<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
Registration No. 333-46257
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-11
PRE-EFFECTIVE AMENDMENT NO. 1
TO AMEND FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CAREY DIVERSIFIED LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
<TABLE>
<S> <C> <C>
DELAWARE 6798 13-3912578
(State or Jurisdiction of (Primary Standard Industrial (IRS Employer
Organization or Incorporation) Classification Code Number) Identification Number)
</TABLE>
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
FRANCIS J. CAREY
CAREY DIVERSIFIED LLC
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
MICHAEL B. POLLACK, ESQUIRE
REED SMITH SHAW & MCCLAY LLP
2500 ONE LIBERTY PLACE
PHILADELPHIA, PENNSYLVANIA 19103
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering: / /
<PAGE> 2
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE PRICE(1) FEE(2)
- -------------------------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Limited Liability Company
Listed Shares 4,500,000 $21.32 $95,940,000 $28,303
</TABLE>
(1) Estimated solely for calculation of the registration fee in accordance
with Rule 457(c) of the Securities Act of 1933
(2) Registration fee previously paid.
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4,500,000 LISTED SHARES
CAREY DIVERSIFIED LLC
LIMITED LIABILITY COMPANY LISTED SHARES
This Prospectus relates to 4,500,000 limited liability company interests, (the
"Listed Shares"), of Carey Diversified LLC, a Delaware limited liability Company
(the "Company") which may be offered and issued from time to time in connection
with acquisition of real estate properties either directly or through the
acquisition of entities owning such properties. See "BUSINESS and PROPERTIES -
Acquisition Strategies".
The Company anticipates that acquisitions, if any, occurring in the future will
consist principally of real estate investments related to or complementary to
the Company's current business. The Company contemplates that the terms of an
acquisition will be determined by negotiations between the Company and the
owners or controlling persons of the property to be acquired. The Company
anticipates that Listed Shares issued in any such acquisition will be valued at
a price reasonably related to the value of the Listed Shares, either at the time
the terms of the acquisition are tentatively agreed upon, or at or about the
time of closing, or during the periods or periods prior to delivery of the
Listed Shares. The Company does not expect that underwriting discounts or
commissions will be paid.
SEE "RISK FACTORS" COMMENCING ON PAGE [--] OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE LISTED SHARES OFFERED HEREBY.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO THE
CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF
ANY PRESENT OR FUTURE CASH BENEFIT OR TAX BENEFIT WHICH MAY FLOW FROM AN
INVESTMENT IN THE COMPANY IS NOT PERMITTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. NEITHER THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Listed Shares are listed on the New York Stock Exchange ("NYSE") under the
symbol "CDC". See "GLOSSARY OF TERMS" for definitions of certain key terms used
in this Prospectus.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount Company(1)
------------- --------------- ---------------
<S> <C> <C> <C>
Per Share $ 21.32 $ N/A $ 21.32
Total $ 95,940,000 $ N/A $ 95,940,000
</TABLE>
(1) The Listed Shares covered by this Prospectus are being registered
for issuance in connection the acquisition of real estate
investments. Consequently, the Company will not receive any cash
proceeds from any offerings.
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The date of this Prospectus is April ___, 1998
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AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). This Prospectus constitutes part of a
Registration Statement on Form S-11 (the "Registration Statement") filed with
the Commission by the Company under the Securities Act of 1933, as amended (the
"Act"). Reports, proxy statements and other information filed with the
Commission by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission: Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. at prescribed rates. In addition,
information may be obtained from the Commission's internet site at
http:/www.sec.gov. This site contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Listed Shares being offered, reference is made to
the Registration Statement and the financial statements and exhibits filed as
part thereof. Statements contained in this Prospectus as to the contents of any
contract or other documents are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.
The Company intends to distribute to holders of Listed Shares annual
reports containing audited consolidated financial statements and a report
thereon by the Company's independent certified public accountants and quarterly
reports containing unaudited consolidated financial information for each of the
first three quarters of each fiscal year.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS SUMMARY
The following Summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus and
supplements thereto. Investors should carefully consider the information set
forth under "Risk Factors" prior to making a decision to acquire any of the
Listed Shares offered hereby. This prospectus contains certain forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from the results anticipated in these forward-looking
statements as a result of certain of the factors set forth in the following
Prospectus Summary and elsewhere in this Prospectus. Capitalized terms not
otherwise defined in this Summary shall have the meanings set forth in the
"GLOSSARY OF TERMS."
THE COMPANY
The Company was formed as a Delaware limited liability company under
the laws of the State of Delaware on October 15, 1996. On January 1, 1998, the
Company completed its merger with the nine CPA(R) Partnerships and now is the
general partner and owner of substantially all of the limited partner interests
in those partnerships. The Company is expected to be treated as a partnership
for tax purposes. See "INCOME TAX CONSEQUENCES--Classification as Partnerships"
As of January 1, 1998, the Company through its subsidiaries owned 198 properties
in 37 states. The Company's principal executive offices are located at 50
Rockefeller Plaza, New York, New York 10020.
The Company's objective is to increase shareholder value and its Funds
from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to access capital at a lower cost
and to take immediate advantage of the significant opportunities to make net
lease and other investments at attractive returns. The Company expects to
evaluate a number of different opportunities and to pursue the most attractive
based upon its analysis of the risk/return tradeoffs.
The Company is a dynamic, growth-oriented organization which intends to
acquire additional net leased properties and make additional opportunistic
investments utilizing the core competencies of the Company's management (which
include in-depth credit analysis, asset valuation and creative structuring). The
Company also intends to optimize its existing portfolio through the expansion of
existing properties and strategic property sales. As a perpetual life,
growth-oriented company, the Company will continue to own Properties as long as
it believes ownership helps the Company attain its objectives. See "BUSINESS AND
PROPERTIES."
MANAGEMENT OF THE COMPANY
The Manager provides both strategic and day-to-day management for the
Company, including research, investment analysis, acquisition and development
services, asset management, capital funding services, disposition of assets and
administrative services. The Manager has
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dedicated senior executives in each area of its organization so that the Company
functions as a fully integrated operating company.
The Board of Directors monitors the performance of the Manager. The
Board consists of ten members, including five directors who are not employees of
the Company or the Manager. Initially, the Directors were appointed by the
Manager and thereafter will be elected by holders of Listed Shares. For the
background of the individuals responsible for the management of the Company and
a more detailed description of the responsibilities of the Manager, please see
the "MANAGEMENT" section of this Prospectus. For more information on fees
payable to the Manager or its Affiliates, please see the "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNER AND MANAGER" section of
this Prospectus.
The following organizational chart illustrates the organizational
structure of the Company.
W.P. Carey & Co.
& Holders of Listed Shares
Affiliates(1)
Carey Management
LLC, Manager(2)
Holders of Subsidiary
Partnership Units
CAREY DIVERSIFIED LLC
Subsidiary Partnerships(3)
- CPA(R):1-9
(1) Affiliates include CCP, Seventh Carey, Eighth Carey and Ninth Carey
(2) Carey Management LLC owns 661,718 Listed Shares and is a Limited
Partner of each Subsidiary Partnership. See "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER"
for the interest by Carey Management LLC in each Subsidiary
Partnership.
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(3) Carey Diversified LLC is the General Partner of all of the Subsidiary
Partnerships.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered ............ 4,500,000 Limited Liability Company Listed
Shares which are being offered by the Company.
Number of Listed Shares ....... 23,974,791 Listed Shares
Outstanding as of the
date of this Prospectus
Use of Proceeds ............... The Company will issue the Listed Shares to
acquire interests in properties or other
assets.
</TABLE>
BUSINESS PLAN
The Company's objective is to increase shareholder value and its Funds
from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to take immediate advantage of
the significant opportunities to make net lease and other investments at
attractive returns. The Company expects to evaluate a number of different
opportunities in a variety of property types and geographic locations and to
pursue the most attractive based upon its analysis of the risk/return tradeoffs.
The Company presently intends to:
- Seek additional investment and other opportunities that
leverage core management skills (which include in-depth credit
analysis, asset valuation and sophisticated structuring
techniques);
- optimize the current portfolio of properties through expansion
of existing properties, timely dispositions and favorable
lease modifications;
- utilize its enhanced size and access to capital to refinance
existing debt; and
- increase the Company's access to capital.
The Company is a perpetual life, growth-oriented company and,
therefore, will continue to own properties as long as it believes ownership
helps attain the Company's objectives.
DESCRIPTION OF PROPERTIES
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SEE THE SECTION ENTITLED "BUSINESS AND PROPERTIES" ON PAGE __.
INCOME TAX ASPECTS
SEE THE SECTION ENTITLED "INCOME TAX CONSEQUENCES" ON PAGE __.
SUMMARY SELECTED COMBINED FINANCIAL INFORMATION
The following table sets forth selected combined operating and balance
sheet information on a combined historical basis, for the CPA(R) Partnerships.
The following information should be read in conjunction with the financial
statements and notes thereto for the Company included elsewhere herein. The
combined historical operating and balance sheet information of the CPA(R)
Partnerships as of December 31, 1995, 1996, and 1997, and for the years ended
December 31, 1994, 1995, 1996, and 1997 have been derived from the historical
Combined Financial Statements audited by Coopers & Lybrand L.L.P., independent
accountants. The combined historical operating information for the year ended
December 31, 1993 and the historical balance sheet information as of December
31, 1993 and 1994, have been derived from the unaudited combined financial
statements of the Company.
(in thousands)
<TABLE>
<CAPTION>
OPERATING DATA 1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $109,027 $109,137 $107,946 $102,731 $ 98,347
Income before extraordinary items 33,790 38,456 49,363 45,547 40,561
Distributions 50,638 35,589 57,216 34,173 43,620
Cash provided by operating activities 45,673 45,131 63,276 50,983 49,904
Cash provided by (used in) investing
activities 21,051 37,136 24,327 19,545 (863)
Cash used in financing activities (66,071) (70,045) (105,578) (69,686) (59,008)
BALANCE SHEET DATA
Real estate, net (1) 345,199 330,671 301,505 271,660 240,498
Investment in direct financing leases 260,663 244,746 218,922 215,310 216,761
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets 679,284 659,047 582,324 544,728 523,420
Mortgages and notes payable 358,768 325,886 274,737 227,548 207,627
Long-term obligations (2) 322,539 284,291 233,300 187,414 150,907
</TABLE>
(1) Real estate leased to others accounted for under the operating
method and operating real estate, net of accumulated
depreciation.
(2) Represents mortgage and note obligations due after more than
one year.
RISK FACTORS
An investment in the Listed Shares offered hereby is speculative and
involves a high degree of risk, including, but not necessarily limited to, the
risk factors described below. Prior to investing in the Listed Shares, each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company before making an
investment decision.
Uncertainty Regarding Trading Price for the Listed Shares. There has
been no long-term prior market for the Listed Shares, and it is possible that
the Listed Shares will trade at prices substantially below the value of the
assets of the Company. The market price of the Listed Shares may be subject to
significant volatility and could substantially decrease as a result of increased
selling activity by investors who have held their interests for extended
periods, the interest level of investors in purchasing the Listed Shares, the
amount of distributions to be paid by the Company and the acceptance by the
securities markets of a limited liability company as an investment vehicle.
No IRS Ruling with Respect to Partnership Status. Neither the Company
nor any of the Subsidiary Partnerships will apply for an IRS ruling that they
will be classified as partnerships rather than associations taxable as
corporations for federal income tax purposes. The Company and each Subsidiary
Partnership have received the opinion of Reed Smith Shaw & McClay LLP that they
will be classified as partnerships for federal income tax purposes. An opinion
of counsel is not, however, binding upon the IRS or the courts. In addition,
such opinion is subject to certain conditions. See "INCOME TAX
CONSEQUENCES--Classification as 'Partnerships'." The treatment of the Company as
a partnership is also dependent upon the present provisions of the Code, the
regulations thereunder and existing administrative and judicial interpretations
thereof, all of which are subject to change. The Manager intends to operate the
Company and the Subsidiary Partnerships so that they will be taxed as
partnerships. If the Company were treated as a corporation: (i) the income,
deductions and losses of the Company would not pass through to the holders of
Listed Shares; (ii) the Company would be required to pay federal income taxes on
its taxable income, thereby substantially reducing the amount of cash available
to be distributed to holders of Listed Shares; (iii) state and local taxes could
be imposed on the Company; and (iv) any distributions to holders of Listed
Shares would be taxable to them as dividends to the extent of
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current and accumulated earnings and profits of the Company. Finally, the change
from treatment as a partnership to treatment as a corporation for federal income
tax purposes could be treated as a taxable event in which case holders of Listed
Shares could have a tax liability without receiving a distribution from the
Company. Similar tax consequences would result with respect to any Subsidiary
Partnership found to be an association taxable as a corporation.
Restrictions on Changes in Control. Certain provisions of the
Organizational Documents and the Shareholder Rights Plan may restrict changes in
control of the Company's management. These include provisions which: (i) permit
the issuance of additional classes and series of shares which, depending on its
terms, may impede a merger, tender offer or other transaction; (ii) staggered
terms for members of the Board of Directors which may affect the ability of the
holders of Listed Shares to change control of the Company; (iii) apply
restrictions on certain business combinations involving Interested Parties which
may deter potential purchasers who seek control of the Company; (iv) apply
control share acquisition restrictions which may make it more difficult or
costly for another party to acquire and exercise control of the Company or to
remove the existing management of the Company; (v) apply Shareholder Rights Plan
provisions which may have certain anti-takeover effects; and (vi) require a
Termination Fee payable to the Manager, in the event the Manager is terminated
in connection with a change in control, which will make it more costly to
acquire control of the Company and may discourage third parties from seeking
control of the Company. See "DESCRIPTION OF LISTED SHARES--Restricting Changes
in Control and Business Combination Provisions" and "COMPENSATION, REIMBURSEMENT
AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER--Amounts Payable by the
Company."
General Risks Related to Investments in Real Estate. Real property
investments are subject to varying degrees of risk. Values of commercial and
industrial properties are affected by changes in the general economic climate,
local conditions such as an oversupply of space or reduction in demand for real
estate in the area and competition from other available commercial and
industrial space. Real estate values are also affected by such factors as
government regulations and changes in zoning or tax laws, interest rate levels,
the availability of financing and potential liability under environmental and
other laws. The yields available on equity investments in commercial and
industrial real estate of the kind that will be owned by the Company depend in
part upon the amount of net income generated from the property. Upon the
termination of a tenant lease, the Company may not be able to re-lease the
property at comparable rents. If the property is leased at a lower rent, the
income of the Company will be reduced.
Risk of Leverage. Many of the Company's properties are subject to
limited recourse debt, and the Company has recourse debt outstanding. The Board
of Directors may authorize additional borrowing by the Company. The Company may
become more highly leveraged and, thereby, increase its debt service, which may
adversely affect the Company's ability to make distributions to holders of
Listed Shares and increase the Company's risk of default on its obligations.
If the Company incurs substantial debt, it will be subject to the
following risks: (i) the Company could lose its interests in Properties given as
collateral for secured borrowing if the
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required principal and interest payments are not made when due; (ii) the
Company's cash flow from operations may not be sufficient to retire these
obligations upon their maturity, making it necessary for the Company to raise
additional debt and/or equity for the Company or dispose of some of the
Company's assets to retire the obligations; and (iii) the Company's ability to
borrow additional funds (except for the purpose of refinancing existing
indebtedness) may be restricted.
Rent Income Dependent Upon Creditworthiness of Tenants. Substantially
all of the Properties are single tenant properties. The financial failure of a
tenant could result in the termination of its lease with the Company which, in
turn, might cause a reduction of the cash flow of the Company and/or decrease
the value of the Property leased to such tenant. If a tenant defaults on its
lease payments to the Company, the Company would lose not only the net cash flow
from such tenant, but also might use cash generated from other Properties to
meet expenses, including the mortgage payments, if any, on such Property in
order to maintain ownership and prevent a foreclosure. If a lease is terminated,
there can be no assurance that the Company will be able to re-lease the Property
for the same amount of rent previously received or will be able to sell the
Property without incurring a loss. The Company could also experience delays in
enforcing its rights against tenants.
In addition, the Company may enter into or acquire net leases with
tenants for properties that are specially suited to the particular needs of a
tenant as is the case with certain of the Properties. Such a property may
require renovations or lease payment concessions in order to re-lease it to
another tenant upon the expiration or termination of the current lease. The
Company may also have difficulty selling a special purpose property to a party
other than the tenant for which the property was designed.
The financial failure of a tenant could cause the tenant to become the
subject of bankruptcy proceedings. Under bankruptcy law, a tenant has the option
of continuing or terminating an unexpired lease. If the tenant continues its
lease with the Company, the tenant must cure all defaults under the lease and
provide the Company with adequate assurance of its future performance under the
lease. If the tenant terminates the lease, the Company's claim for breach of the
lease would (absent collateral securing the claim) be treated as a general
unsecured claim. The amount of the claim would be capped at the amount owed for
unpaid pre-petition lease payments unrelated to the termination plus the greater
of one year's lease payments or 15 percent of the remaining lease payments
payable under the lease (but not to exceed three years' lease payments).
Although the Company believes that each of its net lease transactions
is a "true lease" for purposes of bankruptcy law, depending on the terms of the
lease transaction, including the length of the lease and terms providing for the
repurchase of a property by the tenant, it is possible that a bankruptcy court
could re-characterize a net lease transaction as a secured lending transaction.
If a transaction were recharacterized as a secured lending transaction, the
Company would not be treated as the owner of the property and could lose certain
rights as the owner in the bankruptcy proceeding.
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Losses From Uninsured Liabilities or Casualty. The Company requires
tenants to maintain liability and casualty insurance of the kind that is
customarily obtained for similar properties. However, certain disaster-type
insurance (covering events of a catastrophic nature, such as earthquakes) may
not be available or may only be available at rates that, in the opinion of the
Company, are prohibitive. In the event that an uninsured disaster occurs or a
tenant does not maintain the required insurance and a loss occurs, the Company
could suffer a loss of the capital invested in, as well as anticipated profits
from, the damaged or destroyed Property. If the loss involves a liability claim,
the loss may extend to the other assets of the Company.
Losses From Casualty and Condemnation related Lease Terminations. The
Company's leases may permit the tenant to terminate its lease in the event of a
substantial casualty or a taking by eminent domain of a substantial portion of a
Property. Should these events occur, the Company generally will be compensated
by insurance proceeds in the case of insured casualties or a condemnation award
in the case of a taking by eminent domain. There can be no assurance that any
such insurance proceeds or condemnation award will equal the value of the
Property or the Company's investment in the Property. Any such lease termination
could adversely affect the Company's income and cash flow.
Risks of Joint Ventures. The Company may participate in joint ventures.
See "BUSINESS AND PROPERTIES." An investment by the Company in a joint venture
which owns properties, rather than a direct investment in such properties, may
involve certain risks, including the possibility that the Company's joint
venture partner may become bankrupt, may have economic or business interests or
goals which are inconsistent with the business interests or goals of the Company
or may be in a position to take action contrary to the instructions or the
requests of the Company or contrary to the Company's policies or objectives.
Actions by the Company's joint venture partner might, among other things, result
in subjecting property owned by the joint venture to liabilities in excess of
those contemplated by the terms of the joint venture agreement, exposing the
Company to liabilities of the joint venture in excess of its proportionate share
of such liabilities or having other adverse consequences for the Company. In a
case where the joint venturers each own a 50 percent interest in a venture, they
may not be able to agree on matters relating to the properties owned by the
venture. Although each joint venturer may have a right of first refusal to
purchase the other venturer's interest in a property if a sale is desired, the
joint venturer may not have sufficient resources to exercise its right of first
refusal.
The Company may from time to time participate jointly with
publicly-registered investment programs or other entities sponsored by the
Manager or one of its Affiliates in investments as tenants-in-common or in some
other joint venture arrangement. The risks of such joint ownership may be
similar to those mentioned above for joint ventures and, in the case of a
tenancy-in-common, each co-tenant normally has the right, if an unresolvable
dispute arises, to seek partition of the property, which partition might
decrease the value of each portion of the divided property. The Company or the
Manager may also experience difficulty in enforcing the rights of the Company in
a joint venture with an Affiliate due to the fiduciary obligation the Manager or
the Board may owe to the other partner in such joint venture.
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Competition with Affiliates May Reduce Available Properties, Tenants
and Purchasers of Properties. The CPA(R) REITs have investment policies similar
to those of the Company. The CPA(R) REITs, therefore, may be in competition with
the Company for properties, purchasers and sellers of properties, tenants and
financing. Affiliates of the General Partners and the Manager may sponsor
additional REITs or other investment entities, public and/or private or may
provide acquisition or management services to third parties, some of which may
have the same investment objectives and may be in a position to acquire
properties in competition with the Company.
In the event that a potential investment might be suitable for the
Company and an Affiliate, the decision as to which entity will make the
investment will be made by the Investment Committee. The Investment Committee
also serves as the investment committee of the CPA(R) REITs. The Investment
Committee of the Manager will review the investment portfolios of each entity
and other factors such as cash flow, the effect of the acquisition on the
diversification of each entity's portfolio, the length of the term of the lease,
renewal options, the estimated income tax effects of the purchase on each
entity, the policies of each entity relating to leverage, the funds of each
entity available for investment, the length of time such funds have been
available for investment and the various ways in which the potential investment
can be structured. Consideration will be given to joint ownership (e.g.,
tenancy-in-common or joint venture arrangement) of a particular property
determined to be suitable for the Company and an Affiliate in order to achieve
diversification of each entity's portfolio. In any joint ownership, the
investment by each entity will be on substantially the same economic terms and
conditions, and each investment entity may have a right of first refusal to
purchase the interest of the other, if a sale of that interest is contemplated.
To the extent that a particular property might be determined to be suitable for
more than one investment entity, the investment will be made by the most
appropriate investment entity after consideration of the factors identified
above.
Growth of Company Dependent on Borrowing Capacity and Ability to Raise
Capital. The Company's ability to acquire additional properties and make other
investments will be subject to the availability of suitable investments and the
Company's ability to obtain debt and/or equity capital to make such investments.
The Company could be delayed or prevented from structuring transactions and
acquiring desirable properties by an inability to obtain capital, either because
the financial or other terms of the available financing are unacceptable or
because debt or equity financing is unavailable on any terms.
Possible Environmental Liabilities. Under various federal, state and
local environmental laws, ordinances and regulations, a current or former owner
of real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property or may be held liable
to governmental entities or to third parties for property or natural resource
damage and for investigation, clean up and other costs incurred by such parties
in connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner knew of or
caused the presence of the contamination, and the liability under such laws has
been interpreted to be joint and several, unless the harm is capable of
apportionment and there is a reasonable basis for allocation of responsibility.
The Company's leases generally provide that the tenant is responsible for
compliance with applicable laws and
-14-
<PAGE> 15
regulations. This contractual arrangement does not eliminate the Company's
statutory liability or preclude claims against the Company by governmental
authorities or persons who are not parties to such arrangement. Contractual
arrangements in the Company's leases may provide a basis for the Company to
recover from the tenant damages or costs for which the Company has been found
liable. The cost of an investigation and clean-up of site contamination can be
substantial, and the fact that the property is or has been contaminated, even if
remediated, may adversely affect the value of the property and the owner's
ability to sell or lease the property or to borrow using the property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs that it
incurs in connection with the contamination, and certain state laws provide that
such lien has priority over all other encumbrances on the property or that a
lien can be imposed on any other property owned by the liable party. Finally,
the owner of a site may be subject to common law claims by third parties based
on damages and costs resulting from the environmental contamination emanating
from the site.
Other federal, state and local laws, regulations and ordinances govern
the removal or encapsulation of asbestos-containing material when such material
is either in poor condition or in the event of building remodeling, renovation
or demolition. Still other federal, state and local laws, regulations and
ordinances may require the removal or upgrade of underground storage tanks that
are out of service or are out of compliance. In addition, federal, state and
local laws, regulations and ordinances may impose prohibitions, limitations and
operational standards on, or require permits, licenses or approvals in
connection with, the discharge of wastewater and other water pollutants, the
emission of air pollutants, the operation of air or water pollution equipment,
the generation, storage, transportation, disposal and management of materials
classified as hazardous or nonhazardous waste, the use of electrical equipment
containing polychlorinated biphenyls, the storage or release of toxic or
hazardous chemicals and workplace health and safety. Noncompliance with
environmental or health and safety requirements may also result in the need to
cease or alter operations at a Property which could affect the financial health
of a tenant and its ability to make lease payments. Furthermore, if there is a
violation of such a requirement in connection with the tenant's operations, it
is possible that the Company, as the owner of the Property, could be held
accountable by governmental authorities for such violation and could be required
to correct the violation. See "BUSINESS AND PROPERTIES--Environmental Matters"
for a discussion of certain environmental matters relating to the Properties and
the measures the Company currently undertakes by means of prepurchase site
assessments, financial assurances and indemnification provisions and other
protective lease terms to address potential liabilities.
It was not customary business practice to obtain environmental audits
in connection with the acquisition of the Properties prior to 1988, and
therefore, no environmental audits were obtained by CPA(R):1-7 at the time their
properties were acquired. Phase I audits were performed for the properties and
by CPA(R):1-6 in 1994. Based upon the results of the Phase I investigations
conducted in 1993 and 1994 on the CPA(R):1-6 Properties, Phase II investigations
were recommended for 30 Properties. Phase II investigations have been or are in
the process of being performed on 21 of the 30 Properties. Of the remaining nine
Properties, the particular CPA(R) Partnership determined not to proceed with a
Phase II investigation on five Properties and the tenants would not permit a
Phase II investigation on the remaining four.
-15-
<PAGE> 16
Environmental audits were conducted on many of the properties acquired
by CPA(R):8 and CPA(R):9 at the time they were acquired. There may, however, be
environmental problems that may have developed since the properties were
acquired or since environmental testing was performed.
Limitation of Director Liability. The Delaware Limited Liability
Company Act (the "LLCA"), as well as the Organizational Documents, limit the
liability of Directors and officers to Shareholders. In addition, the
Organizational Documents generally provide for (i) greater indemnification of
Directors and officers than is available to the General Partners under the
Partnership Agreements and (ii) the ability to relieve Directors and officers of
certain monetary liabilities not available to the General Partners under the
Partnership Agreements. See "FIDUCIARY RESPONSIBILITY AND
INDEMNIFICATION--Limitation on Liability of Directors and Officers of the
Company."
Other Potential Tax Risks. A potential investor should consider the tax
consequences of owning Listed Shares which include, among others, the following:
(i) the possibility that taxable income or gain allocable to a holder of Listed
Shares will exceed the cash distributed by the Company to the holder of Listed
Shares, resulting in tax payments being required from individual assets of a
holder of Listed Shares; (ii) the possibility that the IRS will not give effect
to the allocation of profits and losses provided by the Operating Agreement or
the Subsidiary Partnerships' Partnership Agreements and reallocate profits and
losses so as to cause a holder of Listed Shares or Subsidiary Partnership Units'
taxable income or loss to be different from that reported by the Company or the
Subsidiary Partnership; (iii) the possibility that the IRS will disallow as
current deductions certain payments made for management and other services in
connection with the Company's or Subsidiary Partnerships' Properties, especially
where such payments are made to the Manager, the General Partner or its
Affiliates, and, thereby, increase the Company's taxable income or decrease the
Company's tax loss; (iv) the possibility that the IRS will challenge the
allocations of acquisition costs of real property between land and depreciable
improvements, the characterization and purpose of various payments made to
sellers of properties or Affiliates of the Manager or the General Partner or the
legal characterization of the Company's or Subsidiary Partnerships' interest in
a Property and, thereby, increase the Company's taxable income or decrease the
Company's tax loss; (v) the possibility that the "at risk" rules could limit the
deductibility of Company losses, if any; (vi) the possibility that an audit of
the Company's or a Subsidiary Partnership's information return may result in an
audit of an individual tax return; (vii) the possibility that an IRA or a
qualified pension or profit-sharing plan (including a Keogh) or stock bonus plan
which invests in Listed Shares may receive "unrelated business taxable income"
and could become subject to federal income tax. See "INCOME TAX CONSEQUENCES"
for further details with respect to the above and other possible tax
consequences of the ownership of Shares.
Holders of Listed Shares should be aware that federal income taxation
rules are constantly under review by the IRS, resulting in revised
interpretations of established concepts. The IRS pays close attention to the
proper application of tax laws to partnerships. The present federal income tax
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<PAGE> 17
treatment of an investment in the Company may be modified by legislative or
judicial action at any time, and any such action may adversely affect
investments and commitments previously made.
The Operating Agreement may be modified from time to time by the
Manager, without the consent of the holders of Listed Shares, in order to
achieve compliance with certain changes in federal income tax regulations and
legislation. In some circumstances, such revisions could have an adverse impact
on some or all of the holders of Listed Shares.
Tax Risks of Trading of Listed Shares. Since the Listed Shares are
traded on an established securities market, the Company will be treated as a
publicly traded partnership as defined in the Code. See "INCOME TAX
CONSEQUENCES--Classification as 'Partnerships'." As a publicly traded
partnership, net passive income from the Company allocable to the holders of
Listed Shares will probably be treated as portfolio income, except that passive
activity losses from the Company may offset such income. See "INCOME TAX
CONSEQUENCES--Passive Activity Loss Limitations." Additionally, if less than 90
percent of its gross income consists of, among other things, interest,
dividends, real property rents and gain from the sale or exchange of real
property, the Company will be treated as a corporation for federal income tax
purposes. It is anticipated that the Company will not be treated as a
corporation for federal income tax purposes.
Risk of Investment in Real Property Located Outside the United States.
The Company may invest in property located outside the United States. Such
investments may be affected by factors peculiar to the laws of the jurisdiction
in which such property is located, including but not limited to, land use and
zoning laws, environmental laws, laws relating to the foreign ownership of
property and laws relating to the ability of foreign persons or corporations to
remove profits earned from activities within such country to the person's or
corporation's country of origin. These laws may expose the Company to risks that
are different from and in addition to those commonly found in the United States.
In addition, such foreign investments could be subject to the risks of adverse
market conditions due to changes in national or local economic conditions,
currency fluctuation, changes in interest rates and in the availability, cost
and terms of mortgage funds resulting from varying national economic policies,
changes in real estate and other tax rates and other operating expenses in
particular countries and changing governmental rules and policies.
Dependence on Key Personnel. The Company is dependent on the efforts of
the executive officers of the Manager and the members of the Investment
Committee. While the Company believes that the Manager could find replacements
for its executive officers and Investment Committee members from either within
or outside the Company, the loss of their services could have a temporary
adverse affect on the operations of the Company.
Competition for Investments. The Company faces competition to purchase
net leased properties or provide alternative sources of real estate financing to
businesses from insurance companies, commercial banks, credit companies, pension
funds, private individuals, investment companies, REITs and other real estate
finance companies. There can be no assurance that the Company will find suitable
net leased properties in the future.
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<PAGE> 18
Status of the Company under ERISA. The Company has received an opinion
of counsel to the effect that based on certain assumptions concerning the public
ownership and transferability of the Listed Shares, the Listed Shares should be
"publicly-offered securities" for purposes of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and that, consequently, the assets
of the Company should not be deemed "plan assets" of an ERISA plan, individual
retirement account or other non-ERISA plan that invests in the Listed Shares. If
the Company's assets were deemed to be plan assets of any such plan, then, among
other consequences, certain persons exercising discretion as to the Company's
assets would be fiduciaries under ERISA, transactions involving the Company
undertaken at their direction or pursuant to their advice might violate ERISA,
and certain transactions that the Company might enter into in the ordinary
course of its business might constitute "prohibited transactions" under ERISA
and the Code.
If a prohibited transaction were to occur, the Code imposes an excise
tax equal to 15 percent of the amount involved and authorizes the IRS to impose
an additional 100 percent excise tax if the prohibited transaction is not
"corrected." Such taxes would be imposed on any disqualified person who
participates in the prohibited transaction. In addition, certain persons subject
to ERISA, exercising discretion as to the Company's assets who permitted such
prohibited transaction to occur or who otherwise breached their fiduciary
responsibilities, would be required to restore to the plan any profits realized
by these fiduciaries as a result of the transaction or breach and to make good
to the plan any losses incurred by the plan as a result of such transaction or
breach. With respect to an IRA that invests in the Company, the occurrence of a
prohibited transaction involving the individual who established the IRA or his
beneficiary would cause the IRA to lose its tax-exempt status under Section
408(e)(2) of the Code.
THE COMPANY
The Company was formed as a Delaware limited liability company under
the laws of the State of Delaware on October 15, 1996. On January 1, 1998, the
Company completed its merger with the nine CPA(R) Partnerships and now is the
General Partner and owner of substantially all of the limited partner interests
in those partnerships. The Company is expected to be treated as a partnership
for tax purposes. See "INCOME TAX CONSEQUENCES--Classification as
'Partnerships'." The Company, through its subsidiaries, currently owns 198
properties in 37 states. The Company's principal executive offices are located
at 50 Rockefeller Plaza, New York, New York 10020.
The Company's objective is to increase shareholder value and its Funds
from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to access capital at a lower cost
and to take immediate advantage of the significant opportunities to make net
lease and other investments at attractive returns. The Company expects to
evaluate a number of different opportunities and to pursue the most attractive
based upon its analysis of the risk/return tradeoffs.
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<PAGE> 19
The Company is a dynamic, growth-oriented organization which intends to
acquire additional net leased properties and make additional opportunistic
investments utilizing the core competencies of the Company's management (which
include in-depth credit analysis, asset valuation and creative structuring). The
Company also intends to optimize its existing portfolio through the expansion of
existing properties and strategic property sales. As a perpetual life,
growth-oriented company, the Company will continue to own Properties as long as
it believes ownership helps attain the Company's objectives. See "BUSINESS AND
PROPERTIES."
The Manager provides both strategic and day-to-day management for the
Company, including research, investment analysis, acquisition and development
services, asset management, capital funding services, disposition of assets and
administrative services. The Manager has dedicated senior executives in each
area of its organization so that the Company functions as a fully integrated
operating company.
The Board of Directors monitors the performance of the Manager. The
Board consists of ten members, including five directors who are not employees of
the Company or the Manager. Initially, the Directors were appointed by the
Manager and thereafter will be elected by holders of Listed Shares. For the
background of the individuals responsible for the management of the Company and
a more detailed description of the responsibilities of the Manager, please see
the "MANAGEMENT" section of this Prospectus. For more information on fees
payable to the Manager or its Affiliates, please see the "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNER AND MANAGER" section of
this Prospectus.
USE OF PROCEEDS
This Prospectus relates to the Company's Listed Shares which may be
offered and issued by the Company from time to time in the acquisition of real
estate or other investments. Other than any real estate or other interests
acquired, there will be no proceeds to the Company from the issuance or sale of
any of the Shares offered hereby. The Company will bear all expenses of the
offering.
MARKET FOR REGISTRANT'S LISTED SHARES
The Listed Shares are traded on the New York Stock Exchange under the
symbol "CDC". Trading of Listed Shares began on January 21, 1998. The following
table presents the high and low sales prices for the period reflected. On April
15, 1998, the high and low sales prices were $20.25 and $20.56, respectively.
<TABLE>
<CAPTION>
Low High
------ ------
<S> <C> <C>
January 21 - April 15, 1998 $20.13 $22.94
</TABLE>
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<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
consolidated pro forma basis for the Company and on a combined historical basis
in thousands as of December 31, 1997.
<TABLE>
<CAPTION>
Pro Forma
Combined Consolidated
---------- ------------
<S> <C> <C>
Mortgage notes payable $ 182,718 $ 182,718
Notes payable to affiliate 200 200
Notes payable 24,709 24,709
Partners' capital 300,888 505,423
---------- ----------
Total capitalization $ 523,420 $ 725,858
========== ==========
</TABLE>
SELECTED COMBINED FINANCIAL INFORMATION
The following table sets forth selected combined operating and balance
sheet information on a combined historical basis, for the CPA(R) Partnerships.
The following information should be read in conjunction with the financial
statements and notes thereto for the Company included elsewhere herein. The
combined historical operating and balance sheet information of the CPA(R)
Partnerships as of December 31, 1995, 1996, and 1997, and for the years ended
December 31, 1994, 1995, 1996, and 1997 have been derived from the historical
Combined Financial Statements audited by Coopers & Lybrand L.L.P., independent
accountants. The combined historical operating information for the year ended
December 31, 1993 and the historical balance sheet information as of December
31, 1993 and 1994, have been derived from the unaudited combined financial
statements of the Company.
(in thousands)
<TABLE>
<CAPTION>
OPERATING DATA 1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $109,027 $109,137 $107,946 $102,731 $ 98,347
Income before extraordinary items 33,790 38,456 49,363 45,547 40,561
Distributions 50,638 35,589 57,216 34,173 43,620
Cash provided by operating activities 45,673 45,131 63,276 50,983 49,904
Cash provided by (used in) investing
activities 21,051 37,136 24,327 19,545 (863)
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash used in financing activities (66,071) (70,045) (105,578) (69,686) (59,008)
BALANCE SHEET DATA
Real estate, net (1) 345,199 330,671 301,505 271,660 240,498
Investment in direct financing leases 260,663 244,746 218,922 215,310 216,761
Total assets 679,284 659,047 582,324 544,728 523,420
Mortgages and notes payable 358,768 325,886 274,737 227,548 207,627
Long-term obligations (2) 322,539 284,291 233,300 187,414 150,907
</TABLE>
(1) Real estate leased to others accounted for under the operating method
and operating real estate, net of accumulated depreciation.
(2) Represents mortgage and note obligations due after more than one year.
ACQUISITION OF KEYSTONE
Description of Acquisition
The Company has agreed to acquire all of the stock of Keystone Capital
Company, Inc. ("Keystone"), a privately held Washington corporation, in exchange
for 710,000 Shares. Additional Shares may also be issued as described below. The
sole asset of Keystone is a property (the "Eagle Hardware Property") in
Bellevue, Washington, net leased to Eagle Hardware & Garden, Inc. ("Eagle
Hardware") a company whose stock and debentures are traded in the
over-the-counter market on the NASDAQ National Market System. The property
includes approximately 8.4 acres of land improved with a 154,880 square foot
retail store operated as an Eagle Hardware & Garden store. The Eagle Hardware
Property is suitable and adequate for the operation of a retail store. The cost
of the improvements on the Eagle Hardware Property will be depreciated for tax
purposes over a 40-year period on a straight-line basis.
Description of the Lease
General
The Eagle Hardware Property is subject to a net lease (the "Eagle
Lease") with Eagle Hardware pursuant to which Eagle Hardware is responsible for
all expenses of occupancy of the Eagle Hardware Property including the payment
of all taxes, insurance premiums, maintenance and repair costs. Eagle Hardware
is obligated to maintain the Eagle Hardware Property in good repair and
condition. In the opinion of management of the Company, the Eagle Hardware
Property is adequately covered by insurance.
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<PAGE> 22
Term
The term of the Eagle Lease runs through August, 2017. The Eagle Lease
includes no renewal terms.
Rent
The Eagle Lease requires Eagle Hardware to pay annual basic rent of
$1,057,665. The rent is payable monthly and is subject to adjustment at the end
of each lease year in an amount corresponding to the percentage increase in the
Seattle Urban Consumer Price Index.
In addition, Eagle Hardware is required to pay additional rent in an
amount equal to 1.5% of the amount by which gross sales at the Eagle Hardware
Property exceed the levels described below in the corresponding lease year.
<TABLE>
<CAPTION>
Sales Level
(in millions) Lease Year Ended
- ------------- ----------------
<S> <C>
$26 8/99 - 8/01
27 8/02 - 8/04
28 8/05 - 8/07
29 8/08 - 8/10
30 8/11 - 8/17
</TABLE>
For the lease years ending in September, 1995, 1996 and 1997, Eagle Hardware
paid additional rent of $254,185, $217,775 and $295,300 respectively.
Additional Consideration
The Company has agreed to pay to the shareholders of Keystone
additional consideration in the form of additional Shares. If Eagle Hardware's
cumulative sales during any consecutive four quarters equals or exceeds the
amounts specified below, the Company will issue the following additional Shares:
<TABLE>
<CAPTION>
Sales (millions) Additional Shares
- ---------------- -----------------
<S> <C>
$ 50 17,500
52.5 11,250
55 11,250
57.5 10,000
------
50,000
</TABLE>
The issuance of the additional Shares is cumulative and in no event shall the
Company issue more than 50,000 additional Shares.
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<PAGE> 23
Description of Eagle Hardware
Eagle Hardware considers itself to be a leading operator of
customer-friendly home improvement centers in the western United States. Eagle
Hardware has 32 stores with approximately 4.1 million square feet of selling
space.
Financial statements of Eagle Hardware are on file with the Securities
and Exchange Commission. The following is a summary of selected financial data
for Eagle Hardware over the last three years:
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 26, 1996 JANUARY 31, 1997 JANUARY 30, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS DATA
(IN THOUSANDS)
Net Sales $615,674 $760,963 $971,488
Gross Margin 165,809 211,580 273,352
Net Income 11,335 21,737 29,916
BALANCE SHEET DATA (IN THOUSANDS)
Working Capital 55,391 143,351 172,605
Total Assets 366,567 519,385 601,655
Total Debt 136,042 108,416 145,836
Shareholders' Equity 155,601 304,843 336,537
</TABLE>
SUBSEQUENT EVENTS
America West Property
On February 18, 1998, the Company and an unaffiliated limited liability
company, AWHQ LLC, with 80% and 20% interests, respectively, as
tenants-in-common, acquired land in Tempe, Arizona upon which a nine-story
225,00 square foot office building with an attached parking garage is to be
constructed pursuant to construction agency and net lease agreements with
American West Holdings Corporation ("America West"). Total acquisition and
project costs are estimated to be approximately $37,000,000. America West has
the obligation for any costs in excess of such amount necessary to complete the
project.
During the construction period, America West will pay monthly rent
based on the weighted average amount advanced for project costs. The lease
provides for an initial term of 15 years with two five-year renewal terms
commencing May 1, 1999. Annual rent will initially be
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<PAGE> 24
equal to total project costs multiplied by 9.2%. Rent increases are scheduled
for May 2003 and every five-years thereafter, on a formula indexed to increases
in the Consumer Price Index ("CPI"), with each increase capped at 11.77%.
The lease provides America West with purchase options to purchase the
property at the end of the tenth lease year of the initial term and the end of
the initial term at an option price equal to the greater of fair market value as
affected and encumbered by the lease or the Company's and AWHQ LLC's project
costs for the property.
Federal Express Property
On March 17, 1998, the Company acquired approximately 46 acres of land
in Collierville, Tennessee upon which four office buildings totaling up to
400,000 square feet are being constructed. At the end of the construction
period, the buildings will be occupied by Federal Express Corporation ("Federal
Express") pursuant to a master net lease.
In connection with the acquisition of the land, the Company entered
into a lease agreement with FEEC II, L.P. ("FEEC") which in turn is the
sublessor to Federal Express. The lease between the Company and FEEC provides
for a development period term ending on the earlier of the completion of the
project or November 30,1 999 followed by twenty-year initial term.
The FEEC lease grants the Company an exclusive option to acquire FEEC's
leasehold estate in the Federal Express net lease, as lessor, with such option
exercisable at any time after the end of the development period. The option
price will be based on a formula indexed to Federal Express' annual rent under
its lease with FEEC less all amounts previously advanced by the Company to FEEC
for project costs. The Company expects that the total cost will not exceed
$77,000. The Company intends to exercise its option at the earliest practicable
date and at such time will assume the Federal Express lease.
Federal Express' initial annual rent will be based on the actual costs
necessary to complete the build-to-suit project with such rent capped at $6,628.
Rent increases are scheduled annually and are indexed to increases in the CPI
with annual increases limited to 1.7%. The Federal Express lease provides for an
initial term of 20 years with two ten-year renewal terms at the option of the
lessee.
