equity method. The carrying value of the equity interest in the Meristar operating partnership was $18,889 and $18,725 as of December 31, 2000 and 1999, respectively. Because of a continued weakness in the public market’s valuation of equity securities of real estate investment companies including Meristar, Management concluded that the under- lying value of its investment in operating partnership units was impaired. Accordingly, the Company wrote down its equity investment by $4,830 in 1999. The carrying value of the investment in Meristar subsequent to the write- down approximated the Company’s pro rata ownership of Meristar at Meristar’s reported net asset value. As of December 31, 2000, Meristar’s quoted per share market value was $19.69 resulting in an aggregate value of approx- imately $15,364 if converted. The audited consolidated ﬁnancial statements of Meristar ﬁled with the United States Securities and Exchange Commission (“SEC”) reported total assets of $3,013,008 and $3,094,201 and shareholders’ equity of $1,134,555 and $1,183,896 as of December 31, 2000 and 1999, respectively, and revenues of $400,778, $374,904 and $525,297 and net income of $105,861, $98,964 and $43,707 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company owns equity interests as a limited partner in two limited partnerships that each own real estate net leased to a single tenant. Corporate Property Associates 10 Incorporated owns the remaining controlling inter- ests as a general partner in each partnership. The Company also owns equity interests in two limited liability com- panies that each own real estate net leased to a single tenant with CPA®:14. Effective as of June 29, 2000, the Company acquired 20,000 shares of common stock in the four CPA® REITs with which it has advisory agreements. Since June 29, 2000, the Company has acquired an additional 105,691 and 132,066 shares, respectively, of Carey Institutional Properties Incorporated and Corporate Property Associates 12 Incorporated, both CPA® REITs, in connection with earning incentive fees (see Note 3). The interests in the CPA® REITs are accounted for under the equity method due to the Company’s ability to exercise signiﬁcant inﬂuence as the Advisor to the REITs. The Company’s ownership interests in each of the CPA® REITs represent less than 1% of the outstanding shares of 44 12. Equity Investments (continued) each CPA® REIT. The audited consolidated ﬁnancial statements of the CPA® REITs are ﬁled with the SEC. Com- bined ﬁnancial information of the afﬁliated equity investees is summarized as follows: Assets Liabilities Capital Revenue(1) Expenses Net income D E C E M B E R 3 1 1999 2000 $1,745,901 789,984 $ 955,917 $81,054 51,211 $29,843 Y E A R E N D E D D E C E M B E R 3 1 1998 1999 2000 $173,006 100,006 $ 73,000 $8,465 5,603 $2,862 $6,990 4,536 $2,454 (1) Includes the net effect of minority interests in income, income from equity investments and gains (losses) on the sale of real estate and securities. 13. Disclosures About Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The Company estimates that the fair value of mortgage notes payable and other notes payable was $294,278 and $313,747 at December 31, 2000 and 1999, respectively (see Note 6). The fair value of ﬁxed rate debt instru- ments was evaluated using a discounted cash ﬂow model with discount rates that take into account the credit of the tenants and interest rate risk. The fair value of the note payable from the line of credit approximates the car- rying value as it is a variable rate obligation with an interest rate that resets to market rates. 45 14. Selected Quarterly Financial Data (unaudited) March 31, 2000 $23,276 13,659 9,625 .38 .4225 March 31, 1999 $21,114 11,084 9,866 9,827 .39 .4175 Revenues Expenses Net income (loss) Net income (loss) per share — basic and diluted Dividends declared per share Revenues Expenses Income before extraordinary items Net income Net income per share — basic and diluted Dividends declared per share 15. Stock Options and Warrants T H R E E M O N T H S E N D E D June 30, September 30, December 31, 2000 2000 2000 $ 26,611 54,744 (30,041) (1.18) .4225 $33,929 22,114 11,375 .34 .4225 $36,435 33,461 (237) (.01) .4225 T H R E E M O N T H S E N D E D June 30, September 30, December 31, 1999 1999 1999 $21,877 11,687 9,620 9,620 .38 .4175 $23,731 13,872 9,470 9,470 .37 .4175 $21,784 17,478 5,122 5,122 .20 .4175 In January 1998, an afﬁliate was granted warrants to purchase 2,284,800 shares exercisable at $21 per share and 725,930 shares exercisable at $23 per share as compensation for investment banking services in connection with structuring the consolidation on the CPA® Partnerships. The warrants are exercisable until January 2009. The Company maintains stock option incentive plans pursuant to which share options