<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended MARCH 31, 1999
of
CAREY DIVERSIFIED LLC
CD LLC
A DELAWARE Limited Liability Company
IRS Employer Identification No. 13-3912578
SEC File Number 001-13779
50 ROCKEFELLER PLAZA,
NEW YORK, NEW YORK 10020
(212) 492-1100
CD LLC has LISTED SHARES registered pursuant to Section 12(g) of the Act.
CD LLC is registered on the NEW YORK STOCK EXCHANGE.
CD LLC does not have any Securities registered pursuant to Section 12(b) of the
Act.
CD LLC is unaware of any delinquent filers pursuant to Item 405 of Regulation
S-K.
CD LLC (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
There are 25,555,964 Listed Shares, no par value outstanding at May 10, 1999.
<PAGE> 2
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets,
as of March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income for the
three months ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-12
PART II - Other Information
Item 3A. - Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. - Submission of Matters to a Vote of Security Holders 13
Item 6. - Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
*The summarized financial information contained herein is unaudited; however in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
<PAGE> 3
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Real estate leased to others under the
operating method, net of accumulated depreciation of $9,702
and $7,617 at March 31, 1999 and December 31, 1998 $393,706 $390,312
Net investment in direct financing leases 296,084 295,826
Operating real estate, net of accumulated depreciation of $381
and $300 at March 31, 1999 and December 31, 1998 7,011 7,013
Real estate leased to others under construction 71,102 55,856
Cash and cash equivalents 5,451 5,673
Assets held for sale 12,768 12,842
Equity investments 29,515 29,532
Other assets 20,779 16,210
-------- --------
Total assets $836,416 $813,264
======== ========
LIABILITIES:
Mortgage notes payable $135,880 $138,964
Notes payable 158,000 132,334
Accrued interest 1,200 2,128
Accounts payable to affiliates 5,432 7,013
Dividends payable 10,661 10,447
Other liabilities 10,968 11,771
-------- --------
Total liabilities 322,141 302,657
-------- --------
Minority interest (3,219) (3,626)
-------- --------
Commitments and contingencies
MEMBERS' EQUITY:
Listed Shares, no par value;
25,553,764, and 25,343,402 shares issued and
outstanding at March 31, 1999 and December 31, 1998 521,908 517,755
Distributions in excess of accumulated earnings (3,640) (2,803)
Accumulated other comprehensive income (774) (719)
-------- --------
517,494 514,233
-------- --------
Total liabilities and
members' equity $836,416 $813,264
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The consolidated balance sheet at December 31, 1998 has been derived from
the audited consolidated financial statements at that date
-2-
<PAGE> 4
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
------- -------
<S> <C> <C>
Revenues:
Rental income $10,829 $10,520
Interest from direct financing leases 8,482 8,921
Other interest income 141 236
Other income 304 57
Revenue of hotel operations 1,358 1,967
------- -------
21,114 21,701
------- -------
Expenses:
Interest 4,141 4,692
Depreciation and amortization 2,336 1,845
General and administrative 1,852 1,621
Property expenses 1,616 1,259
Operating expenses of hotel operations 1,139 1,627
------- -------
11,084 11,044
------- -------
Income before minority interest,
income from equity investments
and extraordinary item 10,030 10,657
Minority interest in income (746) (931)
-------- -------
Income before income from equity
investments and extraordinary item 9,284 9,726
Income from equity investments 582 557
------- -------
Income before extraordinary item 9,866 10,283
Extraordinary loss on extinguishment of
debt, net of minority interest of $75 in 1998 (39) (569)
------- -------
Net income $ 9,827 $ 9,714
======= =======
Basic and diluted earnings per share:
Earnings before extraordinary item $.39 $.43
Extraordinary item (.03)
---- ----
$.39 $.40
==== ====
Weighted average shares outstanding:
Basic 25,416,171 23,994,926
========== ==========
Diluted 25,416,171 24,003,074
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE> 5
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net income $9,827 $9,714
------ ------
Other comprehensive income (loss)
Unrealized (loss) gain,
marketable securities (183) 160
Foreign currency translation adjustments 128 --
------ ------
Other comprehensive income (loss) (55) 160
------ ------
Comprehensive income $9,772 $9,874
====== ======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE> 6
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,1999 March 31,1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,827 $ 9,714
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,336 1,845
Amortization of deferred income (334) (240)