Credit Agreement
On March 26, 1998, the Company obtained a line of credit of
$150,000,000 pursuant to a revolving credit agreement with The Chase Manhattan
Bank. The revolving credit agreement has a term of three years.
Advances from the line of credit must be for at least $3,000 and in
multiples of $500 for any single advance. Advances made will bear interest at an
annual rate of either (i) the one, two,
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<PAGE> 25
three or six-month LIBOR Rate, as defined, plus a spread which ranges from 0.6%
to 1.45% depending on leverage or corporate credit rating or (ii) the greater of
the bank's Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a
spread ranging from 0% to .125% depending upon the Company's leverage. In
addition, the Company will pay a fee (a) ranging between 0.15% and 0.20% per
annum of the unused portion of the credit facility, depending on the Company's
leverage, if no minimum credit rating for the Company is in effect or (b) equal
to .15% of the total commitment amount, if the Company has obtained a certain
minimum credit rating.
The revolving credit agreement has financial covenants that require
the Company to (i) maintain minimum equity value of $400,000 plus 85% of amounts
received by the Company as proceeds from the issuance of equity interests and
(ii) meet or exceed certain operating and coverage ratios. Such operating and
coverage ratios include, but are not limited to, (a) ratios of earnings before
interest, taxes, depreciation and amortization to fixed charges for interest and
(b) ratios of net operating income, as defined, to interest expense.
The Company has drawn $55,000,000 from the line of credit to pay off
existing debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Carey Diversified LLC ("Carey Diversified" or the "Company") which
commenced public trading on the New York Stock Exchange on January 21, 1998 was
organized to combine and continue the business of the nine Corporate Property
Associates real estate limited partnerships. The Partnerships own and manage a
diverse portfolio of real properties, generally leased to corporate tenants
pursuant to long-term net leases. With the Consolidation of the nine CPA(R)
Partnerships into Carey Diversified, effective January 1, 1998, the Company will
use the corporate finance, asset valuation and structuring capabilities of its
management team to expand the existing net lease Partnership portfolio and to
use such expertise, as appropriate, to engage in new lines of business.
From 1979 through 1991, the CPA(R) Partnerships raised approximately
$400 million of equity through public offerings of Limited Partnership Units.
Each CPA(R) Partnership was structured so that holders of limited partnership
units anticipated a return of their investment over the finite life of the
Partnership with a disposition strategy that included the sale of assets and
liquidation of the Partnership. Accordingly, each CPA(R) Partnership was
structured so that there would be no additional raising of equity after the
initial offering, nor, after a defined period, reinvestment of sales proceeds in
new properties.
This structure restricted the ability of a CPA(R) Partnership to
increase its asset base after the investment of offering proceeds was completed.
As a Partnership disposed of a property, its asset base and income from
continuing operations would decrease. Further, the stated objective
-25-
<PAGE> 26
of a Partnership was to use its cash flow to pay distributions at an increasing
rate rather than for reinvestment. In contrast, the Company is an infinite life
entity that has the ability to raise additional equity capital either through
public stock or debt offerings or by exchanging shares in the Company to acquire
properties. Management will have greater flexibility in evaluating whether
shareholder value will better benefit from the reinvestment of a portion of its
cash flow in acquiring properties or in increasing its rate of distributions.
The historical results of operations described below may not reflect future
operating results because the flexibility to pursue strategies to increase the
Company's asset base was not possible under the constraints of the finite life
and static structure of the CPA(R) Partnerships.
Limited Partners in the CPA(R) Partnerships that elected to receive
Listed Shares in the Company in exchange for Limited Partnership Units were
issued 23,225,967 Listed Shares on the effective date. The listing of the Listed
Shares on the New York Stock Exchange provides the holders thereof with
liquidity. The allocation of Listed Shares was based on Total Exchange Value as
determined pursuant to an independent valuation.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1997 decreased by
$4,734,000 as compared with net income for the year ended December 31, 1996. The
decrease was due to increases in general and administrative and property
expenses, property writedowns, a decrease in earnings from the Company's hotel
operations and a decrease in gains on asset dispositions. The effect of these
items was partially offset by an increase in other income and decreases in
interest expense and depreciation. Lease revenues (rental income and interest
income from direct financing leases) were substantially unchanged.
The increase in general and administrative costs was primarily the
result of administrative costs incurred in connection with the evaluation of
Partnership liquidity alternatives and the structuring of the Consolidation. The
increase in property expenses reflected (i) higher management fees, determined
in accordance with the Agreement of Partnership of each CPA(R) Partnership, (ii)
increased legal fees as a result of the CPA(R) Partnerships seeking to preserve
its interests in both existing bankruptcy claims against former and current
lessees and disputes with current lessees, (iii) leasing commissions paid to
brokers in the remarketing of properties, (iv) operating costs for those
properties that are not subject to net leases and (v) charges incurred in
connection with evaluating reserves for uncollected rent. The increase in
property writedowns reflected the writedown of a property held for sale pursuant
to the exercise of a purchase option to an amount equal to the estimated
proceeds to be received on sale and the evaluation of the fair value on two
other properties during the year. A full year's lease revenues from leases with
Sports & Recreation, Inc. and Excel Communications, Inc., an increase by the
United States Postal Service for space leased at the property in Bloomingdale,
Illinois from 34% to 52% of such leasable space, the benefit from the 1996 lease
modification and extension agreement with Hughes Markets, inc. and several rent
increases, generally based on formulas indexed to increases in the Consumer
Price Index, offset the reduction in lease revenues resulting from the
-26-
<PAGE> 27
sale of properties in 1996 and the expiration of the Advanced System
Applications lease at the Bloomingdale property
The decrease in earnings from hotel operations resulted from the
disposition of two hotel properties in 1996 as earnings for the three remaining
hotels operated by the Company and located in Alpena, Petosky and Livonia,
Michigan increased in 1997. For the three remaining hotels, operating earnings
increased by more than $400,000, or approximately 12%, as a result of a 3.5%
increase in revenues with no change in operating expenses. The increase in
revenues reflect moderate increases in both overall occupancy and average room
rates. Other income included $2,467,000, received as distributions in bankruptcy
claims from former tenants and equity income of $2,076,000 including $1,472,000
from the Company's equity interest in the operating partnership of American
General Hospitality Corporation, a publicly traded real estate investment trust
specializing in hotel properties. The decrease in interest expense was the
result of decreasing mortgage balances resulting from both prepayments and
scheduled amortizing payments of mortgage principal. The decrease in
depreciation was due to the disposition of properties in both 1997 and 1996.
Net income for the year ended December 31, 1996 decreased by
$7,275,000 as compared with the year ended December 31, 1995, Several
nonrecurring items; however, are reflected in the results for 1995 including
$3,207,000 of extraordinary gains from the extinguishments of mortgage debt and
a gain of $11,499,000 on the settlement of a dispute with The Leslie Fay
Company. Excluding extraordinary items and other gains for the comparable years,
income (including the effect of minority interest) would have reflected an
increase in earnings of $7,173,000 for 1996. The increase in income, as
adjusted, was the result of lower interest, depreciation and general and
administrative expenses, and a higher level of property writedowns in 1995 as
compared with 1996 and was partially offset by lower hotel earnings. Lease
revenues decreased by approximately 2%, primarily due to the sale of properties.
The decrease in interest expense was due to the prepayment of
several mortgages in both 1995 and 1996 and the continuing amortization of the
Company's mortgage debt. The decrease in depreciation reflected the effect of
property sales, while the decrease in general and administrative expenses was
due to costs incurred in 1995 for state taxes and nonrecurring costs related to
the relocation of the CPA(R) Partnerships' offices. The property writedown in
1996 related to the hotel in Rapid City, South Dakota and establishing its fair
value at an amount equal to its anticipated sales price. Hotel earnings
decreased by $1,058,000 reflecting the exchange of the Kenner, Louisiana Holiday
Inn New Orleans Airport for units in the operating partnership of American
General Hospitality in July 1996 and the sale of the Rapid City Holiday Inn in
October 1996. Hotel earnings at the three remaining hotels increased with such
increases ranging from 7% to 13%.
The Company exchanged its ownership interests in the Kenner hotel
for 960,672 units of the American General Hospitality operating partnership.
Management's expectation was that the exchange would eliminate the uncertainty
and fluctuation in cash flow related to operating a single hotel by a CPA(R)
Partnership as the operating partnership owns a diversified portfolio of
-27-
<PAGE> 28
hotel properties and continues to acquire properties. The Company has the right
to exchange its units on a one-for-one basis for shares of American General
Hospitality common stock. While conversion of units to shares would be taxable
to holders of Listed Shares, the shares would be freely transferable on
conversion. The quoted market value of a share of common stock at December 31,
1997 was $26-3/4 resulting in an aggregate value as of that date of
approximately $25,700,000, if converted.
Gains realized in 1996 included a gain of $4,408,000 on the sale of
a warehouse property in Hodgkins, Illinois leased to GATX Logistics, Inc. as
well as the sale of the Rapid City hotel. Management sold the Rapid City
property, after concluding that the cost of upgrading the hotel to meet the core
modernization plan of Holiday Inn and retain the Holiday Inn affiliation would
not provide an adequate return on the additional investment. Revenues and
profitability of the Rapid City operation were expected to decrease from any
change in hotel chain affiliations.
Lease revenues of the Company are expected to decrease in 1998 as a
result of the expiration of a lease in June 1997 with Advanced System
Applications, the termination of the Gould, Inc. lease in November 1997 granted
in exchange for a settlement payment by Gould and the expiration of a lease with
Hughes, in April 1998. While revenue from these lessees represented
approximately 12% of 1997 lease revenues, both the Hughes and Advanced System
Applications lease had been renegotiated in prior years at rents substantially
in excess of market rates. The Hughes lease provided for a final rental payment
of $3,500,000 which the Company had initially anticipated as being needed for
retrofitting the special purpose property and remarketing costs. Because the
Company has entered into a lease with Copeland Beverage Group for that property
which will go into effect when Hughes Markets vacates, the Company will not need
to use the final payment from Hughes as initially anticipated. In addition, the
annual rent from the Copeland Beverage lease will approximate the rents received
from Hughes prior to the two-year extension term. Advanced System Applications
renegotiated its lease in 1994 in order to allow it to complete its lease
obligation in 1997 rather than 2003. The rents paid during this abbreviated term
were intended to provide the Company with a significant proportion of the rents
that would have been due over the remainder of the original term. A portion of
the increased rents were used to amortize fully the loan on the Bloomingdale
property so that the carrying costs of the property do not include any debt
service obligations. The Company is remarketing the remaining leasable space.
Although the Gould lease was originally scheduled to expire in August 1999, the
Company permitted an early termination in consideration for a lump sum payment
approximately of $1,830,000, received in January 1998, representing
approximately 80% of remaining rents for what would have been the remaining
lease term. Lockheed Martin Corporation has entered into a lease for a portion
of the vacated space. While it will be a challenge to fully replace the rents
from Hughes, Advanced System Applications and Gould, these transactions
reflected agreements that were negotiated for increased rents and/or lump sum
settlement amounts. Since January 1, 1998, the Company has entered into net
leases with America West Holdings Corporation for a new corporate headquarters
in Tempe, Arizona and Federal Express Corporation for an office building complex
in Collierville, Tennessee When these build-to-suit projects are completed, they
are expected to provide annual rents of up to $10,000,000. As described in the
overview, the use of resources to build the asset base is a direct
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<PAGE> 29
result of the Consolidation. Several lessees have purchase options that are
exercisable over the next several years. The Company will now have the option of
investing the proceeds from any such sales in new properties.
In connection with the Consolidation, the operations of the Livonia,
Michigan hotel and related license and franchise agreements have been
transferred to an affiliate, Livho, Inc. in 1998. Based on Management's
analysis, retaining direct control of the Livonia hotel could have adverse tax
consequences for holders of Listed Shares under the qualification regulations
for publicly-traded partnerships. The lease with Livho will initially provide
annual rent of $2,348,000.
The expense structure of the Company may be expected to change as a
result of the Consolidation. There were certain costs in maintaining nine
publicly-registered real estate limited partnerships that mitigated against any
benefit that could be achieved from economies of scale. Such benefits are more
likely to be available to the Company in the future. Certain of these
efficiencies will not be realized until the interests of the Subsidiary
Partnership Unitholders in the CPA(R) Partnerships are liquidated.
Because of the long-term nature of the Company's net leases,
inflation and changing prices should not unfavorably affect the Company's
revenues and net income or have an impact on the continuing operations of the
Company's properties. The Company's net leases have rent increases based on the
Consumer Price Index and may have caps on such CPI increases, or sales
overrides, which should increase operating revenues in the future. The moderate
increases in the CPI over the past several years will affect the rate of such
future rent increases. Management believes that hotel operations will not be
significantly impacted by changing prices. In addition, Management believes that
reasonable increases in hotel operating costs may be partially or entirely
offset by increases in room rates.
LIQUIDITY AND CAPITAL RESOURCES
The CPA(R) Partnerships' portfolio of properties was acquired with
funds from the offering of each Partnership and with financing provided by
limited recourse mortgage debt. Cash flow from operations was used to pay
scheduled principal payment obligations on the mortgage debt and to fund
quarterly distribution to partners, generally at an increasing rate each
quarter. Net proceeds from the sale of assets and lump sums received from
disputes or bankruptcy claims were used, after reviewing the adequacy of cash
reserves, to pay off high rate mortgage debt or to fund special distributions to
partners.
While the Company will initially distribute a significant portion of
its cash flow to shareholders, Management will have the ability to evaluate
whether a greater return may be realized by reinvesting any available excess
cash flow, rather than increasing the rate of distributions. The Company will
have more flexibility in structuring its debt as well. The Company may use
non-amortizing and unsecured debt to lower debt service levels. On March 26,
1998, the Company entered into a three year revolving credit agreement which
provides the Company with a line of credit of $150,000,000. The Company
initially expects to use the funds
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<PAGE> 30
available under the line of credit to fund acquisitions and build-to-suit
projects and to pay off higher interest and/or maturing debt. The use of
unsecured financing will require the Company to meet financial covenant
requirements. Such requirements generally include maintaining defined net worth
levels and operating cash flow and interest coverage ratios.
The Company expects to meet its short-term liquidity requirements,
including general and administrative and property expenses, scheduled principal
payment installment obligations and distribution objectives from cash generated
from operations and from existing cash balances. The CPA(R) Partnerships
maintained working capital reserves in order to fund their nonrecurring needs,
including capital improvements and maturing debt. The CPA(R) Partnerships cash
balance at December 31, 1997 was $18,586,000. Such cash balance may decrease in
the future as the Company might have the opportunity to use lines of credit to
supplement cash flow from operations to fund short-term liquidity and working
capital reserve needs. Since March 26, 1998, the Company has used $55,000,000
from its newly acquired line of credit to satisfy outstanding mortgage and note
payable principal balances on higher interest debt.
The Company's cash balance decreased by $9,967,000 primarily as a
result of paying the CPA(R) Partnerships' distributions of $9,730,000 in
December 1997, that were intended to adjust the net assets of each CPA(R)
Partnership to conform with the estimate of Total Exchange Value, as specified
in the Consent Solicitation Statement/Prospectus. Without such distribution,
cash balances would have been unchanged from the prior year. Cash flow from
operations of $49,559,000 was sufficient to fund payment of four quarterly
distributions in January, April, July and October 1997, totaling $33,890,000,
scheduled principal installments of $8,166,000, debt prepayments of $6,699,000
and a portion of additional capital costs, primarily at the hotel properties of
$1,955,000. Other mortgage prepayments of $12,700,000 were paid off by acquiring
new limited recourse mortgage financing on the same properties. Mortgages were
refinanced based on the opportunity to lower interest rates, and, therefore,
debt service requirements.
The Company expects to have the opportunity to raise additional
equity capital through public offerings of shares or the issuance of shares in
exchange for properties. The Company is also adopting a dividend reinvestment
and share purchase plan which may allow the Company to raise additional capital
at little or no cost.
The Company's management company has responsibility for maintaining
the Company's books and records. An affiliate of the management company services
the computer systems used in maintaining such books and records. In its
preliminary assessment of Year 2000 issues, the affiliate believes that such
issues will not have a material effect on the Company's operations; however such
assessment has not been completed. The Company relies on its bank and transfer
agent for certain computer-related services and has initiated discussions to
determine whether they are addressing Year 2000 issues that might affect the
Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure about Segments
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<PAGE> 31
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in full set general purpose financial statements.
SFAS No. 131 establishes accounting standards for the way that public business
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 130 and SFAS No. 131 are
required to be adopted in 1998. The Company is currently evaluating the impact,
if any, of SFAS No. 130 and SFAS 131.
BUSINESS AND PROPERTIES
The Company (or their representatives) from time to time may make or
may have made certain forward-looking statements, whether orally or in writing,
including, without limitation, statements in this Prospectus and otherwise,
regarding the business plan of the Company, estimates of future cash flows of
the Company, the types of investments to be made by the Company and hypothetical
distribution and returns to Unitholders. Such statements are qualified in their
entirety by reference to, and are accompanied by, the factors disclosed under
the heading "RISK FACTORS." Such factors could cause actual results to differ
materially from those projected in such forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
THE COMPANY'S BUSINESS
The Company's objective is to increase shareholder value and its
Funds from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to take immediate advantage of
the significant opportunities to make net lease and other investments at
attractive returns. The Company expects to evaluate a number of different
opportunities in a variety of property types and geographic locations and to
pursue the most attractive based upon its analysis of the risk/return tradeoffs.
The Company presently intends to:
- Seek additional investment and other opportunities that leverage
core management skills (which include in-depth credit analysis,
asset valuation and sophisticated structuring techniques);
- optimize the current portfolio of properties through expansion of
existing properties, timely dispositions and favorable lease
modifications;
- utilize its enhanced size and access to capital to refinance
existing debt; and
- increase the Company's access to capital.
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<PAGE> 32
The Company is a perpetual life, growth-oriented company and,
therefore, will continue to own properties as long as it believes ownership
helps attain the Company's objectives. The Board of Directors will have the
ability to change investment financing, distribution and other policies of the
Company without the consent of the Shareholders.
MANAGEMENT OF THE COMPANY
The Manager provides both strategic and day-to-day management for
the Company, including research, investment analysis, acquisition and
development services, asset management, capital funding services, disposition of
assets and administrative services. The Manager has dedicated senior executives
in each area of its organization so that the Company will function as a fully
integrated operating company.
ACQUISITION STRATEGIES
The Manager has a well-developed process with established procedures
and systems for acquiring net leased property. As a result of its reputation and
experience in the industry and the contacts maintained by its professionals, the
Manager has a presence in the net lease market that has provided it with the
opportunity to invest in a significant number of transactions on an ongoing
basis. The Company seeks to utilize the Manager's presence in the net lease
market to acquire additional properties in transactions with both new and
current tenants. In evaluating opportunities for the Company, the Manager
carefully examines the credit, management and other attributes of the tenant and
the importance of the property under consideration to the tenant's operations.
Careful credit analysis is a crucial aspect of every transaction. The Company
believes that the Manager has one of the most extensive underwriting processes
in the industry and has an experienced staff of professionals involved with
underwriting transactions. The Manager seeks to identify those prospective
tenants whose creditworthiness is likely to improve over time. The Company
believes that the experience of its management in structuring sale-leaseback
transactions to meet the needs of a prospective tenant enables the Manager to
obtain a higher return for a given level of risk than would typically be
available by purchasing a property subject to an existing lease.
The Manager's strategy in structuring its net lease investments for
the Company is to:
(i) combine the stability and security of long-term lease
payments, including rent increases, with the
appreciation potential inherent in the ownership of real
estate;
(ii) enhance current returns by utilizing varied lease
structures;
(iii) reduce credit risk by diversifying its investments by
tenant, type of facility, geographic location and tenant
industry; and
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<PAGE> 33
(iv) increase potential returns by obtaining equity
enhancements from the tenant when possible, such as
warrants to purchase tenant common stock.
FINANCING STRATEGIES
Consistent with its investment policies, the Company intends to use
leverage when available on favorable terms. The Company plans to have in place a
credit facility, which it intends to use primarily to acquire additional
properties and refinance existing debt. The Manager will continually seek
opportunities and consider alternative financing techniques to refinance debt,
reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, the Manager reviews and
structures many aspects of a transaction, including the tenant, the real estate
and the lease, to determine whether a potential acquisition can be structured to
satisfy the Company's acquisition criteria. The aspects of a transaction which
are reviewed and structured by the Manager include the following:
- Tenant Evaluation. The Manager subjects each potential tenant to
an extensive evaluation of its credit, management, position within
its industry, operating history and profitability. The Manager
seeks tenants it believes will have stable or improving credit. By
leasing properties to such tenants, the Company can generally
charge rent that is higher than the rent charged to tenants with
recognized credit and, thereby, enhance its current return from
such properties as compared with properties leased to companies
whose credit potential has already been recognized by the market.
Furthermore, if a tenant's credit does improve, the value of the
Company's properties leased to such tenants will likely increase
(if all other factors affecting value remain unchanged). The
Manager may also seek to enhance the likelihood of a tenant's
lease obligations being satisfied, such as through a letter of
credit or a guaranty of lease obligations from the tenant's
corporate parent. Such credit enhancement provides the Company
with additional financial security.
- Leases with Increasing Rents. The Manager seeks to include clauses
in the Company's leases that provide for increases in rent over
the term of the leases. These increases are generally tied to
increases in certain indices such as the consumer price index, in
the case of retail stores participation in gross sales above a
stated level, mandated rental increases on specific dates and by
other methods. The Company seeks to avoid entering into leases
that provide for contractual reductions in rents during their
primary term.
- Properties Important to Tenant Operations. The Manager, on behalf
of the Company, generally seeks to acquire properties with
operations that are
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<PAGE> 34
essential or important to the ongoing operations of the tenant.
The Company believes that such properties provide better
protection in the event that a tenant files for bankruptcy,
because leases on properties essential or important to the
operations of a bankrupt tenant are less likely to be rejected
and, thereby, terminated by a bankrupt tenant. The Manager also
seeks to assess the income, cash flow and profitability of the
business conducted at the property, so that, if the tenant is
unable to operate its business, the Company can either continue
operating the business conducted at the property or re-lease the
property to another entity in the industry which can operate the
property profitably.
- Lease Provisions that Enhance and Protect Value. When
appropriate, the Manager attempts to include provisions in the
Company's leases that require the Company's consent to certain
tenant activity or require the tenant to satisfy certain operating
tests. These provisions include, for example, operational and
financial covenants of the tenant, prohibitions on a change in
control of the tenant and indemnification from the tenant against
environmental and other contingent liabilities. Including these
provisions in its leases enables the Company to protect its
investment from changes in the operating and financial
characteristics of a tenant that may impact its ability to satisfy
its obligations to the Company or could reduce the value of the
Company's Properties.
- Diversification. The Manager attempts to diversify the Company's
portfolio of properties to avoid dependence on any one particular
tenant, type of facility, geographic location and tenant industry.
By diversifying its portfolio, the Company reduces the adverse
effect on the Company of a single underperforming investment or a
downturn in any particular industry.
The Manager employs a variety of other strategies and practices in
connection with the Company's acquisitions. These strategies include attempting
to obtain equity enhancements in connection with transactions. Typically, such
equity enhancements involve warrants to purchase stock of the tenant to which
the property is leased or the stock of the parent of the tenant. In certain
instances, the Company grants to the tenant a right to purchase the property
leased by the tenant, but generally the option purchase price will be not less
than the fair market value of the property. The Manager's practices include
performing evaluations of the physical condition of properties and performing
environmental surveys in an attempt to determine potential environmental
liabilities associated with a property prior to its acquisition.
ACQUISITION AND UNDERWRITING PROCESS
The Manager's Acquisition and Asset Management Department has the
primary responsibility for the origination and negotiation of acquisitions of
properties. Members of this Department will identify potential acquisitions and
conduct negotiations with sellers and tenants.
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<PAGE> 35
Members of the Acquisition and Asset Management Department generally structure
the terms of any financing the Company may use to acquire a property.
As a transaction is structured, it is evaluated by the Chairman of
the Investment Committee with respect to the potential tenant's credit, business
prospects, position within its industry and other characteristics important to
the long-term value of the property and the capability of the tenant to meet its
lease obligations. Before a property is acquired, the transaction is reviewed by
the Investment Committee to ensure that it satisfies the Company's investment
criteria. Aspects of the transaction that are typically reviewed by the
Investment Committee include the expected financial returns, the
creditworthiness of the tenant, the real estate characteristics and the lease
terms.
The Investment Committee is not directly involved in originating or
negotiating potential acquisitions, but instead functions as a separate and
final step in the acquisition process. The Manager places special emphasis on
having experienced individuals serve on its Investment Committee and does not
invest in a transaction unless it is approved by the Investment Committee.
The Company believes that the Investment Committee review process
gives it a unique, competitive advantage over other unaffiliated net lease
companies because of the substantial experience and perspective that the
Investment Committee has in evaluating the blend of corporate credit, real
estate and lease terms that combine to make an acceptable risk.
The following people serve on the Investment Committee:
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the CPA(R)
Programs for over 16 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer
was responsible for all of Prudential's investments, including
stocks, bonds, private placements, real estate and mortgages.
- Lawrence R. Klein is Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton School.
Dr. Klein has been awarded the Alfred Nobel Memorial Prize in
Economic Sciences and currently advises various governments and
government agencies.
The Company invests in properties subject to Triple Net Leases
(i.e., leases in which the tenant is responsible for real estate taxes and
assessments, repairs and maintenance, insurance and other expenses relating to
the property and has the duty to restore in case of casualty). However, the
Company may, in its discretion, acquire properties subject to leases under which
it has more responsibilities than would normally be the case under a Triple Net
Lease and may make other investments.
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<PAGE> 36
ASSET MANAGEMENT
The Company believes that effective management of net lease assets
is essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process. The Company believes that the Manager's
knowledgeable and experienced professionals are well qualified in these areas of
asset management.
The Manager monitors, on an ongoing basis, compliance by tenants
with their lease obligations and other factors that could affect the financial
performance of any of its Properties. Such monitoring includes receiving
assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the Properties it occupies and confirming that appropriate
insurance coverage is being maintained by the tenant. The Manager reviews
financial statements of its tenants and undertakes regular physical inspections
of the condition and maintenance of its Properties. Additionally, the Manager
periodically analyzes each tenant's financial condition, the industry in which
each tenant operates and each tenant's relative strength in its industry.
PROPERTIES
As of January 1, 1998, the Company, through its subsidiaries, owned
198 Properties, 191 of which are currently net leased. The following table
provides certain information with respect to the Properties.
<TABLE>
<CAPTION>
PROPERTY PROPERTY SQUARE ANNUAL INCREASE LEASE MAXIMUM % OF
LESSEE LEASE GUARANTOR LOCATION TYPE FOOTAGE RENT FACTOR EXPIRATION TERM REVENUES
--------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Santee Dairies, Inc. (2)
Hughes Markets Los Angeles, 1 390,000 $5,783,992 Stated Apr-98 Oct-98 7.61%
CA
Dr Pepper Bottling
Company of Texas
Dr Pepper Irving, TX 2 459,497
Holdings, Inc.
Houston, TX 2 262,450
--------
721,947 $3,998,000 CPI Jun-14 Jun-14 5.26%
Detroit Diesel
Corporation
Detroit, MI 1 2,730,750 $3,658,059 PPI Jun-10 Jun-30 4.81%
Barnstead Thermolyne
Corporation
Ormco Corporation Sybron Dubuque, IA 1 144,300 $452,956 CPI Dec-13 Dec-38
International
Corp.
Erie Scientific Company Glendora, CA 3 25,000 $369,186 CPI Dec-13 Dec-38
Nalge Company Portsmouth, 1 95,000 $537,058 CPI Dec-13 Dec-38
NH
Kerr Corporation Rochester, NY 1 221,600 $985,378 CPI Dec-13 Dec-38
Romulus, MI 1 220,000 $966,504 CPI Dec-13 Dec-38
----------------------
705,900 $3,311,082 4.36%
Gibson Greetings, Inc.
Cincinnati, 1 593,340
OH
Berea, KY 2 601,500
--------
1,194,840 $3,100,000 Stated Nov-13 Nov-23 4.08%
Stoody Deloro
Stellite, Inc.
Industry, CA 1 325,800 $2,234,190 CPI Feb-10 Feb-35
Goshen, IN 1 54,270 $500,212 CPI Feb-10 Feb-35
----------------------
380,070 $2,734,402 3.60%
AmerSig Southeast, Inc.
AS Memphis, Inc. Quebecor Printing Doraville, GA 1 432,559 $1,522,498 CPI Dec-09 Dec-34
Inc.
Olive 1 270,500 $980,643 CPI Jun-08 Jun-33
Branch, MS
----------------------
703,059 $2,503,141 3.29%
Furon Company
New Haven, CT 1 110,389
Mickleton, NJ 1 86,175
Aurora, OH 1 147,848
</TABLE>
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<PAGE> 37
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mantua, OH 1 150,544
Bristol, RI 1 105,642
Aurora, OH 1 26,692
--------
1 627,290 $2,416,049 PPI Jul-07 Jul-37 3.18%
Pre Finish Metals
Incorporated
Material Sciences Walbridge, OH 1 313,704 $2,263,395 CPI Jun-03 Jun-28 2.98%
Corporation
AutoZone, Inc.
Fleming 31 Locations: 4 185,990 $540,815 % Sales Jan-11 Jan-26
Companies, Inc.
NC, TX, AL, $844,164 % Sales Feb-11 Feb-26
GA,
AutoZone, Inc. IL, LA, MO
13 Locations: 4 70,425 $311,686 % Sales Aug-12 Aug-37
FL, LA, MO,
AutoZone, Inc. NC, TN
11 Locations: 4 59,400 $529,760 % Sales Aug-13 Aug-38
----------------------
FL, GA, NM,
SC, TX 315,815 $2,226,425 2.93%
Orbital Sciences
Corporation
Chandler, AZ 1 280,000 $2,153,739 CPI Sep-09 Sep-29 2.83%
The Gap, Inc.
Erlanger, KY 2 391,000 $1,225,994 CPI Feb-03 Feb-43
Erlander, KY 2 362,750 $927,568 CPI Feb-03 Feb-43
----------------------
753,750 $2,153,562 2.83%
Simplicity
Manufacturing, Inc.
Port 1 414,236
Washington,
WI
Port 1 5,440
Washington,
WI
---------
419,676 $1,996,712 CPI Mar-03 Mar-13 2.63%
AP Parts Manufacturing
AP Parts Toledo, OH 1 1,160,000
International Inc.
Pinconning, 1 220,588
MI
---------
1,380,588 $1,836,534 CPI Dec-07 Dec-22 2.42%
NVR, Inc.
NVR L.P. Thurmont, MD 1 150,468 $729,114 CPI Mar-14 Mar-39
Farmington, 1 29,273
NY
Pittsburgh, 3 42,000 $938,046 CPI Mar-14 Mar-18
PA
Pittsburgh, 3 36,000
PA
----------------------
257,741 $1,667,160 2.19%
Unisource Worldwide,
Inc.
Commerce, CA 2 411,579 $1,292,800 Stated Apr-10 Apr-30
Anchorage, AK 2 44,712 $312,700 Stated Dec-09 Dec-29
----------------------
456,291 $1,605,500 2.11%
Cleo Inc.
CSS Industries, Memphis, TN 1 1,006,566 $1,500,000 CPI Dec-05 Dec-15 1.97%
Inc.
Peerless Chain Company
Winona, MN 1 357,760 $1,463,425 CPI Jun-11 Jun-26 1.93%
Information Resources,
Inc. (33.33% ownership) Chicago, IL 3 159,600
Chicago, IL 3 92,400
---------
252,000 $1,457,788 CPI Oct-10 Oct-15 1.92%
Red Bank Distribution,
Inc.
Cincinnati, 2 589,150 $1,400,567 CPI Jul-15 Jul-35 1.84%
OH
Brodart Co.
Williamsport, 3 309,030
PA
Williamsport, 3 212,201
PA
---------
521,231 $1,344,764 CPI Jun-08 Jun-28 1.77%
Gould, Inc.
Ohmeda Medical Devices Oxnard, CA 3 142,796 $1,215,000 Stated Nov-99 Nov-19 1.60%
Division Inc.
(Sublessee)
Datcon Instrument
Company
High Voltage Engineering Lancaster, PA 1 70,712 $600,262 CPI Nov-13 Nov-38
Corp.
(Lessee for Sterling, MA 1 70,000 $578,757 CPI Nov-13 Nov-38
Sterling/Guarantor for
Lancaster)
----------------------
140,712 $1,179,019 1.55%
Seven Up Bottling Co.
of St.Louis, Inc.
KSG, Inc. St. Louis, MO 3 148,100 $1,132,310 CPI Mar-12 Mar-37 1.49%
United States Postal
Service
Bloomington, 3 116,000 $1,089,982 Stated 1-Apr 30-Apr 1.43%
IL
Duff-Norton Company,
Inc.
Yale Forrest 1 265,000 $1,020,717 CPI Dec-12 Dec-32 1.34%
International, City, AR
Inc.
Armel, Inc.
Kinney Shoe Ft. 2 80,540 $964,941 CPI Sep-01 Sep-16 1.27%
Corporation Lauderdale,
FL
DeVlieg-Bullard, Inc.
McMinnville, 1 276,991
TN
Frankenmuth, 1 132,400
MI
---------
409,391 $953,803 CPI Apr-06 Apr-26 1.26%
General Electric Company
King of 3 88,578 $934,186 Market Jul-98 Jul-08 1.23%
Prussia, PA
Wal-Mart Stores, Inc.
West 4 118,125 $891,129 CPI Jan-07 Jan-37 1.17%
Mifflin, PA
Anthony's Manufacturing
Company, Inc.
San 1 95,420
Fernando, CA
San 1 7,220
</TABLE>
-37-
<PAGE> 38
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fernando, CA
San 1 40,285
Fernando, CA
San 1 39,920
Fernando, CA
---------
182,845 $876,000 CPI May-07 May-12 1.15%
Hotel Corporation of
America
Holiday Inn Franchisee Topeka, KS 5 117,590 $833,457 Stated Sep-03 Sep-03 1.10%
Varo Inc.
IMO Industries, Garland, TX 1 150,203 $822,750 Stated Sep-02 Sep-07 1.08%
Inc.
United Stationers
Supply Co.
United New Orleans, 2 59,000
Stationers, Inc. LA
Memphis, TN 2 75,000
San Antonio, 2 63,321
TX
---------
197,321 $812,500 CPI Mar-10 Mar-30 1.07%
Agency Management
Services, Inc.
Continental College 3 98,552 $771,666 Stated Oct-98 Oct-03 1.02%
Casualty Company Station, TX
Winn-Dixie Montgomery,
Inc.
Winn-Dixie Montgomery, 4 32,690 $191,534 % Sales Mar-08 Mar-38
Stores, Inc. AL
Panama City, 4 34,710 $170,399 % Sales Mar-08 Mar-38
FL
Leeds, AL 4 25,600 $144,713 % Sales Mar-04 Mar-34
Bay Minette, 4 34,887 $128,472 % Sales Jun-07 Jun-37
AL
Brewton, AL 4 30,625 $134,500 % Sales Oct-10 Oct-30
----------------------
158,512 $769,618 1.01%
AT&T Corp.
Bridgeton, MO 3 55,810 $794,764 Stated Nov-01 Nov-11 1.05%
General Cinema Corp. of
Minnesota
General Cinema Corp. of Harcourt General, Burnsville, 4 31,837 $467,500 % Sales Jul-06 Jul-31
Michigan Inc. MN
Canton, MI 4 29,818 $233,750 % Sales Jul-05 Jul-30
----------------------
61,655 $701,250 0.92%
Western Union FSI
Bridgeton, MO 3 78,080 $656,882 Stated Nov-01 Nov-11 0.86%
Exide Electronics
Corporation
Exide Electronics Raleigh, NC 3 27,770 $572,130 CPI Apr-97 Apr-98 0.74%
Group, Inc.
Family Dollar Services,
Inc.
Salisbury, NC 2 311,182 $561,600 CPI Dec-00 Dec-20 0.74%
Swiss-M-Tex, L.P.
Travelers 1 178,693
Rest, SC
Liberty, SC 1 16,500
---------
195,193 $546,095 CPI Aug-07 Aug-31 0.74%
Motorola, Inc.
Urbana, IL 3 46,350 $540,000 Stated Dec-00 Dec-20 0.71%
EXCEL Teleservices, Inc.
EXCEL Reno, NV 3 53,158 $532,800 Stated Dec-00 Dec-20 0.70%
Communications,
Inc.
Penn Virginia Resources
Corporation
Pennsylvania Crusher Penn Virginia Cuyahoga 1 80,445
Corporation Corporation Falls, OH
(Joint Tenants) Broomall, PA 3 22,810
Duffield, VA 3 12,804
---------
116,059 $498,750 Market Aug-99 Aug-34 0.66%
Titan Corporation
(18.54% ownership) San Diego, CA 3 166,403 $485,084 CPI Jul-07 Jul-31 0.64%
Wozniak Industries, Inc.
Schiller 1 84,197 $452,400 Stated Dec-03 Dec-23 0.60%
Park, IL
Childtime Childcare,
Inc. (33.93% ownership) 12 Locations: 6 83,694 $413,638 CPI Jan-16 Jan-41 0.54%
AZ, CA, MI,TX
Yale Security Inc.
Lemont, IL 1 130,000 $399,000 Stated Apr-11 Apr-11 0.53%
CSK Auto, Inc.
Denver, CO 4 8,129 $51,709 CPI Jan-08 Jan-38
Glendale, AZ 4 3,406 $58,564 CPI Jan-02 Jan-22
Apache 4 5,055 $43,316 CPI Jan-02 Jan-22
Junction, AZ
Casa Grande, 4 11,588 $56,695 CPI Jan-02 Jan-22
AZ
Scottsdale, 4 8,000 $118,586 CPI Jan-02 Jan-22
AZ
Mesa, AZ 4 3,401 $59,955 CPI Jan-02 Jan-22
----------------------
39,579 $388,825 0.51%
B&G Contract Packaging,
Inc.
Maumelle, AR 1 80,000 $168,000 Stated Dec-97 Dec-03 0.22%
80,000 $162,000
160,000 $330,000
Lockheed Martin
Corporation
Glen Burnie, 2 45,804 $310,000 Stated Apr-01 Apr-21 0.41%
MD
Jumbo Sports, Inc.
Moorestown, 3 74,066 $308,750 Stated Jun-12 Jun-42 0.41%
NJ
Broomfield Tech Center
Corporation
Broomfield, 3 60,660 $180,081 None Dec-01 Dec-01 0.39%
CO
Broomfield, 3 40,440 $120,054 None May-02 May-02
CO
----------------------
101,100 $300,135 0.24%
Payless ShoeSource,
Inc. (8 Stores)
Fontana, CA 4 4,500 $183,146 None Dec-06 Dec-36
</TABLE>
-38-
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rialto, CA 4 4,500
Reynoldsburg, 4 3,840
OH
Tallmadge, OH 4 4,000
Anderson, IN 4 4,500
Cuyahoga 4 3,792
Falls, OH
Marion, OH 4 3,900
The Southland
Corporation Fremont, OH 4 4,000
(1 Store)
Chief Auto Parts, Inc.
(3 Stores) Merced, CA 4 4,500 $20,370 None Dec-06 Dec-36
Sacramento, 4 4,400 $63,798 None Dec-06 Dec-36
CA
Stockton, CA 4 4,500
The Kobacker Company Sacramento, 4 4,400
(Obligor for all 12
Stores) CA
----------------------
50,832 $267,314 0.35%
Petrocon Engineering,
Inc.
(One Lease applies to Beaumont, TX 3 48,700 $118,800 Stated Dec-98 Dec-00
three portions of
Facility.)
$103,740 None Jun-97 Jun-01
$43,200 None Nov-97 Nov-01
---------
$265,740 0.35%
Federal Express
Corporation
Corpus 2 30,212 $189,986 Market May-99 May-09
Christi, TX
College 2 12,080 $56,700 Market Feb-99 Feb-09
Station, TX
---------
$246,686 0.32%
NYNEX
Milton, VT 3 30,624 $215,600 Stated Feb-03 Feb-13 0.28%
Penberthy, Inc.
PCC Flow Prophetstown, 1 161,878 $209,507 CPI Apr-06 Apr-26 0.28%
Technologies, Inc. IL
Allied Plywood
Corporation
Manassas, VA 1 60,446 $185,000 Stated Mar-02 Mar-02 0.24%
Rochester Button Company
South 1 43,387
Boston, VA
Kenbridge, VA 1 38,000
---------
81,387 $180,000 None Dec-16 Dec-36 0.24%
Sunds Defibrator
Woodhandling, Inc.
Carthage, NY 1 76,000 $144,239 CPI Aug-05 Jul-07 0.19%
2
Pepsi-Cola Metropolitan
Bottling Company, Inc.
Service Corporation Houston, TX 2 17,725 $97,568 Stated Oct-04 Oct-04 0.13%
International (sublease)
Popular Stores, Inc.
Scottsdale, 4 11,800 $95,810 % Sales Jul-00 Jul-10 0.13%
AZ
Stair Pans of America,
Inc.
Fredericksburg, 1 45,821 $89,810 Stated Jul-98 Jul-98 0.12%
VA
Imo Tech Industries,
Inc.
Elyria, OH 1 183,000 $60,000 None Apr-98 Apr-03 0.08%
Cent Stores, Inc.
Mesa, AZ 4 11,039 $54,000 Stated Jan-13 Jan-13 0.07%
Family Bargain Center
Colville, WA 4 15,300 $49,255 CPI Jan-00 Jan-15 0.06%
The Crafters Mall, Inc.
Glendale, AZ 4 11,760 $47,964 None 0.06%
Quarterly
Renewals
Kinko's, Inc.
Canton, OH 4 1,700 $47,067 % Sales Aug-00 Aug-10 0.06%
Capin Mercantile
Corporation
Silver City, 4 11,280 $36,660 None May-00 May-05 0.05%
NM
Building 7 Corporation
Apache 4 9,945 $23,100 CPI Jun-01 Jun-06 0.03%
Junction, AZ
Moise L. Wexler, Scott
Wexler
New Orleans, 4 1,641 $19,692 % Sales Oct-05 Oct-15 0.03%
LA
Scallon's Carpet
Castle, Inc.
Casa Grande, 4 3,134 $17,710 Stated Dec-03 Dec-03 0.02%
AZ
Arthur L. Jones
Greensboro, 4 1,700 $10,725 CPI Apr-99 Apr-01 0.01%
NC
Petosky Holiday Inn
Petoskey, MI 5 83,462
Alpena Holiday Inn
Alpena, MI 5 96,333
Livonia Holiday Inn
Livonia, MI 3 158,000
Vacant
Columbus, SC 1 168,600
Vacant
Sumter, SC 1 87,000
Vacant
Garland, TX 1 52,241
Vacant
Canton 4 4,800
Total $75,996,924 100.03%
Revenue
</TABLE>
-39-
<PAGE> 40
(1) Property types are coded as follows: 1 -
Industrial/Manufacturing; 2 - Distribution/Warehouse; 3
- Office/Research; 4 - Retail; 5 - Hotel; 6 - Day Care
Center.
(2) A lease has been entered into with Copeland Beverage
Group Inc. which will commence when the lease with
Santee Dairies expires. The lease with Copeland provides
for an annual rent of $1,800,000 with increase based on
the CPI and is for a term of 9 years.
(A) Simplicity has exercised its option to
purchase the property. The said is expected
to be completed by no later than April 1998.
(B) A suite has been brought to enforce Red
Bank's obligations under this lease. Red
Bank is not currently paying the equity
portion of the rent due under the lease.