may be issued. The 1997 Share Incentive Plan (the “Incentive Plan”), as amended, authorizes the issuance of up to 2,600,000 shares. The Company Non-Employee Directors’ Plan (the “Directors’ Plan”) authorizes the issuance of up to 300,000 shares. The Incentive Plan provides for the grant of (i) share options which may or may not qualify as incentive stock options, (ii) performance shares, (iii) dividend equivalent rights and (iv) restricted shares. In 2000, 922,152 share options were granted at exercise prices ranging from $7.69 to $16.50 per share. In 1999, share options for 38,500 shares were granted at an exercise price of $19.69 per share. In 1998, share options for 113,500 shares were granted at an exercise price of $20 per share. The options granted under the Incentive Plan have a 10-year term and are exercisable for one-third of the granted options on the ﬁrst, second and third anniversaries of the date of grant. 46 15. Stock Options and Warrants (continued) The vesting of grants, however, may be accelerated upon a change in control of the Company and under certain other conditions. The Directors’ Plan provides for the same terms as the Incentive Plan. Share options for 21,822, 12,704 and 23,846 shares were granted at exercise prices ranging from $16.38 to $20 per share in 2000, 1999 and 1998, respectively. Share option and warrant activity is as follows: Balance at January 1, 1998 Granted Exercised Forfeited Balance at December 31, 1998 Granted Exercised Forfeited Balance at December 31, 1999 Granted Exercised Forfeited Balance at December 31, 2000 Number of Shares Weighted Average Exercise Price Per Share — 3,148,076 — — 3,148,076 51,204 — — 3,199,280 943,974 — (29,000) 4,114,254 — $21.42 — — $21.42 $19.31 — $21.38 $13.24 — $16.25 $19.57 At December 31, 2000, 1999 and 1998, the range of exercise prices and weighted-average remaining contrac- tual life of outstanding share options and warrants was $7.69 to $23 and 8.32 years, $17.25 to $23.00 and nine years, and $20 to $23 and ten years, respectively. The per share weighted average fair value of share options and warrants issued during 2000 was estimated to be $3.80 using a Black-Scholes option pricing formula. The more signiﬁcant assumptions underlying the determi- nation of the weighted average fair value include a risk-free interest rate of 6.8%, a volatility factor of 22.53%, a dividend yield of 8.44% and an expected life of ten years. The per share weighted average fair value of share options issued during 1999 was estimated to be $1.48, using a binomial option pricing formula. The more signiﬁcant assumptions underlying the determination of the weighted average fair value include a risk-free interest rate of 5.54%, a volatility factor of 18.35%, a dividend yield of 7.64% and an expected life of ten years. 47 15. Stock Options and Warrants (continued) The per share weighted average fair value of share options and warrants issued during 1998 was estimated to be $1.45 using a binomial option pricing formula. The more signiﬁcant assumptions underlying the determina- tion of the weighted average fair value include a risk-free interest rate of 5.36%, a volatility factor of 18.16%, a div- idend yield of 7.33% and an expected life of ten years. The Company has elected to adopt the disclosure only provisions of SFAS No. 123. If stock based compen- sation cost had been recognized based upon fair value at the date of grant for options awarded under the two plans in accordance with the provisions of SFAS No. 123, pro forma net (loss) income for 2000, 1999 and 1998 would have been $(12,770), $33,964 and $38,299, respectively, and pro forma basic and diluted earnings (loss) per share would have been $(.45) for 2000, unchanged for 1999 and $1.54 for 1998. 48 16. Segment Reporting The Company has determined that it operates in two business segments, management services and real estate oper- ations with domestic and international investments. The two segments are summarized as follows: Management Real Estate Other(3) Total Company Revenues: 2000 1999 1998 Operating, interest and tax expenses(1,2) (excluding depreciation and amortization): 2000 1999 1998 Income from equity investments: 2000 1999 1998 Net operating income(4): 2000 1999 1998 Total assets: 2000 1999 Total long-lived assets: 2000 1999 $25,271 — — 12,259 — — 69 — — 7,123 — — 111,375 — 105,504 — $88,736 82,731 79,041 51,568 38,306 31,570 2,813 1,886 1,837 23,113 32,522 36,320 784,628 848,526 761,028 825,411 $6,244 5,775 6,289 $120,251 88,506 85,330 5,006 4,662 4,956 — — — 1,238 1,046 1,253 8,239 7,733 7,136 6,753 68,833 42,968 36,526 2,882 1,886 1,837 31,474 33,568 37,573 904,242 856,259 873,668 832,164 (1) Excludes the writeoff of an acquired management contract of $38,000 in 2000. (2) Excludes amortization of intangibles and goodwill of $5,958 in 2000. (3) Primarily consists of the Company’s hotel operations. (4) Net operating income excludes gains and losses on sales, extraordinary items and the writeoff of an acquired management contract. 