<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended JUNE 30, 1999
of
CAREY DIVERSIFIED LLC
("CDC")
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
CDC has LISTED SHARES registered pursuant to Section 12(g) of the
Act.
CDC is registered on the NEW YORK STOCK EXCHANGE.
CDC does not have any Securities registered pursuant to Section
12(b) of the Act.
CDC is unaware of any delinquent filers pursuant to Item 405 of
Regulation S-K.
CDC (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 25,627,906 Listed Shares, no par value outstanding at
August 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 June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 5-6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
PART II - Other Information
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. - Submission of Matters to a Vote of Security Holders 16
Item 6. - Exhibits and Reports on Form 8-K 16
Signatures 17
</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.
-1-
<PAGE> 3
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Real estate leased to others under the
operating method, net of accumulated depreciation of
$11,938 and $7,617 at June 30,1999 and December 31, 1998 $ 430,455 $ 390,312
Net investment in direct financing leases 296,347 295,826
Operating real estate, net of accumulated depreciation of $466
and $300 at June 30, 1999 and December 31, 1998 7,096 7,013
Real estate leased to others under construction 48,439 55,856
Cash and cash equivalents 4,615 5,673
Assets held for sale 12,610 12,842
Equity investments 36,643 29,532
Other assets 22,922 16,210
--------- ---------
Total assets $ 859,127 $ 813,264
========= =========
LIABILITIES:
Mortgage notes payable $ 149,012 $ 138,964
Notes payable 166,000 132,334
Accrued interest 1,243 2,128
Accounts payable to affiliates 5,494 7,013
Dividends payable 10,692 10,447
Other liabilities 10,450 11,771
--------- ---------
Total liabilities 342,891 302,657
--------- ---------
Minority interest (2,677) (3,626)
--------- ---------
Commitments and contingencies
MEMBERS' EQUITY:
Listed Shares, no par value;
25,627,906, and 25,343,402 shares issued and
outstanding at June 30, 1999 and December 31, 1998 522,950 517,755
Distributions in excess of accumulated earnings (4,713) (2,803)
Accumulated other comprehensive income 676 (719)
--------- ---------
Total members' equity 518,913 514,233
--------- ---------
Total liabilities and
members' equity $ 859,127 $ 813,264
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed 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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 11,748 $ 10,491 $ 22,577 $ 21,011
Interest income from direct financing
leases 8,448 8,474 16,930 17,395
Other interest income 294 188 435 424
Other income 83 204 387 261
Revenue of hotel operations 1,304 1,279 2,662 3,246
------------ ------------ ------------ ------------
21,877 20,636 42,991 42,337
------------ ------------ ------------ ------------
Expenses:
Interest 4,694 4,137 8,835 8,829
Depreciation and amortization 2,476 2,046 4,812 3,891
General and administrative 1,864 1,888 3,716 3,509
Property expenses 1,423 1,224 3,039 2,483
Writedown to fair value 158 158
Operating expenses of hotel
operations 1,072 1,044 2,211 2,671
------------ ------------ ------------ ------------
11,687 10,339 22,771 21,383
------------ ------------ ------------ ------------
Income before minority
interest, income from
equity investments, net gain
and extraordinary item 10,190 10,297 20,220 20,954
Minority interest in income (815) (907) (1,561) (1,838)
------------ ------------ ------------ ------------
Income before income from
equity investments, net gain
and extraordinary item 9,375 9,390 18,659 19,116
Income from equity investments 245 559 827 1,116
------------ ------------ ------------ ------------
Income before net gain and
extraordinary item 9,620 9,949 19,486 20,232
Net gain on sale 90 90
------------ ------------ ------------ ------------
Income before extraordinary item 9,620 10,039 19,486 20,322
Extraordinary loss on extinguishment of debt,
net of minority interest of $4 and $79 for
the three and six-month periods
ended June 30, 1998 (52) (39) (621)
------------ ------------ ------------ ------------
Net income $ 9,620 $ 9,987 $ 19,447 $ 19,701
============ ============ ============ ============
Basic and diluted earnings per share:
Income before extraordinary
item $ .38 $ .40 $ .76 $ .83
Extraordinary item $ (.02)
------------ ------------ ------------ ------------
$ .38 $ .40 $ .76 $ .81
============ ============ ============ ============
Weighted average shares
outstanding:
Basic 25,576,774 24,897,398 25,496,916 24,448,655