Three Properties owned by the CPA(R) Partnerships, through a
subsidiary, are Holiday Inn hotels two of which are not leased. All of these
Holiday Inn hotels (the "Hotels") are licensed to operate as Holiday Inns. The
following table provides certain information with respect to the Hotels that are
not leased.
<TABLE>
<CAPTION>
Number Square
Name Location of Rooms Feet
---- -------- -------- ----
<S> <C> <C> <C>
Petoskey Holiday Inn Petoskey, MI 142 83,452
Livonia Holiday Inn Livonia, MI 226 158,000
Alpena Holiday Inn Alpena, MI 148 96,333
</TABLE>
The Operating results of the Alpena and Petoskey Hotels for the
three years ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands)
----------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 25,077 $ 21,929 $ 14,523
Management fees* (594) (547) (368)
Other operating expenses (17,443) (15,400) (10,380)
-------- -------- --------
</TABLE>
-40-
<PAGE> 41
<TABLE>
<S> <C> <C> <C>
Operating income $ 7,040 $ 5,982 $ 3,775
</TABLE>
*Paid to unaffiliated third parties.
The hotel located in Livonia, Michigan is leased to Livho, Inc.
("Livho"), a corporation wholly owned by Francis J. Carey. Livho will own the
Holiday Inn license and the other licenses necessary for the operation of the
hotel. Livho rents the hotel from CD for a base rent of $2,348,000 for 1998.
DESCRIPTION OF MOST SIGNIFICANT TENANTS
The following is a brief description of the tenants which will pay
the most rent to the Company on an annual basis.
Santee Dairies, Inc., the largest processor of milk products in the
West, processes 235,000 to 260,000 gallons of milk per day. Owned by Hughes
Markets, Inc. and Stake Brothers Markets, the company also processes, bottles
and distributes yogurt, sour cream, ice cream, cottage cheese and fruit juices.
The highlights of Santee's 1996 fiscal year include net sales of $194 million,
total assets of approximately $66 million and a net worth of $26 million.
Hughes, the guarantor of the Santee lease, operates a chain of 51 supermarkets
in the Southern California area, wholly owns a real estate holding company and
owns 50 percent of Santee. The highlights of Hughes' fiscal year ending March
1997 included net sales of approximately $1.0 billion, total assets of
approximately $279 million and a net worth of approximately $160 million.
Dr Pepper Bottling Company of Texas is the largest independent
franchise bottler of Dr Pepper brand products, accounting for approximately 13
percent of the total domestic volume of such products. One of the largest
independent soft drink bottlers in the United States, the Company bottles the
following products: Dr Pepper, Seven-Up, Canada Dry, Sunkist soft drinks, A&W
Root Beer, A&W Cream Soda, Squirt and Countrytime lemonade. For the 1996 fiscal
year, its net sales totaled over $390 million and its assets totaled over $237
million.
Detroit Diesel is a leading designer and producer of heavy-duty
diesel engines and a broad range of new replacement and re-manufactured parts
and components. The company's markets include on-highway vehicles (truck, bus
and coach), construction, industrial, power generation, military and marine. For
the year ending December 31, 1996, Detroit Diesel's net revenues totaled $1,963
million; its total assets were $1,113 million; its long-term debt was $93
million; and its stockholders' equity was $321 million.
Sybron International Corporation is the parent company of four
operating subsidiaries which hold leadership product positions in laboratory and
professional orthodontic and dental markets in the United States and abroad. The
Sybron companies have become market leaders by developing, manufacturing and
marketing an expanding array of value-added products which meet
-41-
<PAGE> 42
their customers' needs. The highlights of Sybron's fiscal year ending September
30, 1996 included total assets of over $975 million and a net worth of over $283
million.
Gibson Greetings, Inc. designs, manufactures and sells greeting
cards, gift-wrapping paper, stationery, candles, calendars and related gift
items. Most of the greeting cards are designed and printed at the Cincinnati
location and then sent to the Berea facility for shipment to retail stores. In
mid-November 1995, the company sold Cleo, Inc., its wholly-owned gift wrap
subsidiary, to CSS Industries, Inc., but continues to produce gift wrapping
accessories. In 1996, Gibson's net sales totaled $390 million; its assets
totaled $425 million; its long-term debt totaled $41 million; and its net worth
totaled $256 million.
Started by Charles Stoody in 1921, Stoody Deloro Stellite, Inc. is
the global leader in the application, design and manufacturing of consumable
welding products, products that protect equipment and parts from wear and
erosion. SDS's coatings for metals and formed products are significant due to
abrasion, impact, heat and corrosive environments in industries such as
construction, mining, agriculture, chemical, military and transportation. The
company is a profitable division of Thermadyne Holdings Corporation which
manufactures and sells worldwide a broad range of welding apparatus, commercial
and industrial maintenance equipment and coatings. Thermadyne operates
facilities in the U.S., Canada, England, Germany, Italy, Japan, Singapore,
Mexico and Malaysia. For the 1996 fiscal year, Thermadyne had net sales of $440
million and total assets of $353 million.
Furon designs and manufactures highly engineered products composed
of high performance polymer materials. The company's parts and components are
used primarily by original equipment manufacturers who reach a broad spectrum of
markets: hydrocarbon processing, utilities, pulp and paper, automotive, truck,
beverage equipment, food processing, semiconductors, electronic assembly and
medical devices and equipment. Most of the components are designed to meet the
particular specifications of each customer. For the fiscal year ended February
5, 1997, Furon's net sales totaled over $390 million; its assets totaled over
$344 million; and its stockholders' equity totaled over $61 million.
Quebecor Printing Inc. is the largest commercial printer in the
United States, Canada and Europe. Based in Canada, the Company has over 23,000
employees and operates approximately 100 printing facilities in the U.S.,
Canada, France, the U.K., Spain, Mexico and India. For the 1996 fiscal year,
Quebecor Printing Inc. had revenues of over $3.1 billion and total assets of
over $2.9 billion.
Material Sciences Corporation is a technology based manufacturer of
continuously processed specialty coated materials and services. The company is a
market leader in its four principal product groups: laminates and composites,
metalizing and coating, coil coating and electrogalvanizing. For its fiscal year
ending February 28, 1997, the company's net sales totaled over $236 million; its
assets totaled over $202 million; and its stockholders' equity totaled over $121
million.
-42-
<PAGE> 43
AutoZone, Inc. currently operates 1,423 auto-part stores in 27
states, primarily in the Sunbelt and Midwest regions. The "Do-It-Yourself"
stores sell replacement parts (from spark plugs to complete engines), entire
lines of accessories and motor oils for domestic and foreign cars, vans and
light trucks.
Orbital Sciences Corporation designs, manufactures and operates a
broad range of space-related products and services, including small and
medium-sized satellites and personal navigation equipment. The company is the
world's leading provider of small launch vehicles, including the Pegasus and
Taurus vehicles.
The Gap, Inc. is one of the largest specialty and private-label
clothing retailers in the United States. Over the past ten years, the company
has enjoyed significant growth through trade names including Gap, GapKids, Baby
Gap, Banana Republic and Old Navy. As of March 1996, The Gap, Inc. operated
1,701 stores including some outside of the U.S. For the fiscal year ended
February 1997, the company's sales increased 20 percent to $5.3 billion.
MORTGAGE DEBT
The Company presently has debt of approximately $219 million,
excluding the debt of unconsolidated joint ventures. Approximately $194 million
of such debt is limited recourse mortgage debt secured by mortgages on 108
properties. Substantially all of the mortgage debt is fixed rate and
self-amortizing, and the weighted annual interest rate on the mortgage debt is
8.9 percent. The following table provides certain information with respect to
the Company's debt, including its proportionate share of the debt of
unconsolidated joint ventures:
<TABLE>
<CAPTION>
As of
Number December 31, Interest Maturity
Tenant/Guarantor Name Properties 1997 Rate Date
- --------------------- ---------- ---- ---- ----
<S> <C> <C> <C> <C>
Broomfield Tech Center Corporation 2 $ 2,173,949 9.00% 9/11
Varo Inc. 1 2,080,176 10.00% 10/02
The Gap, Inc. 1 6,003,499 7.25% 5/99
Unisource Worldwide, Inc. 1 6,527,118 7.24% 2/10
Pre Finish Metals Incorporated 1 910,435 Floating 7/98
Simplicity Manufacturing, Inc. 2 4,471,529 10.52% 7/98
Brodart Co. 1 3,054,518 7.60% 1/04
Alpena Holiday Inn 1 7,150,000 (1) (1)
Petoskey Holiday Inn 1 7,150,000 (1) (1)
Motorola, Inc. 1 2,051,702 10.50% 10/96(2)
AutoZone, Inc. 32 8,618,075 9.51% 8/98
General Cinema Corp. of
Minnesota, Inc. 1 1,895,864 8.50% 7/06
Armel, Inc. 1 11,058 Floating 1/98
AP Parts Manufacturing Company 2 5,397,705 7.63% 2/01
</TABLE>
-43-
<PAGE> 44
<TABLE>
<S> <C> <C> <C> <C>
Wal-Mart Stores, Inc. 1 3,351,280 8.25% 8/03
Livonia Holiday Inn 1 7,446,222 Floating 11/97
Sybron Acquisition Company 5 14,018,604 11.25% 1/99
NVR 2 6,700,000 7.50% 12/02
Topeka Holiday Inn 1 8,414,629 6.75% 10/06
7.75% 9/03
High Voltage Engineering Corp. 2 4,165,253 6.05% 12/98
General Electric Company 1 3,307,693 10.50% 5/98
United Stationers Supply Co. 3 2,307,669 7.56% 12/99
Dr. Pepper Bottling Company of Texas 2 15,360,466 11.85% 7/99
Orbital Sciences Corporation 1 8,494,188 10.00% 9/20
AmerSig Southeast, Inc. 1 6,154,031 Floating 5/01
AS Memphis, Inc. 1 3,856,956 Floating 5/01
Furon Company 6 12,558,672 8.42% 7/12
Detroit Diesel Corporation 1 22,658,392 7.16% 6/10
Red Bank Distribution, Inc. 1 5,161,768 10.00% 8/10
Floating
Information Resources, Inc. 2 7,449,554 10.70% 10/00
Childtime Childcare, Inc. 12 1,266,933 9.55% 12/06
Titan Corporation 1 1,918,777 9.75% 7/03
Unsecured recourse debt -- 24,708,981 Floating
--------------
108 $ 216,795,696
==============
</TABLE>
(1) Loan encumbers properties leased to Payless ShoeSource, Inc., The
Southland Corporation and Chief Auto Parts, Inc. (2) Series of bonds
maturing between September 1998 and September 2015 with interest
rates ranging from 6.60 percent to 9.00 percent.
(3) Lender continues to accept monthly payments.
(4) This obligation was fully satisfied after June 30, 1997.
ENVIRONMENTAL MATTERS
The Company will generally undertake a third party Phase I
investigation of potential environmental risks when evaluating an acquisition. A
"Phase I investigation" is an investigation for the presence or likely presence
of hazardous substances or petroleum products under conditions which indicate an
existing release, a post release or a material threat of a release. A Phase I
investigation does not typically include any sampling. The Company may acquire a
property with environmental contamination, subject to a determination of the
level of risk and potential cost of remediation. The Company generally will
require property sellers to fully indemnify it against any environmental problem
or condition existing as of the date of purchase. In some instances, the Company
will be the assignee of or successor to the buyer's indemnification rights.
Additionally, the Company will generally structure its leases to require the
tenant to assume all responsibility for
-44-
<PAGE> 45
environmental compliance or environmental remediation and to provide that
non-compliance with environmental laws be deemed a lease default. In certain
instances, the Company may also require a cash reserve, a letter of credit or a
guarantee from the tenant, the parent company or a third party to assure funding
of remediation. The value of these protections depend upon the financial
strength of the entity providing the protection. Where warranted, further
assessments are performed by third-party environmental consulting and
engineering firms.
Phase I investigations were performed by the CPA(R) Partnerships on
all CPA(R):1-6 Properties between July 1993 and February 1994. Except as
specified in the following sentence, a Phase I investigation or its substantial
equivalent was conducted on all CPA(R):8-9 Properties around the time of
acquisition of such properties. The CPA(R) Partnerships did not undertake
investigations at Tandem Holdings (St. Louis, MO); Winn-Dixie (Bay Minette and
Brewton, AL); M-Tex (Traveler's Rest and Liberty, SC); Northern Automotive
Corporation (Mesa, Glendale, Apache Junction and Casa Grande, AZ and Denver,
CO); Family Bargain Center (Colville, WA); Capin Mercantile Corporation (Silver
City, NM) and the 25 AutoZone stores in Florida, Georgia, Louisiana, Missouri,
New Mexico, North Carolina, South Carolina, Tennessee and Texas.
Based upon the results of the Phase I investigations conducted in
1993 and 1994 on the CPA(R):1-6 Properties, Phase II investigations were
recommended for 30 properties. Phase II investigations have been or are in the
process of being performed on 21 of the 30 properties. On five of the properties
the particular CPA(R) Partnership determined not to proceed with a Phase II
investigation and on four of the properties the tenants would not permit a Phase
II investigation. The issues for which Phase II investigations were recommended
with respect to each of the nine properties are: (a) PicWay Shoes, Cleveland, OH
(records review to determine the existence of any underground storage tanks
("UST") due to former use of property as gas station), (b) Waterbed Outlet,
Merced, CA (records review to determine existence of any USTs due to former use
of property as gas station), (c) Santee Dairies, Los Angeles, CA (geophysical
survey to locate potential USTs), (d) Arley Merchandise, Sumter, SC (tightness
test on existing UST), (e) Stoody Deloro, Goshen, IN (subsurface investigation
to determine if any release from abandoned UST), (f) Industrial General,
Belleville, OH (removal and closure of inactive UST), (g) Industrial General,
Bald Knob, AR (soil testing for potential contamination), (h) Industrial
General, Newburyport, MA (testing of concrete underground leaching pit) and (i)
Industrial General, Forrest City, AR (general housekeeping and regulatory
compliance issues). The Company believes that if any remediation is indicated as
a result of Phase II investigations, the cost of any material remediation would
be born by the lessees pursuant to the terms of the existing leases.
COMPETITION
The Company faces competition from insurance companies, commercial
banks, credit companies, pension funds, private individuals, investment
companies, REITs and other real estate finance companies. The Company also faces
competition from institutions or investors that provide or arrange for other
types of financing through private or public offerings of equity or debt and
from traditional bank financings. The Company believes that its 20 years of
-45-
<PAGE> 46
continuous market presence through the CPA(R) Partnerships, the experience of
its management and its ability to underwrite credit and asset-based investment
opportunities allow it to compete effectively.
EMPLOYEES
The Company has one employee. The Manager has over 60 officers,
employees and directors who will be involved in the operations of the Company.
INSURANCE
Under their leases, the Company's tenants will generally be
responsible for providing adequate insurance on the properties leased. The
Company believes the Properties are covered by adequate fire, flood and property
insurance provided by reputable companies. However, some of the Properties are
not covered by disaster-type insurance with respect to certain hazards (such as
earthquakes) for which coverage is not available or available only at rates
which, in the opinion of the Company, are prohibitive.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The individuals who serve as Directors and executive officers of the
Company are listed below.
Name Office
---- ------
Francis J. Carey Chairman of the Board, Chief Executive Officer and
Director
Gordon F. DuGan President, Chief Acquisitions Officer and Director
Steven M. Berzin Vice Chairman, Chief Legal Officer and Director
Donald E. Nickelson Chairman of the Audit Committee and Director
William P. Carey Chairman of the Executive Committee and Director
Eberhard Faber, IV Director
Barclay G. Jones III Director
Dr. Lawrence R. Klein Director
Charles C. Townsend Jr. Director
Reginald Winssinger Director
Claude Fernandez Executive Vice President--Financial Operations
John J. Park Executive Vice President, Chief Financial Officer
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<PAGE> 47
and Treasurer
H. Augustus Carey Senior Vice President and Secretary
Edward V. LaPuma First Vice President--Acquisitions
Samantha K. Garbus Vice President--Asset Management
Susan C. Hyde Vice President--Shareholder Services
Robert C. Kehoe Vice President--Accounting
The following is a biographical summary of the experience of the
Directors and executive officers of the Company:
Francis J. Carey, age 72, was elected in 1997 as Chairman, Chief
Executive Officer and a Director of the Company, at which time he resigned his
positions as a Director of CPA(R):10, CIP(TM) and CPA(R):12. He served as
President of W.P. Carey & Co. from 1987 to 1997 and as a Director from its
founding in 1973 until 1997. Prior to 1987, he was senior partner in
Philadelphia, head of the real estate department nationally and a member of the
executive committee of the Pittsburgh-based firm of Reed Smith Shaw & McClay
LLP, counsel for W.P. Carey & Co. and the Company. He served as a member of the
executive committee and Board of Managers of the Western Savings Bank of
Philadelphia from 1972 until its takeover by another bank in 1982, and is former
chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar
Association. Mr. Carey served as a member of the Board of Overseers of the
School of Arts and Sciences at the University of Pennsylvania from 1983 to 1990.
He has also served as a member of the Board of Trustees and executive committee
of the Investment Program Association since 1990 and on the Business Advisory
Council of the Business Council for the United Nations since 1994. He holds A.B.
and J.D. degrees from the University of Pennsylvania and completed executive
programs in corporate finance and accounting at Stanford University Graduate
School of Business and the Wharton School of the University of Pennsylvania. Mr.
Carey is the father of H. Augustus Carey and the brother of William P. Carey.
Gordon F. DuGan, age 31, was elected Executive Vice President and a
Managing Director of W.P. Carey & Co. in June 1997. Mr. DuGan rejoined W.P.
Carey & Co. as Deputy Head of Acquisitions in February 1997. Mr. DuGan was until
September 1995 a Senior Vice President in the Acquisitions Department of W.P.
Carey & Co. Mr. DuGan jointed W.P. Carey & Co. as Assistant to the Chairman in
May 1988, after graduating from the Wharton School at the University of
Pennsylvania where he concentrated in Finance. From October 1995 until February
1997, Mr. DuGan was Chief Financial Officer of Superconducting Core
Technologies, Inc., a Colorado-based wireless communications equipment
manufacturer.
Steven M. Berzin, age 47, was elected Executive Vice President,
Chief Financial Officer and a Managing Director of W.P. Carey & Co. in July
1997. From 1993 to 1997, Mr. Berzin was Vice President--Business Development of
General Electric Capital Corporation in the office of the Executive Vice
President and, more recently, in the office of the President, where he was
responsible for business development activities and acquisitions. From 1985 to
1992, Mr. Berzin held various positions with Financial Guaranty Insurance
Company, the last two being Managing Director, Corporate Development and Senior
Vice President and Chief Financial Officer.
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<PAGE> 48
Mr. Berzin was associated with the law firm of Cravath, Swaine & Moore from 1977
to 1985 and from 1976 to 1977, he served as law clerk to the Honorable Anthony
M. Kennedy, then a United States Circuit Judge. Mr. Berzin received a B.A. and
M.A. in Applied Mathematics from Harvard University, a B.A. in Jurisprudence and
an M.A. from Oxford University and a J.D. from Harvard Law School.
Donald E. Nickelson, age 65, was elected to the Board of Directors
of the Company in 1998 and serves as Chairman of the Board and a Director of
Greenfield Industries, Inc. and a Director of Allied Healthcare Products, Inc.
Mr. Nickelson is Vice-Chairman and a Director of the Harbor Group, a leverage
buy-out firm. He is also a Director of Sugen Corporation and D.T.I. Industries,
Inc. and a Trustee of Mainstay Mutual Fund Group. From 1986 to 1988, Mr.
Nickelson was President of PaineWebber Incorporated; from 1988 to 1990, he was
President of the PaineWebber Group; and, from 1980 to 1993 a Director. Prior to
1986, Mr. Nickelson served in various capacities with affiliates of PaineWebber
Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a
Director of a diverse group of corporations in the manufacturing, service and
retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles,
Inc. and Motor Wheel Corporation. He is a former Chairman of National Car
Rentals, Inc. Mr. Nickelson is also a former Director of the Chicago Board
Options Exchange and is the former Chairman of the Pacific Stock Exchange.
William P. Carey, age 67, Chairman, President and Chief Executive
Officer of W.P. Carey & Co., has been active in lease financing since 1959 and a
specialist in net leasing of corporate real estate property since 1964. Before
founding W.P. Carey & Co., in 1973, he served as Chairman of the Executive
Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of
Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers),
head of Real Estate and Private Placements, Director of Corporate Finance and
Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A
graduate of the University of Pennsylvania's Wharton School of Finance, Mr.
Carey is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT) and a Trustee of The Johns Hopkins University and of other educational
and philanthropic institutions. He has served for many years on the Visiting
Committee to the Economics Department of the University of Pennsylvania and
co-founded with Dr. Lawrence R. Klein the Economics Research Institute at the
University. Mr. Carey also serves as Chairman of the Board and Chief Executive
Officer of CPA(R):10, CIP(TM), CPA(R):12 and CPA(R):14. Mr. Carey is the brother
of Francis J. Carey and the uncle of H. Augustus Carey.
Eberhard Faber, IV, age 61, was elected to the Board of Directors of
the Company in 1998 and is currently a Director of PNC Bank, N.A., Chairman of
the Board and Director of the newspaper Citizens Voice, a Director of Ertley's
Motorworld, Inc., Vice-Chairman of the Board of Kings College and a Director of
Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and Chief
Executive officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber also
served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern Bank from 1980 to 1993.
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<PAGE> 49
Barclay G. Jones III, age 37, was elected to the Board of Directors
of the Company in 1998 and is Vice Chairman and a Managing Director of W.P.
Carey & Co. Mr. Jones joined W.P. Carey & Co. as Assistant to the President in
July 1982, after his graduation from the Wharton School of the University of
Pennsylvania where he majored in Finance and Economics. Mr. Jones has served as
a Director of W.P. Carey & Co. since April 1992 and as a Director of the Wharton
School Club of New York. Mr. Jones is a director of CIP(TM) and CPA(R):14.
Dr. Lawrence R. Klein, age 77, was elected to the Board of Directors
of the Company in 1998 and is Benjamin Franklin Professor Emeritus of Economics
and Finance at the University of Pennsylvania and its Wharton School, having
joined the faculty of the University in 1958. He is a holder of earned degrees
from the University of California at Berkeley and the Massachusetts Institute of
Technology and has been awarded the Alfred Nobel Memorial Prize in Economic
Sciences, as well as a number of honorary degrees. Founder of Wharton
Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to
various corporations, governments and government agencies, including the Federal
Reserve Board and the President's Council of Economic Advisers. Dr. Klein joined
W.P. Carey & Co. in 1984 as Chairman of the Economic Policy Committee and as a
Director.
Charles C. Townsend, Jr., age 70, was elected to the Board of
Directors of the Company in 1998 and currently is an Advisory Director of Morgan
Stanley & Co., having held such position since 1979. Mr. Townsend was a Partner
and a Managing Director of Morgan Stanley & Co. from 1963 to 1978 and served as
Chairman of Morgan Stanley Realty Corporation from 1977 to 1982. Mr. Townsend
holds a B.S.E.E. from Princeton University and an M.B.A. from Harvard
University. Mr. Townsend serves as Director of CIP(TM), CPA(R):12 and CPA(R):14
Reginald Winssinger, age 55, was elected to the Board of Directors
of the Company in 1998 and is currently Chairman of the Board and Director of
Horizon Real Estate Group, Inc. Mr. Winssinger has managed portfolios of
diversified real estate assets exceeding $500 million throughout the United
States for more than 20 years. Mr. Winssinger is active in the planning and
development of major land parcels and has developed 20 commercial properties.
Mr. Winssinger is a native of Belgium with more than 25 years of real estate
practice, including 10 years based in Brussels, overseeing appraisals,
construction and management. Mr. Winssinger holds a B.S. in Geography from the
University of California at Berkeley and received a degree in Appraisal and
Survey in Belgium. Mr. Winssinger presently serves as Honorary Belgium Consul to
the State of Arizona, a position he has held since 1991.
Claude Fernandez, age 45, is a Managing Director, Executive Vice
President and Chief Administrative Officer of W.P. Carey & Co. Mr. Fernandez
joined W.P. Carey & Co. as Assistant Controller in March 1983, was elected
Controller in July 1983, a Vice President in April 1986, a First Vice President
in April 1987, a Senior Vice President in April 1989 and Executive Vice
President in April 1991. Prior to joining W.P. Carey & Co., Mr. Fernandez was
associated with Coldwell Banker, Inc. in New York for two years and with Arthur
Andersen & Co. in New York for over three years. Mr. Fernandez, a Certified
Public Accountant, received a B.S. in Accounting
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<PAGE> 50
from New York University in 1975 and an M.B.A. in Finance from Columbia
University Graduate School of Business in 1981.
John J. Park, age 33, is a Senior Vice President, Treasurer and a
Managing Director of W.P. Carey & Co. Mr. Park became a First Vice President of
W.P. Carey & Co. in April 1993 and a Senior Vice President in October 1995. Mr.
Park joined W.P. Carey & Co. as an Investment Analyst in December 1987 and
became a Vice President in July 1991. Mr. Park received B.S. in Chemistry from
Massachusetts Institute of Technology in 1986 and an M.B.A. in Finance from the
Stern School of New York University in 1991.
H. Augustus Carey, age 40, is a Senior Vice President and a Managing
Director at W.P. Carey & Co. He returned to W.P. Carey & Co. as a Vice President
in August 1988 and was elected a First Vice President in April 1992. Mr. Carey
previously worked for W.P. Carey & Co. from 1979 to 1981 as Assistant to the
President. From 1984 to 1987, Mr. Carey served as a loan officer in the North
American Department of Kleinwort Benson Limited in London, England. He received
his A.B. in Asian Studies from Amherst College in 1979 and a M.Phil. in
Management Studies from Oxford University in 1984. He is the son of Francis J.
Carey and the nephew of William P. Carey.
Edward V. LaPuma, age 25, is a First Vice President and Research
Officer for W.P. Carey & Co. Mr. LaPuma joined W.P. Carey & Co. as an Assistant
to the Chairman in July 1995, became a Vice President in April 1997 and a First
Vice President in April 1998. A graduate of the University of Pennsylvania, Mr.
LaPuma received a B.A. in Global Economic Strategies from The College of Arts
and Sciences and a B.S. in Economics with a concentration in Finance from the
Wharton School.
Samantha K. Garbus, age 30, is a Vice President and a Director of
Property Management of W.P. Carey & Co. Ms. Garbus became a Second Vice
President of W.P. Carey & Co. in April 1995 and a Vice President in April 1997.
Ms. Garbus joined W.P. Carey & Co. as a Property Management Associate in January
1992. Ms. Garbus received a B.A. in History from Brown University in 1990 and an
M.B.A. from the Stern School of New York University in January 1997.
Susan C. Hyde, age 29, is a Vice President and a Director of
Investor Relations of W.P. Carey & Co. Ms. Hyde joined W.P. Carey & Co. in 1990,
became a Second Vice President in April 1995 and a Vice President in April 1997.
Ms. Hyde graduated from Villanova University in 1990 where she received a B.S.
in Business Administration with a concentration in marketing and a B.A. in
English.
Robert C. Kehoe, age 37, a Vice President of W.P. Carey & Co.,
joined W.P. Carey & Co. as a Senior Accountant in 1987. Mr. Kehoe became a
Second Vice President of W.P. Carey & Co. in April 1992 and a Vice President in
July 1997. Prior to joining W.P. Carey & Co., Mr. Kehoe was associated with
Deloitte Haskins & Sells for three years and was Manager of Financial Controls
at CBS Educational and Professional Publishing for two years. Mr. Kehoe received
his B.S. in Accounting from Manhattan College in 1982 and his M.B.A. from Pace
University in 1993.
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<PAGE> 51
DIRECTORS AND PRINCIPAL OFFICERS OF THE MANAGER
The Directors and principal officers of the Manager who will have
responsibility for providing services to the Company are as follows:
Name Office
---- ------
William P. Carey Chairman of the Board and Director
Barclay G. Jones III President and Director
Frank J. Hoenemeyer Vice Chairman of the Investment Committee and Director
Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director
George E. Stoddard Chairman of the Investment Committee and Director
Steven M. Berzin Executive Vice President, Chief Financial Officer,
Chief Legal Officer and Director
Gordon F. DuGan Executive Vice President
Claude Fernandez Executive Vice President
H. Augustus Carey Senior Vice President and Secretary
Anthony S. Mohl Senior Vice President--Property Management
John J. Park Senior Vice President and Treasurer
Michael D. Roberts Senior Vice President and Controller
Gordon J. Whiting Senior Vice President--Acquisitions
Information regarding Messrs. W. P. Carey, Jones, Klein, Berzin,
DuGan, Fernandez, Park and H.A. Carey is set forth under "Management--Directors
and Principal Officers of the Company."
George E. Stoddard, age 81, was until 1979 Officer-in-Charge of the
Direct Placement Department of The Equitable Life Assurance Society of the
United States ("Equitable") with responsibility for all activities related to
Equitable's portfolio of corporate investments acquired through direct
negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He
holds an A.B. from Brigham Young University, an M.B.A. from Harvard Business
School and an LL.B. from Fordham University Law School. Mr. Stoddard also serves
as Managing Director of W.P. Carey & Co.
Frank J. Hoenemeyer, age 78, is the former Vice Chairman and Chief
Investment Officer of the Prudential Insurance Company of America, where he was
responsible for Prudential's real estate and securities portfolio. Mr.
Hoenemeyer graduated with a B.S. in Economics from Xavier University,
Cincinnati, Ohio and an M.B.A. from the Wharton School of the University of
Pennsylvania. Mr. Hoenemeyer serves on the Boards of American International
Group and Mitsui Trust Bank (U.S.A.) and is formerly a director of Corporate
Property Investors, a private real estate investment trust. He has also been
active in community affairs and at present is chairman of the Turrell Fund and a
trustee and chairman of the Finance Committee of the Robert Wood Johnson
Foundation.
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Anthony S. Mohl, age 36, is a Senior Vice President of W.P. Carey &
Co. Mr. Mohl joined W.P. Carey & Co. as Assistant to the President in September
1987 after receiving an M.B.A. from the Columbia University Graduate School of
Business and became a Second Vice President in January 1990. Mr. Mohl was
employed as an analyst in the strategic planning group of Kurt Salmon Associates
after receiving a B.A. in History from Wesleyan University.
Michael D. Roberts, age 46, a Senior Vice President and the
Controller of W.P. Carey & Co., joined W.P. Carey & Co. in April 1989 as a
Second Vice President and Assistant Controller, was named a Vice President and
the Controller in October 1989, a First Vice President in July 1990 and a Senior
Vice President in April 1998. From August 1980 to February 1983 and from
September 1983 to April 1989, he was employed by Coopers & Lybrand, LLP and held
the position of Audit Manager at the time of his departure. A Certified Public
Accountant, Mr. Roberts received a B.A. in Sociology from Brandeis University
and an M.B.A. from Northeastern University.
Gordon J. Whiting, age 32, is a Senior Vice President of W.P. Carey
& Co. Mr. Whiting became a First Vice President of W.P. Carey & Co. in April
1997, a Vice President in October 1995 and a Senior Vice President in April
1998. Prior to joining W.P. Carey & Co. as a Second Vice President in September
1994, after Mr. Whiting received an M.B.A. from the Columbia University Graduate
School of Business where he concentrated in finance. Mr. Whiting founded an
import/export Company based in Hong Kong after receiving a B.S. in Business
Management and Marketing from Cornell University.
TERMS OF DIRECTORS OF THE COMPANY
Pursuant to the Organizational Documents, the Board of Directors of
the Company is divided into three classes serving staggered three-year terms.
The terms of the first, second and third classes will expire in 1998, 1999 and
2000, respectively. The term of Messrs. Berzin, DuGan and Winssinger will expire
in 1998; the term of Messrs. F. Carey, Faber and Jones will expire in 1999; and
the term of Messrs. W. Carey, Klein, Townsend and Nickelson will expire in 2000.
Directors for each class will be chosen for a three-year term upon the
expiration of the current class' term beginning in 1998. The staggered terms for
Directors may affect the holder of Listed Shares ability to change control of
the Company, even if a change of control were in the interests of the
Shareholders. An individual who has been elected to fill a vacancy will hold
office only for the unexpired term of the Director being replaced.
The Organizational Documents provide that the number of Directors of
the Company will be fixed by the Board of Directors, but must consist of not
fewer than five nor more than 15 members. One class of Directors will be elected
annually by the affirmative vote of the holders of at least a majority of the
Listed Shares present at a meeting at which a quorum is present. Directors can
be removed from office only by the affirmative vote of the holders of at least a
majority of the Listed Shares. In addition, any vacancy (other than a vacancy
created by an increase in the number of Directors) may be filled, at any regular
meeting or at any special meeting of the Directors called for that purpose, by
the affirmative vote of a majority of the remaining Directors, though less than
a
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quorum. A vacancy created by an increase in the number of Directors shall be
filled by a majority of the entire Board of Directors. Accordingly, the Board of
Directors could temporarily prevent any holder of Listed Shares from enlarging
the Board of Directors and filling the new Directorships with such holders' own
nominees.
The Board of Directors expects to hold meetings at least quarterly
and may take action on behalf of the Company by unanimous written consent
without a meeting. Directors may participate in meetings by conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY
Executive Committee. The Executive Committee may authorize the
execution of contracts and agreements, including those related to the borrowing
of money by the Company. The Executive Committee will exercise, during intervals
between meetings of the Board of Directors and subject to certain limitations,
all of the powers of the full Board of Directors and will monitor and advise the
Board of Directors on strategic business planning for the Company.
Audit Committee. The Audit Committee has been established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls. Messrs. Nickelson
(Chairman), Winssinger and Faber serve on the Audit Committee.
COMPENSATION OF THE BOARD OF DIRECTORS
The Company intends to pay its Directors who are not officers of the
Company fees for their services as Directors. Such Directors will receive annual
compensation of $35,000. Initially, compensation will be paid in the form of
restricted Listed Shares. This compensation may be changed by the Board of
Directors. Officers or employees of the Company or Manager who are Directors
will not be paid any director fees.
EXECUTIVE COMPENSATION
The Company was organized as a Delaware limited liability company in
October 1996. The following table sets forth the base compensation to be awarded
to Francis J. Carey, the Company's Chief Executive Officer during 1998.
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<PAGE> 54
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Salary(1) Awards & Options(2)
--------- -------------------
<S> <C> <C>
Francis J. Carey $250,000 121,000
Chairman & Chief Executive Officer
</TABLE>
(1) Amount specified does not include bonuses that may be paid.
(2) On January 1, 1998, Mr. Carey received options to purchase 38,500
Listed Shares at $20 per share and a grant of 7,500 Listed Shares as
part of his annual compensation. The transferability of the Listed
Shares will be restricted. Mr. Carey also received a one-time grant
of options to purchase 75,000 Listed Shares at $20 per Listed Share.
OPTION GRANT IN FISCAL YEAR 1998(1)
<TABLE>
<CAPTION>
Percent Potential
of Realizable Value
Total at Assumed Annual
Options Rate of Share
Granted to Exercise Price Appreciation
Options Employers in Price per Expiration for Option Term
---------------
Granted(1) Fiscal Year Share Date 5% 10%
---------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Francis J. Carey 113,500 100% $20 01/01/08 $1,427,591 $3,617,795
</TABLE>
* Expiration Date will be 10 years from the date of grant, which will
be the date the Consolidation is completed.
(1) The options will become exercisable for one-third of the covered
shares on each of the first, second and third anniversary of the
date of grant.
1997 LISTED SHARE INCENTIVE PLAN
The Board of Directors have adopted and the initial shareholders of
the Company have approved the 1997 Plan for the purpose of attracting and
retaining executive officers, Directors and employees. The 1997 Plan will be
administered by the Compensation Committee of the Board of Directors or its
delegate. The Compensation Committee may not delegate its authority with respect
to grants and awards to individuals subject to Section 16 of the Exchange Act.
As used in this summary, the term "Administrator" means the Compensation
Committee or its delegate, as appropriate.
Officers and other employees of the Company and its Affiliates
generally will be eligible to participate in the 1997 Plan. The Administrator
selects the individuals who will participate in the 1997 Plan ("Participants").
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<PAGE> 55
The 1997 Plan authorizes the issuance of up to 700,000 Listed
Shares. The Plan provides for the grant of (i) share options which may or may
not qualify as incentive stock options under Section 422 of the Code, (ii)
performance shares, (iii) dividend equivalent rights ("DERs"), issued alone or
in tandem with options, and (iv) restricted shares, which are contingent upon
the attainment of performance goals or subject to vesting requirements or other
restrictions. The Administrator shall prescribe the conditions which must occur
for restricted shares or performance shares to vest and incentive awards to be
earned.
In connection with the grant of options under the 1997 Plan, the
Administrator will determine the option exercise period and any vesting
requirements. The initial options granted under the Plan will have 10-year terms
and will become exercisable for one-third of the covered shares (disregarding
fractional shares, if any) on the first and second anniversaries of the date of
grant and, for the balance of the shares, on the third anniversary of the date
of grant subject to acceleration of vesting upon a change in control of the
Company (as defined in the 1997 Plan). An option may be exercised for any number
of whole shares less than the full number for which the option could be
exercised. A Participant will have no rights as a shareholder with respect to
Listed Shares subject to his or her option until the option is exercised. If a
Participant is terminated due to dishonesty or similar reasons, all unexercised
options, whether vested or unvested, will be forfeited. Any Listed Shares
subject to options which are forfeited (or expire without exercise) pursuant to
the vesting requirement or other terms established at the time of grant will
again be available for grant under the 1997 Plan. The exercise price of options
granted under the 1997 Plan may not be less than the fair market value of the
Listed Shares on the date of grant. Payment of the exercise price of an option
granted under the 1997 Plan may be made in cash, cash equivalents acceptable to
the Compensation Committee or, if permitted by the option agreement, by
exchanging Common Shares having a fair market value equal to the option exercise
price.
On January 1, 1998, options for 113,500 Listed Shares and 7,500
restricted Listed Shares were granted to the sole employee of the Company. The
options have an exercise price equal to $20 per Listed Share.
No option, DER, restricted Listed Shares or performance shares may
be granted under the 1997 Plan after December 31, 2006. The Board may amend or
terminate the 1997 Plan at any time, but an amendment will not become effective
without shareholder approval if the amendment materially (i) increases the
number of shares that may be issued under the 1997 Plan (other than an
adjustment or automatic increase described above), (ii) changes the eligibility
requirements or (iii) increases the benefits that may be provided under the 1997
Plan. No amendment will affect a Participant's outstanding award without the
Participant's consent.
INCENTIVE COMPENSATION
The Company may award incentive compensation to employees of the
Company and its subsidiaries, including incentive awards under the 1997 Plan
that may be earned on the attainment of performance objectives stated with
respect to criteria described above or other
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<PAGE> 56
performance-related criteria. The Compensation Committee may, in its discretion,
approve bonuses to executive officers and certain other officers and key
employees based on criteria which may include achievement of certain performance
objectives.
THE NON-EMPLOYEE DIRECTOR PLAN
The Board of Directors have adopted, and the initial Shareholders
have approved, the Non-Employee Directors' Plan to provide incentives to attract
and retain Independent Directors.
The Directors' Plan provides for the grant of options and the award
of Listed Shares to each eligible Director of the Company. No Director who is an
employee of the Company or an employee of the Manager is eligible to participate
in the Non-Employee Directors' Plan. The Non-Employee Directors' Plan authorizes
the issuance of up to 300,000 Listed Shares.
Pursuant to the Director's Plan, each Independent Director who was a
member of the Board of Directors on the first day of trading of the Listed
Shares was granted an option to purchase 4,000 Listed Shares at an exercise
price of $20 per Listed Share and 1,250 Listed Shares. The exercise price of
options granted under the Directors' Plan may be paid in cash, acceptable cash
equivalents, Listed Shares or a combination thereof. Options issued under the
Directors' Plan are exercisable for ten years from the date of grant.
The option granted under the Directors' Plan shall become
exercisable for 1,333 Listed Shares on each of the first and second
anniversaries of the date of grant and for 1,334 Listed Shares on the third
anniversary of the date of grant provided that the Director is a member of the
Board of Directors on such anniversary date. To the extent an option has become
exercisable under the Directors' Plan, it may be exercised whether or not the
Director is a member of the Board on the date or dates of exercise. An option
may be exercised for any number of whole shares less than the full number of
which the option could be exercised. A Director will have no rights as a
Shareholder with respect to Listed Shares subject to his option, until the
option is exercised.
In subsequent annual periods, each Independent Director may also
receive quarterly an award of options to purchase Listed Shares or Restricted
Listed Shares. Awards will be made on each April 1, July 1, October 1 and
January 1 (each date, a "Quarterly Award Date") during the term of the
Directors' Plan. Each Independent Director may receive, on each Quarterly Award
Date on which he is a member of the Board of Directors, the number of options to
purchase Listed Shares or restricted Listed Shares having a fair market value on
that date that as nearly as possible equals, but does not exceed $6,250.
Restrictions on the exercisability of the options shall lapse or vest over a
three year period. The transfer of Listed Shares granted to Directors may be
restricted, and the restriction will lapse as specified at the time of the
grant.
The terms of outstanding options, the number of Listed Shares for
which options will thereafter be awarded and the number of Listed Shares to be
awarded on a Quarterly Award Date shall be subject to adjustment in the event of
a share dividend, share split, combination, reclassification, recapitalization
or other similar event.
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The Directors' Plan provides that the Board of Directors may amend
or terminate the Directors' Plan, but the Directors' Plan may not be amended
more than once every six months, other than to comply with changes in the Code,
ERISA or the rules thereunder. An amendment will not become effective without
shareholder approval if the amendment materially changes the eligibility
requirements or increases the benefits that may be provided under the Directors'
Plan. No options for Listed Shares may be granted, and no Listed Shares may be
awarded under the Directors' Plan after December 31, 2006.
THE MANAGER
Carey Management LLC, the Manager, will serve as the manager of the
Company. The Manager is a limited liability company and its members are W.P.
Carey & Co., CCP, Seventh Carey and Eighth Carey. The Company has entered into a
management agreement with the Manager (the "Management Agreement") pursuant to
which the Manager will manage the Company's day-to-day affairs. This will
include the purchase and disposition of Company investments and the management
of the Properties. The Manager and its Affiliates will receive certain fees and
compensation pursuant to the Management Agreement. See "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER."
SHAREHOLDINGS
The Manager owns 661,718 Listed Shares, which constitutes
approximately 2.76 percent of the outstanding Listed Shares as of such date.
Furthermore, any resale of the 661,718 Listed Shares that the Manager will own
and the resale of any Shares which may be acquired by Affiliates of the Company
are subject to the provisions of Rule 144 promulgated under the Securities Act,
which limits the number of Shares that may be sold at any one time and the
manner of such resale. There is no limitation on the ability of the Manager or
its Affiliates to resell any Shares they may acquire in the future.
In addition, the Manager has received Warrants to purchase 2,284,800
Listed Shares at $21 per Listed Share and 725,930 Listed Shares at $23 per
Listed Share.
MANAGEMENT DECISIONS
The primary responsibility for the selection of Company investments
and the negotiation for such investments will reside in Francis J. Carey,
Chairman and Chief Executive Officer of the Company and Steven M. Berzin,
William P. Carey, Gordon F. DuGan, Barclay G. Jones III and George E. Stoddard,
all of whom are officers or Directors of the Manager. Each potential Company
investment will be submitted for review to the Investment Committee. George E.