49 16. Segment Reporting (continued) The Company acquired its ﬁrst international real estate investment in 1998. For 2000, geographic information for the real estate operations segment is as follows: Revenues Operating, interest and tax expenses(1,2,3) Income from equity investments Net operating income(4) Total assets Total long-lived assets For 1999, geographic information is as follows: Revenues Operating, interest and tax expenses(1,2,3) Income from equity investments Net operating income(4) Total assets Total long-lived assets For 1998, geographic information is as follows: Revenues Operating, interest and tax expenses(1,2,3) Income from equity investments Net operating income(4) Domestic International Total Real Estate $ 86,312 $ 2,424 $ 88,736 48,670 2,813 23,587 752,126 731,225 2,898 — (474) 32,502 29,803 51,568 2,813 23,113 784,628 761,028 Domestic International $ 80,683 37,227 1,886 31,667 826,312 803,649 $ 2,048 1,079 — 855 22,214 21,762 Domestic International $78,214 31,026 1,837 36,224 $827 544 — 96 Total Real Estate $ 82,731 38,306 1,886 32,522 848,526 825,411 Total Real Estate $79,041 31,570 1,837 36,320 (1) Excludes the writeoff of an acquired management contract of $38,000 in 2000. (2) Excludes amortization of intangibles and goodwill of $5,958 in 2000. (3) Excludes depreciation and amortization. (4) Net (loss) income excluding gains and loss, extraordinary items and the writeoff of an acquired management contract. 50 17. Income Taxes The components of the Company’s provision for income taxes for the years ended December 31, 2000, 1999 and 1998 are as follows: Federal: Current Deferred State and local: Current Deferred Total provision 2000 1999 1998 $ 569 848 1,417 2,176 571 2,747 $4,164 $752 — 752 $752 $419 — 419 $419 2000 $ 634 142 776 2,112 $1,336 Deferred income taxes as of December 31, 2000 consist of the following: Deferred tax assets: Unearned compensation Corporate ﬁxed assets Deferred tax liabilities: Receivables from afﬁliates Net deferred tax liability No deferred income taxes were recognized in 1999 and 1998. The difference between the tax provision and the tax beneﬁt recorded at the statutory rate at December 31, 2000 is as follows: Federal beneﬁt at statutory tax rate State and local taxes, net of federal beneﬁt Writeoff of management contract Amortization of intangible assets Income from entities not subject to federal taxation Other Tax provision 51 $ (1,739) 2,629 12,920 1,706 (11,240) (112) $ 4,164 18. Employee Beneﬁt Plans The Company sponsors a qualiﬁed proﬁt-sharing plan and trust covering substantially all of its full-time employees who have attained age twenty-one, worked a minimum of 1,000 hours and completed one year of service. The Company is under no obligation to contribute to the plan and the amount of any contribution is determined by and at the discretion of the Board of Directors. The Board of Directors can authorize contributions to a maximum of 15% of an eligible participant’s total compensation, limited to $25.5 annually per participant. For the year ended December 31, 2000, amounts expensed by the Company for contributions to the trust were $627. Annual contribu- tions represent an amount equivalent to 15% of each eligible participant’s total eligible compensation for that period. 19. Pro Forma Financial Information (unaudited) The following consolidated pro forma ﬁnancial information has been presented as if the merger of Carey Management into the Company had occurred on January 1, 1999 for the years ended December 31, 2000 and 1999. In Manage- ment’s opinion, all adjustments necessary to reﬂect the merger and the related issuance of common stock of the Company have been made. The pro forma ﬁnancial information is not necessarily indicative of what the actual results would have been, nor does it purport to represent the results of operations for future periods. Pro forma total revenues Pro forma net income Pro forma basic and diluted earnings per share Y E A R S E N D E D D E C E M B E R 3 1 1999 2000 $133,666 29,215 $ 0.86 $129,255 48,781 $ 1.43 The pro forma net income and earnings per share ﬁgures presented above exclude a non-recurring noncash writeoff of $38,000 related to the termination of the Management Agreement between the Company and Carey Management upon completion of the merger. The pro forma (loss) income, including the $38,000 writeoff, for the years ended December 31, 2000 and 1999 is $(8,785) and $10,781, respectively. Pro forma basic and diluted (loss) income per share, including the $38,000 writeoff, for the years ended December 31, 2000 and 1999 is $(0.26) and $0.32, respectively. 52 20. Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, effective January 1, 2001, which establishes accounting and reporting standards for derivative instruments. The Company believes that upon adoption SFAS No. 133 will not have a material impact on the consolidated ﬁnancial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (“SAB 101”) which provides guidance on several revenue recognition issues including recognition of fees earned from services performed and rents based upon lessees’ sales. Certain of the Company’s leases provide for additional rents to be paid based upon the level of sales achieved by the lessee. These percentage rents are recorded once the required sales level is achieved and included in the consolidated statements of income in the rental revenue and interest income from direct ﬁnancing leases. The adoption of SAB 101 did not have any impact on the consolidated ﬁnancial statements. 53 Directors Wm. Polk Carey Chairman Francis J. Carey Vice Chairman Gordon F. DuGan President and Chief Acquisitions Ofﬁcer Donald E. Nickelson Chairman of the Audit Committee; Former President, PaineWebber, Inc. Eberhard Faber, IV Former Director of the Federal Reserve Bank of Philadelphia Dr. Lawrence R. Klein Nobel Laureate in Economics; Benjamin Franklin Professor of Economics (Emeritus), University of Pennsylvania Charles C. Townsend, Jr. Former Head of Corporate Finance, Morgan Stanley & Co. Reginald Winssinger Chairman of Horizon New America National Portfolio Inc. George E. Stoddard Chairman of the Investment Committee; Former Head of the Direct Placement Department, The Equitable Life Assurance Society of the United States Investment Committee Nathaniel S. Coolidge Member; Former Head of Bond and Corporate Finance Department, John Hancock Mutual Life Insurance Company Frank J. Hoenemeyer Vice Chairman of the Investment Committee Former Vice Chairman and Chief Investment Ofﬁcer, The Prudential Insurance Company of America Dr. Lawrence R. Klein Member Officers Wm. Polk Carey Chairman and Director Edward V. LaPuma Executive Director Francis J. Carey Vice Chairman and Director W. Sean Sovak Executive Director Gordon F. DuGan President, Chief Acquisitions Ofﬁcer and Director John J. Park Executive Vice President, Chief Financial Ofﬁcer and Treasurer H. Augustus Carey Managing Director Claude Fernandez Managing Director Stephen H. Hamrick Managing Director Anne R. Coolidge Executive Director Gordon J. Whiting Executive Director Debra E. Bigler Senior Vice President— Regional Director Susan C. Hyde Senior Vice President— Investor Relations Ted G. Lagreid Senior Vice President— Regional Director David W. Marvin Senior Vice President— Regional Director Anthony S. Mohl Senior Director— Paris Michael D. Roberts Senior Vice President and Controller James Longden Director— London Brent Carrier First Vice President— Development Robert C. Kehoe First Vice President— Finance Donna M. Neiley First Vice President— Asset Management David G. Termine First Vice President— Accounting Jeffrey R. Damec Vice President—Regional Director Kimberly J. Dussol Vice President— Asset Management Yasmin Guerrero Vice President— Accounting Benjamin P. Harris Vice President— Acquistions Nichole B. LeFort Vice President— Regional Director Louisa H. Quarto Vice President— Marketing C. Curtis Ritter Vice President— Communications Gagan Singh Vice President— Finance Auditors PricewaterhouseCoopers LLP Counsel Reed Smith LLP Executive Ofﬁces W. P. Carey & Co. LLC 50 Rockefeller Plaza New York, NY 10020 212-492-1100 Transfer Agent Mellon Investor Services L.L.C. 85 Challenger Road Ridgeﬁeld Park, NJ 07660 888-200-8690 Annual Meeting June 7, 2001, 10:30 a.m. at the Waldorf=Astoria Hotel Corporate Information Form 10-K A copy of the Company’s Annual Report on Form 10-K as ﬁled with the Securities and Exchange Commission may be obtained without charge by writing the Executive Ofﬁces at the above address. Website www.wpcarey.com Trading Information Shares of Carey Diversiﬁed LLC began trading on January 21, 1998 on the New York Stock Exchange (“NYSE”). On June 29, 2000, Carey Diversiﬁed merged with its manager to form W. P. Carey & Co. LLC and began trading under the symbol “WPC.” Dividend Information The following table sets forth for the period indicated, the per share dividends paid to shareholders of record since inception: Record Date March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998 March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999 March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000 March 30, 2001 $.4125 $.4125 $.4125 $.4125 $.4175 $.4175 $.4175 $.4175 $.4225 $.4225 $.4225 $.4225 $.4225 54 50 Rockefeller Plaza & New York, NY 10020 & 212- 492-1100 & NYSE: WPC & www.wpcarey.com W. P. Carey & Co. LLC

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