BBC75113-WPC-Cov-build 4/25/02 6:43 PM Page 1 I N G F O R T HE LONG T S E V I N R U N W. P. Carey & Co. LLC Annual Report 2001 Q W. P. Carey & Co. LLC 50 Rockefeller Plaza T New York, NY 10020 T 212-492-1100 T NYSE: WPC T www.wpcarey.com 75113-17 BBCWork/CompWork/WPCarey Annual Report 4/12/02 de-dv aa-jvb p-ad c-la page 1 BBC75113-WPC-Cov-build 4/25/02 7:01 PM Page 2 T W. P. Carey & Co. LLC (NYSE:WPC) is a leading real estate investment banking firm that specializes in the net-leasing of single tenant corporate and industrial properties throughout the United States and Europe. T As the world’s largest publicly traded limited liability company, W. P. Carey & Co. both owns and manages corporate real estate. As part of its asset management business, W. P. Carey & Co. provides asset management services to Corporate Property Associates (CPA®) and to Carey Institutional Properties (CIP®), a series of publicly held non-traded real estate investment trusts (REITs) that make up the $3 billion W. P. Carey Group. T W. P. Carey & Co. currently owns and/or manages more than 450 commercial and industrial properties through- out the United States and Europe comprising more than 55 million square feet. T W. P. Carey & Co. shareholders continue to benefit from the stability of our net lease operations and growth from our asset management business. We remain committed to providing our shareholders with stable income and consistent investment performance, while also meeting the financing needs of our tenant companies. T H E W. P. C A R E Y G R O U P P O R T F O L I O O F P R O P E R T I E S Located in (from left) Alaska, United States, United Kingdom, The Netherlands, Finland and (below) France PROPERTIES OWNED BY WPC PROPERTIES MANAGED BY WPC D I R E C T O R S 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 I N V E S T M E N T C O M M I T T E E George E. Stoddard Chairman of the Investment Committee; Former Head of the Direct Placement Department, The Equitable Life Assurance Society of the United States Frank J. Hoenemeyer Vice Chairman of the Investment Committee Former Vice Chairman and Chief Investment Officer, The Prudential Insurance Company of America Nathaniel S. Coolidge Former Head of Bond and Corporate Finance Department, John Hancock Mutual Life Insurance Company O F F I C E R S Wm. Polk Carey Chairman and Director Francis J. Carey Vice Chairman and Director Gordon F. DuGan President, Chief Acquisitions Officer and Director John J. Park Managing Director, Chief Financial Officer and Treasurer Claude Fernandez Managing Director Stephen H. Hamrick Managing Director Edward V. LaPuma Managing Director W. Sean Sovak Managing Director Thomas E. Zacharias Managing Director Anne R. Coolidge Executive Director Susan C. Hyde Executive Director Michael D. Roberts Executive Director and Controller Gordon J. Whiting Executive Director Debra E. Bigler Senior Vice President — Regional Director Ted G. Lagreid Senior Vice President — Regional Director David W. Marvin Senior Vice President — Regional Director Donna M. Neiley Senior Vice President — Asset Management Anthony S. Mohl Senior Director — Paris James Longden Director — London Brent Carrier First Vice President — Development David S. Eberle First Vice President — Regional Director Benjamin P. Harris First Vice President — Acquisitions Robert C. Kehoe First Vice President — Finance David G. Termine First Vice President — Accounting Timothy W. Burdette Vice President — Asset Management Alistair Calvert Vice President — Acquisitions Jeffrey R. Damec Vice President — Regional Director Kimberly J. Dussol Vice President — Asset Management Yasmin Guerrero Vice President — Accounting Nichole B. LeFort Vice President — Regional Director Frank Machado Vice President — Accounting C O R P O R A T E I N F O R M A T I O N Charles C. Townsend, Jr. Chairman of the Compensation Committee; Former Head of Corporate Finance, Morgan Stanley & Co. Reginald Winssinger Chairman of Horizon New America National Portfolio Inc. Dr. Lawrence R. Klein Member Marisa Mackey Vice President — Acquisitions John F. Moss Vice President — Regional Director Mary P. Nelson Vice President — Systems Louisa H. Quarto Vice President — Marketing Mykolas Rambus Vice President and Chief Information Officer C. Curtis Ritter Vice President — Communications Gino Sabatini Vice President — Acquisitions Gagan Singh Vice President — Finance Mark Wander Vice President — Regional Director 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 11, 2002, 10:30 a.m. at the Waldorf=Astoria Hotel, New York City Website www.wpcarey.com Trading Information Shares of W. P. Carey & Co. LLC trade on the New York Stock Exchange (“NYSE”) under the symbol “WPC.” 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. 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 June 30, 2001 September 30, 2001 December 31, 2001 $.4225 $.4225 $.4225 $.4225 $.4225 $.4250 $.4260 $.4270 $.4125 $.4125 $.4125 $.4125 $.4175 $.4175 $.4175 $.4175 75113-17 BBCWork/CompWork/WPCarey Annual Report 4/12/02 de-dv aa-jvb p-ad c-la page 2 75113-17 BBCWork/CompWork/WPCarey Annual Report 4/12/02 de-dv aa-jvb p-ad c-la page 2 F I N A N C I A L H I G H L I G H T S In thousands except per share and stock data for the year ended December 31 O P E R A T I O N S Total Revenues Net Income Funds From Operations (FFO)(1) P E R S H A R E Diluted Funds From Operations (FFO) Dividend Pay-Out Ratio 2 0 0 1 139,411 35,761 84,160 2.41 1.70 70.5% $ $ $ $ $ Weighted Average Listed Shares Outstanding (Diluted) 34,952,560 S T O C K D A T A Price Range (January 1, 2001 through December 31, 2001) $ 18.26 - $ 23.80 Total Return for 2001 Number of Shareholders 36% 20,616 (1) Net income, excluding gains (or losses) from debt restructuring and sales of property, plus certain noncash items, primarily real estate depreciation, and after adjustments for unconsolidated partner- ships and joint ventures. Funds from operations does not represent net income or cash flows generated from operating activities in accordance with GAAP. It should not be considered an alternative to net income as an indication of the Company’s operating performance or to cash flows as a measure of liquidity or as an indicator of the Company’s ability to fund its cash needs. STANDING FROM LEFT: WM. POLK CAREY, CHAIRMAN, FRANCIS J. CAREY, VICE CHAIRMAN SEATED: GORDON F. DUGAN, PRESIDENT D E A R F E L L O W S H A R E H O L D E R S , n 2001, W. P. Carey & Co. LLC performed well, both as a business and as an investment for its shareholders. T Our revenues, Funds From Operations (FFO) — a key yardstick for real estate I investments — and assets all increased, while our trademark sale-leaseback financing became even more attractive to corporate clients during the year as the economy weakened, corporate earnings declined and the credit markets tightened. We completed nearly $400 million in sale-leaseback transactions during the tency and value, pushed up the price of year, including $185 million in the fourth quarter alone. Our earnings increased solidly and our stock moved up strongly in price, ending the year at $23.20, close to its high of $23.80 and an impressive 28% above its price of $18.10 at year- end 2000. That increase, coupled with dividends of $1.70 during the year, gave shareholders an overall return of approximately 36%. Also, as intended, adding the advi- sory business has in fact enhanced our profitability. This occurred in mid- 2000 when we merged W. P. Carey & Co., Inc. into Carey Diversified LLC to create W. P. Carey & Co. LLC. In last year’s report, we viewed the outlook for our business as “distinctly positive,” despite a weakening econ- omy. None could anticipate the events of 2001, and the year was a challeng- ing one for our business, but as pre- our stock. F U N D S F R O M O P E R A T I O N S G A I N Net income, reported on a GAAP (Gen- T U R N C OMPARIS O N erally Accepted Accounting Principles) basis, increased to $35,761,000 in 2001, WPC compared with a loss of $9,278,000 in 2000. The loss reflected the $38 mil- lion write-off related to the termina- tion of the management contract with Carey Diversified. It was a paper loss (i.e. non-cash) in that it did not reduce cash flow and the real estate opera- tions of the merged entity, W. P. Carey E R R A 4 - Y E 5 7 1 0 5 1 5 2 1 0 0 1 5 7 1.1 98 12.31 98 12.31 99 12.31 00 12.31 01 & Co. LLC, now benefit from the merger. W. P. Carey & Co. LLC NAREIT Index S&P 500 FFO in 2001 rose to $84,160,000, up 24% from $68,044,000 in 2000. On a per-share basis, FFO was $2.41 per diluted share, up 6% from $2.28 in 2000. S E E K I N G S U S T A I N A B L E G A I N S In our 1999 annual report, we com- dicted, we weathered the downturn mented that prudent asset allocation well. Investors, seeking safety, consis- would require investors to put some of www.wpcarey.com 3 their gains from high-risk investments cessful and our investors did well, we into undervalued, income-oriented would be able to raise capital. Thanks investments — the “stay rich” portion of to our strong track record that theory a portfolio. In 2000, we noted that those who followed that advice were well rewarded as high-flying stocks nose-dived and the stock markets declined overall. In 2001, those who had invested the “stay rich” portion of their portfolio in W. P. Carey & Co. LLC stock were further rewarded. Stock price gains, like those of 2001, however, are clearly unsustain- able, simply because our underlying business, while steadily growing, can- not grow that fast. We think and act like owners, has proven true. We have repeatedly raised funds for our REITs, which are publicly held but not publicly traded, through a group of select financial planning and I O L O F T R P O D I V E R SIFICATI O N B Y P R O P E R T Y T Y P E Based on Contractual Annualized Rents 9 8 7,9 6 2,3 1 % 5.1 1 28,845,304 35.1% PERCENTAGE 5 7 5,3 7 6,5 % 8.0 4 . 9 % 4 , 0 0 4 , 4 1 0 $ RENT broker/ dealer firms. Corporate Property Associates 14 (CPA®:14), our largest fund, now has assets in excess of $1 billion, and raised $658 million 3 6 . 9 % 3 0 , 3 0 7 , 1 4 3 before closing to investors in November. Industrial / Manufacturing Office / Research Distribution / Warehouse Retail Hotel Diversification of assets has always been an article of faith at W. P. Carey. Now we plan to diversify our sources taking a long-term perspective in the of capital as well. Accordingly, two knowledge that as earnings grow, stock additional nationally prominent firms prices ultimately will respond. have agreed to join our selling group. D I V E R S I F Y I N G S O U R C E S O F C A P I T A L These firms, in addition to the select group we have established, will offer their customers shares in CPA®:15 — Over the years, ready access to capital our newest REIT — launched in has fueled our growth. We have always November 2001. This arrangement will believed that if our business was suc- not only broaden the distribution of 4 W. P. Carey & Co. LLC shares, but will, we expect, raise more property is central to the bankrupt equity capital and significantly business’s continued operation. increase our capacity to sell shares in On the plus side, today’s real estate this and future funds. I M PA C T O F T H E D O W N T U R N I O L O F T R P O D I V E R SIFICATI O N B Y G E O G R A P H Y Based on Contractual Annualized Rents market enables us to acquire attractive properties at favorable prices. In addi- tion, low current interest rates are Meanwhile, the effects of the recession helpful when we finance new proper- have been widespread, and although we are less affected than many other 1 8 , 6 3 7 , 3 2 2 2 2 . 7 % ties or refinance existing ones. While fewer companies are inclined to under- 13,060,203 15.9 % companies, we are not immune. While take real estate projects in hard times, most industries have excess capacity, few companies have pricing power and 6 . 1 % 2 9 3 2 , 0 5 1 , 4 2 many face weakening markets and PERCENTAGE 4 . 2 % 3 , 4 6 7 , 0 6 9 $ RENT more are turning to sale-leaseback financing for their capital needs. Our talented acquisition and prop- 3 1 . 0 % 2 5 , 4 8 3 , 5 8 8 plunging profits. Widening layoffs and erty management groups have been plant closures have led to a glut of com- mercial properties in many areas, accompanied by falling prices and South Midwest West East Europe dealing energetically with tenant prob- lems throughout this difficult period. If a property is vacated, we move rents. We are largely protected by long- aggressively to re-tenant or sell it. term leases, but the availability of cheaper alternatives affects us in lease renewals and new projects. A tenant’s bankruptcy can leave a C O M B I N I N G T W O R E I T S In the second quarter of 2002, we merged our smallest REIT, CPA®:10, building empty and the lease broken, into Carey Institutional Properties forcing us to write down the property’s (CIP®). As a result, we expect the com- value. Often, though not always, our bined REIT to operate with greater lease will be affirmed because the efficiency. www.wpcarey.com 5 W. P. Carey now manages four diver- We are fortunate to have a business sified net lease REITs — CIP®, CPA®:12, CPA®:14 and CPA®:15 — in addition to our own portfolio, with assets under ownership and/or management total- ing more than $3 billion. Increased capital and diverse sources of capital will give us maxi- mum flexibility in taking advantage of emerging opportunities. At the same that can prosper whether the economy is weak or strong, and whether the stock markets are rising or falling. We are grateful for the efforts of our skilled and talented staff, whose dedi- cation and character contribute so much to our success, and for the strong support of our shareholders. We will continue to do our best on their behalf. I O L O F T R P O D I V E R SIFICATI O N B Y T E N A N T I N D U S T R Y Based on Contractual Annualized Rents- *Incorporates Net Operating Income - from Hotel Operations 5 , 1 8 7 , 2 0 4 6 . 3 % 0 7 0 , 1 0 5 , 4 % 5 . 5 4.9% 5 , 8 6 4 , 3 9 3 7 . 1 % 5,869,100 7.1 % 4,004,410 4.7 % 7 4 0 3,863,306 4 , 8 3 , 2 4 . 0 % 3 . 3 % 2 , 6 8 1 , 2 6 3 1.4% 1,137,052 $ RENT Sincerely, 16.7 % 13,671,250 time, rigorous management of our 6,579,301 8.0% PERCENTAGE REITs and our own operations and portfolio will keep our business on sound footing. 0 5 4 , 8 4 7 , 6 9 . 3 % 10.9% 8,656,988 1 0 . 9 % 8 , 9 2 8 , 6 2 7 Specialty Services Telecommunications Machinery / Equipment Electronics Automotive Consumer Products Retail Paper Food / Beverage Processing Hotel* Medical Products / Services Textile Airline Construction A P O S I T I V E O U T L O O K We are optimistic about the short- and long-term future of W. P. Carey & Co. LLC and of sale-leaseback financing as it has become a particularly attrac- tive source of capital in today’s tight credit market. Build-to-suit financing, a variant in which we finance new con- struction for corporate tenants, has slowed, but is expected to increase as the economy recovers. 6 W. P. Carey & Co. LLC 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 - - ATRIUM COMPANIES, INC. WELCOME, NORTH CAROLINA O W N E R S H I P A N D M A N A G E M E N T he June 2000 merger of Carey Diversified LLC and W. P. Carey & Co., Inc. to create W. P. Carey & Co. LLC joined together two related but distinct ways of making money. The combination T of the two is highly beneficial to shareholders. T Carey Diversified (CD) was designed to make money through ownership of a profitable portfolio of net-leased, single-tenant corporate proper- ties. The leases on these properties have generated a large income stream in the form of rents. W. P. Carey & Co., Inc., on the other hand, earned fees for acquiring, arranging financ- ing and managing these properties for CD and for the Carey-sponsored series of REITs. W. P. Carey & Co. LLC (WPC) now manages its own portfolio, while earning fees for ser- vices to the REITs, currently four in number after the merger of CPA®:10 and CIP®. WADDINGTON NORTH AMERICA , INC . CITY OF INDUSTRY, CALIFORNIA Each of these activities — ownership and management — has been and continues to be successful and profitable in its own right. Together, they provide a formidable mecha- nism for achieving rising income and shareholder value. CD’s portfolio was created by combining the first nine of Carey’s Corporate Property Associates series of limited partnerships (CPA®:1-9). The partners swapped their inter- Q ests in these maturing partnerships for an equivalent value of shares in CD, a New York Stock Exchange-traded entity, gaining immediate liquidity without triggering capital gains taxes. Each of these activities — The portfolio of WPC now comprises 184 properties net-leased to 106 tenants and located in 34 states and France. These holdings total more than 20 million square feet ownership and of space. management — provides a formidable mechanism for Funds from the original partners have long since been fully invested, so money for further investments comes from income, or from the sale or refinancing of properties. Meanwhile, the management portion of WPC’s business has continued to grow as its REIT operations expand. CPA®:14 is now the largest Carey REIT, with over $1 billion in achieving rising income assets at the end of 2001, comprising 111 properties in 27 states and four countries, leased to 53 tenants. It will continue to grow until all the funds raised are invested, after and shareholder value. which growth will slow. The newest REIT, CPA®:15, began raising funds late last year and by year-end had already acquired three properties in three states. In time, CPA®:15 may become the largest affiliated REIT. Shareholders of WPC’s oldest REIT, CPA®:10, approved the fund’s merger into a larger Carey fund, CIP® (Carey Institutional Properties). This combined fund now benefits from 8 W. P. Carey & Co. LLC 8 enhanced investment opportunities and economies of scale, while strengthening returns for its shareholders. CPA®:10, launched in 1991, had 46 properties before the merger, while CIP®’s post-merger portfolio consists of 108 properties. Finding, negotiating, WPC’s other affiliated REIT is CPA®:12. Its portfolio consists of 97 properties in 26 states leased to 42 corporate tenants. underwriting and closing We have often described our net lease strategy, which involves acquiring essential properties from creditworthy corporations and net leasing them back. We typically such projects, and structure leases as triple-net, which requires the tenant to pay for major costs of