Stoddard, Chairman, Frank J. Hoenemeyer and Lawrence R. Klein currently serve as
members of the Investment Committee. The Board of Directors of the Manager has
empowered the Investment Committee to authorize and approve Company investments
on behalf of the Manager. However,
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the Board of Directors of the Manager retains ultimate authority to authorize
and approve Company investments on behalf of the Manager and may make such
investments on behalf of the Company without the approval of, and irrespective
of any adverse recommendation by, the Investment Committee or any other Person,
except the Board of Directors of the Company.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS OF THE COMPANY
Pursuant to the Organizational Documents, no Directors or officers
of the Company will be liable, responsible or accountable in damages or
otherwise to the Company or any of the Shareholders for any act or omission
performed or omitted by such Director or officer, except in the case of
fraudulent or illegal conduct of such person.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
According to the Organizational Documents, all Directors and
officers of the Company are entitled to indemnification from the Company. See
"FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION--Indemnification of Directors and
Officers of the Company."
MANAGEMENT SERVICES PROVIDED BY MANAGER
The Manager provides both strategic and day-to-day management for
the Company, including acquisition services, research, investment analysis,
asset management, capital funding services, disposition of assets and
administrative services. The Manager will also provide office and other
facilities for the Company's needs. Through the Manager and its Affiliates, the
Company will function as a fully integrated operating company.
The Board has authorized the Manager to make investments in any
property on behalf of the Company. Certain types of transactions, however,
require the prior approval of the Board and a majority of the Independent
Directors, including the following: (i) the allocation of interests in
investments made through joint venture arrangements with Affiliates of the
Manager that are public companies, (ii) the terms of any investment made with
the Manager or any affiliate of the Manager that is not a public company, (iii)
transactions that present issues which involve conflicts of interest for the
Manager (other than conflicts involving the payment of fees or the reimbursement
of expenses or joint investments) and (iv) the lease of assets to the Manager,
any Director or an Affiliate of the Manager.
The Company will reimburse the Manager for all of the costs that it
incurs in connection with the services it provides to the Company, including,
but not limited to (i) the cost of goods and services used by the Company and
obtained from entities not affiliated with the Manager, including brokerage fees
paid in connection with the purchase and sale of securities, (ii) administrative
services (including personnel costs; provided, however, that no reimbursement
shall be made for costs of personnel to the extent that such personnel are used
in transactions for which the Manager receives a separate transactional fee),
(iii) rent, depreciation, leasehold improvement costs, utilities
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or other administrative items and (iv) Acquisition Expenses, which are defined
to include expenses related to the selection and acquisition of Properties.
The term of the Management Agreement ends on December 31, 1998 and
thereafter will be automatically renewed for successive one-year periods, unless
either party shall give the other party notice of non-renewal not less than 60
days before the end of any such period. Additionally, the Management Agreement
may be terminated (i) immediately by the Company for "Cause" or upon the
bankruptcy of the Manager or a material breach of the Management Agreement by
the Manager or (ii) immediately with "Good Reason" by the Manager. "Good Reason"
is defined in the Management Agreement to mean either (i) any failure to obtain
a satisfactory agreement from any successor to the Company to assume and agree
to perform the Company's obligations under the Management Agreement or (ii) any
material breach of the Management Agreement of any nature whatsoever by the
Company. "Cause" is defined in the Management Agreement to mean fraud, criminal
conduct, willful misconduct or willful or negligent breach of fiduciary duty by
the Manager or a breach of the Management Agreement by the Manager.
Following the termination of the Management Agreement by the Company, the
Manager shall be entitled to receive payment of any earned, but unpaid,
compensation and expense reimbursements accrued as of such date and an incentive
fee based on the appraised value of the properties owned by the CPA(R)
Partnership. If the Management Agreement is terminated in connection with a
Change of Control of the Company by the Company for any reason other than Cause
or by the Manager for Good Reason, the Manager also shall be entitled to the
payment of the Termination Fee. The Manager shall be entitled to receive all
accrued, but unpaid, compensation and expense reimbursements and the Termination
Fee in cash within 30 days of the effective date of the termination.
The Manager and its Affiliates expect to engage in other business
ventures, and, as such, their resources will not be dedicated exclusively to the
business of the Company. However, pursuant to the Management Agreement, the
Manager must devote sufficient resources to the administration of the Company to
discharge its obligations. The Management Agreement is not assignable or
transferable by either party without the consent of the other party, except that
the Manager may assign the Management Agreement to an Affiliate that has a net
worth of $3,000,000 or more or for whom the Manager agrees to guarantee its
obligations to the Company, and either the Manager or the Company may assign or
transfer the Management Agreement to a successor entity.
The Manager or its Affiliates will be paid certain fees in connection with
services provided to the Company. In the event the Management Agreement is not
renewed by the Company or is terminated without Cause by the Company or with
Good Reason by the Manager, the Manager will be paid all accrued and unpaid fees
and expense reimbursements and, in certain circumstances, will also be paid a
Termination Fee. The Company will not reimburse the Manager or its Affiliates
for services for which the Manager or its Affiliates are entitled to
compensation in the form of a separate fee. See "COMPENSATION, REIMBURSEMENT AND
DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER."
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FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY
The Directors and officers of the Company, in exercising the powers and
responsibilities of managing the Company, owe the Company and its Shareholders a
duty of care and a duty of loyalty. However, under the so-called "business
judgment rule," which could apply by analogy to the Directors and officers of
the Company, the Directors and officers of the Company may not be liable for
errors in judgment or other acts or omissions made in good faith which are done
in a manner they believe to be in the best interests of the Company and are
performed with the care that an ordinarily prudent person in a like position
will use under similar circumstances. In the event any legal action were brought
against the Directors or officers of the Company, they may be able to assert
defenses based on the business judgment rule.
According to the Organizational Documents, all Directors and officers of
the Company are entitled to indemnification from the Company for any loss,
damage or claim (including any reasonable attorney's fees incurred by such
person in connection therewith) due to any act or omission made by him, except
in the case of fraudulent or illegal conduct of such person, provided that any
indemnity shall be paid out of, and to the extent of, the assets of the Company
only (or any insurance proceeds available therefor) and no Shareholder shall
have any personal liability on account thereof. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction or upon a plea
of nolo contendere or its equivalent, shall not of itself create a presumption
that the Director or officer acted fraudulently or illegally.
The indemnification provided by the Organizational Documents is not deemed
to be exclusive of any other rights to which those indemnified may be entitled
under any agreement, vote of Shareholders or Directors or otherwise and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Any repeal or modification of the indemnification provisions contained
in the Organizational Documents will not adversely affect any right or
protection of a Director or officer of the Company existing at the time of such
repeal or modification.
The Company has entered into indemnification agreements with each of its
Directors. The indemnification agreements require, among other things, that the
Company indemnify its officers and Directors to the fullest extent permitted by
Delaware law and advance to the Directors all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company must also indemnify and advance all expenses incurred by
officers and Directors seeking to enforce their rights under the indemnification
agreements and cover officers and Directors under the Company's Directors and
officers liability insurance. Although the form of indemnification agreement
offers substantially the same scope of coverage afforded by provisions in the
Organizational Documents, it provides greater assurance to officers and
Directors that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or by
the Shareholders to eliminate the rights that it provides.
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Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers or persons controlling the Company
pursuant to any provisions described in this Consent Solicitation/Prospectus, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
DIRECTORS AND OFFICERS INSURANCE
According to the Organizational Documents, the Company may, if the
Directors of the Company deem it appropriate in their sole discretion, obtain
insurance for the benefit of the Company's Directors and officers, relating to
the liability of such persons. The Directors and officers liability insurance
would insure (i) the officers and Directors of the Company from any claim
arising out of an alleged wrongful act by such persons while acting as Directors
and officers of the Company and (ii) the Company to the extent that it has
indemnified the Directors and officers for such loss.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Shares as of the March 31, 1998 by (i) each of the
Directors; (ii) the Chief Executive Officer of the Company; and (iii) all
Directors and executive officers of the Company as a group. The business address
of the individuals listed is 50 Rockefeller Plaza, New York, NY 10020.
AMOUNT OF SHARES PERCENTAGE
NAME BENEFICIALLY OWNED(1) OF CLASS
Francis J. Carey 15,000 *
Steven M. Berzin 10,406 *
Gordon F. DuGan 300 *
William P. Carey (2) 877,928 3.78
Eberhard Faber, IV (3) 7,013 *
Barclay G. Jones, III 18,844 *
Lawrence R. Klein 1,638 *
Donald E. Nickelson (4) 8,433 *
Charles C. Townsend 2,638 *
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Reginald Winssinger 1,638 *
All Executive Officers 951,810 4.09
and Directors as a Group
(14 persons)
* Less than one percent.
(1) Beneficial ownership has been determined in accordance with the rules of
the Securities and Exchange Commission. Except as noted, and except for
any community property interests owned by spouses, the listed individuals
have sole investment power and sole voting power as to all Shares which
they are identified as being the beneficial owners.
(2) Includes 690,363 Shares held by Carey Management LLC which Mr. Carey is
deemed to be the beneficial owner of as a result of his indirect
ownership of Carey Management LLC through W.P. Carey & Co., Inc., Carey
Corporate Property, Inc., Seventh Carey Corporate Property, Inc.,
Eighth Carey Corporate Property, Inc. and Ninth Carey Corporate
Property, Inc., the shareholders of Carey Management LLC. Also includes
66,300 Shares held by W.P. Carey & Co., Inc., 17,171 Shares held by
Carey Corporate Property, Inc., 5,539 Shares held by Seventh Carey
Corporate Property, Inc., 6,955 Shares held by Eighth Carey Corporate
Property, Inc., and 5,263 Shares held by Ninth Carey Corporate
Property, Inc. for which Mr. Carey is deemed to be the beneficial
owner. See "Certain Transactions."
(3) Includes 3,175 Shares held by trusts of which Mr. Faber is a trustee
and a beneficiary.
DESCRIPTION OF LISTED SHARES
The following summary of certain provisions of the Organizational
Documents does not purport to be complete. Reference is made to the full text of
the Organizational Documents for their entire terms.
The Company will pay distributions to holders of the Listed Shares when
declared by its Board of Directors out of funds legally available therefor.
While the initial policy of the Company will be to make quarterly distributions
to the holders of Listed Shares, the level and timing of distributions will
depend on, among other things, the cash flow and earnings of the Company, its
financial condition, debt covenants, reinvestment policies and such other
factors as the Board of Directors deems relevant. Distributions to the holders
of Listed Shares may be subject to preferences on distributions on securities
which may be issued by the Company in the future. The Company does not intend to
distribute to the holders of Listed Shares net cash receipts from sales or
refinancings of assets, but, instead, to retain such funds to make new
investments or for other purposes, taking into account the income tax impact, if
any, of reinvesting such proceeds rather than
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distributing them. These policies are within the discretion of the Board of
Directors and may be changed from time to time. It is expected that the Board of
Directors, in setting the level of the distributions to the holders of Listed
Shares, will take into account, among other things, the Company's financial
performance, need of funds for working capital reserves, capital improvements,
tax consequences to holders of Listed Shares and new investment opportunities.
See "DISTRIBUTION POLICY."
The Listed Shares are not redeemable, except pursuant to certain
anti-takeover provisions adopted by the Company. See "Restricting Changes in
Control and Business Combination Provisions."
Upon the liquidation of the Company, the holders of Listed Shares will be
entitled to share ratably in any assets remaining after satisfaction of
obligations to creditors, payment of expenses and any liquidation preferences on
any Shares that may then be outstanding. Therefore, holders of Listed Shares
will be entitled to a distribution based proportionately on their ownership of
the Company.
Any matter submitted to the holders of Listed Shares generally requires
the affirmative vote of holders of a majority of the Listed Shares for approval.
There are no cumulative voting rights with respect to the election of Directors.
Listed Shareholders have voting rights with respect to (i) the election and
removal of Directors, (ii) the sale or disposition of all or substantially all
of the assets of the Company at any one time (other than sales or dispositions,
the proceeds of which are needed to redeem the Partnership Shares), (iii) the
merger or consolidation of the Company (where the Company is not the surviving
entity), (iv) the dissolution of the Company and (v) certain anti-takeover
provisions. The holders of Listed Shares will be entitled to one vote for each
Listed Share owned. Any action that may be taken at a meeting may be taken by
written consent in lieu of a meeting executed by holders of Shares sufficient to
authorize such action at a meeting. At any meeting, a holder of Listed Shares
may vote in person, by written proxy or by a signed writing directing the manner
in which his vote should be cast. Proxies are revocable at the pleasure of the
holder of Listed Shares executing it.
No holders of any Listed Shares have any preemptive rights or any rights
to convert their Listed Shares into any other securities of the Company. Since a
public market for the Listed Shares is a condition to the consummation of the
Consolidation, the Company has applied for listing of the Listed Shares on the
NYSE.
RESTRICTING CHANGES IN CONTROL AND BUSINESS COMBINATION PROVISIONS
Certain provisions of the Organizational Documents and the Shareholder
Rights Plan could make more difficult a change of control of the Company by
means of a tender offer, a proxy contest or otherwise. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and management and in the
policies formulated by the Board of Directors and to discourage an unsolicited
takeover of the Company, if the Board of Directors determines that such takeover
is not in the best interests of the Company and
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its Shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company or remove incumbent
management, even if some or a majority of Shareholders deemed such an attempt to
be in their best interests.
Additional Classes and Series of Shares. The Organizational Documents of
the Company authorize the Board of Directors (subject to certain restrictions)
to provide for the issuance of Shares in other classes or series, to establish
the number of Shares in each class or series and to fix the preference,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications or terms or conditions of redemption of such class
or series. The Company believes that the ability of the Board of Directors to
issue one or more classes or series will provide the Company with increased
flexibility in structuring possible future financing and acquisitions and in
meeting other needs which might arise. The additional classes or series, as well
as the Listed Shares and Partnership Shares, will be available for issuance
without further action by the Company's Shareholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of doing
so, it could issue a class or series that could, depending on the terms of such
class or series, impede a merger, tender offer or other transaction that some or
a majority of the Shareholders might believe to be in their best interests or in
which the Shareholders might receive a premium for their Shares over the then
current market price of such Shares.
Staggered Board of Directors. Pursuant to the Organizational Documents,
the Board of Directors of the Company is divided into three classes, serving
staggered three-year terms. See "MANAGEMENT." The terms of the first, second and
third classes will expire in 1998, 1999 and 2000, respectively. Directors for
each class will be chosen for a three-year term upon the expiration of the
current class's term, beginning in 1998. The staggered terms for Directors may
affect the Company's Shareholders' ability to change control of the Company even
if a change of control were in the interests of the Shareholders. An individual
who has been elected to fill a vacancy will hold office only for the unexpired
term of the Director he is replacing.
Number of Directors; Removal; Filling Vacancies. The Organizational
Documents provide that the number of Directors of the Company will be fixed by
the Board of Directors, but must consist of not fewer than five nor more than 15
Directors. After consummation of the Consolidation, the Board will consist of 11
Directors. One class of Directors will be elected annually by the affirmative
vote of the holders of at least a majority of the then-outstanding Listed Shares
present at a meeting at which a quorum is present. Directors can be removed from
office only by the affirmative vote of the holders of at least a majority of the
then-outstanding Listed Shares. In addition, any vacancy (other than a vacancy
created by an increase in the number of Directors) may be filled, at any regular
meeting or at any special meeting of the Directors called for that purpose, by
the affirmative vote of a majority of the remaining Directors, though less than
a quorum. A vacancy created by an increase in the number of Directors shall be
filled by a majority of the entire Board of Directors.
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Business Combination Provisions. The Organizational Documents of the
Company contain certain business combination provisions (the "Business
Combination Provisions"). The Business Combination Provisions, in general,
provide that the transactions described in paragraphs (i) through (vi) below
(each, a "Business Combination") involving an Interested Party (as defined
below) are not permitted earlier than five years following the most recent date
on which an Interested Party became an Interested Party (the "Five-Year Tolling
Period"), unless either (A) the Business Combination or the transaction which
resulted in the Interested Party becoming an Interested Party is approved by the
Board of Directors prior to the most recent date on which the Interested Party
became an Interested Party (the "Determination Date") or (B) on or subsequent to
the Determination Date, but before the expiration of the Five-Year Tolling
Period, the transaction is approved by two-thirds of the Board of Directors and
two-thirds in interest of the Listed Shareholders other than the Interested
Party.
In addition, the Business Combination Provisions provide that, following
the Five-Year Tolling Period, unless the Business Combination was approved by
the Board of Directors prior to the Determination Date, or the minimum price
criteria and procedural requirements described in paragraphs (a) and (b) below
have been met (collectively, the "Fair Price and Procedural Requirements"), a
Business Combination is permitted only if the Business Combination is
recommended to the Shareholders by the Board of Directors and then approved by
(i) 80 percent in interest of the Listed Shareholders and (ii) two-thirds in
interest of the Listed Shareholders other than the Interested Party (the voting
requirements of clauses (i) and (ii) to be referred to herein as the "Special
Approval Vote").
An "Interested Party" is defined as any person (other than (a) the
Company, (b) any subsidiary of the Company, (c) the General Partners, and (d)
the Original Shareholders and (e) any affiliate or associate of any person in
(c) or (d) above) that (i) is the beneficial owner, directly or indirectly, of
10 percent or more of the voting power of the then outstanding Shares, (ii) is
an affiliate or associate of the Company and within two years prior to the date
in question was the beneficial owner, directly or indirectly, of 10 percent or
more of the then outstanding Shares or (iii) is an affiliate or associate of any
person described in clauses (i) or (ii) above.
A "Business Combination" includes the following transactions:
(i) Unless the merger, consolidation or exchange of interests does not
alter the contractual rights of the Shares as expressly set forth in
the Company Organizational Documents or change or convert in whole
or in part the outstanding Shares, any merger, consolidation or
exchange of interests of the Company or any subsidiary with (a) any
Interested Party or (b) any other entity (whether or not itself an
Interested Party) which is, or after the merger, consolidation or
exchange of interests will be, an affiliate of an Interested Party
that was an Interested Party prior to the transaction;
(ii) Any sale, lease, transfer or other disposition, other than in the
ordinary course of business, in one transaction or a series of
transactions in any
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12-month period to any Interested Party or any affiliate of any
Interested Party (other than the Company or any of its subsidiaries)
of any assets of the Company or any subsidiary having, measured as
of the time the transaction or transactions are approved by the
Board of Directors of the Company, an aggregate book value as of the
end of the Company's most recently ended fiscal quarter of 10
percent or more of the total market value of the outstanding Shares
or of its net worth as of the end of its most recently ended fiscal
quarter;
(iii) The issuance or transfer by the Company or any subsidiary, in one
transaction or a series of transactions, of any of the Shares or any
equity securities of a subsidiary which have an aggregate market
value of 5 percent or more of the total market value of the
outstanding Shares to any Interested Party or any affiliate of any
Interested Party (other than the Company or any of its subsidiaries)
except pursuant to the exercise of warrants or rights to purchase
securities offered pro rata to all Shareholders or any other method
affording substantially proportionate treatment to the Shareholders;
(iv) The adoption of any plan or proposal for the liquidation or
dissolution of the Company in which anything other than cash will be
received by an Interested Party or any affiliate of any Interested
Party;
(v) Any reclassification of securities or recapitalization of the
Company, or any merger, consolidation or exchange of Shares with any
of its subsidiaries which has the effect, directly or indirectly, in
one transaction or a series of transactions, of increasing by five
percent or more of the total number of outstanding Shares, the
proportionate amount of the outstanding Shares or the outstanding
number of any class of equity securities of any subsidiary which is
directly or indirectly owned by any Interested Party or any
affiliate of any Interested Party; or
(vi) The receipt by any Interested Party or any affiliate of any
Interested Party (other than the Company or any of its subsidiaries)
of the benefit, directly or indirectly (except proportionately as a
Shareholder), of any loan, advance, guarantee, pledge or other
financial assistance or any tax credit or other tax advantage
provided by the Company or any of its subsidiaries.
(a) Minimum Price Criteria. A Business Combination proposed by an Interested
Party after the expiration of the Five-Year Tolling Period must obtain the
Special Approval Vote unless the Interested Party complies with the Fair
Price and Procedural Requirements or the Board of Directors approves the
Business Combination or the transaction in which the Interested Party
became an Interested Party prior to the Determination Date.
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The Fair Price and Procedural Requirements provide that, in a Business
Combination involving cash or other consideration being paid to the
Shareholders, the consideration will be required to be either in cash or in the
same form as the Interested Party paid in acquiring the largest number of Shares
that it has acquired in any one transaction or series of related transactions,
except to the extent that the Shareholders otherwise elect in connection with
their approval of the proposed transaction. In addition, the transaction
constituting the Business Combination must provide for payment of consideration
per Share at least equal to the highest of the following: (i) the highest per
Share price paid by the Interested Party for any of the Shares of the same class
or series acquired by it (A) within the five-year period immediately prior to
the first public announcement of the proposed Business Combination (the
"Announcement Date") or (B) within the five-year period immediately before the
Determination Date, (ii) the highest preferential amount per Share to which the
holders of the Shares of such class or series are entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
(iii) the fair market value per Share of the same class or series on the
Announcement Date or the Determination Date, whichever is higher or (iv) the
price per Share equal to the fair market value per Share on the Announcement
Date or on the Determination Date, whichever is higher, multiplied by a fraction
equal to (A) the highest per Share price paid by the Interested Party for any of
the Shares of the same class or series acquired by it within the five-year
period immediately prior to the Announcement Date over (B) the fair market value
per Share of the same class or series on the first day in such five-year period
on which the Interested Party acquired any of the Shares.
For purposes of the Fair Price and Procedural Requirements, the fair
market value of the Shares on the Announcement Date or the Determination Date
will be the highest closing sale price during the 30-day period immediately
preceding the date in question of a Share of the same class or series on the
composite tape for NYSE-listed stocks, or, if Shares of the same class or series
are not quoted on the composite tape, on the NYSE, or, if the Shares of the same
class or series are not listed on the NYSE, on the principal United States
securities exchange registered under the Exchange Act on which the Shares of the
same class or series are listed, or, if the Shares of the same class or series
are not listed on any such exchange, the highest closing bid quotation with
respect to a Share of the same class or series during the 30-day period
preceding the date in question on the NASD automated quotation system or any
system then in use, or, if no such quotations are available, the fair market
value on the date in question of a Share of the same class or series as
determined by the Board of Directors in good faith.
(b) Procedural Requirements. The Fair Price and Procedural Requirements also
provide that, in order to avoid the Special Approval Vote, after an
Interested Party becomes an Interested Party, it will have to comply with
certain procedural requirements, as well as the minimum price
requirements, unless the Business Combination is approved by the Board of
Directors prior to the Determination Date.
Under the Fair Price and Procedural Requirements, the Special Approval
Vote applies after the expiration of the Five Year Tolling Period (unless the
Board of Directors approves the Business Combination prior to the Determination
Date) if the Company, after the Interested Party has
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proposed a Business Combination and after the Determination Date but prior to
consummation of such Business Combination, (A) fails to pay in a timely manner
the full amount of any distributions on any preferred Shares (including any
Partnership Shares) then outstanding, (B) fails to increase the annual rate of
distributions made with respect to any Shares to reflect any recapitalization,
reorganization or similar transaction which has the effect of reducing the
number of outstanding Shares or (C) reduces the annual rate of distributions
paid on any class or series of Shares that are not preferred. The provisions of
clauses (A), (B) and (C) do not apply if no Interested Party or an affiliate or
associate of an Interested Party voted as a member of the Board of Directors in
a manner inconsistent with clauses (A), (B) and (C) and the Interested Party,
within 10 days after any act or failure to act inconsistent with such items,
notifies the Board of Directors that the Interested Party disapproves thereof
and requests in good faith that the Board of Directors rectify such act or
failure to act. This provision is designed to prevent an Interested Party who
controls the necessary voting power from attempting to depress the market price
of the Shares prior to consummating a Business Combination by reducing
distributions thereon and thereby reducing the consideration required to be paid
pursuant to the minimum price criteria.
The Special Approval Vote also applies to a proposed Business Combination
after the expiration of the Five Year Tolling Period (unless the Board of
Directors approves the Business Combination prior to the Determination Date) if
the Interested Party acquired any additional Shares (except as part of the
transaction in which it became an Interested Party or by virtue of proportionate
Share splits or distributions) in any transaction subsequent to the time it
proposes a Business Combination. This provision is intended to prevent an
Interested Party from purchasing additional Shares at prices that are lower than
those set by the minimum price criteria after it proposes a Business
Combination.
The Interested Party will be required to meet the Fair Price and
Procedural Requirements with respect to each class or series of Shares, whether
or not the Interested Party owned Shares of that class or series prior to
proposing the Business Combination. If the Fair Price and Procedural
Requirements are not met with respect to each class or series of Shares, the
Special Approval Vote will be applicable unless the Business Combination was
approved by the Board of Directors prior to the Determination Date. In addition,
if the transaction is not of a type which involves the receipt of any cash,
securities or other consideration by Shareholders generally, such as a sale of
assets or an issuance of Company interests to an Interested Party, the minimum
price criteria discussed in paragraph (a) above could not be met and the Special
Approval Vote will be applicable unless the transaction is approved by the Board
of Directors prior to the Determination Date.
Advantages and Disadvantages of the Business Combination Provisions. The
Business Combination Provisions are designed to prevent certain of the potential
inequities of Business Combinations that involve two or more steps. In the first
instance, in order to complete a Business Combination within the Five-Year
Tolling Period, the Interested Party must either (i) obtain the approval by the
Board of Directors prior to the Determination Date or (ii) obtain the approval
of two-thirds of the Board of Directors and two-thirds in interest of the
Shareholders (excluding the vote of the Interested Party). The effect of these
provisions is to place a veto power over certain transactions in the hands of
the Board of Directors and Shareholders, other than the Interested Party.
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In the second instance, after the expiration of the Five-Year Tolling
Period, the Interested Party must either assure itself of obtaining the
affirmative votes of at least (i) 80 percent in interest of all Shareholders and
(ii) two-thirds in interest of the Shareholders (excluding the vote of the
Interested Party) prior to the vote on the Business Combination, or be prepared
to meet the Fair Price and Procedural Requirements. The Fair Price and
Procedural Requirements are designed to protect those Shareholders who have not
tendered or otherwise sold their Shares to a third party who is attempting to
acquire control, by helping to assure that at least the same price and form of
consideration is paid to such Shareholders in a Business Combination as were
paid to Shareholders in the initial step of the acquisition. In the absence of
these provisions, an Interested Party who acquires control of the Company could
subsequently, by virtue of such control, force minority Shareholders to sell or
exchange their Shares at a price that may not reflect any premium the Interested
Party may have paid in order to acquire its interest. Such a price could be
lower than the price paid by the Interested Party in acquiring control and could
also be in a less desirable form of consideration (e.g., equity or debt
securities of the Interested Party instead of cash).
In many situations, the Fair Price and Procedural Requirements will
require that an Interested Party pay Shareholders a higher price for their
Shares and/or structure the transaction differently from what would be the case
without the provision. Accordingly, the Board of Directors believes that, to the
extent a Business Combination is involved as part of a plan to acquire control
of the Company, the Business Combination Provisions may increase the likelihood
that an Interested Party will negotiate directly with the Board of Directors.
The Board of Directors believes that it is in a better position than individual
Shareholders of the Company to negotiate effectively on behalf of all
Shareholders, in that the Board of Directors is likely to be more knowledgeable
than most individual Shareholders in assessing the business and prospects of the
Company. Therefore, the Board of Directors is of the view that negotiations
between the Board of Directors and an Interested Party will increase the
likelihood that Shareholders in general will receive a higher price for their
Shares than otherwise might be obtained.
Although some substantial acquisitions of equity securities are made
without the objective of effecting a subsequent Business Combination, in many
cases a purchaser acquiring control desires to have the option to consummate
such a Business Combination. Assuming that to be the case, the Business
Combination Provisions will tend to deter a potential purchaser whose objective
is to seek control of the Company at a relatively low price, since acquiring the
remaining equity interest will not be assured unless the applicable voting
requirements were met, the Fair Price and Procedural Requirements were satisfied
or the Board of Directors were to approve the transaction prior to the
Determination Date. The Business Combination Provisions also should help to
deter the accumulation of large blocks of the Shares, which the Board of
Directors believes to be potentially disruptive to the stability of the Company
and which could precipitate a change of control of the Company on terms
unfavorable to other Shareholders.
Tender offers or other non-open market acquisitions of equity securities
usually are made at prices above their prevailing market price. In addition,
acquisitions of equity securities by persons attempting to acquire control
through market purchases may cause the market price of the securities
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to reach levels that are higher than might otherwise be the case. The presence
of the Business Combination Provisions may deter such purchases, particularly
those of less than all of the Shares, and may, therefore, deprive the Company's
Shareholders of an opportunity to sell their Shares at a temporarily higher
market price. Because of the Special Approval Vote for approval of any
subsequent Business Combination and the possibility of having to pay a price to
other Shareholders in such a Business Combination that is not less than the
price paid for its initial holdings, the Business Combination Provisions may
make it more costly for a third party to acquire control of the Company. It
should be noted that the Business Combination Provisions will not necessarily
deter persons who might be willing to seek control by acquiring a substantial
portion of the Shares when they have no intention of acquiring the remaining
Shares.
In certain cases, the Fair Price and Procedural Requirements' minimum
price provisions, while providing objective pricing criteria, could be arbitrary
and not indicative of value. In addition, an Interested Party may be unable, as
a practical matter, to comply with all of the procedural requirements. In these
circumstances, unless an Interested Party were assured of obtaining the required
number of affirmative votes from the other Shareholders, it will be forced
either to negotiate with the Board of Directors and offer terms acceptable to
the Board of Directors or to abandon such proposed Business Combination.
Amendments to Business Combination Provisions. The Organizational
Documents provide that the Business Combination Provisions may be amended or
repealed only by a vote of 80 percent in interest of all Listed Shareholders,
voting together as a single class, excluding Shares held by any Interested Party
or any affiliate of an Interested Party.
Control Share Acquisition Provisions. The Organizational Documents also
contain control Share acquisition provisions (the "Control Share Acquisition
Provisions"). The Control Share Acquisition Provisions, in general, provide that
any person or entity that acquires one-fifth or more of the outstanding Shares
of any class or series acquires voting rights with respect to the acquired
Shares only to the extent approved by the affirmative vote of two-thirds in
interest of the Listed Shareholders, but excluding any votes cast with respect
to Shares in respect of which the acquirer is entitled to exercise or direct the
exercise of the voting power.
The Control Share Acquisition Provisions provide that a person or entity
acquires Control Shares whenever it acquires Shares that, but for the operation
of the Control Share Acquisition Provisions, will bring its voting power within
any of the following ranges: (i) one-fifth to one-third, (ii) one-third to a
majority or (iii) a majority or more. A "Control Share Acquisition" generally
means the acquisition of Shares that will entitle the acquiring person
immediately after the acquisition to exercise or direct the exercise of the
voting power of Shares within one of these ranges of voting power. Excepted from
the definition of Control Share Acquisition is an acquisition of Shares from any
person whose previous acquisition of Shares was pursuant to the laws of descent
or distribution or the satisfaction of a pledge or other security interest
created in good faith and not for the purpose of circumventing the Control Share
Acquisition Provisions or a merger, consolidation or exchange of interests if
the Company is a party thereto. Subject to certain exceptions, a Control Share
Acquisition does not include the acquisition of Shares in good faith and
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not for the purpose of circumventing the Control Share Acquisition Provisions by
or from any person whose voting rights have previously been authorized by the
Listed Shareholders in compliance with the Control Share Acquisition Provisions
or any person whose previous acquisition of the Shares will have constituted a
Control Share Acquisition but for the exclusions in the preceding sentence. In
addition, a Control Share Acquisition does not include the acquisition of Shares
by (a) any subsidiary of the Company, (b) the General Partners and the Original
Shareholders and (c) any affiliate or associate of any person in (b) above.
Voting Rights of Control Shares. Under the Control Share Acquisition
Provisions, a person or entity that acquires Control Shares pursuant to a
Control Share Acquisition acquires voting rights with respect to those control
Shares only to the extent approved by the affirmative vote of two-thirds in
interest of the Listed Shareholders, but excluding any votes cast with respect
to Shares in respect of which the acquirer is entitled to exercise or direct the
exercise of the voting power.
The acquirer may require the Company to hold a meeting of the Listed
Shareholders for the purpose of considering the status of its voting rights by
complying with the requirements of the Organizational Documents. The acquirer
must deliver to the Company an acquiring person statement, which must set forth,
among other things, the terms of the proposed acquisition and representations
that the proposed Control Share Acquisition, if consummated, will not be
contrary to law, and that the acquirer has the financial capacity to make such
acquisition. If the acquirer so requests at the time of delivery of the
acquiring person statement and gives a written undertaking to pay the expenses
of a meeting, the Board of Directors is generally required to call and hold,
within 50 days after receipt of the acquiring person statement and undertaking,
a meeting of the Listed Shareholders to consider the voting rights to be
accorded the Shares to be acquired in the Control Share Acquisition. In
connection with calling the meeting, the Company must send a notice to the
Listed Shareholders which includes or is accompanied by both the acquiring
person statement and a statement by the Board of Directors setting forth its
position or recommendation or stating that it is taking no position or making no
recommendation with respect to the issue of voting rights to be accorded the
Shares acquired in the Control Share Acquisition.
Redemption of Control Shares. If an acquiring person statement has been
delivered on or before the tenth day after the Control Share Acquisition and the
Listed Shareholders do not vote to approve voting rights to the Control Shares,
the Company may redeem the Control Shares from the acquirer at any time during
the 60-day period commencing on the day of a meeting at which the voting rights
of the Control Shares were considered and not approved. If the acquirer fails to
deliver an acquiring person statement on or before the tenth day after the
Control Share Acquisition, the Company may redeem the Control Shares (except
Control Shares for which voting rights have been approved) at any time during
the period commencing on the 11th day after the Control Share Acquisition and
ending 60 days after the acquiring person statement has been delivered. Any
redemption of Control Shares shall be at the fair value of the Control Shares as
of the date of the last acquisition of Control Shares by the acquirer or, if a
meeting is held to consider the voting rights of the Control Shares, as of the
date of the meeting.
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Advantages and Disadvantages of the Control Share Acquisition Provisions.
The Control Share Acquisition Provisions will permit the Listed Shareholders to
review, on a collective basis, the merits of a proposed acquisition of control
of the Company without the time pressure and coercive atmosphere often present
with tender offers and other non-negotiated transactions. Although a change of
control may in certain circumstances be beneficial to security holders, the
Control Share Acquisition Provisions are intended to provide the Listed
Shareholders with the continued ability to make a reasoned, thoughtful decision
on proposed acquisitions of significant voting power. It also may enhance the
Company's bargaining power with a potential acquirer.
The Control Share Acquisition Provisions also may make it more difficult
or costly for another party to acquire and exercise control of the Company. To
the extent that it has the effect of discouraging a future takeover attempt, it
could prevent Shareholders from realizing any premium over the prevailing market
price that might be involved in any such transaction. The Control Share
Acquisition Provisions also may discourage gradual market purchases by an
acquirer, thereby depriving some Listed Shareholders of an opportunity to sell
their Shares at a temporarily higher market price, though the provisions of the
Control Share Acquisition Provisions may force an acquirer to pay a higher price
for control and Shareholders will thereby benefit. Finally, to the extent that
the Control Share Acquisition Provisions enable the Company to resist a takeover
or a change of control or removal of the Board of Directors, it could make it
more difficult to remove the existing management of the Company, even if such
removal will be beneficial to the Shareholders.
Amendments to Control Share Acquisition Provisions. The Organizational
Documents provide that the Control Share Acquisition Provisions may be amended
or repealed only by a vote of 80 percent in interest of all Listed Shareholders,
excluding any votes cast with respect to Control Shares held by an acquirer.
Shareholder Rights Plan. The Company intends to enter into the Shareholder
Rights Plan with a rights agent that will provide for the issuance of one right
(a "Right") for each outstanding Share to the Company's Listed Shareholders of
record on a record date to be established by the Board of Directors (the "Rights
Record Date"). Each Right will entitle the holder thereof to buy one Share at a
specified exercise price, which will be subject to adjustment.
Set forth below is a description of the proposed terms of the Listed
Shareholder Rights Plan.
Distribution Date. Until the close of business on the tenth day after the
earlier to occur of (i) the date a person (an "Acquiring Person") (other than
the Company, any subsidiary of the Company, the General Partners, any Affiliate
of the General Partners, the Original Shareholders and any employee benefit plan
of the Company) alone or together with affiliates and associates, has become the
beneficial owner of five percent or more of the outstanding Shares or (ii) the
date of the commencement of, or announcement of, an intention to make a tender
offer or exchange offer the consummation of which will result in the beneficial
ownership by a person or group (other than the Company, any subsidiary of the
Company, the General Partners, any Affiliate of the General Partners, the
Original Shareholders and any employee benefit plan of the Company) of 10
percent
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or more of the outstanding Shares (the earlier of (i) or (ii) being called the
"Rights Distribution Date"), the Rights will be evidenced by the Shares
registered in the name of the holders of the Shares and not be separate Right
certificates.
The Shareholder Rights Plan is expected to provide that, until the Rights
Distribution Date, the Rights will be transferred with and only with the Shares.
Until the Rights Distribution Date (or earlier termination or expiration of the
Rights), the transfer of any Shares outstanding as of the Rights Record Date
will also constitute the transfer of the Rights associated with such Shares. As
soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights (a "Rights Certificate") will be mailed to
holders of record of the Shares as of the close of business on the Rights
Distribution Date and such separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Rights Distribution Date. The
Rights will expire on the tenth anniversary of the Rights Record Date (the
"Final Expiration Date") unless the Final Expiration Date is extended or unless
the Rights are earlier redeemed by the Company, as described below.
Adjustments to Purchase Price. The purchase price payable (the "Exercise
Price"), and the number of the Shares or other securities or property issuable,
upon exercise of the Rights are subject to adjustment from time to time to
prevent dilution in the event the Company (i) declares or pays any distribution
on the Shares payable in Shares or other securities, (ii) subdivides or splits
the outstanding Shares into a greater number of interest or (iii) combines or
consolidates the outstanding Shares into a smaller number of interests or
effects a reverse split of the outstanding Shares.
Exercise of Rights. In the event that on or after the Rights Distribution
Date, the Company is acquired in a merger or other business combination
transaction or 50 percent or more of its consolidated assets or earning power
are sold (in one transaction or a series of transactions other than in the
ordinary course of business), proper provision will be made so that each holder
of a Right will thereafter have the right to receive, upon the exercise thereof
at the then current Exercise Price, that number of partnership interests, common
shares or other equity securities of the acquiring entity which at the time of
such transaction will have a market value of two times the Exercise Price. In
the event that any person, together with its affiliates and associates, becomes
the beneficial owner of five percent or more of the Shares then outstanding,
unless such acquisition is approved by the Board of Directors, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive upon exercise
thereof and payment of the Exercise Price, the greater of (i) the number of
Shares for which such Right was exercisable immediately prior to such event or
(ii) that number of Shares having a market value of two times the Exercise
Price.
Redemption of Rights. At any time prior to the earlier to occur of (i) the
acquisition by a person, together with its affiliates and associates of
beneficial ownership of five percent or more of the outstanding Shares or (ii)
the Final Expiration Date, the Board of Directors may cause the
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Company to redeem the Rights in whole, but not in part, at a redemption price of
$.01 per Right. Immediately upon any redemption of the Rights, all rights
relating to the Rights (except the right to receive the redemption price for
each Right), including the right to exercise the Rights, will terminate.
Amendment of Rights Plan. The terms of the Rights may be amended by the
Board of Directors in any manner without the consent of the holders of the
Rights, except that from and after such time as any person becomes an Acquiring
Person, no such amendment may adversely affect the interest of the holders of
the Rights (other than Acquiring Persons).
Effect of the Rights Plan. Although the Rights will not prevent a takeover
of the Company, the Rights may have certain anti-takeover effects. The Rights
could cause substantial dilution to a person or group that attempts to acquire
the Company in a manner or on terms not approved by the Board of Directors. The
Rights, however, should not deter any prospective offerer willing to negotiate
in good faith with the Company.
RESALE OF SHARES
The Listed Shares received by the General Partners and their affiliates
are be restricted shares which may only be resold pursuant to an effective
registration statement or pursuant to Rule 144 under the Securities Act. The
General Partners and their affiliates have the ability to compel the Company to
register the Listed Shares they received in the Consolidation. The costs of this
registration would be borne by the Company.
Listed Shares received by persons who may be deemed to be "affiliates" of
the Company may be sold by those persons only in accordance with the provisions
of Rule 144 under the Securities Act, pursuant to an effective registration
under the Securities Act, or in transactions that are exempt from registration
under the Securities Act. Rule 144 provides, in general, that those Listed
Shares may be sold by the affiliate only if (i) the number of Listed Shares sold
within any three-month period does not exceed the greater of one percent of the
total number of outstanding Shares or the average weekly trading volume of the
shares during the four calendar weeks immediately preceding the date on which
the notice of sale is filed with the Commission and (ii) the Shares are sold in
transactions directly with a "market maker" or in "brokers' transactions" within
the meaning of Rule 144 under the Securities Act.
DISTRIBUTION POLICY
The following summarizes the Company's current distribution policy with
respect to Listed Shares and the Subsidiary Partnership Units. The Board of
Directors of the Company will have the ability to change the Company's
distribution policy with respect to the Listed Shares without the consent of the
Shareholders. The Board of Directors of the Company will have the discretion to
adopt a distribution reinvestment plan in the future which would permit holders
of Listed Shares to reinvest the distributions they receive from the Company in
additional Listed Shares.
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LISTED SHARES
The Company intends to make regular quarterly distributions to the
Shareholders. The Company has declared a dividend of $0.4125 per Listed Share to
shareholders of record on March 31, 1998 and was paid on April 15, 1998.
The following table illustrates the adjustments made to the Company's pro
forma net income before extraordinary items for the 12 months ended December 31,
1997, in estimating its cash available for distribution for the 12 month period
ending December 31, 1998 and in establishing its estimated initial annual
distribution:
<TABLE>
<S> <C>
Pro forma net income for the 12 months
ended December 31, 1997 before
extraordinary items $ 37,946
Adjustments:
Non-cash expenses and other adjustments(1) 14,202
Gains on sales of properties and securities (1,565)
Excess of minority interest income over
distributions to minority interest 860
Decrease in interest expense(2) 3,066
Contractual rent increases and new leases(3) 2,085
Lease expirations(4) (3,138)
Reduction of cash flow from hotels due to
commencement of renovations(5) (180)
Estimated adjusted cash generated before
debt repayments and capital expenditures
for the 12 months ending December 31, 1998 53,276
Capital expenditures (4,005)
--------
Estimated adjusted cash generated before
debt repayments 49,271
Principal amortization of mortgage debt(6) (6,555)
--------
Estimated adjusted cash generated
after debt repayments $ 42,716
========
Expected initial annual distribution(7) $ 39,691
========
Expected initial annual distribution
per Listed Share $ 1.65
========
(1) Reflects the following:
Depreciation and amortization $ 9,391
Non-cash writedown of real estate assets 3,806
Vested portion of performance fees paid in stock 705
Directors' and employee's compensation paid in stock 300
--------
$ 14,202
========
</TABLE>
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Performance fees and a portion of the compensation of Directors and the
Company's sole employee will be paid in the form of Listed Shares.
Operating and financing lease adjustments represent the effect of
adjusting straight-line rents on operating leases and interest income on
direct financing leases included in pro forma net income, to a cash basis.
(2) Represents the estimated decrease in interest expense on amortizing debt
for the 12 months ending December 31, 1998.
(3) Represents the estimated increase in lease revenues due to contractually
scheduled rental adjustments and the commencement of new leases. Scheduled
rental adjustments are based on increases in the Consumer Price Index or
fixed increases.