Extraordinary loss, net of minority interest 39 569
Minority interest in income 746 931
Straight-line rent adjustments and other noncash
rent adjustments (390) (907)
Compensation costs paid by issuance of shares 426 150
Payment of deferred leasing fees (1,509)
Provision for uncollected rents 146 165
Securities received in settlement (251)
Net change in operating assets and liabilities (1,646) (1,914)
-------- --------
Net cash provided by operating activities 10,899 8,804
-------- --------
Cash flows from investing activities:
Purchase of real estate (18,444) (8,086)
Additional capital expenditures (1,345) (69)
Payment of disposition fees to affiliate (1,007)
Proceeds from sale of property 74
Purchase of mortgage receivable (3,629)
Distributions received from equity investments in
excess of equity income 17 61
-------- --------
Net cash used in investing activities (24,334) (8,094)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of shares 652 5,410
Payment of accrued preferred distributions to former
general partners (3,676)
Distributions to minority interests (660) (596)
Dividends paid (10,450)
Payments of mortgage principal (1,268) (1,903)
Proceeds from note payable 29,000 55,000
Prepayments of mortgages and notes payable (3,954) (57,898)
Deferred financing costs (68) (1,297)
Prepayment charges paid on extinguishment of debt (39) (644)
-------- --------
Net cash provided by (used in) financing activities 13,213 (5,604)
-------- --------
Net decrease in cash and cash equivalents (222) (4,894)
Cash and cash equivalents, beginning of period 5,673 18,586
-------- --------
Cash and cash equivalents, end of period $ 5,451 $ 13,692
======== ========
Supplemental disclosure of cash flows information:
Interest paid (excluding capitalized interest) $ 5,069 $ 5,560
======== ========
</TABLE>
Noncash investing and financing activities:
During the three-month period ended March 31, 1999, the Company issued
restricted shares of $991 to certain directors, officers and affiliates in
consideration of fees.
In March 1999, the Company purchased the entire 26% minority interest
in the property leased to Sprint Spectrum, L.P. for $2,510 in exchange for the
issuance of 139,859 shares.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
<PAGE> 7
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)
Note 1. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All significant inter-entity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
Note 2. Earnings Per Share:
Basic and diluted earnings per share for the three-month periods ended March 31,
1999 and 1998 were calculated as follows:
<TABLE>
<CAPTION>
Weighted
Income Average Per
Available to Shares Share
1999 To Members Outstanding Amount
---- ---------- ----------- ------
<S> <C> <C> <C>
Basic earnings per share before
extraordinary items $ 9,866 25,416 $ .39
Extraordinary item (39)
------- ------ -----
Basic earnings per share - extraordinary items $ 9,827 25,416 $ .39
======= =====
Effect of dilutive securities - options for shares
Diluted earnings per share before
extraordinary items $ 9,866 25,416 $ .39
Extraordinary item (39)
------- ------ -----
Diluted earnings per share - extraordinary items $ 9,827 25,416 $ .39
======= ====== =====
1998
Basic earnings per share before
extraordinary items $10,283 23,995 $ .43
Extraordinary item (569) (.03)
------- ------ -----
Basic earnings per share - extraordinary items $ 9,714 23,995 $ .40
======= =====
Effect of dilutive securities - options for shares 8
Diluted earnings per share before
extraordinary items $10,283 24,003 $ .43
Extraordinary item (569) (.03)
------- ------ -----
Diluted earnings per share - extraordinary items $ 9,714 24,003 $ .40
======= ====== =====
</TABLE>
-6-
<PAGE> 8
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except per share amounts)
Note 3. Transactions with Related Parties:
Pursuant to its management agreement, Carey Management LLC ("Carey Management"),
an affiliate, performs certain advisory and administrative services for the
Company. Management and performance fees are payable to Carey Management, each
at an annual rate of 1/2 of 1% of the total average market capitalization of the
Company. The management fee is reduced on a dollar-for-dollar basis for
distributions paid to the special limited partners of the Company's nine
subsidiary partnerships. The performance fee is payable in the form of
restricted shares issued by the Company and vests over a five-year period. The
performance fees were $375 and $184 for the three-months ended March 31, 1999
and 1998, respectively. Management fees, net of the distributions paid to
special limited partners, were $368 and $269 for the three-months ended March
31, 1999 and 1998, respectively. General and administrative expense
reimbursements were $357 and $352 for the three-months ended March 31, 1999 and
1998.