operat- ing the facility, including taxes, maintenance and insurance. Our leases are long-term, usually with rent increases indexed to inflation to maintain the value of our revenue stream. And the lease is typically designed to be a general obligation of the parent corpo- overseeing them later, takes skill and dedication, which ration, thereby helping to assure that we will be paid. In a variation known as a build-to- the members of our teams suit, we sometimes finance the construction of a new facility and concurrently complete the lease agreement with our tenant. possess in abundance. Finding, negotiating, underwriting and closing such projects, and overseeing them later to assure that rents are paid and properties maintained, takes skill and dedication, which the members of our acquisition, underwriting and management teams possess in abundance. In doing their jobs well, whether for WPC’s own portfolio account or on behalf of our affiliated REITs, they help to assure the continuing growth of both of our principal revenue streams, fees for performing specific services, and income from WPC’s own properties. Q SICOR, INC . IRVINE, CALIFORNIA www.wpcarey.com 9 9 F I N A N C I A L S T A T E M E N T C O N T E N T S S E L E C T E D F I N A N C I A L D A T A M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S C O N S O L I D A T E D B A L A N C E S H E E T S C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S C O N S O L I D A T E D S T A T E M E N T S O F M E M B E R S ’ E Q U I T Y C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S C O R P O R A T E I N F O R M A T I O N 1 1 1 2 2 6 2 7 2 8 2 9 3 1 3 4 5 9 W. P. Carey & Co. LLC S E L E C T E D F I N A N C I A L D A T A In thousands except per share amounts O P E R A T I N G D A T A Revenues Income (loss) before extraordinary items Basic earnings (loss) per share Diluted earnings (loss) per share Cash dividends(1) Cash provided by operating activities Cash (used in) provided by investing activities Cash (used in) provided by financing activities Cash dividends declared per share B A L A N C E S H E E T D A T A Real estate, net(2) Net investment in direct financing leases Total assets Long-term obligations(3) 2001 THE COMPANY CONSOLIDATED 1999 2000 $139,411 35,761 1.04 1.02 58,048 58,877 (13,368) (46,815) 1.70 $120,251 (9,278) (.31) (.31) 49,957 58,268 41,138 (91,498) 1.69 $ 88,506 34,039 1.33 1.33 42,525 48,186 (55,173) 3,392 1.67 1998 $ 85,330 39,085 1.55 1.55 30,820 51,944 (71,525) 6,668 1.65 THE PREDECESSOR COMBINED 1997 $ 96,271 40,561 43,620 51,641 (273) (61,335) $435,629 258,041 915,883 287,903 $433,867 287,876 904,242 176,657 $501,350 295,556 856,259 310,562 $453,181 295,826 813,264 254,827 $240,498 216,761 523,420 150,907 (1) 1997 amounts represent cash distributions to Limited Partners of the predecessor partnerships. (2) Includes real estate accounted for under the operating method, operating real estate and real estate under construction, net of accumulated depreciation. (3) Represents mortgage and note obligations and deferred acquisition fees due after more than one year. www.wpcarey.com 11 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Dollar amounts in thousands O V E R V I E W WPC with several potential advantages including, but not The following discussion and analysis of financial condition limited to, increased diversification of revenue sources, and results of operations of W. P. Carey & Co. LLC (“WPC”) reduced operating expenses through the elimination of should be read in conjunction with the consolidated finan- management fees formerly paid to Carey Management, a cial statements and notes thereto for the year ended potentially increased earnings growth rate, a strengthened December 31, 2001. The following discussion includes credit profile and improved access to capital markets. forward looking statements. Forward looking statements, The net operating income of the management business of which are based on certain assumptions, describe future Carey Management has historically grown at a faster rate plans, strategies and expectations of WPC. Such state- than the net operating income and revenues of WPC’s real ments involve known and unknown risks, uncertainties estate operations, and Management believes the prospects and other factors that may cause the actual results, perfor- for an increase in the growth rate of earnings (excluding mance or achievement of WPC to be materially different amortization charges) has been improved. Because the from the results of operations or plan expressed or implied capital markets have indicated a strong preference for by such forward looking statements. Accordingly, such internally managed real estate companies, the ability of information should not be regarded as representations by WPC to raise additional equity capital in the public WPC that the results or conditions described in such state- markets should be enhanced. ments or objectives and plans of WPC will be achieved. WPC’s net lease real estate management operations Effective June 29, 2000, Carey Diversified LLC acquired derives substantially all of its revenues from the four affili- the net lease real estate management operations of Carey ated REITs. All transactions with these affiliates are subject Management LLC by issuing 8,000,000 shares, and to contractual agreements including Advisory Agreements. changed its name to W. P. Carey & Co. LLC. As a result of As an Advisor to these REITs, WPC’s contracts are renew- acquiring the operations of Carey Management, WPC able annually by independent directors who are elected by acquired its workforce of approximately 95 employees, each REIT’s shareholders. In connection with each renewal, assumed the advisory contracts with four publicly regis- WPC’s management is required to provide the independent tered affiliated real estate investment trusts (“REITs” and directors with a comparison of the fee structure of the “CPA® REITs”) and terminated the management contract company with several similar companies. The Advisory between Carey Diversified and Carey Management LLC. Agreements also provide that after a specific time period Management believes that the acquisition has provided the asset base used for determining management and 12 W. P. Carey & Co. LLC performance fees are based on valuations performed by ment performs projections of undiscounted cash flows, independent professionals. WPC is also a real estate invest- and if such cash flows are insufficient, the assets are ment company that acquires, owns and manages commer- adjusted (i.e., written down) to their estimated fair value. cial properties leased to companies nationwide, primarily An analysis of whether a real estate asset has been on a triple net basis. As of December 31, 2001, WPC owned impaired requires Management to make its best estimate 184 properties in the United States and 6 properties in of market rents and residual values. In its evaluations, Europe totaling more than 20 million square feet. WPC’s WPC obtains market information from outside sources; core investment strategy is to purchase properties, leased however, such information requires Management to deter- to a variety of companies on a single tenant net lease mine whether the information received is appropriate to basis, that are either owned outright or owned by an entity the circumstances. Because most of WPC’s properties are managed by WPC. leased to one tenant, WPC is more likely to incur signifi- Certain accounting policies are critical to the under- cant writedowns when circumstances change because of standing of WPC’s financial condition and results of opera- the possibility that a property will be vacated in its tions. Management believes that an understanding of entirety and, therefore, it is different than the risks related financial condition and results of operations requires an to leasing and managing multi-tenant properties. Events understanding of accounting policies relating to the use or changes in circumstances can result in further noncash of estimates and revenue recognition. writedowns and impact the gain or loss ultimately realized The preparation of financial statements requires that upon sale of the assets. Management make estimates and assumptions that affect In connection with the net lease real estate management the reported amount of assets, liabilities, revenues and business, WPC earns transaction and asset-based fees. expenses. For instance, WPC must assess its ability to col- Transaction fees are primarily earned in connection with lect rent and other tenant-based receivables and determine investment banking services provided in connection with an appropriate charge for uncollected amounts. Because structuring acquisitions, refinancing and dispositions on WPC’s real estate operations have a limited number of behalf of the affiliated real estate investment trusts. Trans- lessees, Management believes that it is necessary to action fees are earned upon consummation of a transaction, evaluate specific situations rather than solely use statis- that is, when a purchase has been completed by the affili- tical methods. ate. Completion of a transaction includes determining that WPC also uses estimates and judgments when evaluating the purchaser and seller are bound by a contract and all whether long-lived assets and goodwill are impaired. When substantive conditions of closing have been performed. events or changes in circumstances indicate that the carry- When these conditions are met, acquisition-based services ing amount of an asset may not be recoverable, Manage- have been completed and the fees are recognized. www.wpcarey.com 13 Asset-based management services are earned when per- comparable periods would have increased by $7,039. WPC formed. A portion of the fees are subject to subordination is engaged in two reportable segments, real estate opera- provisions pursuant to the Advisory Agreements and are tions and management services. based on specific performance criteria. In connection with Real estate operations operating income (real estate determining whether management and performance fees segment income before gains and losses, income taxes, are recorded as revenue, Management performs analyses minority interest and the charge on the contract termina- on a quarterly basis to measure whether subordination tion) was $33,341 and $26,556 in 2001 and 2000, respec- provisions have been met. Revenue is only recognized tively. The results for 2001 and 2000 include asset when the specific performance criteria are achieved. impairment charges of $12,643 and $11,047, respectively, WPC recognizes rental income from sales overrides representing noncash impairment writedowns of assets when reported by lessees, that is, after the level of sales to estimated fair value. Excluding the effect of the write- requiring a rental payment is reached. downs, operating income from real estate operations for Public business enterprises are required to report finan- 2001 would have reflected an increase of $8,381. cial and descriptive information about their reportable The increase in real estate operating income was pri- operating segments. WPC’s management evaluates the per- marily due to decreases in interest expense and deprecia- formance of its owned and managed real estate portfolio tion. The decrease in interest expense was attributable to as a whole, but allocates its resources between two operat- lower average outstanding balances on WPC’s $185,000 ing segments: real estate operations with domestic and credit facility and a decrease in interest rates during 2001. international investments and management services. Of the $5,834 decrease in interest expense for the compa- rable years to $21,603 in 2001, $6,292 was due to lower R E S U LT S O F O P E R A T I O N S interest from the credit facility. WPC’s credit facility is Year-Ended December 31, 2001 Compared to Year-Ended indexed to the London Inter-Bank Offered Rate (“LIBOR”) December 31, 2000 and the LIBOR benchmark rate declined substantially in WPC reported net income of $35,761 and a net loss of 2001. The average balance outstanding on the credit line $9,278 for the years ended December 31, 2001 and 2000, was $104,000 in 2001 and $146,000 in 2000 and the respectively. The results for 2001 and 2000 are not fully average interest rate declined from 7.77% to 5.29%. As of comparable, primarily due to the acquisition of the man- December 31, 2001, advances outstanding on the credit agement operations in June 2000 and the related charge in facility were $95,000. Based on current outstanding bal- 2000 of $38,000 in connection with terminating its manage- ances on the credit facility, a change of 1% in the bench- ment contract. Excluding the charge on the termination mark rate changes annual interest charges by $950. The of the management contract in 2000, net income for the decrease in interest expense from the credit facility is 14 W. P. Carey & Co. LLC partially offset by an increase in mortgage interest due to however, the timing of such settlements and the amounts placement of mortgages on the Cendant Operations, Inc. that will be received cannot be estimated. and Sprint Spectrum L.P. properties in December 2000 and The increase in property expenses in 2001 of $1,681 July 2001, respectively, resulting in higher interest charges to $7,325 was primarily due to an increase in real estate from mortgages. The decrease in depreciation of $2,976 to taxes and utilities on vacant and partially vacant proper- $10,532 in 2001 was primarily due to the disposition of ties of $1,045 and an increase in the provision for the majority interest in the Federal Express Corporation uncollected rents of $2,098 and was partially offset by property in Colliersville, Tennessee in December 2000 to decreases in management fees of $1,908. Effective with an affiliate and the reclassification of a property located in the cancellation of its Management Agreement in June Los Angeles, California to real estate under development in 2000, the Company no longer incurred management fees. December 1999 at which time depreciation was no longer The provision for uncollected rents included a writeoff incurred. In January 2002, WPC entered into a purchase of accumulated straight-line rents of $1,321 that was and sales agreement with the Los Angeles Unified School recorded in connection with amending a lease. District (“LAUSD”) to sell the property for $24,000. As of The decrease in lease revenues (rental income and December 31, 2001, the carrying value of the property was interest income from direct financing leases) of $6,087 $13,047. The sale is subject to approval by the LAUSD Board to $79,571 in 2001 was primarily as a result of the sale of Education and completion of LAUSD’s due diligence. of a 60% majority interest in the Federal Express property Other income primarily consists of nonrecurring items to an affiliate in December 2000 and the restructuring including, but not limited to, consideration from lease of a lease with Livho, Inc., the lessee of the Holiday Inn termination and settlements. In 2001, WPC received a in Livonia, Michigan, and was partially offset by rent $2,500 final settlement of a claim against a former lessee, increases on various leases and increased rents from New Valley Corporation, relating to a termination of a the completion of expansions at existing properties. lease in 1993. WPC also recognized $2,165 from a settle- The lease restructuring with Livho, Inc. resulted in a ment with Harcourt General Corporation, the guarantor decrease in rental income of $658. During the year ended of a lease with General Cinema Corporation for a property December 31, 2000, revenues from the Federal Express in Burnsville, Minnesota. The settlement was received as lease were $5,404. The remaining 40% interest in the a result of the termination of the General Cinema lease in property is now accounted for under the equity method connection with General Cinema’s plan of reorganization. of accounting. Under the equity method, WPC recognizes The Burnsville property was sold in January 2002. WPC is its share of the net income or loss from the Federal continuing to seek settlements with other former lessees; Express investment. www.wpcarey.com 15 During 2000, WPC acquired a 90% interest in a joint continuing to manage the operation, seeking a single- venture that entered into a build-to-suit commitment in tenant net lease or selling the property. Strasbourg, France at a property which is net leased to WPC is closely monitoring the financial condition of Bouygues Télécom S.A., an existing lessee. The project was several lessees which it believes have been affected by cur- completed in November 2001. The lease has an initial rent economic conditions and other trends. Such lessees term of twelve years with annual rents of approximately include America West Holding Corp. and Livho, Inc. which $2,000. During 2001, WPC completed expansions of the together represent 6% of lease revenues. America West, an Sprint Spectrum and AT&T Corporation properties which air carrier, has obtained government financing subsequent have increased annual rents by $675. Comark, Inc., a to September 11, 2001 and its financial prospects are lessee at WPC’s multi-tenant Bloomingdale, Illinois prop- uncertain. Livho, the lessee of a Holiday Inn in Livonia, erty, and Western Union Financial Services, Inc. exercised Michigan, is affected by the cyclical nature of the automo- renewal options. Comark extended its lease through May tive industry. The financial condition of another lessee, 2003 at an annual rent of $293 and Western Union Peerless Chain Company, has been adversely affected by extended its lease through November 2006 at an annual foreign competition, and it has not kept current on its rent of $937. annual rent of $1,561. Peerless is currently paying only a In December 2001, Thermadyne Holdings Corp. filed a portion of its rents and has entered into discussions petition of bankruptcy and subsequently vacated the prop- with WPC to restructure the lease, but WPC has made erty in February 2002. Annual rents from Thermadyne were no commitment. $2,525. WPC has entered into an agreement-in-principle to In January 2002, The Gap, Inc. notified WPC that it re-lease a portion of the space for approximately $817 and would not renew its leases which expire in February 2003 is actively remarketing the remaining space. and contribute annual rent of $2,205. In addition, In November 2001, WPC evicted Red Bank Distribution