(4) Represents the reduction in lease revenues due to scheduled lease
expirations.
(5) A renovation of the hotel in Livonia, Michigan is expected to commence in
June 1998, resulting in a temporary reduction of operating cash flows. The
renovation will be completed within 12 months of commencement and is
expected to result in an increase in hotel revenues.
(6) Represents scheduled principal amortization on mortgage debt for the 12
months ending December 31, 1998, excluding balloon payments on maturing
debt.
(7) Based on estimated average outstanding Listed Shares for the 12 months
ending December 31, 1998.
The Company will consider various factors in determining future
distributions including expected cash flows generated from operating activities,
cash requirements to fund property improvements and expansions, debt service
requirements, the level of cash balances on hand and the Company's ability to
generate funds from operations. These factors will be taken into account in
determining the Company's ability to pay a sustainable level of distributions.
In addition the Company expects to commence acquiring new investments to meet
its growth objectives and such acquisition strategy may affect the Company's
ability to maintain or increase future distribution levels.
The Company intends to utilize cash generated from operations to fund
distributions to Shareholders and pay regularly scheduled principal amortization
on mortgage debt. For the three years ended December 31, 1995, 1996 and 1997
cash generated from operations of approximately $63,276,000, $50,983,000 and
$49,559,000, exceeded distributions to the Limited Partners of approximately
$57,216,000, $34,173,000 and $43,620,000, respectively. Cash generated from
operations in 1997 decreased by $1,424,000 as compared to 1996 due to an
increase in expenses in
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connection with the evaluation of CPA(R) Partnership liquidity alternatives.
Distributions of $43,620,000 in 1997 reflected an increase of $9,447,000 due to
the payment of a distribution intended to adjust the net assets of each CPA(R)
Partnerships to conform with the estimate of Total Exchange Value, as specified
in the Consent Solicitation Statement.
Cash flows provided (used) by investing activities for the two years ended
December 31, 1995 and 1996 amounted to approximately $24,327,000 and
$19,545,000, respectively, primarily due to the sale of properties. Most of the
Company's properties are subject to net leases under which the lessees are
required to pay all operating expenses of the properties and structural repairs.
Consequently, historical cash needs for capital expenditures on the properties
have not been material. Capital expenditures for the three years ended December
31, 1995, 1996 and 1997 are approximately $2,095,000, $3,420,000 and $1,955,000,
respectively. Future capital expenditures may be expected to increase as many of
the Company's leases are over 10 years old and are scheduled to approach their
initial expiration dates. If cash generated from operating activities is not
sufficient to fund future capital expenditures, such expenditures could be
funded from the Company's working capital reserves or from additional borrowing
of secured or unsecured debt.
Cash flows from financing activities primarily consists of payment of
mortgage principal in connection with loan prepayments or scheduled principal
amortization, payment of distributions to partners and the refinancing of
mortgage loans. Net cash used in financing activities totaled approximately
$105,578,000, $69,686,000 and $59,008,000 for the three years ended December 31,
1995, 1996 and 1997, respectively. Scheduled principal payments on debt for the
years ended December 31, 1998, 1999 and 2000 are expected to be approximately
$37,068,000, $41,264,000 and $4,875,000, respectively, consisting primarily of
balloon payments on mortgage loans currently in place. Such payments can be
funded partially but not entirely from cash generated from operations. The
Company has established an unsecured bank line of credit or may refinance loans
on selected properties to fund these obligations.
The Company's lease revenues from existing properties are expected to
decrease due to the modification of leases with Policy Management Systems and
Hughes Markets. The modification of those leases resulted in a temporary
increase in lease revenues during 1995, 1996 and the first quarter of 1997. In
July 1994 the Company agreed to accelerate the term of a lease with Policy
Management Systems from the originally scheduled expiration in June 2003 to June
1997, resulting in a corresponding acceleration of the rental income that would
have been paid over the original remaining term of the lease. Annual rents
subsequent to the acceleration increased from approximately $1,850,000 to
approximately $5,200,000. The lease with Policy Management Systems expired in
June 1997. The Company has leased a portion of the property at an annual rental
of approximately $723,000 and is currently re-marketing the remaining space. The
Company believes that annual rents on the property, when fully leased, will
approximate the annual rents received prior to acceleration of the term of the
lease with Policy Management Systems.
The lease with Hughes Markets, Inc. for a property in Los Angeles,
California, expired in April 1996 and was extended for a period of two years
with a significant increase in rent. In connection with the lease extension the
Company was able to increase annual rents during the
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extension period from approximately $1,800,000 to approximately $4,000,000.
Hughes Markets agreed to make a lump sum payment of approximately $3,500,000
upon the expiration of the extended lease term in April 1998, and such amount is
recognized on a pro rata, straight-line basis over the extension term. The
Company has entered into an agreement to lease the Los Angeles property upon
termination of the lease with Hughes Markets for an annual rent of approximately
$1,800,000 for a term of nine years.
The Company intends to commence purchasing additional investments. Such
acquisitions may be financed with funds provided by unsecured lines of credit,
additional borrowing on unleveraged properties or the issuance of additional
equity. Acquisitions of new properties are expected to increase future lease
revenues.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Shares is ChaseMellon
Shareholder Services, L.L.C.
COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE
GENERAL PARTNERS AND MANAGER
AMOUNTS PAYABLE TO THE MANAGER
Amounts Payable by the Company.
The following is a description of the fees payable by the Company to the
Manager in connection with the services to be provided by the Manager.
Management Fee. The Manager will be paid a monthly management fee at an
annual rate of .5 percent of the Total Capitalization of the Company. The
Management Fee and Performance Fee will each be reduced by one-half of the
amount received by the Manager from the Subsidiary Partnerships for property
management or leasing fees and distributions of Cash from Operations. The Total
Capitalization of the Company will be measured each month by adding (i) the
average of total principal amount of the debt owed by the Company (measured as
of the first and last day of each month) and (ii) the Average Market
Capitalization of the Company (measured by multiplying the closing price of the
Listed Shares on each trading day of the month by the total number of Listed
Shares issuable in the Consolidation outstanding each trading day, adding the
product for each day and dividing the sum by the number of trading days in the
month).
Performance Fee. The Manager will be paid a monthly Performance Fee at an
annual rate of .5 percent of the Total Capitalization of the Company. This fee
will be paid in the form of restricted Listed Shares which will vest ratably
over five years. Before such shares are vested, the restricted Listed Shares
will not be transferable and will be subject to forfeiture in the event the
Manager is terminated for cause or resigns. The restricted Listed Shares will
vest immediately in
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the event of a change of control and certain other circumstances. The Management
Fee and Performance Fee will each be reduced by one-half of the amount received
by the Manager from the Subsidiary Partnerships for property management or
leasing fees and distributions of Cash from Operations. The sale of the Listed
Shares will be restricted pursuant to Rule 144 of the '33 Act. The fee amount
will be divided by the closing price of the Listed Shares on the last trading
day of the month to determine the number of Listed Shares to be paid to the
Manager.
Termination Fee. If the Management Agreement is terminated in connection
with a change of control, by the Company without cause or by the Manager with
Good Reason, the Manager will be entitled to receive a Termination Fee. The
Termination Fee equals the sum of (A) any fees that would be earned by the
Manager upon the disposition of the assets of the Company and the Subsidiary
Partnerships at their appraised value as of the date the Management Agreement is
terminated (the "Termination Date") and (B)(1) if the agreement is terminated by
the Company after a change in control, $50 million if the change in control
occurs on or before December 31, 1998 and thereafter, five times the total fees
paid to the Manager by the Company and the Subsidiary Partnerships in the 12
months preceding the change in control and (2) if the agreement is terminated
without cause or for Good Reason, $50 million if the agreement is terminated
before December 31, 1999; $40 million if the agreement is terminated before
December 31, 2000; $30 million if the agreement is terminated before December
31, 2001; $20 million if the agreement is terminated before December 31, 2002
and $10 million if the agreement is terminated before December 31, 2003.
The Manager may also be paid fees on a transactional basis for
acquisitions, dispositions and other similar transactions. The terms of such
fees will be negotiated with the Board of Directors.
Amounts Payable by the Subsidiary Partnerships.
The Manager will be entitled to the distributions from the respective
Subsidiary Partnerships described below. Distributions paid to the Manager by
the Subsidiary Partnerships described in the following table will reduce the
management fee and performance fee otherwise payable to the Manager by the
Company each by one-half of the amount paid by the Subsidiary Partnership:
Percent of
<TABLE>
Subsidiary Property Management/ Distribution of Cash
Partnership Leasing Fee from Operations
- ----------- ----------- ---------------
<S> <C> <C>
CPA(R):1 5% of Adjusted Cash from Operations 1%
CPA(R):2 5% of Adjusted Cash from Operations 1%
CPA(R):3 5% of Adjusted Cash from Operations 2%
CPA(R):4 1% of gross lease payments(1) 6%
CPA(R):5 1% of gross lease payments(1) 6%
CPA(R):6 1% of gross lease payments(1) 6%
</TABLE>
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CPA(R):7 1% of gross lease payments(1) 6%
CPA(R):8 3% of gross lease payments over first
five years of original term of each lease 10%
CPA(R):9 3% of gross lease payments over first
five years of original term of each lease. 10%
(1) The management fee for properties not subject to leases with an initial
term of less than 10 years is (i) six percent of the gross revenues of
such leases where such Affiliate performs leasing, re-leasing and leasing
related services, or (ii) three percent of gross revenues of such leases
where such services are not performed; provided, however, that in no event
shall such management fee exceed an amount which is competitive for
similar services in the same geographic area and further provided that
bookkeeping services and fees paid to non-Affiliates for management
services shall be included in the management fee.
Incentive Fee. The Manager will be paid an Incentive Fee equal to 15
percent of the amount of the net proceeds received from the sale of a property
previously held by a CPA(R) Partnership in excess of the appraised value of the
equity interest in such property used in the Consolidation less an adjustment
for the share of such net proceeds in excess of the appraised value of the
equity interest attributable to the Manager's interest in the Listed Shares.
Preferred Return. The Manager will be paid a Preferred Return of
$[1,067,133] if the closing price of the Listed Shares exceeds $23.11 for five
consecutive days. This payment is for services rendered in connection with prior
sales of properties owned by one of the Subsidiary Partnerships.
FEES PAYABLE OVER PAST THREE YEARS
The following table sets forth the actual amounts of compensation and
distributions paid by the CPA(R) Partnerships on a combined basis to the General
Partners for the last three fiscal years and the amounts that would have been
payable to the Manager and its affiliates over the same period if the
Consolidation had taken place effective January 1, 1994. This comparison assumes
that the Company would have conducted its business the same way as the CPA(R)
Partnerships conducted their business over the same period.
MANAGER'S COMPENSATION
<TABLE>
<CAPTION>
Pro Forma(1)
-------------------------------------------------------------
Management Total Cash Performance Total
Fee(2) Compensation Fee-Stock(2) Compensation
-------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 $3,940,000 $3,940,000 $ 788,000 $5,558,000
1996 3,695,000 3,695,000 1,527,000 6,052,000
1997 3,527,000 3,527,000 2,232,000 5,759,000
</TABLE>
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(1) Reflects estimated management fees that would have been paid to the
Manager if the Consolidation had been completed as of January 1, 1995,
assuming maximum participation without the issuance of Subsidiary
Partnership Units. Actual fees would have depended on the market price of
the Listed Shares (see Note 4).
(2) Management fees and Performance Fees are equal to 0.5 percent of the
Company's Total Capitalization payable in cash and 0.5 percent thereof
payable in the form of Listed Shares of the Company, respectively, but
shall not in any event be less than the total amount of leasing fees and
distributions otherwise paid to the General Partners of the CPA(R):
Partnerships. Total Capitalization equals the Company's average market
capitalization plus the average outstanding debt for the relevant period.
For purposes of the presentation, in the absence of applicable market
values for the Listed Shares, pro forma Total Capitalization is deemed to
be equal to the sum of the Total Exchange Value and the average
outstanding debt of the CPA(R) Partnerships. The Company's actual market
capitalization may increase or decrease depending on the Company's
operating performance and market conditions; management fees actually paid
would increase or decrease accordingly. The performance fee will be paid
in the form of restricted Listed Shares which will vest ratably over five
years. The sale of the Listed Shares by the Manager will be restricted
pursuant to Rule 144 of the Securities Act. The amounts shown under
"Performance Fee--Stock" represent amounts of restricted Listed Shares
that would have vested in each of the years 1995, 1996 and 1997.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing, conflicts
of interest and other policies of the Company. These policies have been
determined by the Company's Board of Directors and generally may be amended or
revised from time to time by the Board of Directors without a vote of the
Shareholders.
INVESTMENT POLICIES
Investments in Real Estate. The Company seeks to acquire and manage a
diversified portfolio of properties subject to long-term leases. The Company
seeks to structure leases and to acquire properties subject to leases that
generally provide: (i) that the tenant is responsible for all operating and
capital expenses, as well as environmental and other contingent liabilities;
(ii) for contractual rent increases over the term of the lease; and (iii) for
primary lease terms of 10 to 25 years.
While the Company generally intends to hold its Properties for long-term
investment, the Company may dispose of a Property if it deems such disposition
to be in its best interests and may either reinvest the proceeds of such
disposition or distribute the proceeds to Shareholders. The Company may sell
Properties to tenants pursuant to purchase options included in certain leases.
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Investments in Real Estate Mortgages. While the Company emphasizes equity
real estate investments in properties subject to long-term leases, it may, in
its discretion, invest in mortgages and other interests related to real estate.
The Company does not presently intend to invest to a significant extent in
mortgages, but may do so. The mortgages in which the Company may invest may be
first mortgages or junior mortgages and may or may not be insured by a
governmental agency.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. The Company also may invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities. The Company
may acquire all or substantially all of the securities or assets of REITs or
similar entities where such investments would be consistent with its investment
policies. The Company may also receive an equity interest or rights to purchase
equity interests in tenants or affiliates of tenants in connection with
sale-leaseback transactions. In any event, the Company does not intend that its
investments in securities will require it to register as an "Investment Company"
under the Investment Company Act of 1940, and the Company would divest itself of
such securities before any such registration would be required.
Joint Ventures and Wholly-Owned Subsidiaries. The Company may enter into
joint ventures or general partnerships and other participations with real estate
developers, owners and others for the purpose of obtaining an equity interest in
a particular Property or Properties in accordance with the Company's investment
policies. Such investments permit the Company to own interests in large
Properties without unduly restricting diversification and, therefore, add
flexibility in structuring the Company's portfolio. See "RISK FACTORS -- Real
Estate Investment Risks -- Risks of Joint Ventures."
The Company may from time to time participate jointly with other entities
sponsored or managed by one of its Affiliates in investments as
tenants-in-common or in some other joint venture arrangement. Any joint
investment will be on substantially the same economic terms and conditions and
each investment entity may have a right of first refusal to purchase the
interest of the other if a sale of that interest is contemplated.
Permitted Investments. The purposes of the Company are to own and invest
in or engage in activities related to investment in net leased properties
including, without limitation, industrial, commercial, retail and warehouse
distribution properties; provided, however, that the investment criteria shall
be established by the Board of Directors from time to time in its sole
discretion. The Company is authorized to invest in net leased real estate and
may make mortgage loans, secured by properties of the type in which the Company
may invest. In addition, the Company may acquire other commercial real estate
investments or any other assets.
Engaging in the Purchase and Sale of Investments and Investing in the
Securities of Others for the Purpose of Exercising Control. The Company may
acquire, own and dispose of general and limited partner interests, and stock,
warrants, options or other equity interests in
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entities, and to exercise all rights and powers granted to the owner of any such
interests as well as invest in any type of investment and to engage in any other
lawful act or activity for which limited liability companies may be formed under
the LLCA, and by such statement all lawful acts and activities shall be within
the purposes of the Company.
Offering Securities in Exchange for Property. The Company may offer
securities in exchange for property.
Repurchasing or Reacquiring Its Own Shares. The Company may purchase or
repurchase Shares from any Person for such consideration as the Board of
Directors may determine in its reasonable discretion, whether more or less than
the original issuance price of such Share or the then trading price of such
Share.
Issuance of Additional Shares. The Board of Directors may, in its
discretion, issue additional equity securities. The Company expects to raise
additional equity from time to time to increase its available capital. The
issuance of additional equity interests may result in the dilution of the
interests of the Shareholders.
FINANCING POLICIES
Issuance of Senior Securities. The Company may at any time issue
securities senior to only the Listed Shares, upon such terms and conditions as
may be determined by the Board of Directors, as no such shares may be issued
which subordinate the rights of the Partnership Shareholders.
Borrowing Policy. The Company may, at any time, borrow, on a secured or
unsecured basis, funds to finance its business and in connection therewith
execute, issue and deliver, promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations which may be convertible into
Shares or other equity interests or be issued together with warrants to acquire
Shares or other equity interests. The Operating Agreement limits the Company's
debt to 66.6% of the market capitalization of the Company for as long as there
are Partnership Shares outstanding.
Lending of Money. The Company may at any time, make mortgage loans secured
by properties of the type in which the Company may invest, subject to the
restrictions upon related party transactions contained in the Bylaws.
MISCELLANEOUS POLICIES
Making Annual or Other Reports to Shareholders. The Company will be
subject to the reporting requirements of the Exchange Act and will file annual
and quarterly reports thereunder. The Company currently intends to provide
annual and quarterly reports to its Shareholders.
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Restrictions Upon Related Party Transactions. The Bylaws prohibit the
Company from engaging in a transaction with a Director, officer, advisor, person
owning or controlling 10% or more of any class of Company's outstanding voting
securities of any affiliate of the aforementioned ("interested parties"), except
to the extent that such transactions are specifically authorized by the terms of
the Bylaws. The Bylaws prohibit the Company from entering into a transaction
with any of the interested parties unless the terms or conditions of such
transactions have been disclosed to the Board of Directors and approved by a
majority of Directors not otherwise interested in the matter (including a
majority of Independent Directors), and such Directors, in approving the
transaction, have determined it to be fair, competitive and commercially
reasonable, and on terms and conditions no less favorable to the Company than
those available from unaffiliated third parties. In addition, the Bylaws
specifically authorize the Company to acquire property from interested parties
to the extent the terms and conditions of the acquisition have been approved by
a majority of the Directors not otherwise interested in the transaction
(including a majority of the Independent Directors) and such Directors have made
good faith determinations as to the fairness of the compensation provided for
such property.
Company Control. The Board of Directors has exclusive control over the
Company's business and affairs subject only to the restrictions in the
Organizational Documents. Shareholders have the right to elect members of
the Board of Directors. The Directors are accountable to the Company as
fiduciaries and are required to exercise good faith and integrity in
conducting the Company's affairs. See "FIDUCIARY RESPONSIBILITY."
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not
sufficient, access to borrowings) in amounts that the Board of Directors
determines to be adequate to meet normal contingencies in connection with the
operation of the Company's business and investments.
INCOME TAX CONSEQUENCES
The following is a discussion of the material tax considerations that may
be relevant to a prospective Shareholder. It is impractical to set forth in this
Prospectus all aspects of federal, state, local and foreign tax law which may
impact upon a Shareholder's participation in the Company. Furthermore, the
discussion of various aspects of federal, state, local and foreign taxation
contained herein is based on the Internal Revenue Code of 1986 (the "Code"),
existing laws, judicial decisions and administrative regulations
("Regulations"), rulings and practice, all of which are subject to change. Any
change could be retroactive so as to apply to the Company and/or its properties.
The following discussion is generally directed to the federal tax
treatment of a U.S. resident individual Shareholder subject to regular federal
income tax. Separate sections herein describe in summary form the federal tax
treatment of certain other classes of potential Shareholders including IRAs,
Keoghs, corporate pension and profit-sharing trusts and other tax-exempt
entities. There is no discussion of the federal tax treatment of non-resident
aliens and foreign corporations. The
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discussion herein of the particular tax concerns of these classes of potential
Shareholders is only a general summary.
To the extent that the discussion involves matters of law, it represents
the opinion of Reed Smith Shaw & McClay LLP as to all material federal income
tax aspects of the offering. The Company has received an opinion from its
counsel Reed Smith Shaw & McClay LLP that (i) the Company will be classified as
partnerships for federal tax purposes, provided that, (a) each Participating
Partnership is not a publicly traded partnership for Federal income tax purposes
or 90 percent or more of its gross income consists of qualifying income as
defined in Code Section 7704(d) and 90 percent or more of the Company's gross
income consists of qualifying income as described in Code Section 7704(d), and
(b) the Company and each Participating Partnership are organized as described
in, and operate in compliance with their governing agreements, (ii) confirms the
opinions attributed to it in this Prospectus and (iii) which concludes that in
the aggregate, the remaining federal income tax consequences of owning Shares in
the Company referred to in this Prospectus will occur or be realized by the
Shareholders. No rulings have been sought from the IRS with respect to any of
the tax matters described in this Prospectus. The opinions of counsel are
dependent upon the present provisions of the Code, Regulations and existing
administrative and judicial interpretations thereof, all of which are subject to
change. [A copy of the opinion of counsel filed as exhibit 8.1 to the Company's
Registration Statement filed with the Commission on October 15, 1997
(333-37901), can be obtained without charge by contacting Director of
Shareholder Services of Carey Diversified LLC, 50 Rockefeller Plaza, New York,
NY 10020 or by calling 1-800-733-8481 ext. CPA.
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THEIR INDIVIDUAL
TAX SITUATIONS WITH RESPECT TO THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES
ARISING FROM OWNING SHARES.
NEW TAX LAW PROVISIONS
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") became law on August
6, 1997. Among the changes relevant to Unitholders are the following:
- The maximum capital gain rate applicable to the sale of a capital
asset (not including gain attributable to depreciation on real
estate) held for more than 18 months (long-term) is 20 percent.
- The maximum capital gain rate applicable to the sale of a capital
asset held for more than 12 months but not more than 18 months
(mid-term) is 28 percent.
- In general, long-term gain attributable to depreciation on real
estate is subject to tax at a maximum rate of 25 percent.
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- For tax years beginning in 1998, a partnership's tax year will close
with respect to a partner on the date of that partner's death. As a
result, a portion of the partnership's items of income, loss, gain,
deduction or credit flow through to the decedent's last life time
income tax return and the remainder of the partnership's items are
included on the estate's and/or beneficiaries' income tax returns.
- A large partnership, like the Company, beginning in 1998, may elect
to be an "electing large partnership." In general, an electing large
partnership separately reports to its partners its (a) passive
activity income and loss, (b) income and loss from other than
passive activities, (c) net capital gain allocable to (i) passive
activity sources and (ii) other sources, (d) tax exempt interest,
(e) net alternative minimum tax adjustments separately reported for
passive activity loss limitations, other activities and credits, (f)
income tax credits, (g) cancellation of indebtedness income, and (h)
other items as to be provided in the Regulations.
Other special rules also will apply to electing large partnerships.
Seventy percent of an electing large partnership's deductions that would be
miscellaneous itemized deductions are disallowed and the remaining 30 percent
pass through to the partners and are not subject to the two percent floor. See
"Deductibility of Fees" below. An electing large partnership will not terminate
if 50 percent or more of its interests are sold or exchanged in a 12-month
period. Also, if the IRS changes an item of partnership income, gain, loss,
deduction or credit, the partnership generally will be liable for interest and
penalties, and (i) the change will affect the partners in the year that the IRS
makes the change, as opposed to the partners in the year the partnership
originally reported the item (thus, a partner's prior year's return would not be
affected) or (ii) the partnership can pay tax on the item at the highest rate
(corporate or individual). In addition, the partnership's K-1s must be mailed to
the partners by March 15th of each year.
The Company currently is evaluating whether to elect to be treated as an
electing large partnership.
The 1997 Tax Act is complicated and many of its provisions potentially are
subject to varying interpretation. There are no judicial decisions,
administrative regulations, rulings, or practice addressing the 1997 Tax Act. As
a result, there are uncertainties concerning interpretations of the 1997 Tax
Act.
CLASSIFICATION AS "PARTNERSHIPS"
The federal income tax consequences described herein of owning Shares in
the Company are dependent upon the classification of the Company and the
Participating Partnerships as partnerships for federal income tax purposes
rather than as associations taxable as corporations. For federal tax purposes, a
limited liability company, like the Company, is treated as a partnership
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and its shareholders are treated as partners if certain conditions are
satisfied. The Company intends to satisfy those conditions.
No ruling will be sought from the IRS that the Company or the
Participating Partnerships will be treated as partnerships for federal income
tax purposes. The Company and the Participating Partnerships will rely on an
opinion of counsel that they will be classified as partnerships for federal tax
purposes. The opinion of counsel is not binding on the IRS or the courts.
Counsel's opinion as to partnership status assumes and is conditioned on
the following: (i) the Company is organized and will operate throughout its
existence in compliance with the LLCA and in accordance with the terms and
provision of the Operating Agreement and (ii) the Participating Partnerships
were organized and will continue to operate throughout their existence in
substantial compliance with applicable state statutes concerning limited
partnerships and in accordance with the terms and provisions of their
Partnership Agreements, all as presently in effect and as amended. The Company
believes that such conditions will be satisfied.
If for any reason any Participating Partnership were treated for federal
income tax purposes as an association taxable as a corporation in any taxable
year (i) the income, deductions and losses of such Participating Partnership
would not pass through to the Company and then the Shareholders; (ii) the
Participating Partnership would be required to pay federal income taxes on its
taxable income at rates up to a maximum of 35 percent, thereby substantially
reducing the amount of cash available for distribution to the Company and then
the Shareholders; (iii) state and local taxes also could be imposed on such
Participating Partnership; and (iv) any distributions to the Company from such
Participating Partnership would be treated as taxable dividends to the extent of
the current and accumulated earnings and profits of that Participating
Partnership. In addition, the change in a Participating Partnership's status for
tax purposes could be treated by the IRS as a taxable event, in which case the
Company and the Shareholders could have a tax liability under circumstances in
which they would not receive any cash distributions. Similar consequences would
result if the Company were treated as a corporation in any taxable year.
Effective January 1, 1997, in general, a noncorporate domestic entity with
two or more owners will be treated as partnership for federal income tax
purposes unless the entity affirmatively elects to be treated as a corporation.
Neither the Company nor any Participating Partnership will elect to be treated
as a corporation.
An entity qualifying as a partnership could be taxed as a corporation
under special rules applicable to a publicly traded partnership. If a publicly
traded partnership does not satisfy income tests set forth in the Code, it will
be taxed as a corporation. The Company will be deemed a publicly traded
partnership, but the Participating Partnerships are not expected to be publicly
traded partnerships.
For federal income tax purposes, a publicly traded partnership is treated
as a corporation unless 90 percent or more of its gross income for each tax year
of its existence is "qualifying income." Qualifying income, in relevant part,
includes rents from real property, gain from the sale or other disposition of
real property, gain from the sale or disposition of a capital asset or
depreciable property held for more than one year, real property held for more
than one year used in the trade or business that is not inventory, all interest
and dividends and gain from the sale
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or other disposition of stock, securities or foreign currencies, or other
income, including but not limited to, gains from options, futures or forward
contacts derived with respect to the business of investing in such stock,
securities or currencies.
With few exceptions, the properties owned by the Participating
Partnerships produce income that will be qualifying income for the Company.
Because it anticipates that at least 90 percent of its gross income will be
qualifying income, the Company anticipates that it will be taxable for federal
income tax purpose as a partnership and not as a corporation.
TAX CONSEQUENCES OF CONTRIBUTION OF PROPERTY
A prospective investor who contributes property to the Company in exchange
for Listed Shares would recognize taxable income in the amount by which (a) the
excess of (i) the investor's share of liabilities immediately before the
contribution over (ii) that investor's share of the liabilities of the Company
immediately after the contribution that exceeds (b) the investor's basis of the
property contributed to the Company immediately before the contribution. Any
such gain will generally be treated as gain from the sale of a capital asset.
See "Treatment of Gain or Loss on Disposition of Shares ," below and "New Tax
Law Provisions", above.
If the Company were to merge with, combine with, convert into, or
otherwise engage in a transaction whereby a Shareholder's Shares are converted
into or exchanged for shares of a company that is a real estate investment trust
for Federal income tax purposes (a "REIT"), a shareholder who contributed
Property with debt in excess of the basis therefore to CD could recognize gain
on such transaction notwithstanding that the transaction otherwise might not
result in gain or loss to most Shareholders.
The tax consequence of a contribution of property to the Company by an
investor are dependent on the facts and circumstances relating to the property
(for example, the amount of debt to which it is subject and when the debt was
incurred). As a result, any discussion herein is not intended as a substitute
for careful planning and a prospective investor who is contemplating
contributing property to the Company should look to, and rely on, his
professional tax advisors with respect to the tax consequences of such a
transaction.
SHAREHOLDERS NOT COMPANY, SUBJECT TO TAX
The Company and each Subsidiary Partnership, is required to report to the
IRS each item of its income, gain, loss, deduction and items of tax preference,
if any. The Company and each Subsidiary Partnership will file a federal and may
file a Delaware partnership return of income but the Company will not itself be
subject to any federal or Delaware income taxes. See "Classification as a
Partnership," and "New Tax Law Provisions," above and "State and Local Tax
Consequences" below.
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Each Shareholder will report on his personal income tax return his
distributive share of each item of the Company's income, gain, loss, deduction,
credit and tax preference. Each Shareholder will be taxed on his pro rata share
of the Company's taxable income, whether or not he has received or will receive
any cash distributions from the Company. A Shareholder's share of the taxable
income of the Company and the income tax payable by such Shareholder with
respect to such taxable income may exceed the cash actually distributed to him.
The income tax returns of the Company may be audited by the IRS, and such
audit may result in the audit of the returns of the Shareholders. Various
deductions claimed by the Company or the Subsidiary Partnership Unitholders on
its returns could be disallowed in whole or in part on audit, which would result
in an increase in the taxable income or a decrease in the taxable loss of the
Company or the Subsidiary Partnership with no associated increase in
distributions with which to pay any resulting increase in tax liabilities of the
Shareholders or holders of Subsidiary Partnership Units. But see "New Tax Law
Provisions," above.
Each Shareholder is required to treat partnership items on his return
consistently with their treatment on the Company's return, unless a Shareholder
files a statement with the IRS identifying the inconsistency. Failure to satisfy
this requirement could result in an adjustment to conform the treatment of the
items by such Shareholder with its treatment on the Company's return and may
cause such Shareholder to be subject to penalties.
Audits of partnership items are conducted at the Company level in a single
proceeding, rather than in separate proceedings with each Shareholder.
Administrative adjustment of determinations of the Company items made on audit
can be initiated by the Tax Matters Partners (the "TMP") or by any other
Shareholder. Suits challenging IRS determinations may be brought by the Manager,
who has been designated by the Company as the TMP or, if the TMP fails to act,
by other Shareholders owning certain minimum interests. Only one such action may
be litigated. All Shareholders generally will be bound (subject to certain
exceptions) by the outcome of final partnership administrative adjustments by
the IRS resulting from an audit handled by the TMP, as well as by the outcome of
judicial review of such adjustments. The Company will be the TMP of each
Participating Partnership, and these audit rules apply to such Partnerships in
the same manner as they apply to the Company. See "New Tax Law Provisions" above
for a discussion of electing large partnerships.
ALLOCATIONS OF PROFITS AND LOSSES
A portion of each Participating Partnership's income, gain, loss and
deduction will be allocated to the Manager as Limited Partner of each
Participating Partnership, and the remainder will be allocated to the Company
and the Subsidiary Partnership Unitholders. Items allocated by the Company to
the owners of Listed Shares will be shared among them according to the
respective number of Listed Shares owned by each Shareholder. These allocation
provisions will be recognized for federal income tax purposes only if they are
considered to have "substantial
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economic effect" and are not retroactive allocations or are determined to be in
accordance with the Partners' interests in the Partnership.
Certain special allocations are required by the Code and the Regulations
for contributed property (Code Section 704(c) allocations) and other tax
compliance items such as the basis adjustments required under a Code Section 754
election. See "Tax Elections" below. Allocations under Section 704(c) of the
Code will require that gain inherent in contributed property be allocated to the
person or persons who contributed it and may require the allocation of
depreciation deductions from property contributed or deemed to be contributed to
a partnership, or property whose book value is adjusted by a partnership on
admission of new partners, away from the contributing or previously admitted
partner where there is unrealized gain inherent in such property. As a
consequence of the Consolidation, the Shareholders will be deemed to have
contributed their Units to the Company. The Manager will select the method for
making allocations under Section 704(c) of the Code.
The Company will allocate its taxable income and losses among the
Shareholders in proportion to the number of Shares owned by them, based on the
number of months during the year for which the Shareholder was a record owner of
the Shares. The Company will treat the Shareholder who is the record owner of
such Share, as of the close of business on the last day of the month, as having
been the owner of such Share for the entire month. Hence, in the case of a sale
or other transfer of a Share recorded before the last day of a calendar month,
the transferor Shareholder will not be allocated any taxable income for the
month in which the record transfer occurs, and the transferee Shareholder will
be allocated all taxable income for such month. Therefore, taxable income or
loss may be allocated to a Shareholder even though such income or loss was not
actually realized by such Shareholder. Furthermore, transferees of Shares may
recognize income during a period for which they did not receive distributions.
The Code generally requires that items of partnership income and deduction
be allocated among transferors and transferees of partnership interests, as well
as among partners whose interests otherwise vary during a taxable period, on a
daily basis. The Company's proposed allocation method will not comply with this
requirement. In the event a monthly convention is not allowed by the Regulations
(or only applies to transfers of less than all of a partner's interest), the IRS
may contend that taxable income or losses of the Company must be reallocated
among the Shareholders. If the IRS were to sustain any such contention, the
Shareholders respective tax liabilities would be adjusted to the possible
detriment of certain Shareholders. The Manager is authorized to revise the
Company's method of allocation between transferors and transferees (as well as
among partners whose interests otherwise vary during a taxable period) to comply
with any future Regulations. Similarly, the IRS could challenge the allocations
made by the Subsidiary Partnerships.
The Company believes that the allocations under the Participating
Partnership Agreements and the Operating Agreement should be regarded as meeting
the standards of Section 704(b) of the Code. Counsel is unable to opine to that
effect, however, because, among other things, allocations to preserve uniformity
as among Shares are not in technical compliance with the Regulations.
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PASSIVE ACTIVITY LOSS LIMITATIONS
The Code provides that deductions from passive trade or business
activities, to the extent they exceed income from all such passive activities
(exclusive of portfolio income), generally may not be deducted against other
income of individuals, estates, trusts, closely held C corporations or personal
service corporations.
Passive income, gain, losses and credits from a publicly traded
partnership, such as the Company, may only be applied against other items of
income, gain and loss from that publicly traded partnership. Any unused passive
activity losses and credits are treated as suspended losses and credits and can
be carried forward and treated as deductions and credits from passive activities
in the next taxable year. Suspended losses and credits attributable to passive
trade or business activities are allowed in full upon a fully taxable
disposition of the taxpayer's entire interest in the activity to an unrelated
party. Suspended passive activity losses of a publicly traded partnership, such
as the Company, are allowed only upon a disposition of all of a Shareholder's
interest in the publicly traded partnership. If an interest in a passive
activity is transferred by reason of death, the amount of suspended passive
activity losses that may be deducted are reduced to the extent of any step-up in
the basis of the interest in the passive activity which occurs at the time. A
gift of an interest in a passive activity does not trigger recognition of
suspended passive activity losses, but permits the donee to increase his basis
in the interest by the amount of those losses up to the fair market value of
such interest.
Pursuant to the legislative history of the legislation that included the
passive activity loss rules in the Code, income generated by the Company will
constitute portfolio income to the Shareholders, not passive activity income.
Shareholders will not be able to offset passive activity losses from other
sources with income generated by the Company. See "Investment and Other
Limitations on the Deduction of Interest" below. However, suspended passive
activity losses from the Company can offset passive income from the Company.
DEDUCTIBILITY OF FEES
All expenditures of the Company and the Participating Partnerships must
constitute ordinary and necessary business expenses in order to be deductible,
unless the deduction of any such item is otherwise expressly permitted by the
Code (e.g., interest and certain taxes). In addition, all expenditures for
personal services must be reasonable in amount and, in order to be deductible,
must represent payment for services actually rendered during the current taxable
year rather than in future years.
The Company and the Participating Partnerships intend to claim deductions
both for property management fees and for expense reimbursements payable to the
Manager or its Affiliates. The Company believes, on advice of counsel, that the
management fees and reimbursements payable to the Manager will be deductible as
ordinary and necessary business expenses by the Company and/or the Participating
Partnerships. However, because the Company's belief depends
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upon essentially factual determinations, no assurance can be given that the
deduction of any of the fees paid to the Manager will not be successfully
challenged by the IRS. These issues are essentially questions of fact with
respect to which counsel cannot opine. If all or a portion of such deductions
were to be disallowed, the Company's taxable income would be increased or its
losses would be reduced.
The Company may pay acquisition fees to the Manager, its Affiliates or
others in connection with the acquisition of properties. The Company intends to
add Acquisition Fees paid to the basis of the property acquired. Also, the
Participating Partnership Agreements permit and the Operating Agreement permits
the Participating Partnerships and the Company to pay a fee to the Manager or
its Affiliates in connection with the sale of a partnership property. The
Participating Partnerships and the Company intend to treat these expenses as
expenses of sale of the property involved, thereby decreasing any gain or
increasing any loss recognized thereupon.
The Code limits the deductibility of an individual's miscellaneous
itemized deductions, including investment expenses, to the amount by which such
deductions exceed two percent of his adjusted gross income. Individual
Shareholders will be subject to this limitation in determining their
deductibility of their allocable share of the Company's management fees and
other expenses unless the Company or the Participating Partnerships are deemed
to be engaged in a trade or business. If the Company elects to be treated as an
electing large partnership, this limitation no longer will apply to
Shareholders, rather 70 percent of such items will be nondeductible to the
Company. See "New Tax Law Provisions" above.
START-UP EXPENDITURES
Section 195 of the Code provides that "start-up expenditures" may, at the
election of the taxpayer, be amortized ratably over a period of not less than 60
months (beginning with the month that the business begins). The determination of
whether an item is a start-up expenditure is based on the facts and
circumstances in each case.
The Company may seek to deduct certain expenses incurred by it prior to
the commencement of any rental activity or of its ownership interest in the
Participating Partnerships. The IRS may disallow any such deductions as not
having been incurred in connection with an existing trade or business of the
Participating Partnerships and/or the Company. If the IRS were successful in
such disallowance, such disallowed expenses would be available as deductions
only through amortization over the applicable start-up expenditure period (to
the extent a proper election is in place and such expenses qualify as start-up
expenditures).
The Participating Partnerships and the Company intend to take steps to
preserve their right to amortize start-up expenses commencing with the date of
the Consolidation, in the event it is ultimately determined that the Company
began business at that time. Although the Participating Partnerships and the
Company are advised by counsel and tax accountants, because of the uncertainty
that presently surrounds these matters, no opinion of counsel will be received
with respect to these deductions and there can be no assurance that, despite the
Participating
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Partnerships' or the Company's best efforts, they will be able to preserve their
right to amortize the above described expenses.
TAX AND "AT RISK" BASIS OF SHARES
The tax basis of the Shares received by an investor will equal the
adjusted tax basis of any property contributed to the Company immediately prior
to the contribution plus any cash contributed by the investor (i) increased by
his share, if any, of the liabilities of the Company and the taxable gains, if
any, on the contribution and (ii) decreased (but not below zero) by his share,
if any, of the liabilities to which the property contributed by the investor to
the Company was subject immediately prior to the contribution. The holding
period of Shares will include the holding period of such investor for the
property contributed to the Company.
Each Shareholder's initial adjusted basis for his Share(s) will be
increased by the amount of (i) his share of items of income and gain of the
Company and (ii) any increase in his proportionate share of the Company's share
of nonrecourse indebtedness to which the Participating Partnerships' or the
Company's Properties are subject (limited to the fair market value of the
property securing such indebtedness) and reduced, but not below zero, by (a) the
amount of his share of items of the Company loss and deduction and expenditures
which are neither properly deductible nor properly chargeable to his capital
account, (b) the amount of any cash distributions (including any decrease in his
share of liabilities) and (c) the basis of any property distributions received
by such Shareholder. See "Treatment of Gain or Loss on Disposition of Shares"
and "New Tax Law Provisions."
The amount of the Company's losses that may be deducted by a
Shareholder is limited to the adjusted basis of the Shareholder's Shares. Any
excess losses are carried over until the Shareholder has sufficient basis to
deduct such losses. Deductibility of a Shareholder's share of the Company's
losses is further limited by his "at risk" basis as determined pursuant to the
"at risk" rules found in Section 465 of the Code. The "at risk" rules provide
that a taxpayer may not deduct losses from an activity for a taxable year to the
extent such losses exceed the aggregate amount for which the taxpayer is
considered "at risk" with respect to the activity. Any loss in excess of a
taxpayer's amount "at risk" will be allowed as a deduction in succeeding taxable
years if and to the extent that the taxpayer is "at risk" with respect to the
activity in such subsequent year. The "at risk" rules apply to essentially all
Shareholders except those that are C corporations not more than 50 percent of
the stock of which is owned by more than five individuals during the last half
of the corporation's taxable year. If the Company's "at risk" basis in the
Participating Partnerships or a Shareholder's "at risk" basis in the Company is
decreased below zero in any year (e.g., due to the Company's or the
Shareholder's receipt of a cash distribution or a decrease in its or his share
of liabilities included in its or his "at risk" basis), the Company and the
Shareholder will recognize income to the extent his or its "at risk" basis is
below zero. However, the amount of income which must be recognized in these
circumstances is limited to the net losses previously allowed to the Company
from the Participating Partnerships or to the Shareholder from the Company.
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A Shareholder will be deemed to be "at risk" with respect to its share
of qualified nonrecourse financing secured by real property. However, a
Shareholder will not be considered to have amounts "at risk" to the extent he is
protected against losses through guarantees, stop-loss agreements or other
similar arrangements. To the extent that any borrowing by a Participating
Partnership or the Company is qualified nonrecourse financing, the "at risk"
rules should not limit the deductibility of any Participating Partnership and/or
Company losses, if any. However, to the extent that any borrowings by a
Participating Partnership or the Company is not qualified nonrecourse financing,
the "at risk" rules could apply to limit the deductibility of losses by the
Company or Shareholders, respectively.
The passive activity loss limitations are applied after the "at risk"
rules are applied. Therefore, a loss not currently deductible under the "at
risk" rules would be suspended pursuant to the "at risk" rules, not the passive
activity loss rules. Any such suspended losses could later become subject to the
passive activity loss rules when they would otherwise be deductible under the
"at risk" rules. See "Passive Activity Loss Limitations" above.
TREATMENT OF CASH DISTRIBUTIONS FROM THE COMPANY
Cash distributions (which are considered to include any reduction in
Participating Partnership and/or the Company nonrecourse indebtedness) made to
Shareholders, other than those in exchange for or in redemption of all or part
of their Shares, generally will not affect a Shareholder's distributive share of
income or loss from the Company. Such distributions may represent distributions
of income, returns of capital or both. A distribution of income or a return of
capital generally does not result in any recognition of gain or loss for federal
income tax purposes but reduces a Shareholder's adjusted basis in his Shares.
However, if a distribution of cash exceeds a shareholder's adjusted basis for
his shares, gain would be recognized. See "Tax and "At Risk Basis of Shares,"
above and "Treatment of Gain or Loss on Disposition of Shares," below.