Note 4. Lease Revenues:
For the three months ended March 31, 1999 and 1998, the Company earned its net
leasing revenues (i.e., rental income and interest income from direct financing
leases) from over 75 lessees. A summary of net leasing revenues including all
current lease obligors with more than $1,000 in annualized revenues is as
follows:
<TABLE>
<CAPTION>
1999 % 1998 %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Dr Pepper Bottling Company of Texas $ 1,000 5% $ 1,000 5%
Gibson Greetings, Inc. 980 5 960 5
Detroit Diesel Corporation 915 5 915 5
Sybron International Corporation 907 5 828 4
Livho, Inc. 807 4 538 3
Quebecor Printing, Inc. 614 3 657 3
Furon Company 604 3 604 3
Thermadyne Holdings Corporation. 559 3 559 3
The Gap, Inc. 551 3 545 3
AutoZone, Inc. 560 3 560 3
Orbital Sciences Corporation 538 3 538 3
Copeland Beverage 450 2
CSS Industries, Inc. 396 2 394 2
Brodart, Co. 380 2 336 2
Peerless Chain Company 366 2 366 2
AP Parts International, Inc. 355 2 459 2
Red Bank Distribution, Inc. 350 2 350 2
Unisource Worldwide, Inc. 348 2 319 2
Lockheed Martin Corporation 334 2 323 2
High Voltage Engineering Corporation 332 2 294 1
Eagle Hardware & Garden, Inc. 318 2
Duff-Norton Company, Inc. 291 1 291 1
Sprint Spectrum L.P. 289 1
United States Postal Service 272 1 272 1
Other 6,795 35 8,333 43
------- ---- ------- ----
$19,311 100% $19,441 100%
======= ==== ======= ====
</TABLE>
-7-
<PAGE> 9
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Equity Investments:
The Company owns 780,269 units of the operating partnership of Meristar
Hospitality Corporation ("Meristar"), a publicly traded real estate investment
trust. The Company has the right to convert its units in the operating
partnership to shares of common stock in Meristar at any time on a one-for-one
basis. The exchange of units for common stock would be a taxable transaction in
the year of exchange. The Company's interest in the Meristar operating
partnership is being accounted for under the equity method.
The most recently filed financial statements of Meristar reported total assets
of $2,998,460 and shareholders' equity of $1,150,992 as of December 31, 1998 and
revenues of $525,297 and net income of $43,707 for the year then ended. As of
May 10, 1998, Meristar's quoted share price was $22.75 resulting in an aggregate
value of the Company's units of approximately $17,751 if converted. The carrying
value of the equity interest in Meristar operating partnership as of March 31,
1999 was $24,097.