Pillowtex, Inc. notified WPC in February 2002 that under Inc. and entered into an agreement-in-principle that effec- its plan of reorganization it would terminate its lease with tively terminated the net lease because of Red Bank’s annual rents of $691, effective April 1, 2002. Both the Gap inability to meet its annual rent lease obligation of $1,579. and Pillowtex properties are warehouse/distribution prop- WPC has assumed control of the property and is managing erties and are being actively remarketed. a public warehousing operation that occupies a portion of WPC incurred impairment losses of $12,643 in 2001 the building. The property has approximately 46 short- including a writedown of $6,749 in its equity investment term tenants who collectively generate approximately in the operating partnership of MeriStar Hospitality $130 in monthly rents and expense reimbursements. Corporation as a result of a decrease in MeriStar’s earn- Management is evaluating several alternatives including ings and the uncertainty regarding its distribution rate 16 W. P. Carey & Co. LLC which was reduced in the fourth quarter of 2001. WPC operations occurred June 29, 2000. Results for the years incurred a $2,000 impairment loss on the Red Bank prop- ended December 31, 2001 and 2000 include noncash erty as a result of the eviction. The remaining impairment charges for amortization of goodwill and intangible assets losses primarily related to the writedowns of several of $11,903 and $5,958, respectively. Excluding amortiza- under-performing properties which WPC has entered into tion charges, operating income from management services commitments to sell. would have been $19,501 and $15,319 for the years ended As of December 31, 2001, WPC has classified seven December 31, 2001 and 2000, respectively. Income tax properties as being held for sale in the accompanying expense for management services for the year ended financial statements, based on either a contractual com- December 31, 2001 increased by $4,182 over the year mitment to sell the properties or the expectation that the ended December 31, 2000. The increase is a result of 80% properties will be sold within the next year. If all of the of management revenues being earned by a taxable, properties are subsequently sold, annual lease revenues wholly-owned subsidiary. would decrease by $821. In July 2001, the Company sold Total revenues earned by the management services oper- its property in Forrest City, Arkansas to the lessee, Duff- ations for the years ended December 31, 2001 and 2000 Norton Company, Inc. Annual rent from the Duff-Norton were $46,911 and $25,271, respectively. Management fee lease was $1,164. In addition, annual rents have decreased revenues were comprised of transaction fees of $17,160 by $1,212 as a result of selling nine properties in 2001. and $14,894 and asset-based fees and reimbursements of Because of the long-term nature of WPC’s net leases, $29,751 and $10,377 for the years ended December 31, inflation and changing prices should not unfavorably 2001 and 2000, respectively. Transaction fees included fees affect revenues and net income or have an impact on the from structuring acquisition and refinancing transactions continuing operations of WPC’s properties. WPC’s leases on behalf of the CPA® REITs. WPC and affiliates structured usually have rent increase provisions based on the con- approximately $395,000 of acquisitions in 2001 and Man- sumer price index and other similar indexes and may have agement currently projects that acquisitions will meet or caps on such increases, or sales overrides, which should exceed such acquisition volume in 2002. As of December 31, increase operating revenues in the future. The moderate 2001, Corporate Property Associates 14 Incorporated increases in the consumer price index over the past several (“CPA®:14”), which concluded a public offering in November years will affect the rate of such future rent increases. 2001, had more than $100,000 of cash available for invest- Net operating income from WPC’s management services ment in real estate. Corporate Property Associates 15 operations for the years ended December 31, 2001 and Incorporated (“CPA®:15”), a newly formed CPA® REIT, com- 2000 was $7,598 and $9,361, respectively, and is not fully menced a “best efforts” public offering in November 2001 comparable as the acquisition of the management services and as of March 15, 2002 had raised $59,516 which it will www.wpcarey.com 17 use along with mortgage financing to invest in real estate. merger of the two companies, subject to the approval of Management believes that the CPA® REITs will benefit from the shareholders of both companies. The merger would not several trends including the increasing use of sale-lease- result in a change in assets under management, so that the back transactions by corporations as an alternative source asset-based fees earned by WPC should be unchanged. If of financing and individual investors seeking dividend- the merger is approved, WPC will receive certain fees of paying investments, and which has the potential to allow $1,444 that had been deferred subject to subordination CPA®:15 to fully subscribe its $400,000 “best efforts” offer- provisions in the CPA®:10 Advisory Agreement. ing. CPA®:15 is negotiating sales agreements with two The increase in general and administrative expenses additional major broker-dealers, both of whom WPC expects was primarily due to the acquisition of the management will be selling CPA®:15 shares by the third quarter. services operations in 2000. Approximately 89% of the The asset-based management income includes fees increase in general and administrative costs resulted from based on the value of CPA® REIT real estate assets under personnel-related costs. The portion of personnel costs management. A portion of the CPA® REIT fees is based on necessary to administer the CPA® REITs is billed back to each CPA® REIT meeting specific performance criteria (the the REITs and is included in management income. “performance fee”) and WPC earns this performance fee income only when the performance criteria of each CPA® Year-Ended December 31, 2000 Compared to Year-Ended REIT are being achieved. Total asset based fees for the December 31, 1999 years ended December 31, 2001 and 2000 were $21,511 WPC reported a net loss of $9,278 and net income of and $6,809, respectively. The performance criteria for $34,039 for the years ended December 31, 2000 and 1999, CPA®:14 were satisfied for the first time during 2001, respectively. The results for 2000 and 1999 are not fully resulting in the Company’s recognition of $2,459 for the comparable, primarily due to the acquisition of the opera- period December 1997 through December 31, 2000. As the tions of Carey Management. WPC incurred a charge of real estate asset base of CPA®:14 continues to increase and $38,000 on the termination of its management contract CPA®:15 builds a diversified portfolio, the management with Carey Management. Management believes that the and performance fees will continue to increase. Based on termination of the management contract will provide the value of assets under management of the CPA® REIT’s substantial benefit to WPC. as of December 31, 2001, annualized management and In addition to the $38,000 fair value attributed to the performance fees under the advisory agreements are terminated management contract, a substantial portion of approximately $21,750. the other net assets acquired consists of intangible assets In December 2001, CPA®:10 and CIP®, both affiliated and goodwill. Intangible assets and goodwill are amortized REITs, entered into a merger agreement providing for the over their estimated useful lives, and such amortization, a 18 W. P. Carey & Co. LLC non-cash charge, was $5,958 in the current year. Results a substantial portion of the interest incurred in 1999 was for 2000 include approximately six months of operations on borrowings used to fund construction of the America for the management services business. Prior to the acqui- West and Federal Express projects, and was capitalized sition, real estate operations contributed substantially all rather than expensed, in accordance with generally of WPC’s income. Excluding the charges for amortization accepted accounting principles. Subsequent to the com- and the writeoff of the management contract, the manage- pletion of the projects, interest costs were expensed. ment business segment contributed income of $13,081. The credit facility is a variable rate obligation and also Income from real estate operations provided operating was affected by increases in interest rates during 2000. income (income before gains and losses on sales, income The increase in depreciation of $3,051 was due to the taxes, minority interest, extraordinary items and the completion of build-to-suit projects on properties leased to writeoff of an acquired management contract in 2000) of America West and Federal Express, the acquisition of the $26,556 in 2000 as compared with $35,871 in 1999. The Bell South property, the expansion of the Orbital Sciences results for 2000 and 1999 include impairment charges of property and the renovation of a property in Moorestown, $11,047 and $5,988, respectively, for writedowns of assets New Jersey in 1999 now leased to Cendant Operations, Inc. to estimated fair value. Excluding the effect of the write- The increase in lease revenues was primarily due to the downs, operating income from real estate operations for completion of build-to-suit projects with Federal Express 2000 would have reflected a decrease of $4,256. Corporation in February 2000 and America West in May The decrease in real estate operating income was pri- 1999, new leases with Cendant and Bell South in May and marily due to increases in interest expense and deprecia- December 1999, respectively, and rent increases on various tion offset by increases in lease revenues (rental income leases in 2000 and 1999. Lease revenue increases were and interest income from direct financing leases) and partially offset by the sale of fourteen properties in 2000, other income. the sales of the KSG, Inc. and Hotel Corporation of America The increase in interest expense of $7,870 was primar- properties in 1999 pursuant to the exercise of purchase ily due to mortgage financing obtained in 1999 and a options by the lessees, and the termination of the change in the use of amounts drawn from the credit line. Copeland Beverage Group, Inc. lease in December 1999. Limited recourse financings included a new loan on the As a result of financial difficulties, Copeland was placed America West property, refinancings of the Gap, Inc. and in receivership and subsequently liquidated. Annual rent Orbital Sciences Corporation properties and obtaining from the Copeland lease was $1,800. WPC drew $1,800 mortgage debt in connection with the December 1999 pur- from a letter of credit that had been provided by Copeland chase of the Bell South Telecommunications, Inc. property. which was used to cover property expenses for the period Interest expense from the line of credit increased because subsequent to the lease termination. www.wpcarey.com 19 Other income in the accompanying consolidated state- Management monitors its real estate assets and securi- ments consists of income from real estate operations other ties on an ongoing basis. In the event of certain circum- than lease revenues. Other income increased by $1,418 in stances, including, but not limited to, lease terminations, 2000. The increase in other income in 2000 included vacating of a property by a lessee or nonpayment of rent bankruptcy distributions received from a former lessee or interest, Management evaluates whether an asset has and termination consideration. been impaired. In these instances, when the estimate of Income from equity investments increased by $996 due fair value is less than the carrying value, a writedown is to the improved performance of the operating partnership recorded for the difference. In 2000 and 1999, WPC recog- of MeriStar and an increase in income from the invest- nized writedowns of $11,047 and $5,988, respectively. ment in a net lease with CheckFree Holdings Corp., which is owned with an affiliate. The increase in income from the F I N A N C I A L C O N D I T I O N CheckFree investment was due to recognition of a full Management believes that WPC will generate sufficient year’s revenues on the property leased to CheckFree which cash from operations and, if necessary, from the proceeds of was purchased in June 1999. Rent on the CheckFree lease limited recourse mortgage loans, unsecured indebtedness also increased in connection with the completion of an and the issuance of additional equity securities to meet its expansion in 2000. short-term and long-term liquidity needs. WPC assesses its General and administrative expenses increased due to ability to obtain debt financing on an ongoing basis. the acquisition of the management operations, including Cash flows from operations and distributions from the personnel and office facilities necessary to render equity investments for the year ended December 31, 2001 advisory and administrative services to the REITs. The of $61,645 were sufficient to fund dividends to sharehold- general and administrative expense of the real estate oper- ers of $58,048. Cash flows from operations are expected to ations segment reflected a decrease. Management and increase as a result of the expected growth of the manage- performance fee expenses for periods subsequent to ment business segment. Annual cash flow from operations the merger have been terminated effective June 29, 2000, should continue to fully fund distributions; however, the resulting in a decrease in property expenses for the year coverage of distributions will fluctuate on a quarterly ended December 31, 2000. The provision for income taxes basis due to the timing of certain compensation costs that increased as a result of forming a wholly-owned subsidiary are paid in the second quarter and the timing of transaction- that is responsible for management operations and all related activity. In January 2002, WPC received its administrative functions. Formation of the taxable sub- first installment of deferred acquisition fees of $916 in sidiary allows the Company to maintain its status as a connection with structuring transactions on behalf of publicly-traded partnership. the CPA® REITs. 20 W. P. Carey & Co. LLC Cash flow from real estate operations will benefit from acquire like-kind property, and defer a taxable gain to the completion of the build-to-suit project in December shareholders of approximately $8,900 until the new prop- 2001 for a property leased to Bouygues Télécom, S.A. in erty is sold, if certain conditions are met. A gain on sale France which will provide annual rentals of $2,000. was recognized for financial reporting purposes in 2001 Expansions of properties leased to Sprint and AT&T funded on the Duff-Norton property. In January 2002, the funds in by WPC in consideration for increases in rent and exten- the escrow account were transferred to the Company as the sions of remaining lease terms were completed in July proposed exchange was not completed. WPC expects to 2001 and October 2001, respectively, and will provide receive $1,000 from the LAUSD as reimbursement for additional annual cash flow of approximately $675. These costs that were capitalized prior to entering the purchase increases to operating cash flow may be affected by uncer- and sales agreement. Management is evaluating how it tainties relating to the ability to remarket properties will use these funds. Management continues to evaluate where leases are being terminated and not renewed. the real estate portfolio and is actively evaluating opportu- Investing activities included using $27,243 for pur- nities to sell smaller properties, as such properties require chases of real estate and additional capital expenditures, more intensive asset-management services than larger including $18,520 used for the construction of the single-tenant net lease properties. Bouygues Télécom facility, $894 for the Sprint property In January 2001, WPC paid an installment of deferred expansion, $3,676 for the AT&T property expansion, acquisition fees for $520 relating to 1998 and 1999 $2,921 related to the redevelopments of the former purchases to WPC’s former management company. The Copeland Beverage Group property in Los Angeles and a January 2002 installment was $524. Deferred acquisition property in Broomfield, Colorado and $1,232 to fund other fees are payable over a period of no less than eight years improvements. The funding commitment at the AT&T prop- and had a remaining balance of $3,282 at December 31, erty, which was completed in October 2001, is estimated 2001. In addition, in connection with the acquisition of the to amount to $4,100, of which $3,676 has been funded majority interests in the CPA® Partnerships on January 1, as of December 31, 2001. WPC received $11,627 in net 1998 as described in Note 1, a CPA® partnership had not cash and a note receivable of $700 in connection with the yet achieved the specified cumulative return as of the sales of properties and an equity investment in a property acquisition date. The subordinated preferred return was in Carlsbad, California. WPC sold its property in Arkansas payable currently only if the Company achieved a closing leased to Duff-Norton Company, Inc. for $9,400. WPC price equal to or in excess of $23.11 for five consecutive placed the proceeds in an escrow account for the purpose trading days. On December 31, 2001, the closing price of entering into a Section 1031 noncash exchange which, criterion was met, and the $1,423 subordinated preferred under the Internal Revenue Code, would allow WPC to return was paid in January of 2002. www.wpcarey.com 21 In March 2001, WPC entered into a revolving credit Inc., which was originally scheduled to mature in February agreement for a $185,000 line of credit which renewed and 2001. The terms of the loan remain substantially the same extended its original revolving unsecured line of credit. and provide for a five year extension with a maturity date The credit agreement has a three-year term through March of April 2006. In addition, WPC paid financing costs of 2004. WPC has a one-time right to increase the commit- $1,874, primarily related to the renewal of its line of credit ment to up to $225,000. Borrowings on the credit facility