TREATMENT OF GAIN OR LOSS ON DISPOSITION OF SHARES
Any gain or loss recognized by a Shareholder upon the sale or exchange
of his Shares will generally be treated as capital gain or loss, except that the
portion of any proceeds of sale which is attributable to any unrealized
receivables (which term includes, for these purposes, allocable depreciation
recapture attributable to underlying partnership property (see "Depreciation
Recapture," below) or appreciated inventory items (to the extent that the value
of such inventory items of the Company exceeds the basis of such property, had
such property been disposed of by the Company prior to the sale of such
Shareholder's share) will generally be treated as ordinary income. See "New Tax
Law Provisions" above for a discussion of capital gains tax rates. Shareholders
which are corporations or trusts are taxable on amounts representing
depreciation recapture attributable to underlying Participating Partnership or
Company property upon distribution of Shares to their shareholders or
beneficiaries.
The installment method of reporting income or gain is not available for
a sale or exchange of Listed Shares because the Code prohibits use of the
"installment method" to report gain on the
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sale or exchange of publicly traded property. See "Installment Sales" and
"Depreciation Recapture" below.
In determining the amount received upon the sale or exchange of a
Share, a Shareholder must include, among other things, his allocable share of
non-recourse indebtedness. Therefore, it is possible that the gain or other
income recognized on the sale of a Share may exceed the cash proceeds of the
sale and, in some cases, the income taxes payable with respect to the sale may
exceed such cash proceeds. The same rules apply to the sale by a Subsidiary
Partnership Unitholder of his Units.
The IRS has ruled that a partner must maintain an aggregate adjusted
tax basis in his aggregate partnership interest (consisting of all interests
acquired in separate transactions). On the sale of a portion of such aggregate
interest, a partner would be required to allocate, on the basis of the relative
fair market values of such interests on the date of sale, his aggregate tax
basis between the portion of the interest sold and the portion of the interest
retained. This requirement, if applicable to the Company, effectively would
preclude a Shareholder owning Shares that were acquired at different prices on
different dates from controlling the timing of the recognition of the inherent
gain or loss in his Shares by selecting the specific Shares that he would sell.
The ruling does not address whether this aggregation requirement, if applicable,
results in the tacking of the holding period of older Shares on the holding
period of more recently acquired Shares. Because the application of this ruling
in the context of a publicly traded partnership, such as the Company, is not
clear, a person acquiring Shares and considering the subsequent purchase of
additional Shares should consult his professional tax advisor as to the possible
tax consequences of the ruling.
When a Shareholder subject to the passive activity loss limitations
disposes of his entire interest in a fully taxable disposition to an unrelated
party, his suspended passive activity losses, if any, from the partnership will
be deductible. If a Shareholder subject to the passive activity loss limitations
disposes of less than his entire interest in his respective partnership or
disposes of his interests in a transaction which is not fully taxable, any
suspended passive activity will remain suspended. See "Passive Activity Loss
Limitations" above.
TREATMENT OF GIFTS OF SHARES
Generally, no gain or loss is recognized for income tax purposes as a
result of a gift of property. However, in the event that a gift of a Share is
made at a time when a Shareholder's allocable share of nonrecourse indebtedness
exceeds the adjusted basis for his Share, such Shareholder will recognize gain
upon the transfer of such Share to the extent of such excess. Any such gain will
generally be treated as capital gain. Gifts of Shares may also be subject to a
gift tax imposed pursuant to the rules generally applicable to all gifts of
property.
A gift of a Share will not cause any suspended passive activity losses
to be deductible. The donee's basis for the Share is the donor's basis
immediately before the gift plus any suspended passive activity losses allocable
to the gifted Share. However, the donee's basis for purposes of determining loss
on a later disposition cannot exceed the fair market value of the Share on the
date
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of the gift. Consequently, if the sum of the donor's basis for the Share and
suspended passive activity losses exceed the Share's fair market value, a
portion of the suspended passive activity losses could be lost and would never
be deductible.
ISSUANCE OF ADDITIONAL SHARES
The Company may issue new Shares to finance the acquisition of
additional properties or for other purposes. On any issuance of additional
Shares, the capital accounts of the existing Shareholders will be adjusted to
reflect a revaluation of the Company's properties (based on their then fair
market value, net of liabilities, to which they are then subject). Any resulting
unrealized gain or loss will be allocated among the existing Shareholders and
subsequent allocations of taxable income, gain, loss and deduction will be made
in accordance with the Regulations. See "Allocations of Profits and Losses"
above.
The issuance of additional Shares also could result in a decrease in a
Shareholder's share of nonrecourse debt. Any such reduction would be treated as
a distribution of cash. See "Treatment of Cash Distributions from the Company"
above.
TREATMENT OF GAIN OR LOSS ON SALE OF PROPERTY
Gains or losses realized by the Company on sales of property held for
more than 18 months will be treated as long-term capital gain or loss, (i)
unless it is determined that the Company or the Participating Partnership that
owns the property is a "dealer" in real estate for federal income tax purposes,
(ii) except to the extent that the properties sold constitute Section 1231
assets (real property assets used in a trade or business and held for more than
one year), and (iii) except to the extent the company sells personal property
and has depreciation recapture. See "New Tax Law Provisions" above. Section 1231
assets include depreciable real property of the type which the Company and/or
the Participating Partnerships own or intend to acquire. If the properties sold
constitute Section 1231 assets, a Shareholder's proportionate share of gains and
losses from the sale of such assets would be combined with any other Section
1231 gains or losses recognized by him during the year. The net Section 1231
gain would be taxed as capital gain, except that if the Shareholder has reported
net Section 1231 losses in any of the five years prior to such sale, any net
Section 1231 gains would be reported as ordinary income to the extent of such
reported losses. Net Section 1231 losses would be taxed as ordinary losses. See
"New Tax Law Provisions" for a discussion of capital gains rates.
In the event that the entity owning the property is determined to be a
"dealer," any gain or loss on the sale or other disposition of a property by
such entity would be treated as ordinary income or loss. Although none of the
Participating Partnerships nor the Company anticipates being deemed a "dealer"
in real estate, there can be no assurance that the proposed course of activities
of the Company may not result in it being deemed a "dealer." The Company intends
to conduct its activities and to consult with a tax professional from time to
time with regard to the structuring of its operations and transactions, to avoid
being deemed a "dealer." However, since the determination of "dealer" status is
essentially factual and will depend upon the nature of the properties acquired
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and the conduct of activities by the Company, counsel is unable to express an
opinion as to whether the Company or any Participating Partnership might be
deemed a "dealer."
A foreclosure of a mortgage on a property or the acceptance of a deed
in lieu of foreclosure is deemed to be a disposition of such property. In such
transactions, the Company or a Participating Partnership may recognize gain in
an amount equal to the excess, if any, of the outstanding mortgage over the
adjusted basis of such property.
In certain other circumstances, the gain allocable to the Shareholders
upon a sale, exchange or other disposition of Partnership property may exceed
any resulting cash distributable to the Shareholders and in some cases the
income taxes payable by the Shareholders with respect to such gain may exceed
the cash distributable, if any, to such Shareholders.
SALE-LEASEBACK TRANSACTIONS
Many of the Participating Partnerships Investments are and a number of
the Company's investments may be in the form of sale-leaseback transactions
wherein the Participating Partnership or the Company either (i) purchased or
will purchase property free of encumbrances, net lease such property back to the
seller and obtain separate mortgage financing or (ii) purchase property subject
to a mortgage and/or an existing net lease. If a sale-leaseback transaction were
recharacterized as a financing arrangement, the Participating Partnership or the
Company, as the case may be, would not be entitled to depreciation deductions
with respect to the property, and the lease payments received by the
Participating Partnership or the Company and, in certain circumstances, any gain
on the sale of such property could be treated, at least in part, as interest
income. Such a recharacterization could increase a Shareholder's share of
ordinary income and decrease such Shareholder's share of capital gain. The
Participating Partnerships and the Company will attempt to structure each net
lease transaction to be recognized as a leasing arrangement for federal income
tax purposes and not treated as a financing arrangement or conditional sale.
On June 3, 1996, the IRS proposed Regulations under Code Section 467.
Code Section 467 applies to rental agreements that have increasing or decreasing
rents or prepaid or deferred rents. For lease-backs or long term agreements
entered into for tax avoidance purposes ("disqualified lease-backs or long term
agreements"), the proposed Regulations under Code Section 467 provide that the
rent effectively must be leveled and accrued economically. Both rent and
interest would be accrued for each period similar to a mortgage. These
Regulations do not define what constitutes a tax avoidance purpose. For leases
other than disqualified lease-backs or long term agreements, the Regulations
under Code Section 467 provide that rent properly allocated to each period must
be accrued in that period and interest is deemed to be paid or earned on any
deferred on prepaid rent. These Regulations are proposed to apply to
disqualified lease-backs and long term agreements entered into after June 3,
1996 and other leases entered into after the date final regulations are issued.
The Company and the Participating Partnerships engage in long-term sale
lease-back transactions; however, based on current law and interpretations
thereof, neither the Company nor
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the Participating Partnerships believe that their typical transactions would be
found to have a tax avoidance purpose. Also, neither the Company nor the
Participating Partnerships anticipate having any significant deferred or prepaid
rent. However, because these Regulations are new and not entirely clear, neither
the Company nor the Participating Partnerships can determine with any assurance
how these Regulations, if adopted, might apply to it.
ACQUISITION OF STOCK, OPTIONS AND WARRANTS
The Company currently owns (directly or through the Participating
Partnerships) and may invest in the stock of, or other interests in, or warrants
or other rights to purchase the stock of or other interests (an "Equity
Interest") in any tenant or the parent or controlling person of any tenant of
the Company. If the acquisition of such Equity Interest occurs contemporaneously
with the purchase of property in a sale-leaseback transaction or the execution
of a lease and no separate consideration is provided for such acquisition, the
purchaser will be required to allocate the price paid between the property and
the Equity Interest based upon the relative fair market values of each, or in
the case of a lease, the lessor may be required to recognize rental income equal
to the value of the Equity Interest. Upon the sale or exchange of such Equity
Interest, the gain or loss will generally be capital gain or loss and will be
short-term, mid-term or long-term depending on the property's holding period.
Upon the exercise of an option or warrant, the price paid for the option or
warrant will be added to the exercise price to determine the Participating
Partnership's or the Company's basis in the stock or other interest acquired.
The holding period for the stock or other interest acquired through such an
exercise will commence on the day after the date of exercise of the option or
warrant. Should an option or warrant owned by the Participating Partnerships or
the Company expire or lapse unexercised, the Participating Partnerships or the
Company, respectively will sustain a loss equal to the amount paid for the
option or warrant. Such loss will generally be a capital loss and will be
short-term, mid-term or long-term depending on the Participating Partnership's
or the Company's holding period.
TAX ELECTIONS
The Company and the Participating Partnerships may make various
elections for federal income tax reporting purposes which could result in
various items of income, gain, loss, deduction and credit being treated
differently for tax purposes than for accounting purposes.
The Code provides for optional adjustments to the basis of partnership
property for measuring both depreciation and gain upon distributions of
partnership property (Code Section 734) and transfers of Shares (Code Section
743) provided that a partnership election has been made pursuant to Code Section
754. A Section 754 election will be made for the Company and the Participating
Partnerships. Any such election, once made, is irrevocable without the consent
of the IRS.
The IRS has ruled that under the Code and applicable Regulations, the
Section 754 election will generally allow a Shareholder who purchases Shares
from another Shareholder in the open market to increase his share of the tax
basis in the Participating Partnership's properties to reflect
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the purchaser's purchase price for such Shares, as if such purchaser had
acquired a direct interest in the Company's assets and of its proportionate
share of the Company's assets. If a Shareholder's adjusted basis in his Shares
is less than his proportionate share of the adjusted basis of the Company's
property at the time of acquisition of such Shares, such Shareholder's basis in
his share of the Company's property must be reduced by such an amount resulting
in adverse consequences to such Shareholder.
The Company will calculate the basis adjustment for subsequent
purchasers who furnish certain information to the Company. For purchasers who do
not furnish this information, the Company intends to provide information to
enable them to calculate the basis adjustment for themselves.
The calculations and adjustments in connection with any Section 754
election would depend, among other things, on the day on which a transfer occurs
and the price at which the transfer occurs. In order to help reduce the
complexity of these calculations and the resulting administrative cost to the
Company, the Company may apply the following methods in making the necessary
adjustments: (i) the price paid by a transferee for his Shares will be deemed to
be the lowest quoted trading price of the Shares during the month in which the
transfer was deemed to occur, irrespective of the actual price paid; and (ii)
the transfer will be deemed to occur at the close of business on the last day of
the calendar month in which the transfer occurs, irrespective of when the
transfer actually occurs. The application of these conventions would yield a
less favorable tax result, as compared to adjustments based on actual price, to
a transferee who paid more than the lowest quoted trading price for his Shares.
The calculations under Code Section 754 are highly complex, and there
is little legal authority dealing with the mechanics of the calculations,
particularly in the context of large, publicly-held partnerships. It is possible
the IRS might take the position that the adjustments made by the Company do not
meet the requirements of the Code or the Regulations, particularly given the
special assumptions to be applied by the Company for administrative convenience.
If the IRS were to sustain such a position, any increased depreciation
deductions allowable to a transferee of Shares as the result of the Section 754
election might be reduced, and any gain allocable to a transferee on the sale of
the Company's and the Participating Partnerships' properties might be increased.
The Manager is authorized by the Operating Agreement and by the
Participating Partnership Agreements to cause the Participating Partnerships and
the Company to make or revoke any election required or allowed to be made by
partnerships under the Code. Such election(s) may increase or decrease taxable
income or loss. See "New Tax Law Provisions" above for a discussion of electing
large partnerships.
DEPRECIATION
Current tax law provides for an accelerated cost recovery system
("ACRS") of depreciation. Under this system, the cost of eligible nonresidential
real property, whether new or used, generally must be depreciated over a 39-year
period using the straight-line method.
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Furthermore, under ACRS, eligible personal property is divided into six
classes (i.e., 3-year, 5-year, 7-year, 10-year, 15-year, and 20-year property).
This property, whether new or used, generally must be depreciated over specified
periods using a statutorily prescribed accelerated method of depreciation or, if
the taxpayer so elects, using the straight-line method over various periods.
The depreciation periods are lengthened in certain circumstances where
real property is leased to a tax-exempt entity or owned by a partnership having
tax-exempt entities as partners. For this purpose, "tax-exempt entities" do not
include those entities which would be taxable on their allocable share of
Partnership income as "unrelated business taxable income."
Generally, any real property acquired by the Company will be subject to
a 39-year recovery period, and will be depreciated using the straight-line
method. Any personal property acquired by the Company generally will be
depreciated over a seven-year recovery period using the double declining balance
method (switching to straight-line at a time to maximize the depreciation
deductions). If the Participating Partnerships terminate as a result of the
Consolidation, the then basis for all nonresidential real property owned by the
Participating Partnerships at such time will be depreciated over a 39-year
recovery period. If the Company and Participating Partnerships elect to be
treated as electing large partnerships, it is possible, but not certain, that
the Participating Partnerships will not terminate and their depreciation
deductions will not change. See "New Tax Law Provisions" above. If, for tax
purposes, a Participating Partnership is not considered the owner of a Property
held at the time of the Consolidation (for example, where a lease is treated as
a financing arrangement rather than a "true lease"), the Shareholders would not
be entitled to depreciation deductions with respect to that Property. It is
anticipated that the Participating Partnerships will be treated as the owners
for tax purposes of all of the Properties held at the time of the Consolidation.
In addition, if any tax-exempt entities hold Shares and the Company's
allocations are not considered to be "qualified allocations," then a portion of
the Company's depreciation deductions, corresponding to the tax-exempt entities'
percentage interest in the Company, may be required to be depreciated over
somewhat longer recovery periods than those otherwise applicable. See
"Allocations of Profits and Losses" and "Tax Elections" above and "Investment by
Qualified Pension and Profit-Sharing Plans (Including Keoghs), Stock Bonus
Plans, and Individual Retirement Accounts" below.
DEPRECIATION RECAPTURE
The Code provides that excess depreciation (the excess of accelerated
depreciation over straight-line depreciation) on depreciable real property,
other than low-income housing, and all depreciation on depreciable real property
eligible for ACRS where other than straight-line depreciation is used, is
subject to recapture as ordinary income (to the extent of gain) when the
property is sold, regardless of how long it is held before such sale. Since the
Participating Partnerships and the Company will only claim straight-line
depreciation, it is unlikely that non-corporate Shareholders of the Company will
be subject to depreciation recapture with respect to the Company's depreciable
real property whether or not eligible for depreciation under
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ACRS. However, if depreciable real property is sold or otherwise disposed of
within 12 months of its acquisition, then all depreciation, including
straight-line, will be subject to recapture as ordinary income upon such
disposition. See "New Tax Law Provisions" above for a discussion of the special
rate applicable to gain allocable to depreciation on real property.
Additionally, under the Code, a corporate Shareholder is required to
recognize as ordinary income 20 percent of its distributive share of the
Company's gain from the disposition of depreciable real property, to the extent
of the depreciation deductions claimed thereon, regardless of whether
straight-line depreciation was used.
The Code also provides that all depreciation on tangible personal
property and certain items of real property, such as elevators and escalators,
is, to the extent of any gain recognized, subject to recapture as ordinary
income when such property is sold, regardless of how long it is held before
sale. The Company and/or the Participating Partnerships will own items of such
property, and, accordingly, the Company and the Shareholders may be subject to
depreciation recapture with respect thereto.
ALTERNATIVE MINIMUM TAX
Individual and corporate taxpayers have potential liability for
alternative minimum tax. Certain items from the Company could affect a
Shareholder's alternative minimum tax liability. Since such liability is
dependent upon each Shareholder's own circumstance, Shareholders should consult
their own tax advisors concerning the alternative minimum tax consequences of
being a Shareholder.
INSTALLMENT SALES-IMPUTED INTEREST
If a sale or exchange of the Company's or a Participating Partnership's
real or personal property requires a payment or payments to be made in more than
one tax year, the Code allows any gain recognized to be reported on the
installment method." The Code provides that interest is payable on the
applicable percentage of tax deferred in connection with installment sales of
all non-dealer property the sale price of which exceeds $150,000. Such interest
is payable when the aggregate face amounts of installment obligations held by a
taxpayer which are issued during the taxable year exceed $5,000,000 and until
any such installment obligation is satisfied. A Shareholder will be treated as
owning a proportionate share of any Company or Participating Partnership
installment obligation, and the $5,000,000 threshold is measured at the
Shareholder level. Interest must be paid on the deferred tax at the rate
applicable to underpayments of tax in effect for the month with which the
taxpayer's taxable year ends. The same rules apply with respect to any
Subsidiary Partnership Unitholder's interest in a Participating Partnership that
holds an installment obligation.
The Code provides that a "dealer" may not report dealer gains on the
installment method. A "dealer" is a taxpayer who holds real property for sale to
customers in the ordinary course of the taxpayer's trade or business. The
Company does not anticipate that it or any Participating
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Partnership will be a dealer in real property. Therefore, a Shareholder who is
not a dealer in real property should be eligible to report any gain from an
installment sale by the Company or any Participating Partnership of property on
the installment method. Additionally, the Code provides that if an installment
obligation arising from the disposition of non-dealer property is pledged as
security for any indebtedness, the net proceeds of such secured indebtedness
shall be treated as a payment with respect to the installment obligation.
If, upon an installment sale of property, the Participating
Partnerships or the Company were to receive a rate of interest on any
installment obligation from the buyer which is below the rate provided by law,
the sales terms would be recharacterized in a manner which would increase
ordinary income to the Participating Partnerships or the Company, while
decreasing in a corresponding manner, first, any long-term capital gains and,
second, any depreciation recapture. Such interest income would be recognized by
the Participating Partnerships and/or the Company according to the original
issue discount rules. See "Accrual of Original Issue Discount" below. Because
the terms of sale of properties will be determined in part by then-current
market conditions and negotiations with potential buyers, no assurance can be
given that interest income will not be imputed on installment sales.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT
The Code contains extensive rules relating to the tax accounting for
original issue discount ("OID"). The Participating Partnerships and the Company
will be subject to the OID rules with respect to its installment sales. OID can
arise with respect to an installment sale if (i) the interest rate varies
according to fixed (non-floating) terms, (ii) the debtor is permitted to defer
interest payments to years after such interest accrues, (iii) the amount of the
creditor's share of income or appreciation from the mortgaged property under a
right of participation is determined in a year before payment of such amount is
due or (iv) interest is imputed on an installment sale. See "Installment
Sales--Imputed Interest" above. The Participating Partnerships or the Company
may sell properties on an installment basis with any or all of the preceding
terms and, therefore, may be subject to the OID rules.
Recognition of OID as an item of income in any year will have the
effect of either reducing losses, if any, allocable to Shareholders or
increasing the amount of income which Shareholders must report from the Company
without the receipt of cash distributions with which to pay any tax resulting
from the reporting of such income. However, the Company expects the amount of
OID, if any, which the Company might recognize in any year would be minor in
comparison with cash distributions allocable to Shareholders in such year.
INVESTMENT INTEREST AND OTHER LIMITATIONS ON THE DEDUCTION OF INTEREST
A Shareholder's (that is not a corporation) investment interest expense
may be deducted only up to the Shareholder's net investment income (i.e., the
income from interest, dividends, rents, royalties and net short-term capital
gains from investment property to the extent it exceeds the expenses, including
straight line depreciation, incurred in earning such income). Interest subject
to
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the investment interest limitation includes all interest on debt incurred in
connection with property held for investment (including property subject to a
net lease) but not incurred in connection with the taxpayer's trade or business,
other than consumer interest and qualified residence interest.
To the extent that the Participating Partnerships' or the Company's
Properties are considered to be "investment assets," the amount of mortgage
interest allocated to each Shareholder, other than a corporation, may be
deductible by him only to the extent it does not exceed his net investment
income plus the amount by which certain deductions attributable to property
subject to a net lease exceeds the net income of such property. The amount of
interest not deductible due to such limitation, if any, may be carried over to
subsequent years within certain limits. Unless the Participating Partnerships or
the Company realize a loss for tax purposes in any taxable year, the Company
anticipates that a Shareholder will not have any "excess investment interest"
subject to disallowance attributable to his interest in the Company. Should the
Company or a Subsidiary Partnership suffer a loss for any reason, the
Shareholders may realize "excess investment interest" because of their
investment in the Company.
In addition to the "investment interest" limitation described above,
Section 265(a)(2) of the Code disallows certain deductions for interest paid by
a taxpayer or a related person on indebtedness incurred or continued to purchase
or carry tax-exempt obligations. A Shareholder for whom tax-exempt obligations
constitute a significant portion of his net worth should consider the impact of
Section 265(a)(2) of the Code on his ability to deduct his allocable share of
the Company's interest expense.
Neither the Participating Partnerships nor the Company anticipate that
they will prepay any interest, but either or both may be required by prospective
lenders to pay certain amounts commonly referred to as "points" which may be
considered prepayments of interest for federal income tax purposes. The Code
requires that interest prepayments (including "points") be capitalized and
amortized over the life of the loan with respect to which they were paid.
CONSTRUCTION EXPENSES
The Participating Partnerships or the Company may incur expenditures in
connection with the construction of improvements on real property, some of which
must be capitalized for federal income tax purposes. The Code provides that
interest and real estate taxes incurred during the construction period of
improved real property which would otherwise be deductible must be added the
basis of the property and recovered through depreciation deductions. See
"Depreciation" above.
INVESTMENT BY QUALIFIED PENSION AND PROFIT-SHARING PLANS (INCLUDING KEOGHS),
STOCK BONUS PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
Qualified pension and profit-sharing plans (including Keoghs), stock
bonus plans and IRAs (each a "Qualified Plan") are generally exempt from
taxation except to the extent that their "unrelated business taxable income" (as
defined in Section 512 of the Code) exceeds $1,000 during any fiscal year. The
IRS has ruled that an exempt employee's trust which becomes a limited partner
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in a partnership carrying on a trade or business will realize such unrelated
business taxable income. There can be no assurance that the activities of the
Company or of any Participating Partnership would not be characterized as the
conduct of a trade or business by the IRS. Even to the extent that the
activities of the Company or any Participating Partnership were not so
characterized, since the Company's and each Participating Partnership's income
will be primarily rental income from "debt-financed property," a portion of each
Qualified Plan's distributive share of the Company's (or, if a Subsidiary
Partnership Unitholder, the Subsidiary Partnership) taxable income (including
capital gain) will constitute unrelated business taxable income. This portion is
determined in accordance with the provisions of Section 514(a) of the Code and
is that portion of the Qualified Plan's distributive share of its partnership's
income which is approximately equivalent to the ratio of that partnership's
share of debt to the basis of the partnership's share of the partnership's
property. Therefore, a Qualified Plan that purchases Shares in the Company may
be required to report all or a portion of its pro rata share of the Company's
taxable income as unrelated business taxable income. If, and to the extent that,
the Qualified Plan's unrelated business taxable income from all sources exceeds
$1,000 in any year, the Qualified Plan could incur a tax liability with respect
to such excess at such tax rates as would be applicable to such organizations if
such organizations were not otherwise exempt from taxation.
Section 514(c)(9) of the Code excludes from treatment as "debt-financed
property" certain investments in real property and improvements by, among
others, a pension, profit sharing or stock bonus trust which qualifies under
Section 401 of the Code (a "Qualified Trust"). A Qualified Trust does not
include an IRA which is not a sponsored IRA for which a determination letter has
been issued under Section 401(a) of the Code. It is not clear that the
acquisition or improvement of any real property by the Participating
Partnerships or the Company will be an acquisition or improvement contemplated
by Section 514(c)(9) of the Code with respect to a Qualified Trust. Furthermore,
even if so contemplated, there can be no assurance that any acquisition or
improvement of real property by the Participating Partnership or the Company
which is otherwise "debt-financed" will qualify for the exclusion under Section
514(c)(9) of the Code with respect to any Qualified Trust, especially since many
of the Participating Partnership's or the Company's Properties are expected to
be leased to the sellers thereof.
In considering an investment in the Company of a portion of the assets
of a Qualified Plan, a fiduciary should also consider among other things (i) the
definition of plan assets under ERISA and the status of labor regulations
regarding the definition of plan assets and (ii) whether the investment
satisfies the diversification requirements of Section 404(a)(l)(C) of ERISA.
CERTAIN FEDERAL ESTATE TAX MATTERS
For federal estate tax purposes, an asset owned by a decedent is taxed
at its fair market value on the date of death of the decedent or, in some cases,
an alternate date prescribed by the Code. The basis for a Share received from a
decedent will be determined by adding the decedent's share of the Company's
liabilities to the estate tax value of the Share. As a result, the taxable gain
which a successor Shareholder may realize upon the sale of a Share may be lower
or higher than the
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taxable gain which would have been realized by the decedent if the decedent had
transferred the Company interest during his lifetime.
Upon the death of an individual Shareholder, suspended passive activity
losses are deductible by the deceased shareholder only to the extent that the
suspended passive activity losses exceed the difference between the new
Shareholder's (who received his interest from the decedent) basis for the Share
and the adjusted basis for the Share the deceased Shareholder had immediately
before his death. See "Passive Activity Loss Limitations," and "Tax and
"At-Risk' Basis of Shares" above. Any passive activity losses disallowed
pursuant to this rule are lost permanently.
TAX PENALTIES AND INTEREST
The time period during which the IRS must claim any deficiencies with
respect to partnership items in tax returns of Shareholders is generally three
years from the time that the Company files its partnership return, but not
commencing earlier than the due date for such return. The statute of limitations
may be extended automatically for certain Shareholders for which certain
information is not provided. The period may be extended with respect to any
Shareholder by agreement between the IRS and such Shareholder. In addition, the
period may be extended for all Shareholders by an agreement entered into by the
TMP with the IRS. For settlements entered into after the date of enactment of
the 1997 Tax Act, the one-year partner-level statute of limitations on
assessments for underpayments resulting from partnership level adjustments does
not begin to run until all partnership level items are settled. See, "New Tax
Law Provisions," above.
The Code imposes penalties of up to 20 percent on any underpayment of
tax attributable to a substantial understatement, valuation misstatement,
negligence or disregard of rules and regulations. The penalty is increased to 40
percent for any underpayment attributable to a gross valuation misstatement.
A substantial understatement subject to the penalty does not include
any amount attributable to (i) the tax treatment of any item if there was
substantial authority for the treatment or (ii) the tax treatment of any item
with respect to which the relevant facts are adequately disclosed in the return
if there was a reasonable basis for the position. If, however, any item of
understatement is attributable to a "tax shelter," the amount of understatement
is reduced only by the portion of the understatement that is attributable to tax
treatment for which there was "substantial authority" and with respect to which
the taxpayer "reasonably believed" that the tax treatment adopted was "more
likely than not the proper treatment." A "tax shelter" is defined to include a
partnership if the "principal purpose" of the partnership is the "avoidance or
evasion of federal income tax." It is possible that the IRS would take the
position that the Company or any Participating Partnership is a tax shelter for
this purpose and require the higher degree of proof applicable to tax shelters.
TERMINATION OF THE COMPANY FOR TAX PURPOSES
Under Section 708(b) of the Code, if (i) at any time no part of the
business of the Company continues to be carried on by any of the Partners in the
Company or (ii) within a 12-month period
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50 percent or more of the total interests in partnership capital and profits are
sold or exchanged, a termination of the Company would occur for federal income
tax purposes, and the taxable year of the Company would close. It is possible
that Shares representing 50 percent or more of the capital and profits interests
in the Company might be sold or exchanged within a single 12-month period. For
this purpose, a Share that changes hands several times during a 12-month period
will only be deemed sold or exchanged once.
Generally, if the Company is deemed to terminate, a Shareholder would
not recognize any taxable gain or loss as a result of the deemed termination of
the Company. The Company's taxable year would end upon such a termination. If
the Shareholder's taxable year were other than the calendar year, the inclusion
of more than one year of Company income in a single taxable year of the
Shareholder could result. Finally, a termination of the Company could cause the
Subsidiary Partnerships, the Company, the Subsidiary Partnerships' Property or
the Company's Property to become subject to unfavorable statutory or regulatory
changes enacted after the date of the Consolidation and prior to the
termination, but which were not previously applicable to the Subsidiary
Partnerships or the Company or their assets. A deemed termination of the Company
will likely cause a deemed termination of the Subsidiary Partnerships. As a
result, if the Company is terminated, the Subsidiary Partnership Unitholders and
the Subsidiary Partnerships would experience the tax consequences described
above. See "New Tax Law Provisions" for a discussion of electing large
partnerships.
STATE AND LOCAL TAX CONSEQUENCES
In addition to the federal income tax aspects described above,
prospective Shareholders should consider potential state tax consequences of an
investment in the Company. Each Shareholder is advised to consult his own tax
advisor to determine whether the state in which he is a resident imposes an
income tax upon his share of the taxable income of the Company, or an estate or
inheritance tax, and whether an income tax or other return also must be filed in
those states where the Company acquires real property.
The Company will inform each Shareholder of his share of income or
losses to be reported to each of the states in which the Subsidiary Partnerships
or the Company own property. Personal exemptions, computed in various ways, are
allowed by some states and may reduce the amount of tax owed, if any, to a
particular state. The Subsidiary Partnerships or the Company may be required to
withhold state taxes from distributions to the Company or Shareholders or pay
state or local taxes. Any such withholding or payment would reduce distributions
by the Company to the Shareholders.
To the extent that a nonresident Shareholder pays tax to a state by
virtue of the Company's or a Subsidiary Partnership's operations within that
state, he may be entitled to a deduction or credit against tax owed to his state
of residence with respect to the same income and should consult his tax adviser
in that regard. In addition, payment of such state taxes presently constitutes a
deduction for federal income tax purposes if the taxpayer itemizes deductions.
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NECESSITY OF PROSPECTIVE SHAREHOLDERS OBTAINING PROFESSIONAL ADVICE
The foregoing analysis is not intended as a substitute for careful tax
planning. The tax matters relating to the Company, the Subsidiary Partnerships
and the transactions described herein are complex and are subject to varying
interpretations. Moreover, the effect of existing income tax laws, the meaning
and impact of which is not yet clear and of proposed changes in income tax laws
will vary with the particular circumstances of each prospective investor and, in
reviewing this Prospectus, these matters should be considered. In no event
should the Participating Partnerships, Company, General Partners, Manager or any
of their Affiliates, counsel or any other professional advisors or counsel
engaged by any of them, be considered as guarantors of the tax consequences of
an investment in the Company. Unitholders should look to, and rely on, their
professional tax advisors with respect to the tax consequences of this
investment.
EXPERTS
The combined balance sheets of the Company and CPA(R) Partnerships (the
"Group") as of December 31, 1996 and 1997 and the combined statements of income,
partners capital and cash flows for each of the three years ended December 31,
1995, 1996 and 1997, included in this Prospectus, have been incorporated and
included herein, respectively, in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
GLOSSARY OF TERMS
"Acquisition Expenses" means the expenses of the Company related to the
selection and acquisition of properties by the Company, whether or not such
properties are acquired, including but not limited to legal fees and expenses,
travel and communications expenses, costs of appraisals and fairness letters,
non-refundable option payments on property not acquired, accounting fees and
expenses, costs of title reports and title insurance, transfer and recording
taxes and miscellaneous expenses.
"Adjusted Cash from Operations" means cash receipts from the ordinary
day-to-day operations of the Partnership (including all interest on Partnership
investments and mortgages held by the Partnership) without deduction for any
management fee or for depreciation and amortization of intangibles such as
organization, underwriting and debt placement costs but after deducting all
other expenses, debt amortization and provisions for reserves established by the
Manager which it deems to be reasonably required for the proper operation of the
business of a Subsidiary Partnership.
"Affiliate" means, with respect to any Person, (i) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling 10 percent or more of the
outstanding voting securities of such Person, (iii) any officer,
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director or partner of such Person or of any Person specified in (i) or (ii)
above and (iv) any company in which any officer, director or partner of any
Person specified in (iii) above is an officer, director or partner.
"Appraised Value" means the value according to an appraisal made by an
independent qualified appraiser. Such qualification may be demonstrated by
membership in a nationally recognized appraisal society such as American
Institute of Real Estate Appraisers ("M.A.I."), Society of Real Estate
Appraisers ("S.R.E.A.") or their equivalent, but is not limited thereto.
"Audit Committee" means the committee of the Board of Directors
consisting of two or more Independent Directors established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
"Average Market Capitalization" means, for the relevant period, the
closing price of the Listed Shares on each trading day of the period multiplied
by the total number of Listed Shares outstanding on each trading day (including
"Listed Shares Equivalent Units"), adding the product for each day and dividing
the sum by the number of trading days in the periods provided, however, that
this definition may be adjusted to account for changes to the capital structure
of the Company. For purposes of this calculation, the number of "Listed Share
Equivalent Units" is equal to the sum of the product of (i) the total number of
Subsidiary Partnership Units outstanding for each Subsidiary Partnership and
(ii) the Subsidiary Partnership Exchange Ratio for each Subsidiary Partnership.
"Board" or "Board of Directors" means the board of directors of the
Company.
"Bylaws" means the bylaws of the Company.
"Business Combination" means one of the following transactions: (i)
unless the Merger, Consolidation or exchange of interests does not alter the
contract rights of the Shares as expressly set forth in the Company
Organizational Documents or change or convert in whole or in part the
outstanding Shares, any Merger, Consolidation or exchange of interests of the
Company or any subsidiary with (a) any Interested Party or (b) any other entity
(whether or not itself an Interested Party) which is, or after the Merger,
Consolidation or exchange of interest will be, an Affiliate of an Interested
Party that was an Interested Party prior to the transaction; (ii) any sale,
lease, transfer or other disposition, other than in the ordinary course of
business, in one transaction or a series of transactions in any 12-month period
to any Interested Party or any Affiliate of any Interested Party (other than the
Company or any of its subsidiaries) of any assets of the Company or any
subsidiary having, measured as of the time the transaction or transactions are
approved by the Board of Directors of the Company, an aggregate book value as of
the end of the Company's most recently ended fiscal quarter of 10 percent or
more of the total market value of the outstanding Shares or of its net worth as
of the end of its most recently ended fiscal quarter; (iii) the issuance or
transfer by
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the Company or any subsidiary, in one transaction or a series of transactions,
of any of the Shares or any equity securities of a subsidiary which have an
aggregate market value of five percent or more of the total market value of the
outstanding Shares to any Interested Party or any Affiliate of any Interested
Party (other than the Company or any of its subsidiaries) except pursuant to the
exercise of warrants or rights to purchase securities offered pro rata to all
Shareholders or any other method affording substantially proportionate treatment
to the Shareholders; (iv) the adoption of any plan or proposal for the
liquidation or dissolution of the Company in which anything other than cash will
be received by an Interested Party or any Affiliate of any Interested Party; (v)
any reclassification of securities or recapitalization of the Company, or any
merger, consolidation or exchange of Shares with any of its subsidiaries which
has the effect, directly or indirectly, in one transaction or a series of
transactions, of increasing by five percent or more of the total number of
outstanding Shares, the proportionate amount of the outstanding Shares or the
outstanding number of any class of equity securities of any subsidiary which is
directly or indirectly owned by any Interested Party; or (vi) the receipt by any
Interested Party or any Affiliate of any Interested Party (other than the
Company or any of its subsidiaries) of the benefit, directly or indirectly
(except proportionately as a Shareholder), of any loan, advance, guarantee,
pledge or other financial assistance or any tax credit or other tax advantage
provided by the Company or any of its subsidiaries.
"Cash from Financings" means the net cash proceeds realized by a CPA(R)
Partnership from the financing of a CPA(R) Partnership property or the
refinancing of any CPA(R) Partnership indebtedness.
"Cash from Sales" means the net cash proceeds realized by a CPA(R)
Partnership from the sale, exchange or other disposition of any of its assets.
Cash From Sales shall not include net cash proceeds realized from the financing
of CPA(R) Partnership property or the refinancing of any CPA(R) Partnership
indebtedness.
"CCP" means Carey Corporate Property, Inc., managing General Partner of
CPA(R):4, CPA(R):5 and CPA(R):6.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any similar law or provision enacted in lieu thereof, unless the
context indicates otherwise.
"Commission" means the United States Securities and Exchange
Commission.
"Company" or "CD" means Carey Diversified LLC.
"Consolidation" means the merger of up to nine Subsidiary Partnerships
with and into the CPA(R) Partnerships.
"Control Shares" means Shares that, but for the operation of the
Control Share Acquisition Provisions, bring their holder's voting power within
any of the following ranges: (i) one-fifth to one-third; (ii) one-third to a
majority or (iii) a majority or more.
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"Control Share Acquisition" means the acquisition of Shares, with
certain exceptions listed under "DESCRIPTION OF LISTED SHARES--Control Share
Acquisition Provisions," that will entitle the acquiring person immediately
after the acquisition to exercise or direct the exercise of the voting power of
Shares within one of the ranges designating Control Shares.
"Control Share Acquisition Provisions" means Control Share acquisition
provisions contained in the Organizational Documents.
"CPA(R):1" means Corporate Property Associates.
"CPA(R):2" means Corporate Property Associates 2.
"CPA(R):3" means Corporate Property Associates 3.
"CPA(R):4" means Corporate Property Associates 4, a California limited
partnership.
"CPA(R):5" means Corporate Property Associates 5.
"CPA(R):6" means Corporate Property Associates 6--a California limited
partnership.
"CPA(R):7" means Corporate Property Associates 7--a California limited
partnership.
"CPA(R):8" means Corporate Property Associates 8, L.P., a Delaware
limited partnership.
"CPA(R):9" means Corporate Property Associates 9, L.P., a Delaware
limited partnership.
"CPA(R) Partnerships" or "Partnerships" means CPA(R):1, CPA(R):2,
CPA(R):3, CPA(R):4, CPA(R):5, CPA(R):6, CPA(R):7, CPA(R):8 and CPA(R):9.
"CPA(R) Programs" means, collectively, the CPA(R) Partnerships and the
CPA(R) REITs.
"CPA(R) REITs" means Corporate Property Associates 10 Incorporated,
Carey Institutional Properties, Inc. and Corporate Property Associates 12
Incorporated, all Maryland corporations.
"Determination Date" means the date on which a person became an
Interested Party.
"Directors" means persons authorized to manage and direct the affairs
of the Company and who are members of the Board of Directors of the Company.
"Distribution" means any transfer of money or property by a Partnership
to a Partner without consideration.
"Eighth Carey" means Eighth Carey Corporate Property, Inc., managing
General Partner of CPA(R):8.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934.
"Fiscal Quarter" means the three-month period ending on the last day of
the third, sixth, ninth and twelfth calendar months of each Fiscal Year of the
Partnership.
"Fiscal Year" means the twelve-month period ending on December 31.
"Funds from Operations" means net income (loss) before depreciation,
amortization, other noncash items, extraordinary items and gains or losses on
sales of assets.
"GAAP" means Generally Accepted Accounting Principles.
"General Partners" means the general partners of each of the CPA(R)
Partnerships which include William Polk Carey, W.P. Carey & Co., CCP, Seventh
Carey, Eighth Carey and Ninth Carey.
"General Partners' Preferred Return" means the three percent of the
Cash from Sales owed to the General Partners in connection with the sale of
properties by the CPA(R) Partnerships prior to the Consolidation.
"Good Reason" means (i) any failure to obtain a satisfactory agreement
from any successor to the Company to assume and agree to perform the Company's
obligations under the Management Agreement, (ii) any breach of the Management
Agreement of any nature by the Company or (iii) a change in control of the
Company.
"Independent Director" means a Director of the Company who (i) is not
an officer of the Company and (ii) is, in the view of the Company's Board of
Directors, free of any relationship that would interfere with the exercise of
independent judgment.
"Interested Party" means any person (other than (a) the Company, (b)
any subsidiary of the Company, (c) the General Partners and the Original
Shareholders, and (d) any Affiliate or associate of any person in (c) above)
that: (i) is the beneficial owner, directly or indirectly, of 10 percent or more
of the outstanding Shares, (ii) is an Affiliate or associate of the Company and
at any time within the two year period immediately prior to the date in question
was the beneficial owner, directly or indirectly, of 10 percent or more of the
then outstanding Shares, or (iii) is an Affiliate or associate of any person
described in clauses (i) or (ii) above.
"Investment Committee" means the committee of the Board of Directors of
the Manager primarily responsible for the approval of investments to be made by
the Company.
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"IRS" means the Internal Revenue Service.
"LLCA" means the Delaware Limited Liability Company Act (6 Del.C.
ss.ss.18-101 et seq.)
"Listed Shareholder" means a Shareholder of the Company who owns Listed
Shares.
"Listed Shares" means a limited liability company interest in the
Company representing a share of all of the income, loss and capital of the
Company.
"Management Agreement" means the agreement between the Company and the
Manager relating to the management of the Company by the Manager.
"Manager" means Carey Management LLC.
"Merger" means the merger of a Subsidiary Partnership into a CPA(R)
Partnership.
"NASD" means the National Association of Securities Dealers, Inc.
"Nasdaq" means the National Association of Securities Dealers Automated
Quotations System.
"Net Lease or Triple Net Lease" means a lease in which the tenant
undertakes to pay all or substantially all the cash expenses, excluding debt
service, related to the leased property.
"Net Other Assets and Liabilities" means with respect to any CPA(R)
Partnership (A) the sum of (i) cash, (ii) accounts receivable, (iii) security
deposits, (iv) cash held in escrow, (v) the value of all securities and (vi) the
value of any claims in bankruptcy and (vii) any post March 31, 1997 adjustment
to the value of any Properties, less (B) the sum of (i) accounts payable, (ii)
accrued interest, (iii) accrued rent, (iv) rent deposits, (v) escrowed
liabilities, (vi) prepaid rent and (vii) transfer taxes payable upon
consummation of the Consolidation.
"1997 Tax Act" means the Taxpayer Relief Act of 1997.
"Ninth Carey" means Ninth Carey Corporate Property, Inc., managing
General Partner of CPA(R):9.