The Company owns equity interests as a limited partner in two limited
partnerships that each own real estate net leased to single tenant. Corporate
Property Associates 10 Incorporated, an affiliate, owns the remaining
controlling interests as a general partner in each partnership. Summarized
combined financial information of the two limited partnerships is as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Assets (primarily real estate) $46,098 $46,391
Liabilities (primarily mortgage notes payable) 32,240 32,399
Partner's capital 13,858 13,992
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Revenues (primarily rental income) $1,748 $1,748
Expenses (primarily interest on mortgages
and depreciation) 1,124 1,138
Net income 624 610
</TABLE>
Note 6. Acquisitions:
On January 14, 1999, the Company entered into an agreement with J.A. Billipp
Development Corporation ("Billipp") to provide Billipp up to $4,100 of limited
recourse mortgage financing. As of March 31, 1999, $3,629 has been funded, with
a commitment to fund the remaining $471 after certain conditions are met. The
$4,100 mortgage loan is collateralized by a deed of trust on a property located
in Austin, Texas and a lease assignment. The loan provides for monthly payments
of interest at an annual rate of 9.5%. In the event the property is not occupied
by one or more tenants during the term of the loan, any monthly installments of
interest due may be deferred until the maturity date, February 1, 2002, with
interest at an annual rate of 12% during any deferral period. In connection with
providing the limited recourse mortgage financing, Billipp granted the Company a
participating interest in the property's operating cash flow. The participation
provides that the Company receive 25% of the net cash flow from operations, as
defined, for twelve years after the earlier of the maturity of the loan or
payment in full of the loan. The Company also has an option to purchase the
collateralized property. The exercise price is based on a formula relating to
the net operating income of the property.
Majority-owned subsidiaries of the Company entered into two build-to-suit
transactions in France during the quarter ended March 31, 1999. The minority
owner will hold 20% interests in the properties under construction in Lille and
Indre et Loire which will be leased to Gist Brocade France S. A. ("Gist
Brocade") and a subsidiary of the French Postal Service, respectively. Both
leases provide that the lessee bears responsibility for real estate
-8-
<PAGE> 10
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS (CONTINUED)
taxes and insurance costs. The Company will retain the obligation for roof and
structural repairs, after expiration of a ten-year warranty from the builders
expires.
Completion of the Gist-Brocade property is expected to occur on or before June
1, 1999 at a projected total cost of 14,044 French Francs ("FF") (approximately
$2,300). Annual rent at the inception of the lease will be FF1,400
(approximately $229) with annual rent increases based on increases to the INSEE
index, a French construction cost index. The Gist-Brocade lease has an initial
term of six years with a three-year renewal term at the option of the lessee.
Completion of the property to be leased to the subsidiary of the French Postal
Service is expected to occur on or before July 1, 1999 at a projected cost of
FF16,474 (approximately $2,698). Annual rent at the inception of the lease will
be FF1,600 (approximately $262) with rent increases every year based on
increases to the INSEE index. The Postal service lease has an initial term of
six years with a three-year renewal term at the option of the lessee.
The Company has received mortgage commitments for limited recourse mortgage
loans for both properties in amounts equal to between approximately 75% and 80%
of the projected property cost. The loans will have fifteen year terms with
fixed interest rates during the first five years of the respective loan periods.
The Company has also entered into a binding commitment, through a majority-owned
subsidiary, to purchase a property in Tours, France. The construction of the
office facility will be completed in the second or third quarter of 2000 and
will be leased to Bouygues Telecom at a projected cost of FF76,868 ($12,587).
The lease will have a term of nine years and will initially provide annual rent
of FF7,000 (approximately $1,146). Approximately FF57,600 (approximately $9,432)
of the cost for the facility will be funded by a limited recourse mortgage loan.
Note 7. Property in Moorestown, New Jersey:
On February 19, 1999, the Company, through a majority owned newly-formed
subsidiary, entered into a net lease with Cendant Operations, Inc. ("Cendant")
at an existing Company property in Moorestown, New Jersey which became effective
upon completion of the property's renovation on May 5, 1999. The minority owner
of the subsidiary Matrix Realty, Inc. ("Matrix"), is a real estate developer
that oversaw the renovation. The Company has contributed the property to the
subsidiary and is funding $3,100 for renovations to the property. Cendant is
also obligated to fund $472 of the renovation costs.