agreement. WPC uses limited recourse mortgages as a sub- were $95,000 and $81,000 as of December 31, 2001 and stantial portion of its long-term financing because the cost March 15, 2002, respectively. The revolving credit agree- of this financing is attractive and the exposure of its ment has financial covenants that require WPC to main- assets is limited to the collateral designated for each loan. tain a minimum equity value and to meet or exceed certain WPC received proceeds of $6,495 from the issuance of operating and coverage ratios. As advances on the credit shares primarily through WPC’s dividend reinvestment facility are not restricted, WPC believes that the remaining plan, stock purchase plan, and the exercise of options by capacity on the credit line will allow the Company to meet employees. WPC issued additional shares pursuant to its all its liquidity needs on a short-term basis and that renew- merger agreement for the management services operations ing the facility after the current term is likely. in connection with meeting specified performance (500,000 In addition to meeting its commitment to pay dividends shares valued at $8,145 were issued during 2001 and to shareholders, WPC’s financing activities in 2001 500,000 shares valued at $10,440 will be issued in 2002 included using $9,225 for mortgage balloon payments in based on meeting performance criteria as of December 31, May on two properties leased to Quebecor, Inc., obtaining 2000 and 2001, respectively). WPC also acquired the new limited recourse mortgage financing of $5,000 on a remaining minority interest in the CPA® Partnerships for Quebecor property, using $2,318 to pay off the mortgage $2,811 through the issuance of 151,964 shares. on one of its Houston, Texas properties which was sched- In the case of limited recourse mortgage financing that uled to mature in January 2002, using $2,993 to pay off does not fully amortize over its term or is currently due, mortgages on the Red Bank and Burnsville properties and WPC is responsible for the balloon payment only to the making scheduled principal payment installments of extent of its interest in the encumbered property because $8,230 on existing mortgages. During 2001, WPC the holder has recourse only to the collateral. In the event obtained limited recourse mortgage financing on the that balloon payments come due, WPC may seek to refi- Sprint property and the Bouygues Télécom property of nance the loans, restructure the debt with the existing $8,753 and $16,874, respectively. In April 2001, the lenders or evaluate its ability to satisfy the obligation from Company refinanced a limited recourse mortgage on its its existing resources including its revolving line of credit, Toledo, Ohio property leased to AP Parts International, to satisfy the mortgage debt. To the extent the remaining 22 W. P. Carey & Co. LLC initial lease term on any property remains in place for a AT&T property total approximately $454. Commitments for number of years beyond the balloon payment date, WPC capital expenditures on the Livonia, Alpena and Petoskey, believes that the ability to refinance balloon payment Michigan hotels are currently estimated to be approxi- obligations is enhanced. WPC also evaluates all its out- mately $728. Other than its limited mortgage debt and the standing loans for opportunities to refinance debt at lower credit line, WPC has no other significant commitments. interest rates that may occur as a result of decreasing WPC has guaranteed $8,793 loans of officers which are interest rates or improvements in the credit rating of ten- collateralized by shares of WPC owned by the officers and ants. There are no scheduled balloon payments on limited held by WPC and that were issued in connection with recourse mortgage notes in 2002 and $2,500 in 2003. equity incentive plans and the acquisition of the manage- WPC expects to meet its capital requirements to fund ment operations. WPC is also a participant in a cost- future property acquisitions, construction costs on build- sharing agreement with its affiliates for its office space. to-suit transactions, capital expenditures on existing prop- The remaining minimum rents under the office lease are erties and scheduled debt maturities through long-term $6,100 through September 2006 and WPC’s current partic- limited recourse mortgages and unsecured indebtedness ipation commitment is to pay 37% of such costs. The par- and the possible issuance of additional equity securities. ticipation commitment is adjusted quarterly based on a WPC’s remaining commitments on the expansion of the formula and is not expected to fluctuate significantly. A summary of WPC’s obligations under contractual arrangements is as follows: (IN THOUSANDS) Limited recourse mortgage notes payable Unsecured note payable Deferred acquisition fees Share of minimum rents payable under office cost- sharing agreement TOTAL 2002 2003 2004 2005 2006 THEREAFTER $200,515 95,000 3,282 $10,370 524 $ 11,224 95,000 524 $28,438 $ 9,453 $27,114 $113,916 524 524 524 662 2,257 442 484 484 484 363 — $301,054 $11,336 $107,232 $29,446 $10,461 $28,001 $114,578 WPC from time to time may offer to sell its Listed WPC may increase this amount in the future. The Shares, Future Shares and Warrants pursuant to a regis- shares and/or warrants may be offered and sold to or tration statement declared effective by the Securities through one or more underwriters, dealers and agents, and Exchange Commission on February 25, 2002. The or directly to purchasers, on a continuous or delayed total amount of these securities will have an initial basis. The prospectus included as part of the registra- aggregate offering price of up to $100,000 although tion statement describes some of the general terms that www.wpcarey.com 23 may apply to these securities and the general manner in WPC, in excess of specified amounts. Accordingly, Manage- which they may be offered. The specific terms of any ment believes that the ultimate resolution of environmental securities to be offered, the specific manner in which they matters will not have a material adverse effect on WPC’s may be offered and the specific use of proceeds, will be financial condition, liquidity or results of operations. described in a supplement to this prospectus. In July 2001, the Financial Accounting Standards Board In connection with the purchase of many of its proper- (“FASB”) issued Statements of Financial Accounting ties, WPC required the sellers to perform environmental Standards (“SFAS”) No. 141 “Business Combinations” and reviews. Management believes, based on the results of No. 142 “Goodwill and Other Intangibles,” which establish such reviews, that WPC’s properties were in substantial accounting and reporting standards for business combina- compliance with Federal and state environmental statutes tions, certain assets and liabilities acquired in business at the time the properties were acquired. However, portions combinations and asset acquisitions. of certain properties have been subject to some degree of SFAS No. 141 requires that all business combinations contamination, principally in connection with leakage initiated after June 30, 2001 be accounted for under the from underground storage tanks, surface spills or historical purchase method, establishes specific criteria for the on-site activities. In most instances where contamination recognition of intangible assets separately from goodwill has been identified, tenants are actively engaged in the and requires that unallocated negative goodwill be written remediation process and addressing identified conditions. off immediately as an extraordinary gain. Use of the Tenants are generally subject to environmental statutes pooling-of-interests method for business combinations and regulations regarding the discharge of hazardous is no longer permitted. The adoption of SFAS 141 did not materials and any related remediation obligations. In addi- have a material effect on WPC’s financial statements. tion, WPC’s leases generally require tenants to indemnify SFAS No. 142 primarily addresses the accounting for WPC from all liabilities and losses related to the leased goodwill and intangible assets subsequent to their acqui- properties with provisions of such indemnification sition and the accounting for asset acquisitions. The specifically addressing environmental matters. The leases provisions of SFAS No. 142 are effective for fiscal years generally include provisions that allow for periodic environ- beginning after December 15, 2001 and must be adopted mental assessments, paid for by the tenant, and allow WPC at the beginning of a fiscal year. SFAS No. 142 provides to extend leases until such time as a tenant has satisfied that goodwill and indefinite-lived intangible assets will no its environmental obligations. Certain of the leases allow longer be amortized but will be tested for impairment at WPC to require financial assurances from tenants such as least annually. Intangible assets acquired and liabilities performance bonds or letters of credit if the costs of reme- assumed in business combinations will only be amortized diating environmental conditions are, in the estimation of if such assets or liabilities are capable of being separated 24 W. P. Carey & Co. LLC or divided and sold, transferred, licensed, rented or ment loss (measured as of the beginning of the year of exchanged or arise from contractual or legal rights (includ- adoption), if any, and must be completed by the end of ing leases), and will be amortized over their useful lives. In WPC’s fiscal year. Intangible assets deemed to have an connection with the implementation of SFAS No. 142, WPC indefinite life will be tested for impairment using a one- performed its annual test for impairment in March 2002 step process which compares the fair value to the carrying of its management services segment, the reportable unit amount of the asset as of the beginning of the fiscal year. for measurement, and concluded that the carrying value In August 2001, the FASB issued SFAS No. 144 of goodwill is not impaired. “Accounting for the Impairment of Long-Lived Assets” WPC will adopt the provisions of SFAS No. 142 for the which addresses the accounting and reporting for the fiscal year beginning January 1, 2002. With the acquisi- impairment and disposal of long-lived assets and tion of the real estate management operations in 2000, supercedes SFAS No. 121 while retaining SFAS No. 121’s WPC allocated a portion of the purchase price to goodwill fundamental provisions for the recognition and measure- and other identifiable intangible assets. In adopting SFAS ment of impairments. SFAS 144 removes goodwill from its No. 142, WPC will discontinue amortization of existing scope, provides for a probability-weighted cash flow esti- goodwill and certain intangible assets. During the year mation approach for analyzing situations in which alterna- ended December 31, 2001, WPC recorded amortization tive courses of action to recover the carrying amount of charges of $4,597 which beginning January 1, 2002, will long-lived assets are under consideration and broadens the no longer be expensed under SFAS 142. presentation of discontinued operations to include a com- SFAS No. 142 requires that goodwill be tested annually ponent of an entity. The adoption of SFAS 144 will not for impairment using a two-step process. The first step is have a material effect on WPC’s financial statements; to identify a potential impairment and, in transition, this however, the revenues and expenses relating to an asset step must be measured as of the beginning of the fiscal held for sale or sold must be presented as a discontinued year. However, a company has six months from the date of operation for all periods presented. The provisions of adoption to complete the first step. The second step of the SFAS No. 144 are effective for fiscal years beginning after goodwill impairment test measures the amount of impair- December 15, 2001. www.wpcarey.com 25 R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S T O T H E B O A R D O F D I R E C T O R S A N D S H A R E H O L D E R S O F W . P. C A R E Y & C O . L L C In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 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 principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. New York, New York February 25, 2002 26 W. P. Carey & Co. LLC W. P. Carey & Co. LLC C O N S O L I D A T E D B A L A N C E S H E E T S In thousands except share amounts A S S E T S Real estate leased to others: Accounted for under the operating method, net of accumulated depreciation of $32,401 and $24,159 at December 31, 2001 and 2000 Net investment in direct financing leases Real estate leased to others Operating real estate, net of accumulated depreciation of $2,076 and $1,442 at December 31, 2001 and 2000 Real estate under construction and redevelopment Equity investments Assets held for sale Cash and cash equivalents Due from affiliates Goodwill and intangible assets, net of accumulated amortization of $17,862 and $5,958 at December 31, 2001 and 2000 Other assets, net of accumulated amortization of $1,095 and $1,971 at December 31, 2001 and 2000 and reserve for uncollected rent of $3,278 and $2,207 at December 31, 2001 and 2000 Total assets L I A B I L I T I E S , M I N O R I T Y I N T E R E S T A N D M E M B E R S ’ E Q U I T Y Liabilities: Mortgage notes payable Notes payable Accrued interest Dividends payable Due to affiliates Accrued taxes Deferred taxes Other liabilities Total liabilities Minority interest Commitments and contingencies Members’ Equity: Listed shares, no par value, 34,742,436 and 33,604,716 shares issued and outstanding at December 31, 2001 and 2000 Dividends in excess of accumulated earnings Unearned compensation Accumulated other comprehensive loss Total members’ equity DECEMBER 31, 2001 2000 $426,842 258,041 684,883 5,990 2,797 50,629 23,693 8,870 18,789 92,810 $414,006 287,876 701,882 6,502 13,359 47,224 2,573 10,165 7,945 94,183 27,422 $915,883 20,409 $904,242 $200,515 95,000 1,312 14,836 16,790 3,020 6,608 17,343 355,424 794 664,751 (97,200) (4,454) (3,432) 559,665 $196,094 94,066 2,655 14,182 15,308 2,688 1,336 15,038 341,367 802 644,749 (74,260) (5,291) (3,125) 562,073 Total liabilities, minority interest and members’ equity $915,883 $904,242 The accompanying notes are an integral part of the consolidated financial statements. www.wpcarey.com 27 W. P. Carey & Co. LLC C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S In thousands except share and per share amounts FOR THE YEARS ENDED DECEMBER 31, 2001 2000 1999 R E V E N U E S Rental income Interest income from direct financing leases Management income from affiliates Other interest income Other income Revenues of other business operations E X P E N S E S Interest Depreciation Amortization General and administrative Property expenses Impairment loss on real estate and investments Operating expenses of other business operations Termination of management contract Income (loss) before income from equity investments, gain (loss) on sale, minority interest and income taxes Income from equity investments Income (loss) before gain (loss) on sale, minority interest and income taxes Gain (loss) on sale of real estate and securities, net Income (loss) before minority interest and income taxes Minority interest in loss (income) Income (loss) before income taxes Provision for income taxes Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share Weighted average shares outstanding: Basic Diluted $ 47,763 31,808 46,911 1,023 5,962 5,944 139,411 21,603 10,532 13,857 29,345 7,325 12,643 4,671 — 99,976 39,435 2,827 42,262 1,948 44,210 68 44,278 (8,517) $ 35,761 1.04 $ $ 1.02 $ 52,086 33,572 25,271 452 2,626 6,244 120,251 27,437 13,508 6,935 16,487 5,644 11,047 4,920 38,000 123,978 (3,727) 2,882 (845) (2,752) (3,597) (1,517) (5,114) (4,164) $ (9,278) (.31) (.31) $ $ $46,719 33,842 — 962 1,208 5,775 88,506 19,567 10,457 8 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 $ 1.33 $ 1.33 34,465,217 29,652,698 25,596,793 34,952,560 29,652,698 25,596,793 The accompanying notes are an integral part of the consolidated financial statements. 28 W. P. Carey & Co. LLC W. P. Carey & Co. LLC C O N S O L I D A T E D S T A T E M E N T S O F M E M B E R S’ E Q U I T Y For the years ended December 31, 2001, 2000 and 1999 In thousands except share amounts Balance at January 1, 1999 Cash proceeds on issuance of shares, net Shares issued in connection with services rendered and properties acquired Dividends declared Repurchase of shares Comprehensive income: Net income Other comprehensive income: Change in unrealized appreciation (depreciation) of marketable securities Foreign currency translation adjustment Balance at December 31, 1999 Shares issued in connection with services rendered and properties acquired Shares issued in connection with acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Amortization of unearned compensation Repurchase of shares Cancellation of treasury shares Comprehensive loss: Net loss Other comprehensive income: Change in unrealized depreciation of marketable securities Foreign currency translation adjustment SHARES PAID-IN CAPITAL DIVIDENDS IN EXCESS OF ACCUMULATED EARNINGS UNEARNED COMPEN- SATION COMPRE- HENSIVE INCOME (LOSS) 25,343,402 $517,755 $ (2,803) 34,272 652 455,929 7,723 (62,300) (42,796) 34,039 $ 34,039 ACCUMULATED OTHER COMPREHEN- SIVE INCOME (LOSS) $ (719) TREASURY SHARES TOTAL $514,233 652 7,723 (42,796) (1,060) 34,039 $ (1,060) 497 (688) (191) $ 33,848 (191) (191) 25,771,303 526,130 (11,560) (910) (1,060) 512,600 226,290 3,169 8,104,673 124,630 347,100 (8,050) 6,311 (160) (836,600) (15,331) (53,422) $(6,311) 160 860 (9,278) $ (9,278) 3,169 124,630 — — (53,422) 860 (14,271) — (9,278) (14,271) 15,331 (1,155) (1,060) (2,215) $(11,493) (2,215) (2,215) Balance at 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. www.wpcarey.com 29 W. P. Carey & Co. LLC C O N S O L I D A T E D S T A T E M E N T S O F M E M B E R S’ E Q U I T Y ( c o n t i n u e d ) For the years ended December 31, 2001, 2000 and 1999 In thousands except share amounts Balance at December 31, 2000 Cash proceeds on issuance of shares, net Shares issued in connection with services rendered and properties acquired Shares issued in connection with acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Tax benefit of net operating loss—share incentive plans Amortization of unearned compensation Comprehensive income: Net income Other comprehensive income: Change in unrealized depreciation of marketable securities Foreign currency translation adjustment Balance at December 31, 2001 SHARES PAID-IN CAPITAL DIVIDENDS IN EXCESS OF ACCUMULATED EARNINGS UNEARNED COMPEN- SATION COMPRE- HENSIVE INCOME (LOSS) ACCUMULATED OTHER COMPREHEN- SIVE INCOME (LOSS) TREASURY SHARES TOTAL 33,604,716 $644,749 $(74,260) $(5,291) $(3,125) — $562,073 422,032 6,496 6,825 134 651,964 10,956 63,749 (6,850) 1,235 (117) (58,701) 1,298 (1,235) 117 1,955 35,761 $35,761 6,496 134 10,956 (58,701) 1,298 1,955 35,761 130 (437) (307) $35,454 (307) (307) 34,742,436 $664,751 $(97,200) $(4,454) $(3,432) — $559,665 The accompanying notes are an integral part of the consolidated financial statements. 