"NYSE" means the New York Stock Exchange.
"Operating Agreement" means the limited liability company agreement of
the Company.
"Original Shareholder" means Carey Management LLC.
-112-
<PAGE> 113
"Organizational Documents" means the Certificate of Formation, the
Operating Agreement and the Bylaws of the Company, as amended.
"Participating Partnership" means a CPA(R) Partnership which
participates in the Consolidation.
"Participating Partnership Agreement" means the partnership agreement
of a CPA(R) Partnership which participates in the Consolidation.
"Partner" means the General Partner and any Limited Partner where no
distinction is required by the context in which the term is used.
"Partnership" means a CPA(R) Partnership.
"Partnership Agreements" the partnership agreements of the CPA(R)
Partnership.
"Partnership Agreement Amendments" means the amendments of the
Partnership Agreements expressly authorizing the Consolidation.
"Person" means any natural person, partnership, corporation, limited
liability company, association or other legal entity.
"Property" or "Properties" means the partial or entire interests in
real property, including leasehold interests and personal and mixed property
connected therewith held by the CPA(R) Partnerships or the Company.
"Prospectus" shall mean the Prospectus which is included in the
registration statement filed with the Commission in connection with the issuance
of the Shares in this offering.
"Registration Statement" means the Company's Registration Statement on
Form S-1 filed with the Commission in the form in which it becomes effective, as
the same may at any time and from time to time thereafter be amended or
supplemented.
"Regulations" means the Treasury Regulations issued in accordance with
the Code.
"REIT" means a real estate investment trust.
"Right" means a right to buy a Share at a specified exercise price,
which will be subject to adjustment.
"Rights Certificate" means a certificate evidencing a Right.
"Rights Distribution Date" means the earlier of (i) the date an
Acquiring Person, alone or together with affiliates and associates, has become
the beneficial owner of five percent or more of
-113-
<PAGE> 114
the outstanding Shares or (ii) the date of the commencement of, or announcement
of, an intention to make a tender offer or exchange offer the consummation of
which will result in the beneficial ownership by a person or group (other than
the Company, any subsidiary of the Company, any employee benefit plan of the
Company or any subsidiary of the Company or the General Partners or their
Affiliates) of 10 percent or more of the outstanding Shares.
"Rights Record Date" means a record date established by the Board of
Directors for determining the Company's Shareholders of record who will be
entitled to a Right for each outstanding Share held by such person.
"Securities Act" means the Securities Act of 1933, as amended.
"Seventh Carey" means Seventh Carey Corporate Property, Inc., managing
General Partner of CPA(R):7.
"Shareholder" means a member of the Company and holder of Shares.
"Shareholder Rights Plan" means the Shareholder rights plan adopted by
the Company.
"Shareholders" means the holders of the Shares collectively.
"Shares" means the Listed Shares of the Company and includes any other
limited liability company interests that the Company may issue in the future.
"Subsidiary Partnership" means a limited partnership formed by the
Company which will merge with and into a CPA(R) Partnership in connection with
the Consolidation but, for purposes of this Prospectus only, in certain
sections, is used to refer to the surviving CPA(R) Partnership.
"Subsidiary Partnership Unit" means a limited partnership unit in a
Subsidiary Partnership.
"Termination Fee" means an amount equal to the sum of (A) any fees that
would be earned by the Manager upon the disposition of the assets of the Company
and the Subsidiary Partnerships at their appraisal value measured as of the date
the Management Agreement is terminated, (the "Termination Date") and (B)(1) if
the agreement is terminated by the Company after a change in control, $50
million if the change in control occurs on or before December 31, 1998 and
thereafter, five times the total fees paid to the Manager by the Company and the
Subsidiary Partnership in the 12 months preceding the change in control and (2)
if the agreement is terminated without cause or good reason, $50 million if the
agreement is terminated before December 31, 1999; $40 million if the agreement
is terminated before December 31, 2000; $30 million if the agreement is
terminated before December 31, 2001; $20 million if the agreement is terminated
before December 31, 2002; and $10 million if the agreement is terminated before
December 31, 2003.
-114-
<PAGE> 115
"Triple Net Lease" means a lease in which the tenant is responsible for
real estate taxes and assessments, repairs and maintenance, insurance, other
expenses relating to the property and the duty to restore in case of casualty.
"Unit" means an interest of a Limited Partner in a CPA(R) Partnership
representing a specific initial capital contribution of $500 per unit for
CPA(R):1 through CPA(R):5 and $1,000 per Unit for CPA(R):6 through CPA(R):9.
"W.P. Carey & Co." means W.P. Carey & Co., Inc., a New York
corporation.
-115-
<PAGE> 116
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
CAREY DIVERSIFIED LLC AND CORPORATE PROPERTY
ASSOCIATES PARTNERSHIPS
Combined Financial Statements:
Report of Independent Accountants............................................................... F-1
Combined Balance Sheets as of December 31, 1995 and December 31,
1996 and (unaudited) as of September 30, 1997............................................... F-2
Combined Statements of Income for the year ended December 31, 1994, 1995
and 1996 and (unaudited) for the nine months ended September 30,
1996 and 1997............................................................................... F-3
Combined Statements of Partners' Capital for the years ended December 31,
1994, 1995 and 1996 and (unaudited) for the nine months ended
September 30, 1997.......................................................................... F-4
Combined Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and (unaudited) for the nine months ended
September 30,1 997.......................................................................... F-5
Notes to Combined Financial Statements.......................................................... F-7 to F-23
Supplemental Schedule:
Schedule III - Real Estate and Accumulated Depreciation......................................... F-24 to F-37
</TABLE>
<PAGE> 117
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Carey Diversified LLC,
We have audited the combined balance sheets of Corporate Property
Associates Partnerships, as described in Note 1, as of December 31, 1996 and
1997, and the related combined statements of income, partners' capital and cash
flows for each of the three years in the period ended December 31, 1997. We have
also audited the financial statement schedule included in this Annual Report on
Form 10K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of Corporate
Property Associates Partnerships as of December 31, 1996 and 1997, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1997, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the financial information required to
be included therein.
/s/ Coopers & Lybrand L.L.P.
New York, New York
March 27, 1998
F-1
<PAGE> 118
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
Pro Forma
Consolidated Balance
Historical Sheet as of
December 31, December 31,
1996 1997 1997
--------- --------- ---------
(audited) (audited) (unaudited)
ASSETS:
<S> <C> <C> <C>
Real estate leased to others:
Accounted for under the
operating method, net $ 247,580 $ 217,165 $ 349,753
Net investment in direct financing leases 215,310 216,761 268,376
--------- --------- ---------
Real estate leased to others 462,890 433,926 618,129
Operating real estate, net 24,080 23,333 22,805
Assets held for sale 434 14,382 19,772
Cash and cash equivalents 28,553 18,586 9,416
Equity investments 13,660 13,415 44,530
Other assets, net of accumulated amortization of
$2,023 and $2,109 at December 31, 1996 and
1997 and reserve for uncollected rent of
$1,103 at December 31, 1997 15,111 19,778 11,206
--------- --------- ---------
Total assets $ 544,728 $ 523,420 $ 725,858
========= ========= =========
LIABILITIES:
Mortgage notes payable $ 202,339 $ 182,718 $ 182,718
Notes payable to affiliate 500 200 200
Notes payable 24,709 24,709 24,709
Accrued interest payable 1,927 1,798 1,798
Accounts payable to affiliates 2,543 8,792 3,554
Other liabilities 9,415 10,565 5,567
--------- --------- ---------
Total liabilities 241,433 228,782 218,546
--------- --------- ---------
Minority interest (750) (6,250) (6,708)
--------- --------- ---------
Redeemable subsidiary partnership units 8,597
---------
Commitments and contingencies
PARTNERS' CAPITAL/
MEMBERS EQUITY:
Partners' capital 304,045 300,888
--------- ---------
Listed Shares, no par value, 23,959,101
shares issued and outstanding 505,423
---------
Total liabilities and
partners' capital/members' equity $ 544,728 $ 523,420 $ 725,858
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-2
<PAGE> 119
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of INCOME
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Consolidated
Historical Statement of Income
For the Years Ended for the year ended
December 31, December 31,
----------------------------- ----------------------
1995 1996 1997 1997
---- ---- ---- ----
(audited) (audited) (audited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 42,255 $ 44,576 $ 43,045 $ 43,024
Interest income from direct
financing leases 36,391 32,644 34,574 33,560
Other interest income 1,700 1,681 1,270 1,270
Other income 2,523 1,901 4,935 4,935
Revenues of hotel operations 25,077 21,929 14,523 14,523
--------- --------- --------- ---------
107,946 102,731 98,347 97,312
--------- --------- --------- ---------
Expenses:
Interest 28,842 23,200 19,888 19,933
Depreciation and amortization 12,810 11,274 10,628 9,391
General and administrative 4,509 3,747 5,275 6,200
Property expenses 4,086 4,008 6,430 7,666
Writedowns to fair value 3,619 1,300 3,806 3,806
Operating expenses of hotel
operations 18,037 15,947 10,748 10,748
--------- --------- --------- ---------
71,903 59,476 56,775 57,744
--------- --------- --------- ---------
Income before net gains, minority
interest in income and extra-
ordinary items 36,043 43,255 41,572 39,568
Gain on sales of real estate and
securities, net 4,964 5,474 1,565 1,565
Gain on settlement 11,499
--------- --------- --------- ---------
Income before minority interest in
income and extraordinary items 52,506 48,729 43,137 41,133
Minority interest in income (3,143) (3,182) (2,576) (3,187)
--------- --------- --------- ---------
Income before extraordinary
items 49,363 45,547 40,561 37,946
Extraordinary gain (loss) on extinguishments
of debt, net of minority interest of
$(205) and $3 in 1995 and 1996 3,207 (252)
--------- --------- --------- ---------
Net income $ 52,570 $ 45,295 $ 40,561 $ 37,946
========= ========= ========= =========
Pro forma basic earnings per Listed Share
(24,055,145 pro forma weighted average
Listed Shares outstanding) $ 1.58
=========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE> 120
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1995, 1996 and 1997
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1994 $ 297,812
Distributions to partners (57,216)
Purchase of Limited Partnership Units (270)
Net income, 1995 52,570
---------
Balance, December 31, 1995 292,896
Distributions to partners (34,173)
Purchase of Limited Partnership Units (17)
Change in unrealized appreciation,
marketable securities 44
Net income, 1996 45,295
---------
Balance, December 31, 1996 304,045
Distributions to partners (43,620)
Change in unrealized appreciation,
marketable securities (98)
Net income, 1997 40,561
---------
Balance, December 31, 1997 $ 300,888
=========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE> 121
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 52,570 $ 45,295 $ 40,561
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
financing costs, net of amortization of deferred
gains and deferred rental income 12,670 10,905 10,280
Extraordinary (gain) loss (3,207) 252
Gain on sales, net (4,964) (5,474) (1,565)
Gain on settlement (11,499)
Securities received in connection with settlement (1,690)
Minority interest in income 3,143 3,182 2,576
Distributions to minority interest (2,670) (2,334) (2,327)
Straight-line rent adjustments and
other noncash rent adjustments 364 (1,343) (2,310)
Writedowns to fair value 3,619 1,300 3,806
Restructuring consideration received 15,188
Provision for uncollected rents 322 247 1,576
Net changes in operating assets
and liabilities and other (2,260) (1,047) (1,348)
--------- --------- ---------
Net cash provided by operating
activities 63,276 50,983 49,559
--------- --------- ---------
Cash flows from investing activities:
Purchases of real estate and capital
expenditures (2,095) (3,420) (1,955)
Installment and settlement proceeds 5,436
Proceeds from sales of real estate
and securities 22,736 23,394 1,242
Other (1,750) (429) 195
--------- --------- ---------
Net cash provided by (used in)
investing activities 24,327 19,545 (518)
--------- --------- ---------
Cash flows from financing activities:
Distributions to partners (57,216) (34,173) (43,620)
Payments of mortgage principal (60,349) (63,171) (27,565)
Release of escrow funds in connection
with mortgage prepayments 2,395
Proceeds from mortgage financings and
notes payable 10,000 28,189 12,700
Proceeds from notes payable to affiliate 2,550 1,000 200
Payments of notes payable to affiliate (3,050) (500)
Deferred financing costs (293) (603) (66)
Other (270) (273) (157)
--------- --------- ---------
Net cash used in financing
activities (105,578) (69,686) (59,008)
--------- --------- ---------
</TABLE>
(Continued)
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE> 122
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of CASH FLOWS, Continued
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net increase (decrease) in cash
and cash equivalents (17,975) 842 (9,967)
Cash and cash equivalents, beginning
of year 45,686 27,711 28,553
-------- -------- --------
Cash and cash equivalents,
end of year 27,711 $ 28,553 $ 18,586
======== ======== ========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
<TABLE>
<CAPTION>
<S> <C>
A. Accrued preferred distribution $ 5,151
=========
</TABLE>
B. In July 1996, the Group exchanged its interest in a hotel property and
related assets and liabilities for units in the operating partnership of
American General Hospitality Corporation, a publicly-traded real estate
investment trust (see Note 15). The assets and liabilities transferred
were as follows:
<TABLE>
<CAPTION>
<S> <C>
Operating real estate, net of accumulated
depreciation $ 16,098
Mortgage note payable (7,304)
Other assets and liabilities transferred, net 69
---------
Equity investment $ 8,863
=========
</TABLE>
C. In connection with foreclosure of a property in 1997, the Group
transferred the property to the lender and was released from the
obligations of the limited recourse mortgage loan. The gain on the
foreclosure was as follows:
<TABLE>
<CAPTION>
<S> <C>
Mortgage loan payable released $ 4,755
Other liabilities and assets, net 91
Carrying value of property transferred (3,889)
---------
Gain on foreclosure $ 957
=========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE> 123
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS
(All dollar amounts in thousands)
1. Organization and Basis of Combination:
A. The combined financial statements consist of interests in nine
Corporate Property Associates ("CPA(R)") real estate limited
partnerships (individually, a "Partnership"), their wholly-owned
subsidiaries and Carey Diversified LLC ("Carey Diversified")
(collectively, the "Group") which have been presented on a combined
basis at historical cost because of the affiliated general partners,
common management and common control and because the majority
ownership interests in the CPA(R) Partnerships was transferred to
Carey Diversified, effective January 1, 1998, pursuant to a
Consolidation transaction described below. All materialinter-entity
transactions have been eliminated. The General Partners' interest
in the CPA(R) Partnerships is classified under minority interest
as such interest in the CPA(R) Partnerships will be maintained
subsequent to January 1, 1998 by two special limited partners,
William Polk Carey, formerly the Individual General Partner of the
nine CPA(R) Partnerships and Carey Management LLC ("Carey
Management"). Effective January 1, 1998, the exchange of CPA(R)
Partnership Limited Partner interests for interests in Carey
Diversified ("Listed Shares") will be accounted for as a purchase
and recorded at the fair value of the Listed Shares exchanged. The
exchange of the General Partner's interests for Listed Shares will
be accounted for on the historical basis of accounting.
The Group has been engaged in the net leasing of industrial and
commercial real estate. The future business activities of the Group
will not necessarily be limited to net leasing. The CPA(R)
Partnerships referred to above are as follows:
Corporate Property Associates
Corporate Property Associates 2
Corporate Property Associates 3
Corporate Property Associates 4, a California limited
partnership
Corporate Property Associates 5
Corporate Property Associates 6 - a California limited
partnership
Corporate Property Associates 7 - a California limited
partnership
Corporate Property Associates 8, L.P., a Delaware limited
partnership
Corporate Property Associates 9, L.P., a Delaware limited
partnership
B. On October 16, 1997, Carey Diversified distributed a Consent
Solicitation Statement/Prospectus to the Limited Partners of the
nine CPA(R) Partnerships that described a proposal to consolidate
the Partnerships. The General Partner's proposals that each of the
nine CPA(R) limited partnerships be merged with a corresponding
partnership of Carey Diversified, of which Carey Diversified is the
general partner, were approved by the Limited Partners of all nine
of the CPA(R) Partnerships. Each limited partner had the option of
either exchanging his or her limited partnership interests for an
interest in Carey Diversified ("Listed Shares") or to retain a
limited partnership interest in the applicable subsidiary
partnership ("Subsidiary Partnership Units"). On January 1, 1998,
23,225,967 Listed Shares and 10,133 Subsidiary Partnership Units
were issued in exchange for limited partnership units. The General
Partners received 733,134 Listed Shares for their interest in their
share of the appreciation in the Group's properties. W.P. Carey has
received warrants to purchase 2,284,800 Listed Shares at $21 per
share and 725,930 Listed Shares at $23 per share as compensation for
investment bank services performed in connection with structuring
the Consolidation. The warrants will be exercisable for 10 years,
beginning January 1, 1999.
Listed Shares commenced public trading on the New York Stock Exchange
on January 21, 1998. Subsidiary Partnership Units provide
substantially the same economic interest and legal rights as those
of a limited partnership unit in a CPA(R) Partnership, but are not
listed on a securities exchange. A liquidating distribution to
holders of Subsidiary Partnership Units will be made after an
appraisal of an applicable CPA(R) Partnerships appraisal in the time
frame specified to each Partnership in the Consent Solicitation
Statement/Prospectus.
F-7
<PAGE> 124
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
C. The unaudited pro forma Consolidated Balance Sheet as of December
31, 1997 is presented as if the Consolidation transaction and
related issuance of Listed Shares had occurred on December 31, 1997.
The unaudited pro forma Consolidated Statement of Income is
presented as if the Consolidation Transaction had occurred as of
January 1, 1997. The pro forma adjustments are based upon estimates
which are subject to final adjustment. The unaudited pro forma
financial statements are not necessarily indicative of what the
actual financial position would have been at December 31, 1997 and
of what actual results of operations of the Group would have been
for the year then ended, nor do they purport to represent the
future financial position or future results of operations of Carey
Diversified and subsidiaries. In Management's opinion, all
adjustments necessary to reflect the Consolidation transaction and
related issuance of Listed Shares have been made.
The most significant pro forma adjustments relate to the revaluation
of assets and liabilities to fair value and elimination of certain
deferred charges and deferred credits at December 31, 1997, and
adjustments to revenues and expenses resulting from such
revaluation, elimination of the current year's effect of the
amortization of deferred charges and deferred credits and
recognizing estimates for certain incremental recurring expenses
applicable to the new entity. The real estate assets have been
valued by an independent appraiser. The redemption value for
redeemable Subsidiary Partnership Units is based on the exchange
value of limited partnership units to Listed Shares of the
applicable CPA(R) Partnership.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS No. 128") which establishes standards for computing
earnings per share. The adoption of SFAS No. 128 had no impact on
the Group's pro forma financial statements because the effect of
stock warrants was anti-dilutive. As a result the Group has
presented basic per-share amounts in the accompanying pro forma
Consolidated Statement of Income.
2. Summary of Significant Accounting Policies:
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The most
significant estimates relate to the assessment of recoverability of
real estate assets. Actual results could differ from those
estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the
tenant is generally responsible for all operating expenses relating
to the property, including property taxes, insurance, maintenance,
repairs, renewals and improvements.
The Group diversifies its real estate investments among various
corporate tenants engaged in different industries and by property
type throughout the United States. No lessee currently represents
10% or more of total leasing revenues (see Note 10).
The leases are accounted for under either the direct financing or
operating methods. Such methods are described below:
Direct financing method - Leases accounted for under the
direct financing method are recorded at their net investment
(Note 5). Unearned income is deferred and amortized to income
over the lease terms so as to produce a constant periodic rate
of return on the Group's net investment in the lease.
F-8
<PAGE> 125
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
Operating method - Real estate is recorded at cost, rental
revenue is recognized on a straight-line basis over the term
of the leases and expenses (including depreciation) are
charged to operations as incurred.
Substantially all of the Group's leases provide for either scheduled
rent increases, periodic rent increases based on formulas indexed to
increases in the Consumer Price Index or sales overrides.
For properties under construction, interest charges are capitalized
rather than expensed and rentals received are recorded as a
reduction of capitalized project (i.e. construction) costs in
accordance with Statement of Financial Accounting Standards No. 67.
Operating Real Estate:
Land and buildings and personal property are carried at cost.
Renewals and improvements are capitalized while replacements,
maintenance and repairs that do not improve or extend the lives of
the respective assets are expensed currently.
Assets Held for Sale:
Assets held for sale are accounted for at the lower of cost or fair
value, less costs to dispose.
Long-Lived Assets:
The Group assesses the recoverability of its long-lived assets,
including residual interests of real estate assets, based on
projections of undiscounted cash flows over the life of such assets.
In the event that such cash flows are insufficient, the assets are
adjusted to their estimated fair value.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of the properties which range from 5 to 50
years.
Cash Equivalents:
The Group considers all short-term, highly liquid investments that
are both readily convertible to cash and have a maturity of
generally three months or less at the time of purchase to be cash
equivalents. Items classified as cash equivalents include commercial
paper and money market funds. Substantially all of the Group's cash
and cash equivalents at December 31, 1996 and 1997 were held in the
custody of three financial institutions.
Other Assets and Liabilities:
Included in other assets are accrued rents and interest receivable,
escrow funds, deferred charges, deferred costs of Consolidation and
marketable securities. Included in other liabilities are accrued
interest payable, accounts payable and accrued expenses, deferred
rental income and deferred gains.
Escrow funds are funds that are restricted, primarily as additional
collateral on the mortgage financing for certain of the Group's
hotel properties. Such restricted amounts totaled $754 and $634 at
December 31, 1996 and 1997, respectively.
Deferred charges are costs incurred in connection with mortgage
financing and refinancing and are amortized over the terms of the
mortgages.
Deferred rental income is the aggregate difference for operating
method leases between scheduled rents which vary during the lease
term and rent recognized on a straight-line basis. Also included
F-9
<PAGE> 126
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
in deferred rental income are lease restructuring fees received
which are recognized over the remainder of the initial lease terms.
Deferred gains consist of assets acquired in excess of liabilities
assumed in connection with acquiring certain hotel operations and
certain funds received in connection with two loan refinancings
which are being amortized into income over 20 and 24 years,
respectively. The deferred gain on the acquisition of hotel
operations was realized in 1996 in connection with the sale of such
hotel.
Deferred costs of Consolidation represent certain costs related to
the consolidation of the CPA(R) Partnerships into Carey Diversified
which have been capitalized. Such consolidation costs will be
included in the revaluation of the Group's assets subsequent to
December 31, 1997.
Marketable securities are classified as available-for-sale
securities and are reported at fair value with the Group's interest
in unrealized gains and losses on these securities reported in
partner's capital. Such marketable securities have a cost basis and
fair value of $1,735 and $1,683, respectively, at December 31, 1997.
Reclassification:
Certain 1995 and 1996 amounts have been reclassified to conform to
the 1997 financial statement presentation.
Equity Investments:
The Group's limited partner interests in two real estate limited
partnerships in which such ownership is less than 50% are accounted
for under the equity method, i.e., at cost, increased or decreased
by the Group's pro rata share of earnings or losses, less
distributions. Equity income in the limited partnerships has been
included in other income in the accompanying combined financial
statements. The Group's income from these equity investments was
$565, $583 and $607 in 1995, 1996 and 1997, respectively.
Distributions received from such investments were $850, $795 and
$786 in 1995, 1996 and 1997, respectively. The Group is the sole
limited partner in the two partnerships with the general partner
interests owned by Corporate Property Associates 10 Incorporated
("CPA(R):10"), an affiliate. An ownership interest in a third
limited partnership in which CPA(R):10 owned the general partner
interest was written off in 1995.
An interest in the operating partnership of a publicly-traded real
estate investment trust acquired in July 1996 is also accounted for
under the equity method. The share of income from this investment
was $572 and $1,469 in 1996 and 1997, respectively (see Note 15).
Distributions received were $253 and $1,535 in 1996 in 1997,
respectively.
Federal Income Taxes:
None of the Partnerships is liable for Federal income tax purposes as
each partner recognizes his or her proportionate share of income or
loss in his or her tax return. Accordingly, no provision for income
taxes is recognized for financial statement purposes.
Distributions and Profits and Losses:
Partners' distributions and profits and losses are allocated in
accordance with the terms of the Agreements of individual
Partnerships.
F-10
<PAGE> 127
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
3. Transactions with Related Parties:
Through December 31, 1997, the Agreements of each of the Group's
Partnerships provided that the General Partners (consisting of W. P.
Carey & Co., Inc. ("W.P. Carey") or affiliated companies as
Corporate General Partners and William P. Carey as Individual
General Partner) were allocated between 1% and 10%, for the
applicable Partnership, of the profits and losses as well as
Distributable Cash From Operations, as defined, and the Limited
Partners were allocated between 90% and 99%, for the applicable
Partnership, of the profits and losses as well as Distributable Cash
From Operations. The Partners were also entitled to receive an
allocation of gains and losses from the sale of properties and to
receive net proceeds from such sales with such allocation and
distribution as defined in the Agreements. Effective January 1,
1998, as a result of the merger of the CPA(R) Partnerships with
subsidiary partnerships of Carey Diversified, Carey Diversified is
the sole general partner of the nine CPA(R) Partnerships. Carey
Diversified and holders of Subsidiary Partnership Units are
allocated between 90% and 99% of the profits and losses and
distributable cash of the applicable Partnership, and two special
limited partners, Carey Management LLC ("Carey Management"), an
affiliate, and William Polk Carey, are allocated between 1% and 10%
of the profits and losses and distributable cash of the applicable
Partnership.
In connection with the merger of the CPA(R)Partnerships with Carey
Diversified and the listing of Listed Shares of Carey Diversified on
the New York Stock Exchange, the former Corporate General Partners
of eight of the nine CPA(R)Partnerships satisfied provisions for
receiving a subordinated preferred return from the Partnerships
totaling $3,728 based upon the cumulative proceeds from the sale of
the assets of each Partnership since its inception. Such amount has
been included in accounts payable to affiliates as of December 31,
1997 in the accompanying combined financial statements. Payment of
the preferred return, made in January 1998, was contingent on
achieving a specified cumulative return to limited partners. For the
single Partnership that did not achieve the specified cumulative
return, the Group has also accrued the subordinated preferred return
of $1,423 as payable to affiliates as of December 31, 1997. To
satisfy the conditions for receiving the preferred return, the
Listed Shares of Carey Diversified must achieve a closing price
equal to or in excess of $23.11 for five consecutive trading days.
The General Partner believes that it is probable, as defined by
Statement of Financial Accounting Standards No. 5, that the
conditions for this Partnership paying the preferred return will be
achieved. The Exchange Values for the exchange of Limited
Partnership Units to Listed Shares of Carey Diversified was included
in calculating the cumulative return for each of the
CPA(R)Partnerships.
Under the Agreements, certain affiliates were entitled to receive
property management or leasing fees and reimbursement of certain
expenses incurred in connection with the Group's operations. General
and administrative reimbursements consist primarily of the actual
cost of personnel needed in providing administrative services
necessary to the operation of the Group. Property management and
leasing fees in 1995, 1996 and 1997 were $1,886, $916, and $1,139,
respectively. Effective January 1, 1998, the fees and reimbursements
are payable to Carey Management. General and administrative
reimbursements in 1995, 1996 and 1997 were $852, $911 and $1,788,
respectively.
For the years ended December 31, 1995, 1996 and 1997, fees
aggregating $652, $902 and $664, respectively, were incurred for
legal services in connection with the Group's operations and were
provided by a law firm in which the Secretary, until July 1997, of
the Corporate General Partners of the Partnerships is a partner.
The Group is a participant in an agreement with W.P. Carey and
certain affiliates for the purpose of leasing office space used for
the administration of the Group, other affiliated real estate
entities and W.P. Carey and for sharing the associated costs.
Pursuant to the terms of the agreement, the Group's share of rental,
occupancy and leasehold improvement costs is based on adjusted
F-11
<PAGE> 128
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
gross revenues, as defined. Expenses incurred in 1995, 1996 and 1997
were $964, $720 and $590, respectively.
In November 1995, the Group borrowed $2,550 from W.P. Carey in
connection with the retirement of a mortgage loan. The loans from
W.P. Carey were evidenced by two promissory notes, bearing interest
at the prime rate and required the Group to pay the entire principal
amount and accrued interest thereon on demand. Prior to December 31,
1997, the outstanding balances were paid in full.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Real estate leased to others, at cost, and accounted for under the
operating method is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---- ----
<S> <C> <C>
Land $ 73,310 $ 69,154
Buildings 266,193 241,601
-------- --------
339,503 310,755
Less: Accumulated depreciation 91,923 93,590
-------- --------
$247,580 $217,165
======== ========
</TABLE>
The scheduled future minimum rents, exclusive of renewals, under
noncancellable operating leases amount to $35,477 in 1998, $29,027
in 1999, $28,413 in 2000, $26,354 in 2001, $24,869 in 2002 and
aggregate $289,892 through 2016.
Contingent rentals were $1,583, $1,697 and $2,022 in 1995, 1996 and
1997, respectively.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---- ----
<S> <C> <C>
Minimum lease payments
receivable $426,491 $402,530
Unguaranteed residual value 210,146 210,887
-------- --------
636,637 613,417
Less: Unearned income 421,327 396,656
-------- --------
$215,310 $216,761
======== ========
</TABLE>
The scheduled future minimum rents, exclusive of renewals, under
noncancellable direct financing leases amount to $28,163 in 1998,
$28,178 in 1999, $28,302 in 2000, $28,997 in 2001, $27,835 in 2002
and aggregate $402,530 through 2017.
Contingent rentals were approximately $4,889, $3,444 and $4,533 in
1995, 1996 and 1997, respectively.
F-12
<PAGE> 129
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
6. Operating Real Estate:
Operating real estate relating to the Group's hotel operations is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---- ----
<S> <C> <C>
Land $ 3,867 $ 3,867
Buildings 27,979 28,604
Personal property 5,581 5,489
-------- --------
37,427 37,960
Less: Accumulated depreciation 13,347 14,627
-------- --------
$ 24,080 $ 23,333
======== ========
</TABLE>
7. Mortgage Notes Payable and Notes Payable:
A. Mortgage Notes Payable:
Mortgage notes payable, substantially all of which are limited
recourse obligations, are collateralized by the assignment of
various leases and by real property with a gross amount of
approximately $344,514, before accumulated depreciation. As of
December 31, 1997, mortgage notes payable have interest rates
varying from 6.60% to 11.85% per annum and mature from 1998 to 2020.
Scheduled principal payments, including mortgages subject to
acceleration, during each of the next five years following December
31, 1997 and thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
1998 $ 37,068
1999 41,264
2000 4,875
2001 22,472
2002 10,543
Thereafter 66,496
--------
$182,718
========
</TABLE>
B. Notes Payable:
The Group's notes payable which aggregated $24,709 at December 31,
1996 and 1997 provide for quarterly payments of interest at a
variable rate of the London Inter-Bank Offered Rate plus 4.25% per
annum with such notes maturing between July 1999 and December 1999
at which time balloon payments for the entire outstanding principal
balance will be due. Each note obligation is recourse to the assets
of a specific Partnership.
Covenants under the notes limit the amount of limited recourse
indebtedness the applicable Partnership may incur. Additionally,
each Partnership must maintain certain debt coverage ratios, minimum
net worth and aggregate appraised property values. The debt coverage
ratios require each Partnership to maintain ratios of free operating
cash flow, as defined, to the debt service on the applicable note
ranging from 3:1 to 3.4:1 over the terms of the note. The net worth
and aggregate property values minimums range from $15,000 to
$25,000. Under the covenants, certain of the Partnerships have
limitations on the amount of total indebtedness that such
Partnership may incur. The Company is in compliance with the
covenants of the note payable agreements as of December 31, 1997.
F-13
<PAGE> 130
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
The note payable agreements require that the lender be offered the
proceeds from property sales as a principal payment. To date, the
lender has declined to accept all mandatory offers of proceeds.
Interest paid by the Group on mortgages and notes payable aggregated
approximately $28,197, $23,805, and $19,534 in 1995, 1996 and 1997,
respectively.
8. Distributions to Partners:
Distributions declared and paid to partners are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
1995:
Quarterly $35,962
Special 21,254
-------
$57,216
=======
1996:
Quarterly $33,350
Special 823
-------
$34,173
=======
1997:
Quarterly $42,828
Special 792
-------
$43,620
=======
</TABLE>
9. Income for Federal Tax Purposes:
Income for financial statement purposes differs from income for
Federal income tax purposes because of the difference in the
treatment of certain items for income tax purposes and financial
statement purposes. A reconciliation of accounting differences is as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income per Statements of Income $ 52,570 $ 45,295 $ 40,561
Excess tax depreciation (10,489) (8,440) (7,667)
Difference in recognition of gain from sales 7,272 3,532 562
Difference in the recognition of restructuring fees 14,491
Difference in timing of recognition of
purchase installments as income (5,881)
Writedowns to fair value 11,019 1,300 3,806
Provision for uncollected rents 322 247 1,576
Straight-line rent adjustments and
other noncash rent adjustments 120 (1,620) (2,570)
Minority interest 3,143 3,182 2,576
Other (890) (1,871) 204
-------- -------- --------
Income reported for Federal
income tax purposes $ 71,677 $ 41,625 $ 39,048
======== ======== ========
</TABLE>
F-14
<PAGE> 131
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
10. Industry Segment Information:
The Group's operations consist of two business segments (i) the
investment in and the leasing of industrial and commercial real
estate and (ii) owning and operating hotels.
For the years ended December 31, 1995, 1996 and 1997, the Group
earned its net leasing revenues (i.e., rental income and interest
income from direct financing leases) from over 75 lessees. A summary
of net leasing revenues including all current lease obligors with
more than $1,000 in annual revenues is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 % 1996 % 1997 %
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Hughes Markets, Inc. $ 1,734 2% $ 4,463 5% 5,784 7%
Dr Pepper Bottling Company of Texas 3,998 5 3,998 5 3,998 5
Detroit Diesel Corporation 3,496 5 3,645 5 3,645 5
Gibson Greetings, Inc. 7,234 9 3,384 4 3,466 5
Sybron International Corporation 3,311 4 3,311 4 3,311 4
Stoody Deloro Stellite, Inc. (a) 2,551 3 2,624 3 2,725 4
Quebecor Printing Inc. 2,569 3 2,533 3 2,618 4
AutoZone, Inc. 2,444 3 2,304 3 2,512 3
Pre Finish Metals Incorporated 2,436 3 2,408 3 2,421 3
Furon Company 2,539 3 2,528 3 2,416 3
Advanced System Applications, Inc. 4,693 6 4,586 6 2,267 3
Orbital Sciences Corporation 2,154 3 2,154 3 2,154 3
The Gap, Inc. 2,154 3 2,154 3 2,154 3
Simplicity Manufacturing, Inc. 1,997 3 1,997 3 1,997 3
CSS Industries, Inc./Cleo, Inc. 1,793 2 1,844 2
AP Parts International, Inc. 1,526 2 1,729 2 1,837 2
NVR, Inc. 1,803 3 1,814 2 1,819 2
Peerless Chain Company 1,280 2 1,611 2 1,709 2
Unisource Worldwide, Inc. 1,656 2 1,646 2 1,654 2
Red Bank Distribution, Inc. 1,350 2 1,401 2 1,401 2
Brodart, Co. 1,319 2 1,314 2 1,308 2
High Voltage Engineering Corp. 1,168 1 1,179 1 1,174 2
Lockheed Martin Corporation 1,035 1 1,035 1 1,131 1
Gould, Inc. 1,133 1 1,215 2 1,114 1
Duff-Norton Company, Inc. 1,021 1 1,021 1 1,021 1
Anthony's Manufacturing
Company, Inc. 1,073 1 876 1 876 1
GATX Logistics, Inc. 1,399 2 381 1
Other 19,573 25 18,116 26 19,263 25
------- ---- ------- ---- ------- ----
$78,646 100% $77,220 100% $77,619 100%
======= ==== ======= ==== ======= ====
</TABLE>
(a) Stoody Deloro Stellite, Inc. assigned its leases in 1997. Leases
were assigned to DS Group, Ltd. and Thermodyne Holdings Corp.,
respectively.
Results for the hotel properties are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 25,077 $ 21,929 $ 14,523
Management fees paid to
unaffiliated hotel managers (594) (547) (368)
Other operating expenses (17,443) (15,400) (10,380)
-------- -------- -------
$ 7,040 $ 5,982 $ 3,775
======== ======== ========
</TABLE>
F-15
<PAGE> 132
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
11. Gain on Settlement:
In August 1995, the Group reached a settlement with The Leslie Fay
Company ("Leslie Fay") and its surety company regarding Leslie Fay's
lease with the Group. In connection with the settlement, the Group
recognized a gain of $11,499, which consisted of aggregate net cash
received from Leslie Fay and the surety company of $18,840 and the
waiving of the $383 accrued interest, offset by the writedown of
$7,400 and aggregate management fees, payable to an affiliate, of
$324 since the beginning of the dispute in 1992. Of the rent
received, $5,436 was received in 1995. Under the settlement
agreement, Leslie Fay was required to dismiss with prejudice all of
its suits filed against the Group, and the Group's bankruptcy claim
against Leslie Fay, as an unsecured creditor, was reduced to $2,650.
During 1997, the Group received distributions on its bankruptcy
claim of $1,691 consisting of securities of Leslie Fay, Inc. and
Sassco Fashions, Ltd. There is no assurance that the remaining
amount of the claim will be distributed.
As the fair value of the property was no longer affected by the
Leslie Fay lease, the Group wrote down the estimated fair value of
the property, net of anticipated selling costs, to $2,000 and
recognized a noncash charge of $7,400, which is netted against the
1995 gain of settlement.
In January 1996, the Group sold the vacant property to a third
party, net of transaction costs, for $1,854. The Group recognized an
additional writedown on the property to an amount equal to the net
sales proceeds, resulting in a charge to income in 1995 of $146.
Accordingly, no gain or loss was recognized in 1996 in connection
with the sale.
12. Gains and Losses on Disposition of Properties:
Significant sales of properties and securities are summarized as follows:
1997
In September 1996, the Group entered into a purchase and sale
agreement for the sale of the Group's property in Louisville,
Kentucky, leased to Winn-Dixie Stores, Inc. ("Winn-Dixie") for
$1,100 less selling costs. The Winn-Dixie property was sold in
August 1997 at which time, the Group received $1,042 and recognized
a gain on sale of $608. Such property was classified as real estate
held for sale as of December 31, 1996.
The Group owned two properties in Sumter and Columbia, South
Carolina that were leased to Arley Merchandise Corporation
("Arley"). In July 1997, the Arley lease was terminated by the
Bankruptcy Court in connection with Arley's voluntary petition of
bankruptcy. In connection with the termination of the lease, the
Partnership wrote off $300 of uncollected rents and wrote down the
Arley properties by $1,350. In May 1997, the lender on the limited
recourse mortgage loan collateralized by the Arley properties made a
demand for payment for the entire outstanding principal balance of
the loan of $4,755. In June 1997, the lender initiated a lawsuit for
the purpose of foreclosing on the Arley properties. The Group chose
not to contest the lender's actions, and in November 1997, the
ownership of the Arley properties was transferred to the lender and
the loan obligation was canceled. Since the loan was limited
recourse, the lender's sole recourse was to the Arley properties and
certain deposits. In connection with the foreclosure, the Group
recognized a gain of $957 on the difference between liabilities
forgiven and assets surrendered.
1996
In January 1996, the Group sold a multi-tenant property in Helena,
Montana whose primary tenant was IBM Corporation ("IBM") for $4,800.
Net of closing costs, the Group received cash proceeds of $1,741 and
assigned a mortgage loan obligation of $2,854 and accrued interest
of $12 thereon to the purchaser. A gain of $90 was recognized on the
sale. All of the Group's leases at the Helena property, including
the IBM lease, were assigned to the purchaser.
F-16
<PAGE> 133
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
In April 1996, the Group sold its warehouse property in Hodgkins,
Illinois leased to GATX Logistics, Inc. ("GATX") for $13,200 and
assigned the GATX lease to the purchaser. Net of the costs of sale
and amounts necessary to satisfy the $3,209 balance on the mortgage
loan collateralized by the Hodgkins property, the Group received
cash proceeds of $9,661 and recognized a gain of $4,408. The Group
used $7,477 of the cash proceeds from the Hodgkins sale to satisfy
two mortgage loan obligations which were scheduled to mature in
1996.
In 1985, the Group purchased a hotel in Rapid City, South Dakota,
which was operated as a Holiday Inn, with $6,800 of tax-exempt bonds
which were supported by a letter of credit issued by a third party.
In September 1994, the Group was advised by Holiday Inn that it
would need to upgrade the hotel's physical plant by January 1997 in
order to meet the requirements of a modernization plan adopted by
Holiday Inn or surrender its Holiday Inn license. Management
concluded that such additional investment required was not in the
best interests of the Group and determined to sell the property. In
1995, the Group reevaluated the fair value of the property and
recognized a noncash charge of $1,000. In 1996, the Group recognized
an additional charge of $1,300 as a writedown to fair value to an
amount Management believed would approximate the proceeds from a
sale.
In October 1996, the Group sold the property and the operating assets
and liabilities of the hotel for $4,105. The Group recognized a gain
of $785 on the sale and the bonds were paid off. The gain includes
the recognition of the release of unamortized deferred gains
relating to the acquisition of the hotel operation in 1991 from the
former lessee.
1995
In December 1995, the Group sold the food service facility in Jupiter,
Florida, at which it operated a restaurant, for $4,140, recognizing
a gain on the sale of $1,019.
In June 1995, the Group sold its property in Allentown, Pennsylvania,
which it purchased in June 1983 for $11,702, to its lessee, Genesco,
Inc. ("Genesco") for $15,200 and recognized a gain on the sale of
$3,330, net of certain costs. In connection with the sale, the Group
paid off an existing limited recourse mortgage loan on the Genesco
property for $5,723.
In August 1985, the Group purchased from and net leased to Industrial
General Corporation ("IGC") and certain of its wholly-owned
subsidiaries, seven properties located in Elyria and Bellville,
Ohio, Forrest City and Bald Knob, Arkansas, Carthage, New York,
Saginaw, Michigan and Newburyport, Massachusetts for $9,100.
Subsequent to the purchase, the Group agreed to exchange the Saginaw
property for an expansion of the Newburyport facility, severed the
Carthage property from the lease sold the Forrest City property. In
July 1995, IGC filed a voluntary petition of bankruptcy. In
connection with IGC's sale of its plastics division, in September
1995, the Group entered into a series of transactions which resulted
in the termination of the IGC lease, the sale of the Bald Knob,
Bellville and Newburyport properties and the full satisfaction of
the mortgage loan obligation collateralized by all of the IGC
properties that had been scheduled to mature at that time. In
connection with the sale of the Bald Knob property to IGC, the Group
received cash of $987 and IGC, with the consent of the mortgage
lender, assumed the Group's mortgage obligation of $720 and accrued
interest of $6. Additionally, the Group received an additional $200
in installments subsequent to the sale. The Bellville and
Newburyport properties were sold for $2,400 in cash to the third
party that acquired the assets of the IGC plastics division. The
Group used $2,200 of the proceeds to pay off the remaining balance
on the matured mortgage loan obligation on the IGC and FMP
properties. In connection with the sale of the three properties, the
Group realized a loss of $1,720 in 1995.
F-17
<PAGE> 134
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
In January 1984, the Group purchased properties in Gordonsville,
Virginia and in North Bergen, New Jersey for $7,000 and entered into
a net lease with Liberty Fabrics of New York ("Liberty"). In
December 1993, Liberty notified the Group of its intention to
exercise its purchase option on the properties. On December 29,
1994, the Group and Liberty terminated the lease and agreed that the
properties would be transferred to Liberty for $9,359, subject to a
final determination of the fair value of the property. The final
determination was made with no adjustment to the fair market value,
thereby completing the sale. As a result, the Group recognized a
gain in 1995 on the sale of the properties of $2,334.