The agreement with Matrix provides that the Company will receive a preferred
annualized return of 9% on its capital contributions, as defined. After the
payment of the preferred return, any remaining cash flow will be allocated 75%
to the Company and 25% to Matrix. Matrix will also receive up to $150 as a
development fee and a one-time leasing fee equal to 2% of the annual rent, net
of certain expenses. The lease with Cendant has a five-year term commencing in
May 1999. Annual rents are initially $1,016 with stated increases every year.
The Company has an obligation to purchase Matrix's interest in the subsidiary
within one year of the inception of the Cendent lease. The purchase price will
be based on the fair value of the property; subject to a minimum and maximum
purchase price of $500 and $250, respectively. Matrix has the option to receive
the proceeds from the purchase of its interest in cash or shares of the Company.
Note 8. Property in Ft. Lauderdale, Florida:
On March 1, 1999, the Company and Armel, Inc., a tenant of a Company property in
Ft. Lauderdale, Florida, agreed to a lease termination retroactively effective
as of February 1, 1999. Although the lease was scheduled to expire in August
2001, the Company agreed to an early termination in consideration for $1,540,
representing
-9-
<PAGE> 11
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS (CONTINUED)
approximately 62% of the rents due for what would have been the remaining lease
term. Armel's annual rent was $965. Bell South Entertainment, Inc. ("Bell
South") has entered into a ten-year lease for the property, commencing July
1999, at an annual rent of $300 with stated increases every year, increasing to
$630 by the tenth year of the lease term. Bell South has the right to terminate
its lease on or before January 1, 2000 if it fails to obtain all municipal
approvals required for the completion of certain tenant improvements.
Note 9. Property Leased to KSG, Inc. and Held for Sale:
In December 1996, KSG, Inc. ("KSG") notified the Company that it was exercising
its option to purchase the property it leases in Hazelwood, Missouri. The
Company and KSG were not able to reach an agreement as to the determination of
the exercise price. In January 1999, the Company and KSG entered into an
agreement to establish a minimum and maximum exercise price of $9,000 and
$11,500 and to defer the exercise price determination until a dispute regarding
an interpretation of the lease was resolved. The exercise price is to be
determined based on the fair market value of the property as encumbered by the
lease, determined in part by discounting all future rents over the remaining
terms, including renewal terms, of the lease. A dispute about the Company's
calculation of a rent increase in April 1997 prevented the sale of the property
pursuant to the exercise option to be completed. On March 25, 1999, the Circuit
Court of the County of St. Louis, State of Missouri ruled in favor of the
Company's interpretation of the terms of the calculation. The Company and KSG
have resumed their discussions relating to the purchase price, subject to the
minimum and maximum exercise price agreed upon. The Company is considering a
proposal by KSG to defer the completion of the sale until 2000.
Note 10. Segment Reporting:
The Company operates in two business segments - real estate and hotel
operations. The two segments are summarized as follows:
<TABLE>
<CAPTION>
Real Estate Hotel Total Company
----------- ----- -------------
Three months ended March 31, Revenues:
--------------------------------------
<S> <C> <C> <C>
1999 $ 19,756 $ 1,358 $ 21,114
1998 19,734 1,967 21,701
Operating and interest expenses:
(excluding depreciation and
amoritization)
1999 $ 7,609 $ 1,139 $ 8,748
1998 7,572 1,627 9,199
Income from equity investments:
1999 $ 582 $ 582
1998 557 557
Net operating income (1):
1999 $ 9,647 $ 219 $ 9,866
1998 9,943 340 10,283
Total assets:
March 31, 1999 $827,773 $ 8,643 $836,416
December 31, 1998 804,755 8,509 813,264
</TABLE>
(1) Represents income before extraordinary items.