30 W. P. Carey & Co. LLC W. P. Carey & Co. LLC C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S In thousands Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Amortization of deferred income Equity income in excess of distributions (Gain) loss 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 Impairment loss on real estate and investments Structuring fees receivable Provision for uncollected rents Costs paid by issuance of shares Writeoff of cumulative straight-line rent adjustment 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, equity investments 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 (used in) provided by investing activities Cash flows from financing activities: Dividends paid Contributions from (distributions to) minority interest Payments of mortgage principal Proceeds from mortgages and notes payable Prepayments of mortgages and notes payable 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 (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year FOR THE YEARS ENDED DECEMBER 31, 2001 $ 35,761 2000 $ (9,278) 1999 $ 34,039 25,191 (475) (232) (1,948) (68) (897) (11,489) 12,643 (6,915) 1,520 278 1,321 1,955 — 2,232 58,877 (23,290) (3,953) (520) 11,627 — — — 2,768 — — (13,368) (58,048) 204 (8,230) 97,627 (82,665) (1,874) 6,496 (325) — (46,815) 11 (1,295) 10,165 $ 8,870 21,309 (566) (180) 2,752 1,517 (1,831) (2,747) 11,047 (6,351) 743 1,482 — 860 38,000 1,511 58,268 (21,497) (2,078) (392) 45,617 — — — 1,732 17,544 212 41,138 (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) (16) (471) 2,664 (1,646) — 5,988 — 328 1,647 — — — (4,142) 48,186 (60,804) (3,784) — 9,631 (1,007) (3,676) 3,676 791 — — (55,173) (42,525) (2,344) (6,393) 74,251 (17,803) (1,744) 652 (627) (75) 3,392 219 (3,376) 5,673 $ 2,297 The accompanying notes are an integral part of the consolidated financial statements. www.wpcarey.com 31 W. P. Carey & Co. LLC C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S ( c o n t i n u e d ) In thousands Noncash operating, investing and financing activities: A. The purchase of Carey Management LLC in June of 2000 consisted of the acquisition of certain assets and liabilities at fair value in exchange for the issuance of listed shares as follows: Intangible assets and goodwill: Management contracts Trade name Workforce Goodwill Other assets and liabilities, net Listed shares issued Net cash acquired $ 97,135 4,700 4,900 22,356 129,091 (4,673) (124,630) 212 $ In connection with the acquisition, the Company has an obligation to issue up to an additional 2,000,000 shares over four years, if specified performance criteria are achieved. The performance criteria for the years ended December 31, 2001 and 2000 were achieved, and as a result 500,000 shares ($8,145) were issued during the year ended December 31, 2001 and 500,000 shares will be issued during 2002. At December 31, 2001, the cost of such issuable shares ($10,440) has been included in goodwill and accounts payable to affiliates. Effective January 1, 2001, the CPA® Partnerships became wholly-owned subsidiaries of the Company when 151,964 shares ($2,811) were issued in consideration for acquiring the remaining special partner interests. B. The Company issued 6,825, 181,644 and 203,166 restricted shares valued at $134, $2,424 and $3,311 in 2001, 2000 and 1999, respectively, to certain directors, officers and affiliates in consideration of service rendered. Restricted shares and stock options valued at $1,235 and $6,295 in 2001 and 2000, respectively, were issued to employees and recorded as unearned compensation of which $117 and $160, respectively, was forfeited in 2001 and 2000. $1,955 and $860 of unearned compensation in 2001 and 2000, respectively, has been amortized and recorded as compensation expense. C. In connection with the acquisition of real estate interests in 2000 and 1999, the Company issued shares valued at $778 and $4,412, respectively, and in 1999 assumed mortgage obligations of $6,098. D. In 2001, the Company sold a property in Arkansas leased to Duff-Norton Company, Inc. for approximately $9,400 and placed the funds in an escrow account for the purpose of entering into a Section 1031 noncash exchange which, under the Internal Revenue Code, would allow the Company to acquire like-kind property, and defer a taxable gain. The funds were released from escrow in 2002. The Company also received a note of $700 in partial consideration for the sale of a property. In connection with the disposition of a property in Topeka, Kansas in 1999, the property was transferred to the pur- chaser 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 $(7,654) 8,107 (373) 80 $ Gain on sale E. During 2001 the Company purchased an equity interest in an affiliate, W. P. Carey International, LLC, in consideration for issuing a promissory note of $1,000. The accompanying notes are an integral part of the consolidated financial statements. 32 W. P. Carey & Co. LLC W. P. Carey & Co. LLC C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S ( c o n t i n u e d ) In thousands S U P P L E M E N T A L C A S H F L O W S I N F O R M A T I O N Interest paid, net of amounts capitalized Income taxes paid 2001 $22,144 $ 1,615 2000 $24,790 $ 1,437 1999 $20,055 659 $ The accompanying notes are an integral part of the consolidated financial statements. www.wpcarey.com 33 W. P. Carey & Co. LLC N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S All amounts in thousands except share and per share amounts 1 . O R G A N I Z A T I O N initial 8,000,000 shares issued are restricted from resale W. P. Carey & Co. LLC (the “Company”) (formerly known as for a period of up to three years and the additional shares Carey Diversified LLC) commenced operations on January 1, are subject to Section 144 regulations. The acquisition of 1998, pursuant to a consolidation transaction, when the the interests in Carey Management was accounted for as Company acquired the majority ownership interests in the a purchase and was recorded at the fair value of the initial nine Corporate Property Associates (“CPA®”) Partnerships. 8,000,000 shares issued. The total initial purchase price The former General Partner interests in the CPA® was approximately $131,300 including the issuance of Partnerships were retained by two special limited part- 8,000,000 shares, transaction costs of $2,605, the acqui- ners, William Polk Carey, formerly the Individual General sition of Carey Management’s special limited partnership Partner of the nine CPA® Partnerships, and Carey minority interests in the CPA® Partnerships and the value Management LLC (“Carey Management”). of restricted shares and options issued in respect of the On June 28, 2000 the Company acquired the net lease interests of certain officers in a non-qualified deferred real estate management operations of Carey Management compensation plan of Carey Management. The Company subsequent to receiving shareholder approval. The assets has guaranteed loans of $8,793 to these officers in connec- acquired include the Advisory Agreements with four affili- tion with their acquisition of equity interests in the ated publicly owned real estate investment trusts (the Company. The loans are collateralized by shares of WPC “CPA® REITs”), the Company’s Management Agreement, owned by the officers and held by WPC. the stock of an affiliated broker-dealer, investments in the The purchase price has been allocated to the assets and common stock of the CPA® REITs, and certain office furni- liabilities acquired based upon their fair market values. ture, fixtures, equipment and employees required to carry Intangible assets acquired, including the Advisory Agree- on the business operations of Carey Management. The pur- ments with the CPA® REITs, the Company’s Management chase price consisted of the initial issuance of 8,000,000 Agreement, the trade name, and workforce, were determined shares with an additional 2,000,000 shares issuable over pursuant to an independent valuation. The value of the four years if specified performance criteria are achieved Advisory Agreements and the Management Agreement (of which 500,000 shares valued at $8,145 were issued were based on a discounted cash flow analysis of the during 2001 and 500,000 shares valued at $10,440 will projected fees. The excess of the purchase price over the be issued in 2002 based on meeting performance criteria fair values of the identified tangible and intangible assets, as of December 31, 2000 and 2001, respectively). The has been recorded as goodwill. The acquisition of the 34 W. P. Carey & Co. LLC Company’s Management Agreement was accounted for as a the reported amounts of revenues and expenses during the contract termination and the fair value of the Management reporting period. The most significant estimates relate to Agreement of $38,000 was expensed as of the date of the the assessment of recoverability of real estate, intangible merger. For financial reporting purposes, the value of any assets and goodwill. Actual results could differ from additional shares issued under the acquisition agreement those estimates. is recognized as additional purchase price and recorded as goodwill. Issuances based on performance criteria are Real Estate Leased to Others valued based on the market price of the shares on the date Real estate is leased to others on a net lease basis, whereby when the performance criteria are achieved. the tenant is generally responsible for all operating expenses Effective January 1, 2001, the Company acquired all relating to the property, including property taxes, insur- remaining minority interests in the CPA® Partnerships ance, maintenance, repairs, renewals and improvements. by issuing 151,964 shares at $18.50 per share ($2,811) Expenditures for maintenance and repairs including rou- to the remaining special limited partner of the CPA® tine betterments are charged to operations as incurred. Partnerships, William Polk Carey. The acquisition price Significant renovations which increase the useful life of was determined pursuant to an independent valuation of the properties are capitalized. the CPA® Partnerships as of December 31, 2000. The Company diversifies its real estate investments among various corporate tenants engaged in different 2 . S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S industries and by property type. No lessee currently repre- Basis of Consolidation sents 10% or more of total leasing revenues. The leases are The consolidated financial statements include the Company accounted for under either the direct financing or operat- and its wholly-owned and majority-owned subsidiaries ing methods. Such methods are described below (also see including the CPA® Partnerships. All material inter-entity Notes 4 and 5): transactions have been eliminated. Direct financing method — Leases accounted for under Use of Estimates the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and The preparation of financial statements in conformity with amortized to income over the lease terms so as to produce accounting principles generally accepted in the United a constant periodic rate of return on the Company’s net States of America requires management to make estimates investment in the lease. and assumptions that affect the reported amounts of Operating method — Real estate is recorded at cost less assets and liabilities and disclosure of contingent assets accumulated depreciation, minimum rental revenue is and liabilities at the date of the financial statements and recognized on a straight-line basis over the term of the www.wpcarey.com 35 related leases and expenses (including depreciation) are Equity Investments charged to operations as incurred. The Company’s interests in entities in which the Company’s Substantially all of the Company’s leases provide for ownership is 50% or less and the Company exerts signifi- either scheduled rent increases, periodic rent increases cant influence are accounted for under the equity method, based on formulas indexed to increases in the Consumer i.e. at cost, increased or decreased by the Company’s pro Price Index (“CPI”) or sales overrides. Rents from sales rata share of earnings or losses, less distributions. overrides (percentage rents) are recognized as reported by the lessees, that is, after the level of sales requiring Assets Held for Sale a rental payment to the Company is reached and are Assets held for sale are accounted for at the lower of carry- included in the accompanying consolidated financial state- ing value or fair value, less costs to dispose. Assets are ments in rental income and interest income from direct classified as held for sale when the Company has commit- financing leases. ted to a plan to actively market a property for sale and expects that a sale will be completed within one year. Operating Real Estate The Company recognizes gains and losses on the sale of Land and buildings and personal property are carried at properties when among other criteria, the parties are bound cost less accumulated depreciation. Renewals and improve- by the terms of the contract, all consideration has been ments are capitalized, while replacements, maintenance exchanged and all conditions precedent to closing have been and repairs that do not improve or extend the lives of the performed. At the time the sale is consummated, a gain or respective assets are expensed as incurred. loss is recognized as the difference between the sale price less any closing costs and the carrying value of the property. Real Estate Under Construction and Redevelopment For properties under construction, operating expenses Goodwill and Intangible Assets including interest charges are capitalized rather than Goodwill represents the excess of the purchase price of the expensed and rentals received are recorded as a reduction net lease real estate management operations over the fair of capitalized project (i.e., construction) costs. value of net assets acquired. Other intangible assets repre- The amount of interest capitalized is determined by sent cost allocated to trade names, advisory contracts with applying the interest rate applicable to outstanding bor- the CPA® REITs and the acquired workforce. Intangible rowings on the line of credit to the average amount of assets are being amortized over their estimated useful accumulated expenditures for properties under construc- lives which range from 21/ 2 to 161/ 2 years. (See Note 18.) tion during the period. 36 W. P. Carey & Co. LLC Goodwill and intangible assets are as follows: currency for these investments will be the Euro. The trans- Management contracts Workforce Trade name Goodwill Less accumulated amortization DECEMBER 31, 2001 $ 59,135 4,700 4,900 41,937 110,672 17,862 $ 92,810 2000 $ 59,135 4,700 4,900 31,406 100,141 lation 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 compre- 5,958 hensive income as part of members’ equity. The cumulative $ 94,183 translation loss as of December 31, 2001 was $2,668. Goodwill and Long-Lived Assets Cash Equivalents When events or changes in circumstances indicate that The Company considers all short-term, highly liquid the carrying amount may not be recoverable, the Company investments that are both readily convertible to cash and assesses the recoverability of its goodwill and long-lived have a maturity of generally three months or less at the assets, including residual interests of real estate assets time of purchase to be cash equivalents. Items classified and investments and certain intangible assets, based on as cash equivalents include commercial paper and money projections of undiscounted cash flows, without interest market funds. Substantially all of the Company’s cash and charges, over the life of such assets. In the event that such cash equivalents at December 31, 2001 and 2000 were cash flows are insufficient, the assets are adjusted to their held in the custody of three financial institutions and estimated fair value. which balances, at times, exceed federally insurable limits. The Company mitigates this risk by depositing funds with Depreciation major financial institutions. Depreciation is computed using the straight-line method over the estimated useful lives of the properties (generally Other Assets and Liabilities forty years) and for furniture, fixtures and equipment Included in other assets are accrued rents and interest (generally up to seven years). receivable, deferred rent receivable, deferred charges and marketable securities. Included in other liabilities are Foreign Currency Translation accrued interest, accounts payable and accrued expenses The Company consolidates its real estate investments in and deferred income taxes. Deferred charges include costs France. The functional currency for these investments is incurred in connection with debt financing and refinanc- the French Franc. Effective January 1, 2002, the functional ing and are amortized and included in interest expense www.wpcarey.com 37 over the terms of the related debt obligations. Deferred earned for investment banking services provided in con- rent receivable is the aggregate difference for operating nection with the analysis, negotiation and structuring of method leases between scheduled rents which vary during transactions, including acquisitions and dispositions and the lease term and rent recognized on a straight-line the placement of mortgage financing obtained by the CPA® basis. Also included in deferred rent receivable are lease REITs. Asset-based fees consist of property management, restructuring fees received which are recognized over the leasing and advisory fees and reimbursement of certain remainder of the initial lease terms. expenses in accordance with the separate management Marketable securities are classified as available-for-sale agreements with each CPA® REIT for