13. Extraordinary Gains and Losses on Extinguishment of Debt:
1996
In 1996, the Group obtained $6,400 of new limited recourse mortgage
financing on one of its properties leased to The Gap, Inc. (the
"Gap"). Proceeds from the mortgage financing were used to pay off
the remaining balance of $6,195 on an existing mortgage loan on the
Gap property, certain refinancing costs and prepayment charges of
$255. The prepayment charges have been reflected as an extraordinary
charge on the extinguishment of debt in the accompanying combined
financial statements. The new mortgage loan is a limited recourse
obligation and is collateralized by a deed of trust and a lease
assignment. The loan bears interest at 7.25% per annum and provides
for monthly payments of principal and interest of $58 based on a
15-year amortization schedule. The retired mortgage loan provided
for quarterly payments of $211 at an annual interest rate of 10%.
The new mortgage loan has a term of three years and a balloon
payment of $5,608 will be due on the maturity date, May 1, 1999.
1995
In connection with the sale of its property in Jupiter, Florida in
December 1995, the Group satisfied the mortgage notes collateralized
by the Jupiter property. Under a prior agreement, certain principal
and interest payments were deferred through 1995. The prior
agreement provided that the payment of deferred amounts would be
forgiven under certain circumstances including the payment in full
of all other amounts due under the mortgage notes. At the time of
sale, the Group paid all amounts due and met the conditions for
forgiveness of the deferred amounts. Accordingly, the Group
recognized an extraordinary gain of $1,324 on the extinguishment of
debt on the satisfaction of the Jupiter property mortgage notes.
The Group recognized a gain on the satisfaction of the mortgage loan
collateralized by the property leased to Anthony's Manufacturing
Company, Inc. ("Anthony's"). In May 1995, the Group paid off and
satisfied the mortgage loan collateralized by the Anthony's
properties. The lender accepted payments aggregating $5,440 to
satisfy an outstanding principal balance of $6,854 and accrued
interest thereon of $705. In connection with the satisfaction of the
debt, the Group recognized an extraordinary gain on the
extinguishment of debt of $2,088, net of certain related legal
costs. The Group also received $1,550 from Anthony's under a
settlement agreement.
F-18
<PAGE> 135
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
14. Writedowns to Fair Value:
Significant writedowns of properties to fair value are summarized as
follows:
As described in Note 16, Simplicity Manufacturing, Inc. ("Simplicity")
notified the Group that it was exercising its option to purchase the
property it leases from the Group in Port Washington, Wisconsin on
April 1, 1998. The Group concluded that it was not likely that the
agreed-upon exercise price would be in excess of the minimum
exercise price of $9,684. Accordingly, the Group recognized a
noncash charge of $2,316 in 1997 on the writedown of the property to
the anticipated exercise price.
The Group owned two properties in Sumter and Columbia, South
Carolina leased to Arley. As more fully described in note 12, the
Group reevaluated the fair value of the property in connection with
the termination of the Arley lease and recognized a noncash charge
of $1,350 in 1997.
The Group owned a hotel property in Rapid City, South Dakota which
it sold in October 1996. As more fully described in Note 12, the
Group reevaluated the fair value of the property in 1995 and
recognized a noncash charge of $1,000 on the writedown. An
additional noncash charge of $1,300 was recorded in 1996.
In connection with the sale of the IGC properties as described in
Note 12, the Group retained ownership of a property in Elyria, Ohio
and wrote off its carrying value of $692 in 1995.
In January 1991, the Group and CPA(R):10 formed a limited
partnership, Hope Street Connecticut Limited Company ("Hope
Street"), for the purpose of purchasing land and an office building
in Stamford, Connecticut for $11,000. The Group contributed $1,500
to Hope Street for a 31.915% limited partnership interest and
CPA(R):10 contributed $3,200 for a 68.085% general partnership
interest. Hope Street used this equity and assumed an existing
limited recourse mortgage loan of $6,300 collateralized by the
property and also assumed an existing net lease, as lessor, with
Xerox Corporation ("Xerox"), as lessee. The mortgage loan was an
interest only obligation with annual debt service of $639 and was
scheduled to mature on September 1, 1995 with a balloon payment of
$6,300 due at that time.
In August 1995, Xerox vacated the property at the end of the initial
term. Hope Street was unsuccessful in its efforts to remarket the
property and find a new lessee even at a substantially lower annual
rental. Based on its assessment of current conditions for the
Stamford market, the general partner concluded that the fair value
of the property was less than the outstanding balance of the
mortgage loan. Given these circumstances, the general partner
considered various alternatives, including negotiating with the
lender to extend the maturity, restructure the loan or satisfy the
balloon payment obligation at a substantial discount. All of these
alternatives were rejected by the lender. Since the Group did not
anticipate receiving any further cash distributions from Hope Street
and did not have any obligation to contribute additional funds in
Hope Street, the Group wrote off its remaining equity investment in
Hope Street and recognized a charge of $1,173 in 1995. The property
was transferred to the lender in connection with a foreclosure
proceeding which was completed in September 1997, at which time Hope
Street was released from its limited recourse mortgage obligation.
F-19
<PAGE> 136
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
15. Equity Investment in American General Hospitality Operating Partnership
L.P.:
The Group purchased a hotel property in Kenner, Louisiana, in June
1988. The Group assumed operating control of the hotel in 1992 after
evicting the lessee due to its financial difficulties. On July 30,
1996, the Group completed a transaction with American General
Hospitality Operating Partnership L.P. (the "Operating
Partnership"), the operating partnership of a newly-formed real
estate investment trust, American General Hospitality Corporation,
("AGH"), in which the Group received 920,672 limited partnership
units in exchange for the hotel property and its operations. In
connection with the exchange the Group and the Operating Partnership
assumed the mortgage loan obligation collateralized by the hotel
property of $7,304.
The exchange of the hotel property for limited partnership units was
treated as a nonmonetary exchange for tax and financial reporting
purposes. The Group's interest in the Operating Partnership is being
accounted for under the equity method. The Group has the right to
convert its equity interest in the Operating Partnership to shares
of common stock in AGH on a one-for-one basis. AGH completed an
initial public offering during 1996. The Partnership's carrying
value for the limited partnership units at the time of the exchange
of $9,292 was based on the historical basis of assets transferred,
net of liabilities assumed by the Operating Partnership; cash
contributed and costs incurred to complete the exchange.
As of September 30, 1997, the unaudited consolidated financial
statements of AGH reported total assets of $562,013 and
shareholders' equity of $284,629 and for the nine months then ended
revenues of $43,439 and net income of $17,212. As of December 31,
1997, AGH's quoted per share market value was $26 3/4 resulting in
an aggregate value of approximately $24,628, if converted. The
carrying value of the equity interest in the Operating Partnership
as of December 31, 1997 was $9,545. For the period from July 31,
1996 to December 31, 1996, and for the year ended December 31, 1997,
the Group's share of the Operating Partnership's earnings were $572
and $1,469, respectively.
16. Assets Held for Sale:
In March 1997, Simplicity notified the Group that it was exercising
its option to purchase the property it leases from the Group in Port
Washington, Wisconsin on April 1, 1998. The agreed-upon option price
is $9,684. After paying the limited recourse mortgage loan on the
Simplicity properties, the Group will realize cash proceeds of
approximately $5,362, before any selling costs. Annual cash flow
from the property (rent less mortgage debt service on the property)
is $934. The carrying value of the Simplicity property at December
31, 1997 was $9,684 (also see Note 14).
In December 1996, KSG, Inc. ("KSG") notified the Group that it was
exercising its option to purchase the property it leases in
Hazelwood, Missouri. The exercise price will be the greater of
$4,698 (the Group's purchase price for the property in March 1987)
or fair market value as encumbered by the lease. The option provides
that the sale of the property occur no later than March 8, 1998. KSG
and the Group; however, have not been able to reach an agreement as
to the exercise price. The fair market value is determined, in part,
by estimating future rents for the remaining lease terms including
the renewal terms. KSG is disputing the methodology used to
calculate a rent increase that went into effect in 1997.
Accordingly, determination of the exercise price is contingent on
resolving the dispute. The carrying value of the KSG property at
December 31, 1997 was $4,698.
F-20
<PAGE> 137
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
17. Environmental Matters:
Substantially all of the Group's properties, other than the hotel
properties, are currently leased to corporate tenants, all of which
are subject to environmental statutes and regulations regarding the
discharge of hazardous materials and related remediation
obligations. The Group generally structures a lease to require the
tenant to comply with all laws. In addition, substantially all of
the Group's net leases include provisions that require tenants to
indemnify the Group from all liabilities and losses related to their
operations at the leased properties. The costs for remediation, that
are expected to be performed and paid by the affected tenant, are
not expected to be material. In the event that the Group absorbs a
portion of any costs, Management believes such expenditures will not
have a material adverse effect on the Group's financial condition,
liquidity or results of operations.
In 1994, based on the results of Phase I environmental reviews
performed in 1993, the Group voluntarily conducted Phase II
environmental reviews on certain of its properties. The Group
believes, based on the results of Phase I and Phase II reviews, that
its leased properties are in substantial compliance with Federal and
state environmental statutes and regulations. Portions of certain
properties, which do not include any of the hotel properties, have
been documented as having a limited degree of contamination,
principally in connection with surface spills from facility
activities and leakage from underground storage tanks. For those
conditions that were identified, the Group has advised the affected
tenants of the Phase II findings and of their obligations to perform
required remediation.
18. Disclosures About Fair Value of Financial Instruments:
The carrying amounts of cash, accounts receivable, accounts payable
and accrued expenses approximate fair value because of the short
maturity of these items.
The Group estimates that the fair value of mortgage notes payable and
other notes payable approximates the carrying amounts for such loans
at December 31, 1996 and December 31, 1997. The fair value of debt
instruments was evaluated using a discounted cash flow model with
discount rates which take into account the credit of the tenants and
interest rate risk.
The fair value of the Group's marketable securities were $93 at
December 31, 1996 and $1,683 at December 31, 1997 based on the
quoted value for such securities.
19. Accounting Pronouncements:
In June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in full set general purpose
financial statements. SFAS No. 131 establishes accounting standards
for the way that public business enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. SFAS No. 130 and SFAS No. 131 are required
to be adopted in 1998. The Company is currently evaluating the
impact, if any, of SFAS No. 130 and SFAS 131.
F-21
<PAGE> 138
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
20. Subsequent Events:
A. On February 18, 1998, the Group and an unaffiliated limited liability
company, AWHQ LLC, with 80% and 20% interests, respectively, as
tenants-in-common, acquired land in Tempe, Arizona upon which a
nine-story 225,000 square foot office building with an attached
parking garage is to be constructed pursuant to construction agency
and net lease agreements with America West Holdings Corporation
("America West"). Total acquisition and project costs are estimated
to be $37,000. America West has the obligation for any costs in
excess of such amount necessary to complete the project.
During the construction period, America West will pay monthly rent
based on the weighted average amount advanced for project costs. The
lease provides for an initial term of 15 years with two five-year
renewal terms commencing May 1, 1999. Annual rent will initially be
equal to total project costs multiplied by 9.2%. Rent increases are
scheduled May 2003 and every five-years thereafter, on a formula
indexed to increases in the Consumer Price Index ("CPI"), with each
increase capped at 11.77%.
The lease provides America West with purchase options to purchase the
property at the end of the tenth lease year of the initial term and
the end of the initial term at an option price equal to the greater
of fair market value as affected and encumbered by the lease or the
Group's and AWHQ LLC's project costs for the property.
B. On March 17, 1998, the Group acquired approximately 46 acres of land
in Collierville, Tennessee upon which four office buildings totaling
up to 400,000 square feet are being constructed. At the end of the
construction period, the buildings will be occupied by Federal
Express Corporation ("Federal Express") pursuant to a master net
lease.
In connection with the acquisition of the land, the Group entered into
a lease agreement with FEEC II, L.P. ("FEEC") which in turn is the
sublessor to Federal Express. The lease between the Group and FEEC
provides for a development period term ending on the earlier of the
completion of the project or November 30, 1999 followed by a
twenty-year initial term.
The FEEC lease grants the Group an exclusive option to acquire FEEC's
leasehold estate in the Federal Express net lease, as lessor, with
such option exercisable at any time after the end of the development
period. The option price will be based on a formula indexed to
Federal Express' annual rent under its lease with FEEC less all
amounts previously advanced by the Group to FEEC for project costs.
The Group expects that the total cost will not exceed $77,000. The
Group intends to exercise its option at the earliest practicable
date and at such time will assume the Federal Express lease.
Federal Express' initial annual rent will be based on the actual costs
necessary to complete the build-to-suit project with such rent
capped at $6,628. Rent increases are scheduled annually and are
indexed to increases in the CPI with annual increases limited to
1.7%. The Federal Express lease provides for an initial term of 20
years with two ten-year renewal terms at the option of the lessee.
C. On March 26, 1998, the Group obtained a line of credit of $150,000
pursuant to a revolving credit agreement with The Chase Manhattan
Bank. The revolving credit agreement has a term of three years.
F-22
<PAGE> 139
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
Advances from the line of credit must be for at least $3,000 and in
multiples of $500. for any single advance. Advances made will bear
interest at an annual rate of either (i) the one, two, three or
six-month LIBO Rate, as defined, plus a spread which ranges from
0.6% to 1.45% depending on leverage or corporate credit rating or
(ii) the greater of the bank's Prime Rate and the Federal Funds
Effective Rate, plus .50%, plus a spread ranging from 0% to .125%
depending upon the Group's leverage. In addition, the Group will pay
a fee (a) ranging between 0.15% and 0.20% per annum of the unused
portion of the credit facility, depending on the Group's leverage,
if no minimum credit rating for the Group is in effect or (b) equal
to .15% of the total commitment amount, if the Group has obtained a
certain minimum credit rating.
The revolving credit agreement has financial covenants that require
the Group to (i) maintain minimum equity value of $400,000 plus 85%
of amounts received by the Group as proceeds from the issuance of
equity interests and (ii) meet or exceed certain operating and
coverage ratios. Such operating and coverage ratios include, but are
not limited to, (a) ratios of earnings before interest, taxes,
depreciation and amortization to fixed charges for interest and (b)
ratios of net operating income, as defined, to interest expense.
The Group has drawn $55,000 from the line of credit to pay off
existing debt.
F-23
<PAGE> 140
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method:
Office, warehouse and
manufacturing buildings
in Broomfield, Colorado $ 2,173,949 $ 354,970 $ 3,073,575 $ 559,647
Office and manufacturing
buildings leased to IMO
Industries Inc. 2,080,176 685,026 2,006,559 2,617,652
Office and manufacturing
buildings formerly leased to
IMO Industries, Inc. 221,474 448,641 4,384 $ (38,155)
Distribution facilities
and warehouses leased to
The Gap, Inc. 6,003,499 1,363,909 19,065,813 225,569
Supermarkets
leased to Winn-Dixie
Stores, Inc. 904,589 6,749,989 111,880
Land leased to
Kobacker Stores, Inc. 1,236,735 (176,112)
Warehouse and manufac-
turing plant leased to
Pre Finish Metals
Incorporated 910,435 636,000 16,470,208 33,652
Retail store leased
to A. Jones 40,946 186,926 14,508
Retail store leased
to Wexler & Wexler 129,065 188,599 15,776
Retail stores leased to
Kinko's of Ohio, Inc.
and Lutz Bagels, LLC 47,350 581,034 10,795
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
-------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method:
Office, warehouse and
manufacturing buildings
in Broomfield, Colorado $ 354,970 $ 3,633,222 $ 3,988,192 $ 2,301,151 November 17, 1978 10-30 yrs.
Office and manufacturing
buildings leased to IMO
Industries Inc. 685,026 4,624,211 5,309,237 2,477,994 April 20, 1979 17 yrs.
Office and manufacturing
buildings formerly leased to
IMO Industries, Inc. 183,319 453,025 636,344 453,025 April 20, 1979 17 yrs.
Distribution facilities
and warehouses leased to July 6, 1979 and
The Gap, Inc. 1,363,909 19,291,382 20,655,291 11,114,925 February 16, 1988 5-50 yrs.
Supermarkets March 12, 1984,
leased to Winn-Dixie June 17, 1987,
Stores, Inc. 904,589 6,861,869 7,766,458 2,298,653 March 17, 1988, and 30 yrs.
October 26, 1990
Land leased to
Kobacker Stores, Inc. 1,060,623 1,060,623 January 17, 1979
Warehouse and manufac-
turing plant leased
to Pre Finish December 11, 1980 5-30 yrs.
Metals Incorporated 636,000 16,503,860 17,139,860 9,147,519 and June 30, 1986
Retail store leased
to A. Jones 40,946 201,434 242,380 144,402 September 2, 1980 15-35 yrs.
Retail store leased
to Wexler & Wexler 129,065 204,375 333,440 150,795 January 5, 1981 15-35 yrs.
Retail stores leased to
Kinko's of Ohio, Inc.
and Lutz Bagels, LLC 47,350 591,829 639,179 432,315 October 1, 1980 15-35 yrs.
</TABLE>
F-24
<PAGE> 141
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Warehouse and distribution
center leased to, B&G
Contract Packaging, Inc. 216,000 3,048,862 29,922
Land leased to Unisource
Worldwide, Inc. 2,171,572 3,575,000
Centralized telephone
bureau leased to Excel
Communications, Inc. 1,139,600 3,379,679 1,576,606 (1,230,690)
Building leased to
Sports & Recreation, Inc. 677,600 4,908,238 (2,625,838)
Dairy processing
facility leased to
Hughes Markets, Inc. 2,029,682 9,699,041 26,000
Office building in
Beaumont, Texas
leased to Petrocon
Engineering, Inc. and
Olmstead Kirk Paper Company 510,000 4,490,000 612,462 $(4,346,960)
Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,800,000 6,710,638 105,000
Warehouse and
distribution center
in Salisbury,
North Carolina 291,540 5,708,460 153,179
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
-------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Warehouse and distribution
center leased to, B&G
Contract Packaging, Inc. 216,000 3,078,784 3,294,784 1,710,911 April 9, 1981 30 yrs.
Land leased to Unisource
Worldwide, Inc. 3,575,000 3,575,000 April 29, 1980
Centralized telephone
bureau leased to Excel
Communications, Inc. 1,139,600 3,725,595 4,865,195 267,567 November 24, 1981 30 yrs.
Building leased to
Sports & Recreation, Inc. 359,068 2,600,932 2,960,000 411,813 November 24, 1981 30 yrs.
Dairy processing
facility leased to
Hughes Markets, Inc. 2,055,682 9,699,041 11,754,723 6,962,751 June 1, 1983 10-36 yrs.
Office building in
Beaumont, Texas
leased to Petrocon
Engineering, Inc. and
Olmstead Kirk Paper Company 278,801 986,701 1,265,502 530,968 August 11, 1983 30 yrs.
Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,800,000 6,815,638 8,615,638 5,253,695 October 20, 1983 15-40 yrs.
Warehouse and
distribution center
in Salisbury,
North Carolina 291,540 5,861,639 6,153,179 2,265,158 December 16, 1983 30 yrs.
</TABLE>
F-25
<PAGE> 142
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office
buildings leased to Penn
Virginia Corporation 453,192 3,246,808 3,112
Land leased to
Exide Electronics
Corporation 1,170,000
Motion picture theaters leased
to Harcourt General
Corporation 1,895,864 1,387,000 5,113,000 36,459
Office/Manufacturing
facility in leased to
Inno Tech Industries, Inc. 122,884 568,756 (691,640)
Office facility leased
to Motorola, Inc. 2,051,702 387,000 3,981,000 11,455
Warehouse/ office research
and manufacturing
facilities leased to
Lockheed Martin
Corporation 3,307,692 3,074,247 17,528,226 61,078
Warehouse and office
facility leased to
Kinney Shoe Corporation/
Armel, Inc. 11,058 1,360,935 3,899,415 8,000
Manufacturing and office
facility leased to
Yale Security, Inc. 300,000 3,400,000
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
-------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office
buildings leased to Penn
Virginia Corporation 453,192 3,249,920 3,703,112 2,477,521 August 7, 1984 5-30 yrs.
Land leased to
Exide Electronics
Corporation 1,170,000 1,170,000 N/A June 20, 1985
Motion picture theaters
leased to Harcourt General July 17, 1985 and
Corporation 1,387,000 5,149,459 6,536,459 2,027,496 July 31, 1986 30 yrs.
Office/Manufacturing
facility in leased to
Inno Tech Industries, Inc. August 30, 1985 N/A
Office facility leased
to Motorola, Inc. 387,000 3,992,455 4,379,455 1,602,310 December 23, 1985 30 yrs.
Warehouse/ office research
and manufacturing
facilities leased to November 25, 1985
Lockheed Martin May 15, 1986 and
Corporation 3,079,188 17,584,363 20,663,551 6,381,976 December 12, 1988 30 yrs.
Warehouse and office
facility leased to
Kinney Shoe Corporation/
Armel, Inc. 1,360,935 3,907,415 5,268,350 1,470,719 September 17, 1986 30 yrs.
Manufacturing and office
facility leased to
Yale Security, Inc. 300,000 3,400,000 3,700,000 198,333 August 13, 1985 30 yrs.
</TABLE>
F-26
<PAGE> 143
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing facilities
leased to AP Parts
International, Inc. 5,397,705 443,500 11,256,500 1,733,087
Manufacturing facilities
leased to Anthony's
Manufacturing Company, Inc. 3,200,000 8,300,000
Manufacturing facilities
leased to Swiss
M-Tex, L.P. 420,440 4,379,560 1,300 (621,098)
Land leased to
AutoZone, Inc. 3,221,466 7,199,219 60,795 (206,920)
Retail stores formerly
leased to Yellow
Front Stores, Inc. 4,934,160 3,897,549 351,255 (2,238,493)
Office facility leased to
Bell Atlantic Corporation 275,363 1,955,820 24,093
Land leased to Sybron
International Corporation 414,533 742,246 4,230
Office facility leased
to United States
Postal Service 1,484,340 14,835,661 992,244
Manufacturing and office
facility leased to
Allied Plywood, Inc. 661,196 1,932,997 13,383
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
-------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing facilities
leased to AP Parts
International, Inc. 443,500 12,989,587 13,433,087 4,248,706 December 23, 1986 30 yrs.
Manufacturing facilities
leased to Anthony's
Manufacturing Company, Inc. 3,200,000 8,300,000 11,500,000 3,001,667 February 24, 1987 30 yrs.
Manufacturing facilities
leased to Swiss
M-Tex, L.P. 255,678 3,924,524 4,180,202 1,351,768 August 24,1987 30 yrs.
January 17 &
May 2, 1986,
Land leased to August 28, 1987 &
AutoZone, Inc. 7,053,094 7,053,094 August 24, 1988 N/A
Retail stores formerly
leased to Yellow
Front Stores, Inc. 3,332,294 3,612,177 6,944,471 922,024 January 29,1988 30 yrs.
Office facility leased to
Bell Atlantic Corporation 275,363 1,979,913 2,255,276 654,471 January 29,1988 30 yrs.
Land leased to Sybron
International Corporation 746,476 746,476 December 22, 1988 N/A
Office facility leased
to United States
Postal Service 1,485,075 15,827,170 17,312,245 4,626,563 September 29, 1988 30 yrs.
Manufacturing and office
facility leased to
Allied Plywood, Inc. 661,627 1,945,949 2,607,576 275,676 March 31, 1989 30 yrs.
</TABLE>
F-27
<PAGE> 144
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office
leased to StairPans of
America, Inc. 87,936 1,110,847 3,458 (456,203)
Manufacturing facilities
leased to Quebecor
Printing Inc. 10,010,987 3,957,645 15,961,355 13,782
Land leased to High
Voltage Engineering
Corp. 742,407 1,720,000 1,601
Manufacturing facility
leased to
Wozniak Industries, Inc./
Mayfair Molded
Products Corporation 793,325 2,456,675 4,356
Distribution and office
facilities leased to
Federal Express
Corporation 394,544 2,102,456 49,041
Land leased to Dr Pepper
Bottling Company
of Texas 4,004,474 7,351,740 34,370
Manufacturing facility
leased to Detroit Diesel
Corporation 22,658,392 4,986,450 26,513,550 8,130
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
-------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office
leased to StairPans of
America, Inc. 54,566 691,472 746,038 98,210 March 31 , 1989 30 yrs.
Manufacturing facilities
leased to Quebecor June 24, 1988 and
Printing Inc. 3,961,025 15,971,757 19,932,782 4,604,905 December 29, 1989 30 yrs.
Land leased to High
Voltage Engineering
Corp. 1,721,601 1,721,601 N/A November 10, 1988 N/A
Manufacturing facility
leased to
Wozniak Industries, Inc./
Mayfair Molded
Products Corporation 794,388 2,459,968 3,254,356 743,364 December 8, 1988 30 yrs.
Distribution and office
facilities leased to
Federal Express March 24 and
Corporation 401,526 2,144,515 2,546,041 613,060 June 30, 1989 30 yrs.
Land leased to Dr Pepper
Bottling Company
of Texas 7,386,110 7,386,110 N/A June 30, 1989 N/A
Manufacturing facility
leased to Detroit Diesel
Corporation 4,987,737 26,520,393 31,508,130 6,666,826 June 15, 1990 30 yrs.
</TABLE>
F-28
<PAGE> 145
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Engineering and
Fabrication Facility
leased to Orbital
Sciences Corporation 8,494,188 3,675,966 7,757,081 5,976,705
Land leased to
NVR, Inc. 1,828,657 3,342,854 23,850
Distribution facility
leased to PepsiCo 156,327 829,488 15,075
Land leased to Childtime
Childcare, Inc. 518,986 1,170,448
Hotel complex leased to
Hotel Corporation of America 8,414,628 762,839 8,241,162
------------ ----------- ------------ ----------- ------------
$ 86,312,370 $71,875,282 $235,984,168 $15,527,891 $(12,632,109)
============ =========== ============ =========== ============
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
-------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Engineering and
Fabrication Facility
leased to Orbital
Sciences Corporation 3,676,492 13,733,260 17,409,752 3,307,829 September 29, 1989 30 yrs.
Land leased to
NVR, Inc. 3,366,704 3,366,704 May 16, 1989 N/A
Distribution
facility leased to
PepsiCo 158,717 842,173 1,000,890 228,117 November 16, 1989 30 yrs.
Land leased to Childtime
Childcare, Inc. 1,170,448 1,170,448 January 4, 1991 N/A
Hotel complex leased to
Hotel Corporation of America 762,839 8,241,162 9,004,001 2,165,499 30 yrs.
----------- ------------ ------------ -----------
$69,154,063 $241,601,169 $310,755,232 $93,590,682
=========== ============ ============ ===========
</TABLE>
F-29
<PAGE> 146
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------ Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Direct financing method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $4,355,546 $ 298,655 $ 9,956,345 $9,528 $ 703,449
Retail stores leased
to Kobacker Stores,
Inc. 2,008,850 105,207 (376,015)
Centralized Telephone
Bureau leased to
Western Union Financial
Services, Inc. 893,200 5,050,489 (92,976)
Computer Center
leased to
AT&T Corporation 369,600 6,985,844 3,189 36,891
Warehouse and
manufacturing
buildings leased to
Gibson Greetings, Inc. 1,904,186 $17,239,235 (5,478,876)
Warehouse and
manufacturing buildings
leased to CSS Industries,
Inc./ Cleo, Inc. 1,133,761 15,142,206 (4,588,867)
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct financing method:
Office buildings and
warehouses leased to December 28, 1979 and
Unisource Worldwide, Inc. $10,967,977 April 29, 1980
Retail stores leased
to Kobacker Stores,
Inc. 1,738,042 January 17, 1979
Centralized Telephone
Bureau leased to
Western Union Financial
Services, Inc. 5,850,713 November 24, 1981
Computer Center
leased to
AT&T Corporation 7,395,524 November 24, 1981
Warehouse and
manufacturing buildings
leased to Gibson
Greetings, Inc. 13,664,545 January 26, 1982
Warehouse and
manufacturing buildings
leased to CSS Industries,
Inc./ Cleo, Inc. 11,687,100 January 26, 1982
</TABLE>
F-30
<PAGE> 147
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------ Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Direct Financing Method
(continued):
Manufacturing,
distribution and
office buildings
leased to
Brodart Co. 3,054,518 241,550 6,141,429 (226,002)
Manufacturing facility
to Duff-Norton
Company, Inc. 444,730 5,055,270
Manufacturing facilities
leased to Rochester
Button Company, Inc. 86,663 2,815,596 4,429 (1,044,696)
Manufacturing facilities
leased to Thermadyne
Holdings Corp. 2,615,000 9,085,000
Office and research
facility leased to
Exide Electronics
Corporation 2,030,000 1,500
Manufacturing facilities
leased to DeVlieg
Bullard, Inc. 310,032 4,782,667
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct Financing Method
(continued):
Manufacturing,
distribution and
office buildings
leased to
Brodart Co. 6,156,977 June 15, 1988
Manufacturing facility
to Duff-Norton
Company, Inc. 5,500,000 December 30, 1983
Manufacturing facilities
leased to Rochester
Button Company, Inc. 1,861,992 April 11, 1984
Manufacturing facilities
leased to Thermadyne
Holdings Corp. 11,700,000 February 14, 1985
Office and research
facility leased to
Exide Electronics
Corporation 2,031,500 June 20, 1985
Manufacturing facilities
leased to DeVlieg
Bullard, Inc. 5,092,699 April 3, 1986
</TABLE>
F-31
<PAGE> 148
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------ Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Direct Financing Method
(continued):
Manufacturing facility
leased to Penberthy
Products, Inc. 48,968 1,028,333
Manufacturing facility
and warehouse leased
to DS Group Limited 200,000 2,800,000
Manufacturing
facilities leased
Sunds Defibrator
Woodhandling, Inc. 24,750 669,427
Retail stores leased to
AutoZone, Inc. 5,396,609 12,649,956 98,930 (321,900)
Manufacturing facility
leased to Peerless
Chain Company 829,000 6,991,000
Retail facility leased to
Wal-Mart Stores, Inc., 3,351,280 1,467,000 5,208,000 10,250
Manufacturing and office
facilities leased to Sybron
International Corporation 13,604,070 1,984,406 22,383,348 138,318
Manufacturing and office
facilities leased to
NVR, Inc. 4,871,343 570,729 12,904,948 321,200 551,758
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct Financing Method
(continued):
Manufacturing facility
leased to Penberthy
Products, Inc. 1,077,301 April 3, 1986
Manufacturing facility
and warehouse leased
to DS Group Limited 3,000,000 December 22, 1986
Manufacturing
facilities leased
Sunds Defibrator
Woodhandling, Inc. 694,177 August 30, 1985
Retail stores leased to January 17, 1986
AutoZone, Inc. 12,426,986 May 2, 1986; August 28, 1987
and August 24, 1988
Manufacturing facility
leased to Peerless
Chain Company 7,820,000 June 18, 1986
Retail facility leased to
Wal-Mart Stores, Inc., 6,685,250 August 7, 1986
Manufacturing and office
facilities leased to Syb
International Corporatio 24,506,072 December 22, 1988
Manufacturing and office
facilities leased to March 31, 1989 and
NVR, Inc. 14,348,635 May 16, 1989
</TABLE>
F-32
<PAGE> 149
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------ Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ---------------- ---- --------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Direct Financing Method
(continued):
Manufacturing and
generating facilities
leased to High
Voltage Engineering
Corp. 3,422,846 688,000 7,242,000 7,394
Office/warehouse
facilities leased to
Stationers Distributing
Company 2,307,669 1,120,000 3,510,000 293 (732,255)
Bottling and Distribution
facilities lease to
Dr Pepper Bottling
Company of Texas 11,355,992 20,848,260 97,467
Land and industrial/
warehouse/office
facilities leased to
Furon Company 12,558,672 4,187,766 19,104,786 127,177 (5,981,113)
Office/warehouse
facility leased
to Red Bank
Distribution, Inc. 5,161,768 1,572,296 9,065,704 11,302
Day care facilities
leased to Childtime
Childcare, Inc. 747,947 1,686,816
----------- ----------- ------------ -------- ------------
$70,188,260 $20,990,292 $212,385,509 $936,184 $(17,550,602)
=========== =========== ============ ======== ============
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct Financing Method
(continued):
Manufacturing and
generating facilities
leased to High
Voltage Engineering
Corp. 7,937,394 November 10, 1988
Office/warehouse
facilities leased to
Stationers Distributing
Company 3,898,038 December 29, 1988
Bottling and Distribution
facilities lease to
Dr Pepper Bottling
Company of Texas 20,945,727 June 30, 1989
Land and industrial/
warehouse/office
facilities leased to
Furon Company 17,438,616 January 29, 1990
Office/warehouse
facility leased
to Red Bank
Distribution, Inc. 10,649,302 July 20, 1990
Day care facilities
leased to Childtime
Childcare, Inc. 1,686,816 January 4, 1991
------------
$216,761,383
============
</TABLE>
F-33
<PAGE> 150
CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
Schedule III - Real Estate AND ACCUMULATED DEPRECIATION
as of December 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Cost
Company Capitalized Decrease
------------------------- Personal Subsequent to in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investment (b)
----------- ---------------- ---- --------- --------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating real estate (e):
Hotels located in:
Alpena, Michigan $ 7,150,000 $ 210,000 $ 7,551,000 $ 742,500 $1,262,297
Petoskey, Michigan 7,150,000 527,000 7,211,000 765,500 936,886
Livonia, Michigan 7,446,223 3,130,000 12,410,000 2,260,000 953,552
----------- ---------- ----------- ---------- ----------
$21,746,223 $3,867,000 $27,172,000 $3,768,000 $3,152,735
=========== ========== =========== ========== ==========
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
-------------------------------- Accumulated Income
Description Land Personal Property Buildings Total Depreciation Date Acquired is Computed
----------- ---- ----------------- --------- ----- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating real estate (e):
Hotels located in:
Alpena, Michigan $ 210,000 $1,455,188 $ 8,100,609 $ 9,765,797 $ 4,176,740 March 6, 1987 5-30 yrs
Petoskey, Michigan 527,000 1,356,197 7,557,189 9,440,386 3,679,335 June 30, 1987 5-30 yrs
Livonia, Michigan 3,130,000 2,677,513 12,946,039 18,753,552 6,770,673 November 20, 1987 5-30 yrs
---------- ----------- ----------- ----------- -----------
$3,867,000 $5,488,898 $28,603,837 $37,959,735 $14,626,748
========== ========== =========== =========== ===========
</TABLE>
F-34
<PAGE> 151
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to Schedule III - Real Estate
and ACCUMULATED DEPRECIATION
(a) Consists of the cost of improvements and acquisition costs subsequent to
acquisition, including legal fees, appraisal fees, title costs, other
related professional fees and purchases of furniture, fixtures, equipment
and improvements at the hotel properties.
(b) The increase (decrease) in net investment is primarily due to (i) the
amortization of unearned income from net investment in direct financing
leases producing a periodic rate of return which at times may be greater
or less than lease payments received, (ii) accumulated depreciation from
operating leases that were reclassified to direct financing leases, (iii)
sales of properties, and (iv) writedowns of properties to fair value.
(c) At December 31, 1996, the aggregate cost of real estate owned by the
Company and its subsidiaries for Federal income tax purposes is
$599,953,299.
(d)
Reconciliation of Real Estate Accounted
for Under the Operating Method
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------- -------------
<S> <C> <C>
Balance at beginning
of year $ 348,220,453 $ 339,503,452
Additions 2,842,338 1,422,179
Sales (14,157,435) (6,458,555)
Writedowns to fair value (1,489,999)
Reclassification from (to) investment in
direct financing lease 3,700,000 (21,868,468)
Reclassification to assets
held for sale (1,101,904) (353,377)
------------- -------------
Balance at end of
year $ 339,503,452 $ 310,755,232
============= =============
</TABLE>
F-35
<PAGE> 152
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to Schedule III - Real Estate
and ACCUMULATED DEPRECIATION
Reconciliation of Accumulated Depreciation
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Balance at beginning
of year $ 87,603,614 $ 91,923,183
Depreciation expense 9,334,741 8,819,816
Reclassification to assets
held for sale (153,377)
Reclassification to direct financing
lease (667,565) (4,429,853)
Writeoff resulting from sales
of property (4,347,537) (2,569,087)
------------ ------------
Balance at end of
year $ 91,923,253 $ 93,590,682
============ ============
</TABLE>
(e)
Reconciliation for Operating Real Estate
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Balance at beginning
of year $ 55,369,375 $ 37,426,984
Additions 578,005 532,751
Sales and exchange of property (18,520,396)
------------ ------------
Balance at close of
year $ 37,426,984 $ 37,959,735
============ ============
</TABLE>
F-36
<PAGE> 153
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to Schedule III - Real Estate
and ACCUMULATED DEPRECIATION
Reconciliation of Accumulated Depreciation
Operating Real Estate
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Balance at beginning
of year $ 14,481,112 $ 13,346,982
Depreciation expense 1,215,149 1,279,766
Writeoff resulting from
sales and exchange (2,349,279)
------------ ------------
Balance at end of year $ 13,346,982 $ 14,626,748
============ ============
</TABLE>
F-37
<PAGE> 154
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration .............................. $28,303
Legal Fees and Expenses ....................... $25,000
Accounting Fees and Expenses .................. $ 5,000
Printing and Engraving Expenses ............... $10,000
Miscellaneous ................................. $15,000
-------
Total ......................................... $83,303
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
NONE
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
NONE
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification is provided for in the Organizational Documents of the
Registrant and such provisions are incorporated herein by reference.
Reference is hereby made to the captions "FIDUCIARY RESPONSIBILITY AND
INDEMNIFICATION -- Indemnification of Directors and Officers of the Company" and
"FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION -- Directors and Officers
Insurance" in the Prospectus, which is part of this Registration Statement, for
a more detailed description of indemnification and insurance arrangements
between the Company and its officers and directors.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
2
<PAGE> 155
ITEM 36. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
<TABLE>
Exhibit No. Exhibit
<S> <C>
1(1) Listed Share Purchase Warrant Agreement
2.1(1) Form of Certificate of Merger of CPA(R):1
2.2(1) Form of Certificate of Merger of CPA(R):2
2.3(1) Form of Certificate of Merger of CPA(R):3
2.4(1) Form of Certificate of Merger of CPA(R):4
2.5(1) Form of Certificate of Merger of CPA(R):5
2.6(1) Form of Certificate of Merger of CPA(R):6
2.7(1) Form of Certificate of Merger of CPA(R):7
2.8(1) Form of Certificate of Merger of CPA(R):8
2.9(1) Form of Certificate of Merger of CPA(R):9
2.10(1) Form of Agreement of Merger of CPA(R):1
2.11(1) Form of Agreement of Merger of CPA(R):2
2.12(1) Form of Agreement of Merger of CPA(R):3
2.13(1) Form of Agreement of Merger of CPA(R):4
2.14(1) Form of Agreement of Merger of CPA(R):5
2.15(1) Form of Agreement of Merger of CPA(R):6
2.16(1) Form of Agreement of Merger of CPA(R):7
2.17(1) Form of Agreement of Merger of CPA(R):8
2.18(1) Form of Agreement of Merger of CPA(R):9
3.1(1) Amended and Restated Limited Liability Company
Agreement of Carey Diversified LLC
</TABLE>
3
<PAGE> 156
<TABLE>
<S> <C>
3.2(1) By Laws of Carey Diversified LLC
4(1) Form of Listed Share Stock Certificate
5(2) Opinion of Reed Smith Shaw & McClay as to Legality
of Securities Issued
8.1(2) Opinion of Reed Smith Shaw & McClay as to Certain
Tax Matters
8.2(1) Opinion of Reed Smith Shaw &
McClay as to Certain ERISA Matters
8.3(1) Opinion of Delaware Counsel,
Richards, Layton & Finger
10.1(1) Management Agreement Between Carey
Management LLC and the Company
10.2(1) Non-Employee Stock Option Plan
10.3(1) 1998 Listed Share Incentive Plan
10.4(1) Investment Banking Engagement Letter
21(1) List of Registrant Subsidiaries
24 Consent of Coopers & Lybrand
99.1(1) Fairness Opinion of Robert A.
Stanger & Co., Inc.
99.2(1) Independent Appraisal of Fair
Market Value of the CPA(R) Partnerships'
Real Estate Portfolios
99.3(1) Consolidation Consent Card
99.4(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):1
99.5(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):2
99.6(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):3
</TABLE>
4
<PAGE> 157
<TABLE>
<S> <C>
99.7(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):4
99.8(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):5
99.9(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):6
99.10(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):7
99.11(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):8
99.12(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):9
99.13(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):1
99.14(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):2
99.15(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):3
99.16(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):4
99.17(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):5
99.18(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):6
99.19(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):7
99.20(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):8
99.21(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):9
</TABLE>
<PAGE> 158
1 Filed with the Company's Registration Statement on Form S-4
(333-37901), dated October 15, 1997 and incorporated herein by reference.
2 Filed previously.
(b) 1. Consolidated Financial Statements
The following combined financial statements are filed as part
of this Report:
Report of Independent Accountants.
Report of Independent Accountants.
Combined Balance Sheets of the Corporate Property Associates Partnerships as of
December 31, 1996 and 1997.
Combined Statements of Income of the Corporate Property Associates Partnerships
for the years ended December 31, 1995, 1996 and 1997.
Combined Statements of Partners' Capital of the Corporate Property Associates
Partnerships for the years ended December 31, 1995, 1996 and 1997.
Combined Statements of Cash Flows of the Corporate Property Associates
Partnerships for the years ended December 31, 1995, 1996 and 1997.
Notes to Combined Financial Statements.
Schedule III - Real Estate and Accumulated Depreciation
(b) Financial Statement Schedules
NONE
ITEM 37. UNDERTAKINGS.
The undersigned registrant undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective
5
<PAGE> 159
amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in
the registration statement; (iii) To include any material
information with respect to the plan of distribution not
previously disclosed in the registration statement,. or any
material change to such information in the registration
statement; and (iv) to file by means of a post-effective
amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the
subject of and included in the registration statement when it
became effective.
(2) That, for the purpose of determining liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
6
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York on the day of April,
1998.
CAREY DIVERSIFIED LLC
By:
Francis J. Carey, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
Chairman of the Board and Chief April , 1998
- --------------------
Francis J. Carey Executive Officer (Principal Executive
Officer) of the Registrant
Director of the Registrant April , 1998
- --------------------
William P. Carey
President and Director of the April , 1998
- -------------------- Registrant
Gordon F. DuGan
Vice Chairman and Director of the April , 1998
- --------------------
Steven M. Berzin Registrant
Executive Vice President of the April , 1998
- -------------------- Registrant
Claude Fernandez
Executive Vice President and Chief April , 1998
- --------------------- --
John J. Park Financial Officer of the Registrant
(Principal Financial Officer)
Director April , 1998
- --------------------
Barclay G. Jones III
</TABLE>
7
<PAGE> 161
<TABLE>
<S> <C> <C>
Director April , 1998
- --------------------
Donald E. Nickelson
Director April , 1998
- --------------------
Charles C. Townsend,
Director April , 1998
- --------------------
Eberhard Faber, IV
Director April 1998
- --------------------
Lawrence R. Klein
Director April , 1998
- --------------------
Reginald Winssinger
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of Carey Diversified
LLC on Form S-11 (File No. 333-46257) of our report dated March 27, 1998, on
our audits of the combined financial statements and financial statement
schedule of Corporate Property Associates Partnerships as of December 31, 1996
and 1997 and for the years ended December 31, 1995, 1996, and 1997. We also
consent to the references to our firm under the captions "Experts," "Summary
Selected Combined Financial Information," and "Selected Financial Data."
Coopers & Lybrand L.L.P.
New York, New York
April 17, 1998