-10-
<PAGE> 12
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Company's condensed consolidated financial statements and notes thereto as of
March 31, 1999 included in this quarterly report and the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. This quarterly report
contains forward looking statements. Such statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievement of the Company to be materially different from the
results of operations or plans expressed or implied by such forward looking
statements. Accordingly, such information should not be regarded as
representations by the Company that the results or conditions described in such
statements or the objectives and plans of the Company will be achieved.
RESULTS OF OPERATIONS:
Net income for the three-months ended March 31, 1999 increased by $113
as compared with net income for the three-month period ended March 31, 1998.
Income before extraordinary items; however, decreased by $417. The decrease in
income before extraordinary items was primarily due to an increase in
depreciation and property expenses, and, to a lesser extent, a moderate increase
in general and administrative expenses. The effect of these items were partially
offset by a decrease in interest expense and an increase in other income. Lease
revenues (rental income and interest from direct financing leases) were stable.
The increase in depreciation expense was due to the acquisition of
several properties during 1998 including a portfolio of properties in Houston,
Texas and the Eagle Hardware & Garden, Inc. property in Bellevue, Washington.
The increase in property expense was due primarily to an increase in the
performance fee. Property expense also was affected by legal costs related to
disputes with tenants. The increase in general and administrative costs was
primarily due to consulting expenses related to Year 2000 issues and the
implementation of new integrated accounting and asset management software
systems.
Although lease revenues were stable, the comparable periods reflected
several changes in the composition of lease revenues. The Company's lease with
Hughes Markets, Inc., which provided approximately 7% of lease revenues for the
three-month period ended March 31, 1998, ended in April 1998. The Hughes lease
had been extended in 1996 at an above-market rental. The former Hughes property,
a dairy processing facility in Los Angeles, California, is now leased to
Copeland Beverage, Inc. Although the rents from Copeland approximate the rents
received from Hughes prior to the negotiation of the extension term, rents from
the property for the comparable three-month periods declined by $996. This
decrease was offset by property acquisitions in 1998, including the Houston
portfolio, Eagle Hardware, Sprint Spectrum L.P. and the French properties. Lease
revenues will increase as a result of the completion of the build-to-suit
project with America West Airlines, Inc. and the new lease with Cendant
Operations, Inc. in May 1999. The American West property in Tempe, Arizona will
provide annual rent of approximately $3,404. The Cendant property in Moorestown,
New Jersey has just been redeveloped and will initially provide annual rent of
$1,016. Both the America West and Cendant properties are owned with unaffiliated
partners so that a portion of each property's net cash flow is required to be
distributed to the partner. The decrease in interest expense was due to the
prepayment of several mortgage loans in 1998 that were paid off, in part, with
cash reserves and with draws from the line of credit that was obtained in March
1998. Other income increased as the result of $251 of securities received as
part of a bankruptcy claim against a former tenant.
The decrease in hotel earnings is due to the transfer of the hotel
operations and commencement of a lease for the Livonia hotel effective February
1, 1998. Earnings for the remaining hotel properties increased by 24% as a
result of an increase in occupancy rates of 1% and average room rental rates of
6%.
-11-
<PAGE> 13
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION:
There has been no material change in the Company's financial position
since December, 31, 1998. Cash flow from operations of $10,899 was sufficient to
fund dividends of $10,450.
The Company's investing activities consisted of funding $18,444 for
existing build-to-suit projects for America West and Federal Express
Corporation, new build-to-suit projects in France and expansion of the existing
facility leased to Orbital Sciences Corporation. The Company also used $3,629 to
purchase a mortgage receivable in which it has a participating interest. Current
capital commitments for the completion of existing properties total $55,955
including $1,810 for capital improvements to an affiliate at the Livonia,
Michigan hotel property leased to Livho, Inc. The Company also paid disposition
fees of $1,007 to an affiliate in connection with sales of properties in 1998.
The Company's financing activities consisted of paying dividends to
shareholders of $10,450, distributions to minority partners of $660 and
scheduled mortgage principal payments of $1,268. In addition, the Company
prepaid debt balances of $3,954, including a partial prepayment of $650 on a
mortgage loan. The outstanding balance on the Company's line of credit as of
March 31, 1999 increased to $158,000 with the additional draws used primarily
for investing purposes including the funding for current build-to-suit projects.