administrative ser- securities and reported at fair value with the Company’s vices provided for operation of such CPA® REIT. Receipt of interest in unrealized gains and losses on these securities the incentive fee portion of the management fee, however, reported as a component of other comprehensive income is subordinated to the achievement of specified cumulative until realized. Such marketable securities had a cost basis return requirements by the shareholders of the CPA® of $1,124 and $1,362 and reflected a fair value of $363 REITs. The incentive portion of management fees (“the and $470 at December 31, 2001 and 2000, respectively. performance fees”) may be collected in cash or shares of the CPA® REIT at the option of the Company. During 2001, Due to Affiliates the Company elected to receive its earned performance Included in due to affiliates are deferred acquisition fees fees in CPA® REIT shares. and amounts related to issuable shares for meeting the All fees are recognized as earned. Transaction fees are performance criteria in connection with the acquisition of earned upon the consummation of a transaction and man- Carey Management. Deferred acquisition fees are payable agement fees are earned when services are performed. for services provided by Carey Management prior to the Fees subject to subordination are recognized only when termination of the Management Contract, relating to the the contingencies affecting the payment of such fees are identification, evaluation, negotiation, financing and resolved, that is, when the performance criteria of the purchase of properties. The fees are payable in eight equal CPA® REIT is achieved. annual installments each January 1 following the first The Company also receives reimbursement of certain anniversary of the date a property was purchased. marketing costs in connection with the sponsorship of a Revenue Recognition ing. Reimbursement income is recorded as the expenses CPA® REIT that is conducting a “best efforts” public offer- In connection with the acquisition of Carey Management are incurred. described in Note 1, the Company earns transaction and asset-based fees. Structuring and financing fees are 38 W. P. Carey & Co. LLC Income Taxes tain income and expense items for financial reporting and The Company is a limited liability company and has tax reporting purposes. Income taxes are computed under elected partnership status for federal income tax purposes. the asset and liability method. The asset and liability The Company is not liable for federal income taxes as each method requires the recognition of deferred tax liabilities member recognizes his or her proportionate share of and assets for the expected future tax consequences of income or loss in his or her tax return. Certain wholly- temporary differences between tax bases and financial owned subsidiaries are not eligible for partnership status bases of assets and liabilities (see Note 16). and, accordingly, all tax liabilities incurred by these sub- sidiaries do not pass through to the members. Accordingly, Earnings Per Share the provision for federal income taxes is based on the The Company presents both basic and diluted earnings results of those consolidated corporate subsidiaries that per share (“EPS”). Basic EPS excludes dilution and is com- do not pass through any share of income or loss to members. puted by dividing net income available to shareholders by The Company is subject to certain state and local taxes. the weighted average number of shares outstanding for the Deferred income taxes are provided for the corporate sub- period. Diluted EPS reflects the potential dilution that sidiaries based on earnings reported. The provision for could occur if securities or other contracts to issue shares income taxes differs from the amounts currently payable were exercised or converted into common stock, where such because of temporary differences in the recognition of cer- exercise or conversion would result in a lower EPS amount. Basic and diluted earnings (loss) per share were calculated as follows: Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 1 Basic earnings Effect of dilutive securities — stock options and warrants Diluted earnings Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 0 Basic and diluted net loss Y E A R E N D E D D E C E M B E R 3 1 , 1 9 9 9 Basic and diluted net earnings NET INCOME (LOSS) BASIC AND DILUTED WEIGHTED SHARES OUTSTANDING PER SHARE AMOUNT $35,761 34,465,217 $1.04 $35,761 487,343 34,952,560 $1.02 $ (9,278) 29,652,698 $ (.31) $34,039 25,596,793 $1.33 www.wpcarey.com 39 For the years ended 2000 and 1999, 4,143,254 and three and four years, respectively. Compensation cost for 3,199,280 share options, respectively, were not reflected share plans was $1,955 and $860 in 2001 and 2000, because such options were anti-dilutive, either because the respectively. No compensation cost was recognized in exercise prices of the options were higher than the average 1999 in connection with the Company’s share plans. share price or because the Company incurred a net loss. All transactions with non-employees in which the The Company repurchased 836,600 and 62,300 of its Company issues stock as consideration for services shares outstanding during 2000 and 1999, respectively, in received are accounted for based on the fair value of the connection with an announcement in December 1999 that stock issued or services received, whichever is more it would purchase up to 1,000,000 shares. reliably determinable. Stock Based Compensation Reclassification The Company accounts for stock-based compensation Certain prior year amounts have been reclassified to con- using the intrinsic value method prescribed in Accounting form to the current year financial statement presentation. Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB 3 . T R A N S A C T I O N S W I T H R E L A T E D PA R T I E S No. 25”). Under APB No. 25, compensation cost is mea- As described in Note 1, the Company’s Management sured as the excess, if any, of the quoted market price of Agreement with Carey Management was cancelled effective the Company’s shares at the date of grant over the exercise with the acquisition of the business operations of Carey price of the option granted. Management. The Company is now internally managed The Company has granted restricted shares and stock and, as a result of the cancellation of the Management options to substantially all employees. Shares were Agreement and acquisition of Carey Management’s work- awarded in the name of the employee, who has all the force as of the date of the acquisition, no longer incurs rights of a shareholder, subject to certain restrictions of management and performance fees nor reimburses a transferability and a risk of forfeiture. The forfeiture pro- manager for general and administrative reimbursements, visions on the awards expire annually, over periods of four primarily consisting of the manager’s cost of providing and three years for the shares and stock options, respec- administration to the operation of the Company. For the tively. Shares and stock options subject to forfeiture provi- years ended 2000 and 1999, the Company incurred com- sions have been recorded as unearned compensation and bined management and performance fees of $1,924 and are presented as a separate component of members’ equity. $3,025, respectively, and general and administrative costs Compensation cost for stock options and restricted stock, of $861 and $1,457, respectively. if any, is recognized ratably over the vesting period of 40 W. P. Carey & Co. LLC Under the Advisory Agreements with the CPA® REITs, 2000, the Company earned transaction fees of $17,160 the Company performs various services, including but not and $14,894, respectively. limited to the day-to-day management of the CPA® REITs In connection with the acquisition of the majority and transaction-related services. In addition, the Company’s interests in the CPA® Partnerships on January 1, 1998 broker-dealer subsidiary earns fees in connection with the described in Note 1, a CPA® Partnership had not achieved on-going “best efforts” public offering of CPA®:15. The the specified cumulative return as of the acquisition date. Company earns an asset management fee of 1/ 2 of 1% per The subordinated preferred return was payable only if the annum of Average Invested Assets, as defined in the Company achieved a closing price equal to or in excess of Advisory Agreements, for each CPA® REIT and, based upon $23.11 for five consecutive trading days. On December 31, specific performance criteria for each REIT, may be entitled 2001, the closing price criterion was met, and the $1,423 to receive performance fees, calculated on the same basis subordinated preferred return was paid in January of as the asset management fee, and is reimbursed for certain 2002. Such amount is included in due to affiliates. costs, primarily the cost of personnel. The performance cri- Prior to the termination of the Management Agreement, teria for CPA®:14 were initially satisfied in 2001, resulting Carey Management performed certain services for the in the Company’s recognition of $2,459 for the period Company and earned transaction fees in connection with December 1997 through December 31, 2000 which had the purchase and disposition of properties. Transaction been deferred. For the years ended December 31, 2001 and fees paid to Carey Management and affiliates were $1,832 2000, asset-based fees and reimbursements earned were in 1999. The Company is also obligated to pay deferred $29,751 and $10,377, respectively. acquisition fees in equal annual installments over a period In connection with structuring and negotiating acquisi- of no less than eight years. As of December 31, 2001 and tions and related mortgage financing for the CPA® REITs, 2000, unpaid deferred acquisition fees were $3,282 and the Advisory Agreements provide for transaction fees $3,802, respectively, and bear interest at an annual rate of based on the cost of the properties acquired. A portion of 6%. Installments of $520 and $392 were paid in January the fees are payable in equal annual installments over no 2001 and 2002, respectively. less than eight years, subject to certain limitations. Such The Company owns a 33.93% interest in a real estate unpaid amounts bear interest at an annual rate of 6% or venture with an affiliate in which the ownership of real 7%. The Company may also earn fees related to the disposi- property is held directly by each investor and not through tion of properties, subject to subordination provisions and an incorporated or unincorporated jointly held affiliate. will only be recognized as such subordination provisions Title to these properties is held by each investor as tenants are achieved. For the years ended December 31, 2001 and in common. The ownership interest satisfies the criteria for accounting as undivided interests in real property www.wpcarey.com 41 including: investors in the venture hold an undivided inter- 4 . R E A L E S T A T E L E A S E D T O O T H E R S A C C O U N T E D est in each asset, investors are severally liable for any lia- F O R U N D E R T H E O P E R A T I N G M E T H O D bility, there is no joint control, investors are only entitled Real estate leased to others, at cost, and accounted for to their proportionate share of income and are liable for under the operating method is summarized as follows: their share of expenses and each investor may sell its interest without the consent of the other investor. For this investment, the Company reports its proportionate share of the assets, liabilities and expenses in the accompanying consolidated financial statements. The joint venture is not subject to joint control. The Company also owns interests in affiliates which are accounted for under the equity method (see Note 11). Land Buildings and improvements Less: Accumulated depreciation DECEMBER 31, 2001 $ 84,199 375,044 459,243 32,401 $426,842 2000 $ 86,134 352,031 438,165 24,159 $414,006 The Company is a participant in an agreement with cer- The scheduled future minimum rents, exclusive of tain affiliates for the purpose of leasing office space used renewals, under noncancelable operating leases amount for the administration of the Company and other affiliated to $45,300 in 2002, $38,098 in 2003, $34,009 in 2004, real estate entities and sharing the associated costs. $30,518 in 2005, $27,901 in 2006, and aggregate Pursuant to the terms of the agreement, the Company’s $275,665 through 2018. share of rental, occupancy and leasehold improvement Contingent rentals (including percentage rents and costs is based on gross revenues. Expenses incurred were CPI-based increases) were $815, $621 and $563 in 2001, $528, $348 and $545 in 2001, 2000 and 1999, respec- 2000 and 1999, respectively. tively. The Company’s share of minimum lease payments on the office lease is currently $2,257 through 2006. 5 . N E T I N V E S T M E N T I N D I R E C T F I N A N C I N G L E A S E S An independent director of the Company has an owner- Net investment in direct financing leases is summarized ship interest in companies that own the minority interest as follows: 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 compa- nies. An officer of the Company is the sole shareholder of Livho, Inc., a lessee of the Company (see Note 8). Minimum lease payments receivable Unguaranteed residual value Less: Unearned income DECEMBER 31, 2001 2000 $236,997 $348,316 254,520 491,517 233,476 $258,041 284,843 633,159 345,283 $287,876 42 W. P. Carey & Co. LLC The scheduled future minimum rents, exclusive of The Company has a line of credit of $185,000 pursuant renewals, under noncancelable direct financing leases to a revolving credit agreement with The Chase Manhattan amount to $24,745 in 2002, $24,668 in 2003, $24,189 in Bank in which numerous lenders participate. The Company 2004, $22,092 in 2005, $20,634 in 2006, and aggregate has a one-time right to increase the commitment up to $236,997 through 2018. $225,000. The revolving credit agreement has a remaining Contingent rentals (including percentage rents and term through March 2004. As of December 31, 2001, the CPI-based increases) were approximately $1,345, $1,491 Company had $95,000 drawn from the line of credit. No and $995 in 2001, 2000 and 1999, respectively. additional advances have been drawn from the line of credit since December 31, 2001, and as of March 15, 2002, 6 . M O R T G A G E N O T E S PA Y A B L E A N D N O T E S PA Y A B L E the outstanding balance was $81,000. Mortgage notes payable, substantially all of which are lim- Advances, which are prepayable at any time, bear inter- ited recourse obligations, are collateralized by the assign- est at an annual rate of either (i) the one, two, three or six- ment of various leases and by real property with a carrying month LIBOR, as defined, plus a spread which ranges from value of approximately $367,894. 0.6% to 1.45% depending on leverage or corporate credit The interest rate on the variable rate debt as of rating or (ii) the greater of the bank’s Prime Rate and the December 31, 2001 ranged from 4.56% to 6.44% and Federal Funds Effective Rate, plus .50%, plus a spread mature from 2004 to 2015. The interest rate on the fixed of up to .125% depending upon the Company’s leverage. rate debt as of December 31, 2001 ranged from 5.92% to At December 31, 2001 and 2000, the average interest rate 10% and mature from 2002 to 2015. on advances on the line of credit was 3.22% and 7.86%, Scheduled principal payments for the mortgage notes respectively. In addition, the Company will pay a fee and notes payable during each of the next five years follow- (a) ranging between 0.15% and 0.20% per annum of the ing December 31, 2001 and thereafter are as follows: unused portion of the credit facility, depending on the YEAR ENDING DECEMBER 31, 2002 2003 2004 2005 2006 Thereafter Total TOTAL DEBT $ 10,370 11,224 123,438 9,453 27,114 113,916 FIXED RATE DEBT $ 9,444 10,266 27,412 8,394 25,947 98,557 $ VARIABLE RATE DEBT 926 958 96,026 1,059 1,167 15,359 Company’s leverage, if no minimum credit rating for the Company is in effect or (b) equal to .15% of the total com- mitment amount, if the Company has obtained a certain minimum credit rating. The revolving credit agreement has financial covenants that require the Company to (i) maintain minimum equity $295,515 $180,020 $115,495 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. www.wpcarey.com 43 Such operating and coverage ratios include, but are not limited 7 . D I V I D E N D S PA Y A B L E to, (a) ratios of earnings before interest, taxes, depreciation The Company declared a quarterly dividend of $0.427 per and amortization to fixed charges for interest and (b) ratios share on December 12, 2001 payable on January 15, 2002 of net operating income, as defined, to interest expense. to shareholders of record as of December 31, 2001. The Company’s operations consist of the investment in and the leasing of industrial and commercial real estate. The financial reporting sources of the lease revenues for the years ended December 31, 2001, 2000 and 1999 are as follows: 8 . L E A S E R E V E N U E S Per Statements of Income: Rental income Interest income from direct financing leases Adjustment: Share of leasing revenues applicable to minority interests Share of leasing revenues from equity investments 2001 2000 1999 $47,763 31,808 (536) 6,820 $85,855 $52,086 33,572 (443) 3,679 $88,894 $46,719 33,842 (460) 2,680 $82,781 44 W. P. Carey & Co. LLC For the years ended December 31, 2001, 2000 and 1999, the Company earned its net leasing revenues (i.e., rental income and interest income from direct financing leases) from over 80 lessees. A summary of net leasing revenues includ- ing all current lease obligors with more than $1,000 in annual revenues is as follows: YEARS ENDED DECEMBER 31, Dr Pepper Bottling Company of Texas Detroit Diesel Corporation Gibson Greetings, Inc. Federal Express Corporation(a) Orbital Sciences Corporation Livho, Inc. Quebecor Printing Inc. America West Holdings Corp. Thermadyne Holdings Corp. Saint-Gobain Performance Plastics Corporation (formerly Furon Company) AutoZone, Inc. The Gap, Inc. Sybron International Corporation Lockheed Martin Corporation CheckFree Holdings, Inc.(b) Unisource Worldwide, Inc. Information Resources, Inc.(b) AP Parts International, Inc. Sybron Dental Specialties Inc. CSS Industries, Inc. Peerless Chain Company Brodart Co. Red Bank Distribution, Inc. Sprint Spectrum L.P. BellSouth Telecommunications, Inc. Eagle Hardware & Garden, Inc. United States Postal Service Cendant Operations, Inc. Other(c) 2001 $ 4,354 4,118 4,107 2,836 2,655 2,568 2,559 2,539 2,525 2,415 2,400 2,205 2,164 2,100 2,088 1,734 1,644 1,617 1,613 1,609 1,561 1,519 1,493 1,380 1,224 1,186 1,165 1,075 25,402 % 5% 5 5 3 3 3 3 3 3 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 29 2000 $ 4,283 3,795 4,046 5,659 2,655 3,226 2,586 2,539 2,477 2,415 2,378 2,205 2,164 2,056 1,681 1,725 1,504 1,617 1,463 1,598 1,463 1,519 1,475 1,154 1,224 1,288 1,090 1,075 26,534 % 5% 4 5 6 3 4 3 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 2 1 1 2 1 1 28 1999 $ 4,123 3,658 3,954 247 2,311 3,226 2,552 1,839 2,243 2,415 2,331 2,205 2,181 2,217 737 1,726 1,458 1,617 1,446 1,588 1,463 1,519 1,401 1,154 175 1,387 1,090 634 29,884 % 5% 4 5 — 3 4 3 2 3 3 3 3 3 3 1 2 2 2 2 2 2 2 2 1 — 2 1 1 34 $85,855 100% $88,894 100% $82,781 100% (a) Represents the Company’s 40% proportionate share of lease revenues from its equity ownership in 2001. The Company owned a 100% interest until December 2000. (b) Represents the Company’s proportionate share of lease revenue from its equity investment. (c) Includes proportionate share of lease revenues from the Company’s equity investments and net of proportionate share applicable to its minority interest owners. www.wpcarey.com 45 9 . G A I N S A N D L O S S E S O N S A L E O F $77,000. In February 2000, a net lease with Federal R E A L E S T A T E A N D S E C U R I T I E S Express with an initial lease term of 20 years commenced Significant sales of properties are summarized as follows: at an annual rent of $6,360. In order to mitigate the con- 2001 centration of risk in a single lease, the Company agreed to sell a 60% majority interest in the subsidiary that owns In March 2001, the Company sold its property in Sterling, the Federal Express property to an affiliate, Corporate Massachusetts, leased to High Voltage Corporation for Property Associates 14 Incorporated (“CPA®:14”), at a $5,731, net of costs, and recognized a gain of $42. purchase price based on an independent appraisal. Based In July, 2001, the Company sold a property in Arkansas on such independent appraisal, the Company received leased to Duff-Norton Company, Inc. (“Duff-Norton”) for $42,287 and recognized a loss of $2,262 in connection approximately $9,400, and recognized a gain of $304. The with the sale. Company placed the proceeds of the Duff-Norton sale in During 2000, the Company sold ten properties formerly an escrow account for the purpose of entering into a leased to The Kobacker Stores, Inc. a property formerly Section 1031 noncash exchange which, under the Internal leased to AutoZone, Inc. located in Pensacola, Florida, Revenue Code, would allow the Company to acquire like- a property in Silver City, New Mexico and a property in kind property, and defer a taxable gain until the new Carthage, New York. In connection with the sales, the property is sold, upon satisfaction of certain conditions. Company received $3,372, net of costs, and incurred In January 2002, the funds in the escrow account were combined losses on the sales of $775. transferred to the Company as the proposed exchange was The Company recognized a gain of $257 on the sale of not completed. Accordingly, a gain of approximately $8,900 18,540 shares of common stock of Titan Corporation. will be recognized for federal income tax purposes in 2002. The Company had previously exercised warrants that were The Company sold eight other properties and an equity granted in connection with structuring its net lease with investment in a real estate partnership in 2001 for $6,330 Titan Corporation in 1991. (including $5,630 in cash and a note receivable of $700) and recognized a combined net gain of $1,558 on the sales. 1999 2000 In 1999, the Company sold its property in Topeka, Kansas, leased to Hotel Corporation of America (“Hotel Corp.”) and In 1998, the Company acquired land in Colliersville, its property in Hazelwood, Missouri leased to KSG, Inc. for Tennessee and entered into a build-to-suit commitment to $8,107 and $11,000, respectively pursuant to Hotel Corp.’s construct four office buildings to be occupied by Federal exercise of its purchase option. In connection with the Express Corporation (“Federal Express”) at a cost of up to sales, the Company recognized a combined $471 gain. 46 W. P. Carey & Co. LLC 1 0 . I M PA I R M E N T O F R E A L E S T A T E $1,500 was recognized. In 2001, the Company entered into A N D I N V E S T M E N T S an agreement to sell the property for $2,200. In connection Significant writedowns of properties and investments with the proposed sale of the property, the Company recog- to estimated fair value based on an assessment of each nized an impairment loss of $763 in 2001 to writedown asset’s recoverability are summarized as follows: the property to the anticipated sales price, less estimated The Company incurred impairment losses of $12,643, costs to sell. The sale was completed in January 2002. In $11,047 and $5,988 in 2001, 2000 and 1999, respectively, connection with termination of the General Cinema lease, in connection with the writedown of real estate interests the Company received $2,450 as a settlement from and other long-lived assets to estimated fair value based Harcourt General Corporation, the lease guarantor, of on the following: which $2,145 is included in other income in 2001. The Company owns 780,269 units of the operating part- In November 2001, the Company evicted Red Bank nership of MeriStar Hospitality Corporation (“MeriStar”), Distribution, Inc. (“Red Bank”) due to Red Bank’s inability a publicly traded real estate investment trust which pri- to meet its lease obligations and the Company assumed marily owns hotels. In 1999, the Company recognized an the management of public warehousing operations at the impairment charge of $4,830. Because of a continued and property. The Company has recognized an impairment prolonged weakness in the hospitality industry, a sub- charge of $2,000 on the writedown of the property to its stantial decrease in MeriStar’s earnings and funds from estimated fair value. In connection with the eviction, the operations and the risk that the decrease in MeriStar’s Company and Red Bank have an agreement-in-principle to distribution rate are projected to continue, the Company terminate the lease and to release the Company from a concluded that the underlying value of its investment in subordinated mortgage loan of $2,097 in which Red Bank the operating partnership units has undergone an other is the mortgagee. than temporary impairment. Accordingly, the Company DeVlieg Bullard, Inc., the former lessee of properties wrote down its equity investment in MeriStar by $6,749 in in Frankenmuth, Michigan and McMinnville, Tennessee 2001 to reflect the investment at its estimated fair value terminated its master lease for the two properties in con- based on MeriStar’s share price at December 31, 2001. nection with its petition of voluntary bankruptcy in 1999. The Company leased a property in Burnsville, The Company recognized impairment losses on the Minnesota to General Cinema Corporation (“General McMinnville property of $500 and $2,677 for 2001 and Cinema”). During 2000, General Cinema filed a petition of 2000, respectively. voluntary bankruptcy, and in March 2001 the lease was The Company owns a property in Garland, Texas leased terminated. During 2000, the property had been written to Varo, Inc. (“Varo”). The lease ends in October 2002 and down to its estimated fair value and an impairment loss of although Varo continues to meet its lease obligations, the www.wpcarey.com 47 property is vacant. As a result, the Company is actively As of December 31, 2001, the Company has classified remarketing the property. The property was written down seven properties as assets held for sale which the Company to its estimated fair value and an impairment loss of anticipates selling within one year, including three which $2,238 was recognized in 2000. have been sold since December 31, 2001. Operating income The Company owns a property in Traveler’s Rest, South from the properties was $469 and the effect of suspending Carolina formerly leased to Swiss-M-Tex L.P. (“M-Tex”). depreciation expense as a result of reclassification was $5. Based on M-Tex’s weak financial condition and its inability to meet its lease obligations, the lease was terminated in 1 1 . E Q U I T Y I N V E S T M E N T S 2000. M-Tex was subsequently liquidated. The property The Company owns 780,269 units of the operating part- was written down to its estimated fair value and an impair- nership of MeriStar Hospitality Corporation (“MeriStar”), ment loss of $2,657 was recognized during 2000. a publicly traded real estate investment trust which pri- In 2001 and 2000, the Company also recorded impair- marily owns hotels. The Company has the right to convert ment losses of $850 and $1,514, respectively, on its its units in the operating partnership to shares of common assessments of the recoverability of a redeemable pre- stock in MeriStar at any time on a one-for-one basis. The ferred limited partnership interest that was acquired in exchange of units for common stock would be a taxable connection with the sale of a property in 1995 and deben- transaction in the year of exchange. The Company’s tures received in connection with a bankruptcy settlement interest in the MeriStar operating partnership is being with a former lessee. accounted for under the equity method. The carrying value The Company owned a property in Carthage, New York of the equity interest in the MeriStar operating partner- which was leased to Sunds Defibrator, Inc. (“Sunds”). ship was $11,000 and $18,889 as of December 31, 2001 During 1999, the Company accepted offers to sell the prop- and 2000, respectively (also see Note 10). erty for $300 and to receive a lease termination payment The audited consolidated financial statements of of $500, payable at the time of sale. In connection with the MeriStar filed with the United States Securities and proposed sale, the Company recognized an impairment Exchange Commission (“SEC”) reported total assets of loss of $1,000 on the writedown of the property to the $3,009,860 and $3,013,008 and shareholders’ equity of anticipated sales price, less estimated costs to sell. The $1,022,563 and $1,134,555 as of December 31, 2001 and property was subsequently sold in 2000. 2000, respectively, and revenues of $1,084,888, $400,778 In connection with the anticipated sale of four proper- and $374,904 and net (loss) income of $(42,762), ties in 2002, the Company has recognized impairment $105,861 and $98,964 for the years ended December 31, losses of $1,781 in 2001 on the writedown of the properties 2001, 2000 and 1999, respectively. to their anticipated sales price, less estimated costs to sell. 48 W. P. Carey & Co. LLC The Company owns equity interests as a limited partner Combined financial information of the affiliated equity in two limited partnerships and in two limited liability investees is summarized as follows: companies, with the remaining interests owned by affiliates, that each own real estate net leased to a single tenant. The Company also purchased a 10% interest in W. P. Carey International, LLC (“WPCI”), an affiliate, in 2001 for a $1,000 promissory note. WPCI is an investment banking Assets (primarily real estate) Liabilities (primarily mortgage notes payable) firm which structures net lease transactions outside of the Capital DECEMBER 31, 2001 2000 $2,196,166 $1,745,901 1,031,445 $1,164,721 789,984 $ 955,917 United States. Effective as of June 29, 2000, the Company acquired 20,000 shares of common stock in four CPA® REITs with which it has advisory agreements. Since June 29, 2000, the Company has acquired an additional 265,341, 329,043 and 491,723 shares, respectively, of Carey Institutional Properties Incorporated, Corporate Property Associates 12 Incorporated, and Corporate Property Associates 14 Incorporated, all CPA® REITs, in connection with earning performance fees and electing to receive restricted shares Revenue (primarily rental revenue)(1) Expenses (primarily interest on mortgages and depreciation) YEARS ENDED DECEMBER 31, 2001 2000 1999 $217,075 $173,006 $8,465 142,601 100,006 5,603 Net income $ 74,474 $ 73,000 $2,862 (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. of common stock rather than cash in consideration for 1 2 . D I S C L O S U R E S A B O U T F A I R V A L U E O F such fees (see Note 3). As of December 31, 2001, the F I N A N C I A L I N S T R U M E N T S Company also owned 20,000 shares of Corporate Property The Company estimates that the fair value of mortgage Associates 15 Incorporated’s (“CPA®:15”) common stock for notes payable and other notes payable was $295,843 and $200, representing 100% of its outstanding shares. As of $294,278 at December 31, 2001 and 2000, respectively March 15, 2002, CPA®:15 has issued 5,861,577 shares of (see Note 6). The fair value of fixed rate debt instruments common stock ($5,862) to investors. The interests in the was evaluated using a discounted cash flow model with CPA® REITs are accounted for under the equity method due rates that take into account the credit of the tenants and to the Company’s ability to exercise significant influence interest rate risk. The fair value of the note payable from as the Advisor to the REITs. The audited consolidated finan- the line of credit approximates the carrying value as it is a cial statements of the CPA® REITs are filed with the SEC. variable rate obligation with an interest rate that resets to market rates. www.wpcarey.com 49 1 3 . S E L E C T E D Q U A R T E R LY F I N A N C I A L D A T A ( U N A U D I T E D ) Revenues Expenses Net income Net income per share — basic diluted Dividends declared per share Revenues Expenses Net income (loss) Net income (loss) per share — basic and diluted Dividends declared per share THREE MONTHS ENDED MARCH 31, 2001 $31,897 20,791 12,639 JUNE 30, 2001 $35,658 22,021 11,752 SEPTEMBER 30, 2001 $33,341 21,048 11,237 DECEMBER 31, 2001 $38,515 36,116 133 .37 .37 .4225 .34 .34 .4250 .33 .32 .4260 — — .4270 THREE MONTHS ENDED MARCH 31, 2000 $23,276 13,659 9,625 JUNE 30, 2000 $26,611 54,744 (30,041) SEPTEMBER 30, 2000 $33,929 22,114 11,375 DECEMBER 31, 2000 $36,435 33,461 (237) .38 .4225 (1.18) .4225 .34 .4225 (.01) .4225 1 4 . S T O C K O P T I O N S A N D W A R R A N T S rights and (iv) restricted shares. In 2001, share options for In January 1998, an affiliate was granted warrants to pur- 465,000 shares were granted at exercise prices ranging chase 2,284,800 shares exercisable at $21 per share and from $16.875 to $21.86 per share. In 2000, 922,152 share 725,930 shares exercisable at $23 per share as compensa- options were granted at exercise prices ranging from $7.69 tion for investment banking services in connection with to $16.50 per share. In 1999, share options for 38,500 structuring the consolidation on the CPA® Partnerships. shares were granted at an exercise price of $19.69 per The warrants are exercisable until January 2009. share. The options granted under the Incentive Plan have The Company maintains stock option incentive plans a 10-year term and are exercisable for one-third of the pursuant to which share options may be issued. The 1997 granted options on the first, second and third anniver- Share Incentive Plan (the “Incentive Plan”), as amended, saries of the date of grant. The vesting of grants, however, authorizes the issuance of up to 2,600,000 shares. The may be accelerated upon a change in control of the Company Non-Employee Directors’ Plan (the “Directors’ Company and under certain other conditions. Plan”) authorizes the issuance of up to 300,000 shares. The Directors’ Plan provides for the same terms as the The Incentive Plan provides for the grant of (i) share Incentive Plan. Share options for 21,822 and 12,704 options which may or may not qualify as incentive stock shares were granted at exercise prices ranging from options, (ii) performance shares, (iii) dividend equivalent $16.38 to $20 per share in 2000 and 1999, respectively. 50 W. P. Carey & Co. LLC Share option and warrant activity is as follows: to be $3.80 using a Black-Scholes option pricing formula. NUMBER OF SHARES WEIGHTED AVERAGE EXERCISE PRICE PER SHARE Balance at January 1, 1999 Granted Exercised Forfeited Balance at December 31, 1999 Granted Exercised Forfeited Balance at December 31, 2000 Granted Exercised Forfeited Balance at December 31, 2001 3,148,076 51,204 — — 3,199,280 943,974 — (29,000) 4,114,254 465,000 (229,105) (29,334) 4,320,815 $$ 21.42 $$ 19.31 — — $$ 21.38 $$ 13.24 — $(16.25) $$ 19.57 $$ 18.66 $(12.21) $(16.62) $$ 19.88 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 granted during 1999 was estimated to be $1.48, using a binomial option pricing formula. The more signifi- cant assumptions underlying the determination of the weighted average fair value include a risk-free interest rate of 5.54% a volatility factor of 18.35%, a dividend yield of 7.64% and an expected life of ten years. The Company has elected to adopt the disclosure only provisions of SFAS No. 123. If stock-based compensation cost had been recognized based upon fair value at the date of grant for options awarded under the two plans in accor- dance with the provisions of SFAS No. 123, pro forma net At December 31, 2001, 2000 and 1999, the range of income (loss) for 2001, 2000 and 1999 would have been exercise prices and weighted-average remaining contrac- $34,979, $(12,770) and $33,964, respectively, and pro tual life of outstanding share options and warrants was forma basic and diluted earnings (loss) per share would $7.69 to $23.00 and 7.5 years, $7.69 to $23.00 and 8.32 have been $1.02 and $1.00, respectively, in 2001, $(.45) years and $17.25 to $23.00 and 9 years, respectively. for both basic and diluted loss per share for 2000 and The per share weighted average fair value of share unchanged for 1999. options and warrants granted during 2001 were estimated to be $1.70 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 4.87%, a volatility factor of 22.51%, a dividend yield of 8.04% and an expected life of 3.21 years. The per share weighted average fair value of share options and warrants granted during 2000 were estimated www.wpcarey.com 51 The Company has determined that it operates in two business segments, management services and real estate operations with domestic and international investments. The two segments are summarized as follows: 1 5 . S E G M E N T R E P O R T I N G Revenues: 2001 2000 1999 Operating, interest, depreciation and amortization expenses(1) (excluding income taxes): 2001 2000 1999 Income from equity investments: 2001 2000 1999 Net operating income(3): 2001 2000 1999 Total assets: 2001 2000 Total long-lived assets: 2001 2000 MANAGEMENT REAL ESTATE OTHER ( 2 ) TOTAL COMPANY $ 46,911 25,271 — $ 86,556 88,736 82,731 $5,944 6,244 5,775 $139,411 120,251 88,506 39,747 15,979 — 434 69 — 7,598 9,361 — 122,156 111,375 64,286 59,580 55,608 64,993 48,746 2,393 2,813 1,886 33,341 26,556 35,871 785,730 784,628 721,895 758,063 4,621 5,006 4,662 — — — 1,323 1,238 1,113 7,997 8,239 5,990 6,502 99,976 85,978 53,408 2,827 2,882 1,886 42,262 37,155 36,984 915,883 904,242 792,171 824,145 (1) Excludes the writeoff of an acquired management contract of $38,000 in 2000. (2) Primarily consists of the Company’s other business operations. (3) Net operating income excludes gains and losses on sales, income taxes, minority interest, extraordinary items and the writeoff of an acquired manage- ment contract of $38,000 in 2000 and includes $11,903 and $5,958 of amortization charges in 2001 and 2000, respectively. 