The Company remains in compliance with the financial covenants of its credit
agreement for the line of credit. On May 10, 1999, the Company placed $15,000 of
new limited recourse mortgage financing on the Orbital Sciences property and is
intending to use the proceeds to pay down a portion of the outstanding balance
on the line of credit or in connection with funding new property acquisitions.
The Company is also attempting to finalize $50,750 of new mortgage financing on
existing properties and to obtain up to $25,000 of limited recourse financing on
the America West property.
The Company and its affiliates are actively evaluating their
readiness relating to the Year 2000 issue. The Year 2000 issue refers to the
series of problems that have resulted or may result from the inability of
certain computer software and embedded processes to process dates properly. The
Company and its affiliates are completing a program of replacing or upgrading
equipment that has been identified as not being Year 2000 compliant. The Company
and its affiliates have also completed remediating certain software
applications. Contingency plans are in the process of being developed and should
be completed during the second quarter.
The Company believes it is addressing its internal Year 2000 issues in a
timely manner. There is, however, a risk that the inability of third-party
suppliers and tenants to meet Year 2000 readiness issues could have an adverse
effect on the Company. The Company and its affiliates have identified their
critical suppliers and are requiring that suppliers communicate their plans and
progress in identifying Year 2000 readiness.
The Company has contacted its tenants regarding Year 2000 readiness and
has emphasized the need to address Year 2000 issues. Generally, tenants are
contractually required to maintain their leased properties in good working order
and to make necessary alterations, foreseen or unforeseen, to meet their
contractual obligations. Because of those obligations, the Company believes that
the risks and costs of upgrading systems related to operations of the buildings
and that contain technology affected by Year 2000 issues will generally be
absorbed by tenants rather than the Company. The major risk is that Year 2000
issues have such an adverse effect on the financial condition of a tenant that
its ability to meet its lease obligations, including the timely payment of rent,
is impaired. In such an event, the Company may ultimately incur the costs for
Year 2000 readiness at the affected properties. The potential materiality of any
impact is not known at this time.
-12-
<PAGE> 14
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
PART II
Item 3A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
$107,908 of the CDC's long-term debt bears interest at fixed rates,
and therefore the fair value of these instruments is affected by changes in the
market interest rates. The following table presents principal cash flows based
upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. The interest rate on the variable rate debt as of March 31, 1998 ranged
from 4.85% to 10.00%. There has been no material change since December 31, 1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $9,219 $4,947 $8,701 $7,285 $7,614 $70,141 $107,908 $108,673
Average
interest rate 7.54% 8.00% 7.86% 7.88% 7.97% 7.88%
Variable rate $5,127 $760 $167,840 $557 $587 $11,101 $185,972 $185,972
</TABLE>
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1999, no matters were submitted to
a vote of security holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended March 31, 1999 the Company
was not required to file any reports on Form 8-K.
-13-
<PAGE> 15
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
5/11/99 By: /s/ John J. Park
Date ------------------------------
John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
5/11/99 By: /s/ Claude Fernandez
Date ------------------------------
Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,451
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,451
<PP&E> 706,884
<DEPRECIATION> 10,083
<TOTAL-ASSETS> 836,416
<CURRENT-LIABILITIES> 17,293
<BONDS> 293,880
0
0
<COMMON> 0
<OTHER-SE> 517,494
<TOTAL-LIABILITY-AND-EQUITY> 836,416
<SALES> 0
<TOTAL-REVENUES> 21,114
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,778
<LOSS-PROVISION> 165
<INTEREST-EXPENSE> 4,141
<INCOME-PRETAX> 9,866
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,866
<DISCONTINUED> 0
<EXTRAORDINARY> (39)
<CHANGES> 0
<NET-INCOME> 9,827
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