52 W. P. Carey & Co. LLC The Company acquired its first international real estate investment in 1998. For 2001, geographic information for the real estate operations segment is as follows: Revenues Operating, interest, depreciation and amortization expenses (excluding income taxes)(1) Income from equity investments Net operating income(2) Total assets Total long-lived assets DOMESTIC $ 82,795 INTERNATIONAL $ 3,761 TOTAL REAL ESTATE $ 86,556 52,183 2,393 33,005 736,152 675,919 3,425 — 336 49,578 45,976 55,608 2,393 33,341 785,730 721,895 For 2000, geographic information for the real estate operations segment is as follows: Revenues Operating, interest, depreciation and amortization expenses (excluding income taxes)(1) Income from equity investments Net operating income(2) Total assets Total long-lived assets For 1999, geographic information is as follows: Revenues Operating, interest, depreciation and amortization expenses (excluding income taxes)(1) Income from equity investments Net operating income(2) DOMESTIC $ 86,311 INTERNATIONAL $ 2,425 TOTAL REAL ESTATE $ 88,736 62,290 2,813 26,834 752,126 728,260 DOMESTIC $80,683 47,284 1,886 35,285 2,703 — (278) 32,502 29,803 64,993 2,813 26,556 784,628 758,063 INTERNATIONAL $2,048 TOTAL REAL ESTATE $82,731 1,462 — 586 48,746 1,886 35,871 (1) Excludes the writeoff of an acquired management contract of $38,000 in 2000. (2) Net (loss) income excludes gains and losses on sales, income taxes, minority interest, extraordinary items and the writeoff of an acquired management contract of $38,000 in 2000 and includes $11,903 and $5,958 of amortization charges in 2001 and 2000, respectively. www.wpcarey.com 53 1 6 . I N C O M E T A X E S No deferred income taxes were recognized in 1999. The components of the Company’s provision for income The net operating loss to be carried forward is $3,278 and taxes for the years ended December 31, 2001, 2000 and expires in 2021. The difference between the tax provision and the tax benefit recorded at the statutory rate at December 31, 2001 2000 1999 2001 and 2000 is as follows: 1999 are as follows: Federal: Current Deferred State and local: Current Deferred Total provision $ (46) 4,783 4,737 1,993 1,787 3,780 $8,517 $ 569 848 1,417 2,176 571 2,747 $4,164 $752 — 752 $752 Deferred income taxes as of December 31, 2001 and 2000 consist of the following: 2001 2000 $1,531 $ — Income (loss) from taxable subsidiaries before income tax Federal provision (benefit) at statutory tax rate (34%) State and local taxes, net of federal benefit Writeoff of management contract Amortization of intangible assets Other Tax provision — taxable subsidiaries Other state and local taxes Total tax provision 2001 2000 $3,236 $(38,172) 1,100 1,137 (12,978) 557 — 12,920 3,458 794 6,489 2,028 $8,517 1,706 34 2,239 1,925 $ 4,164 544 98 115 2,288 4,975 3,921 8,896 634 142 — 776 2,112 — 2,112 1 7 . E M P L O Y E E B E N E F I T P L A N S 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 $6,608 $1,336 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 years Deferred tax assets: Net operating loss carry forward Unearned compensation Corporate fixed assets Other long-term liabilities Deferred tax liabilities: Receivables from affiliates Investments Net deferred tax liability 54 W. P. Carey & Co. LLC ended December 31, 2001 and 2000, amounts expensed by least annually. Intangible assets acquired and liabilities the Company for contributions to the trust were $1,388 assumed in business combinations will only be amortized and $627, respectively. Annual contributions represent an if such assets and liabilities are capable of being separated amount equivalent to 15% of each eligible participant’s or divided and sold, transferred, licensed, rented or total eligible compensation for that period. exchanged or arise from contractual or legal rights (includ- ing leases), and will be amortized over their useful lives. 1 8 . A C C O U N T I N G P R O N O U N C E M E N T S In connection with the implementation of SFAS No. 142, In July 2001, the Financial Accounting Standards Board WPC performed its annual test for impairment of its issued Statements of Financial Accounting Standards management services segment, the reportable units for (“SFAS”) No. 141 “Business Combinations” and No. 142 measurement, in March 2002, and concluded that the “Goodwill and Other Intangibles,” which establish account- carrying value of goodwill is not impaired. ing and reporting standards for business combinations, The Company will adopt the provisions of SFAS No. 142 certain assets and liabilities acquired in business combi- for the fiscal year beginning January 1, 2002. With the nations and asset acquisitions. acquisition of the real estate management operations in SFAS No. 141 requires that all business combinations 2000, the Company allocated a portion of the purchase initiated after June 30, 2001 be accounted for under the price to goodwill and other identifiable intangible assets. purchase method, establishes specific criteria for the In adopting SFAS No. 142, the Company will discontinue recognition of intangible assets separately from goodwill amortization of existing goodwill. SFAS 142 will have a sig- and requires that unallocated negative goodwill be written nificant impact on the Company’s financial results based off immediately as an extraordinary gain. Use of the on the historical amortization of goodwill and certain pooling-of-interests method for business combinations is intangible assets. During the years ended December 31, no longer permitted. The adoption of SFAS 141 did not have 2001 and 2000 the Company had amortization expense of a material effect on the Company’s financial statements. $4,597 and $2,001, respectively, which beginning January 1, SFAS No. 142 primarily addresses the accounting for 2002, will no longer be expensed under SFAS 142. goodwill and intangible assets subsequent to their acquisi- SFAS No. 142 requires that goodwill be tested annually tion and the accounting for asset acquisitions. The provi- for impairment using a two-step process. The first step is sions of SFAS No. 142 are effective for fiscal years to identify a potential impairment and, in transition, this beginning after December 15, 2001 and must be adopted step must be measured as of the beginning of the fiscal at the beginning of a fiscal year. SFAS No. 142 provides year. However, a company has six months from the date of that goodwill and indefinite-lived intangible assets will no adoption to complete the first step. The second step of the longer be amortized but will be tested for impairment at goodwill impairment test measures the amount of impair- www.wpcarey.com 55 ment loss (measured as of the beginning of the year of subject to completion of LAUSD’s conducting certain due adoption), if any, and must be completed by the end of the diligence, environmental approvals and the approval of the Company’s fiscal year. Intangible assets deemed to have an LAUSD Board of Education. If the sale has not been com- indefinite life will be tested for impairment using a one- pleted by June 30, 2002, the LAUSD will be required to pay step process which compares the fair value to the carrying monthly extension fees at an increasing rate. amount of the asset as of the beginning of the fiscal year. The Company also entered into an agreement with the In August 2001, FASB issued SFAS No. 144 “Accounting LAUSD to provide environmental and management ser- for the Impairment of Long-Lived Assets” which addresses vices in connection with the development of the property. the accounting and reporting for the impairment and dis- Under the agreement which expires in April 2002, the posal of long-lived assets and supercedes SFAS No. 121 Company received an initial payment of $200 and will be while retaining SFAS No. 121’s fundamental provisions for paid a management fee of $25 per month. The Company the recognition and measurement of impairments. SFAS 144 and the LAUSD are currently negotiating an extension of removes goodwill from its scope, provides for a probability- the agreement. Under the agreement, the LAUSD has weighted cash flow estimation approach for analyzing situa- agreed to reimburse the Company for approximately tions in which alternative courses of action to recover the $1,150 of costs which were incurred in the redevelopment carrying amount of long-lived assets are under considera- of the property. Such reimbursements will be applied to tion and broadens that presentation of discontinued opera- the carrying value of the property. The carrying value of tions to include a component of an entity. The adoption of the property of $13,047 is included in assets held for sale SFAS 144 is not expected to have a material effect on the in the accompanying consolidated financial statements as Company’s financial statements; however, the revenues and of December 31, 2001. expenses relating to an asset held for sale or sold must be In January 2002, the Company sold properties in presented as a discontinued operation for all periods pre- Burnsville, Minnesota, Urbana, Illinois and Maumelle, sented. The provisions of SFAS No. 144 are effective for fis- Arkansas for $9,400 less closing costs. The carrying value cal years beginning after December 15, 2001. of the properties of $7,783 is included in assets held for sale in the accompanying consolidated financial state- 1 9 . S U B S E Q U E N T E V E N T S ments. The Burnsville and Urbana properties were vacant In 1999, subsequent to the termination of a lease, the at the time of sale. Company commenced redeveloping its property in Los The Company from time to time may offer to sell its Angeles, California. In January 2002, the Company entered Listed Shares, Future Shares and Warrants pursuant to a into a purchase and sales agreement with the Los Angeles registration statement declared effective by the Securities Unified School District (“LAUSD”) for $24,000. The sale is and Exchange Commission on February 25, 2002. The total 56 W. P. Carey & Co. LLC amount of these securities will have an initial aggregate ment describes some of the general terms that may apply offering price of up to $100,000, although the Company to these securities and the general manner in which they may increase this amount in the future. The shares may be offered. The specific terms of any securities to be and/or warrants may be offered and sold to or through offered, the specific manner in which they may be offered one or more underwriters, dealers and agents, or and the specific use of proceeds, will be described in a directly to purchasers, on a continuous or delayed basis. supplement to the prospectus. The prospectus included as part of the registration state- www.wpcarey.com 57 M A R K E T F O R T H E C O M PA N Y ’ S C O M M O N S T O C K A N D R E L A T E D S T O C K H O L D E R M A T T E R S Listed Shares are listed on the New York Stock Exchange. L I S T E D S H A R E S Trading commenced on January 21, 1998. The high, low and closing prices on the New York Stock As of December 31, 2001 there were 20,616 sharehold- Exchange for a Listed Share for each fiscal quarter of ers of record. 2001, 2000 and 1999 were as follows (in dollars): D I V I D E N D P O L I C Y Quarterly cash dividends are usually declared in December, March, June and September and paid in January, April, July and October. Cash dividends declared per share: Quarter 1 2 3 4 Total: 2001 $ .4225 .4250 .4260 .4270 $1.7005 2000 $ .4225 .4225 .4225 .4225 1999 $ .4175 .4175 .4175 .4175 $1.6900 $1.6700 2001 First Quarter Second Quarter Third Quarter Fourth Quarter 2000 First Quarter Second Quarter Third Quarter Fourth Quarter 1999 First Quarter Second Quarter Third Quarter Fourth Quarter HIGH $20.60 21.80 22.05 23.80 HIGH $16.03 17.02 17.15 18.10 HIGH $17.88 17.38 20.00 17.19 LOW $18.26 18.50 19.25 20.00 LOW $14.39 15.51 15.90 16.11 LOW $17.44 17.06 17.38 16.63 CLOSE $19.35 18.50 21.35 23.20 CLOSE $15.45 15.60 17.15 18.10 CLOSE $17.69 17.25 20.00 16.88 R E P O R T O N F O R M 1 0 - K The Company will supply to any shareholder, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission. 58 W. P. Carey & Co. LLC BBC75113-WPC-Cov-build 4/25/02 7:01 PM Page 2 T W. P. Carey & Co. LLC (NYSE:WPC) is a leading real estate investment banking firm that specializes in the net-leasing of single tenant corporate and industrial properties throughout the United States and Europe. T As the world’s largest publicly traded limited liability company, W. P. Carey & Co. both owns and manages corporate real estate. As part of its asset management business, W. P. Carey & Co. provides asset management services to Corporate Property Associates (CPA®) and to Carey Institutional Properties (CIP®), a series of publicly held non-traded real estate investment trusts (REITs) that make up the $3 billion W. P. Carey Group. T W. P. Carey & Co. currently owns and/or manages more than 450 commercial and industrial properties through- out the United States and Europe comprising more than 55 million square feet. T W. P. Carey & Co. shareholders continue to benefit from the stability of our net lease operations and growth from our asset management business. We remain committed to providing our shareholders with stable income and consistent investment performance, while also meeting the financing needs of our tenant companies. T H E W. P. C A R E Y G R O U P P O R T F O L I O O F P R O P E R T I E S Located in (from left) Alaska, United States, United Kingdom, The Netherlands, Finland and (below) France PROPERTIES OWNED BY WPC PROPERTIES MANAGED BY WPC D I R E C T O R S 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 I N V E S T M E N T C O M M I T T E E George E. Stoddard Chairman of the Investment Committee; Former Head of the Direct Placement Department, The Equitable Life Assurance Society of the United States Frank J. Hoenemeyer Vice Chairman of the Investment Committee Former Vice Chairman and Chief Investment Officer, The Prudential Insurance Company of America Nathaniel S. Coolidge Former Head of Bond and Corporate Finance Department, John Hancock Mutual Life Insurance Company O F F I C E R S Wm. Polk Carey Chairman and Director Francis J. Carey Vice Chairman and Director Gordon F. DuGan President, Chief Acquisitions Officer and Director John J. Park Managing Director, Chief Financial Officer and Treasurer Claude Fernandez Managing Director Stephen H. Hamrick Managing Director Edward V. LaPuma Managing Director W. Sean Sovak Managing Director Thomas E. Zacharias Managing Director Anne R. Coolidge Executive Director Susan C. Hyde Executive Director Michael D. Roberts Executive Director and Controller Gordon J. Whiting Executive Director Debra E. Bigler Senior Vice President — Regional Director Ted G. Lagreid Senior Vice President — Regional Director David W. Marvin Senior Vice President — Regional Director Donna M. Neiley Senior Vice President — Asset Management Anthony S. Mohl Senior Director — Paris James Longden Director — London Brent Carrier First Vice President — Development David S. Eberle First Vice President — Regional Director Benjamin P. Harris First Vice President — Acquisitions Robert C. Kehoe First Vice President — Finance David G. Termine First Vice President — Accounting Timothy W. Burdette Vice President — Asset Management Alistair Calvert Vice President — Acquisitions Jeffrey R. Damec Vice President — Regional Director Kimberly J. Dussol Vice President — Asset Management Yasmin Guerrero Vice President — Accounting Nichole B. LeFort Vice President — Regional Director Frank Machado Vice President — Accounting C O R P O R A T E I N F O R M A T I O N Charles C. Townsend, Jr. Chairman of the Compensation Committee; Former Head of Corporate Finance, Morgan Stanley & Co. Reginald Winssinger Chairman of Horizon New America National Portfolio Inc. Dr. Lawrence R. Klein Member Marisa Mackey Vice President — Acquisitions John F. Moss Vice President — Regional Director Mary P. Nelson Vice President — Systems Louisa H. Quarto Vice President — Marketing Mykolas Rambus Vice President and Chief Information Officer C. Curtis Ritter Vice President — Communications Gino Sabatini Vice President — Acquisitions Gagan Singh Vice President — Finance Mark Wander Vice President — Regional Director 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 11, 2002, 10:30 a.m. at the Waldorf=Astoria Hotel, New York City Website www.wpcarey.com Trading Information Shares of W. P. Carey & Co. LLC trade on the New York Stock Exchange (“NYSE”) under the symbol “WPC.” 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. 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 June 30, 2001 September 30, 2001 December 31, 2001 $.4225 $.4225 $.4225 $.4225 $.4225 $.4250 $.4260 $.4270 $.4125 $.4125 $.4125 $.4125 $.4175 $.4175 $.4175 $.4175 75113-17 BBCWork/CompWork/WPCarey Annual Report 4/12/02 de-dv aa-jvb p-ad c-la page 2 75113-17 BBCWork/CompWork/WPCarey Annual Report 4/12/02 de-dv aa-jvb p-ad c-la page 2 BBC75113-WPC-Cov-build 4/25/02 6:43 PM Page 1 I N G F O R T HE LONG T S E V I N R U N W. P. Carey & Co. LLC Annual Report 2001 Q W. P. Carey & Co. LLC 50 Rockefeller Plaza T New York, NY 10020 T 212-492-1100 T NYSE: WPC T www.wpcarey.com 75113-17 BBCWork/CompWork/WPCarey Annual Report 4/12/02 de-dv aa-jvb p-ad c-la page 1