============ ============ ============ ============
Diluted 25,576,774 24,919,685 25,496,916 24,479,996
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE> 5
CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 9,620 $ 9,987 $19,447 $19,701
------- ------- ------- -------
Other comprehensive income:
Change in unrealized appreciation
of marketable securities 266 43 31 203
Foreign currency translation
adjustment 1,184 44 1,364 44
------- ------- ------- -------
Other comprehensive income 1,450 87 1,395 247
------- ------- ------- -------
Comprehensive income $11,070 $10,074 $20,842 $19,948
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE> 6
CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,447 $ 19,701
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,812 3,891
Amortization of deferred income (715) (479)
Extraordinary loss, net of minority interest 39 621
Securities received in lieu of cash (265)
Minority interest in income 1,561 1,759
Straight-line rent adjustments (797) (1,545)
Compensation costs paid by issuance of shares 857 484
Payment of deferred leasing fees (1,509)
Provision for uncollected rents 300 297
Writedowns to fair value 158
Net change in operating assets and liabilities (1,028) (2,265)
-------- --------
Net cash provided by operating activities 24,369 20,955
-------- --------
Cash flows from investing activities:
Purchases of real estate and equity investments (41,940) (35,172)
Additional capital expenditures (1,965) (936)
Proceeds from sale of property 74 9,684
Distributions from equity investments in
excess of equity income 371 101
Payment of disposition fees (1,007)
Purchases of mortgage receivable and marketable securities (3,676) (65)
-------- --------
Net cash used in investing activities (48,143) (26,388)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of shares 652 5,410
Dividends paid (21,111) (10,015)
Distributions to former general partners (4,272)
Distributions to minority interest (1,309) (1,117)
Payments of mortgage principal (3,135) (3,496)
Proceeds from notes payable 37,000 95,072
Proceeds from mortgages payable 15,000 8,343
Prepayments of mortgages and notes payable (3,954) (68,590)
Deferred financing costs (388) (1,561)
Prepayment charges paid on extinguishment of debt (39) (700)
Other (477)
-------- --------
Net cash provided by financing activities 22,716 18,597
-------- --------
Net (decrease) increase in cash and
cash equivalents (1,058) 13,164
Cash and cash equivalents, beginning of period 5,673 18,586
-------- --------
Cash and cash equivalents, end of period $ 4,615 $ 31,750
======== ========
</TABLE>
(Continued)
-5-
<PAGE> 7
CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) - CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flows information:
Interest paid $9,720 $ 9,314
======== ========
</TABLE>
Noncash operating, investing and financing activities:
A. During the six-month periods ended June 30, 1999 and 1998, the Company issued
restricted shares of $1,980 and $2,197, respectively, to certain directors,
officers and affiliates in consideration of services rendered.
B. In March 1999, the Company purchased the entire 26% minority interest in a
subsidiary that net leases property to Sprint Spectrum, L.P. for $2,510 in
exchange for the issuance of 139,859 shares.
C. In connection with the acquisition of properties in 1998, the Company assumed
mortgage obligations of $13,593 and issued shares of $16,377.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
<PAGE> 8
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 common share for the Company for the three-month
and six-month periods ended June 30, 1999 and 1998 were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Income before extraordinary item $ 9,620 $ 10,039
Extraordinary item (52)
----------- -----------
Net income $ 9,620 $ 9,987
=========== ===========
Weighted average shares - basic 25,576,774 24,897,398
Effect of dilutive securities -
options for shares 22,287
----------- -----------
Weighted average shares - diluted 25,576,774 24,919,685
=========== ===========
Basic and diluted earnings per share $ .38 $ .40
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Income before extraordinary item $ 19,486 $ 20,322
Extraordinary item (39) (621)
----------- -----------
Net income $ 19,447 $ 19,701
=========== ===========
Weighted average shares - basic 25,496,916 24,448,655
Effect of dilutive securities -
options for shares 31,341
----------- -----------
Weighted average shares - diluted 25,496,916 24,479,996
=========== ===========
Basic and diluted earnings per share
before extraordinary item $ .76 $ .83
Extraordinary item (.02)
----------- -----------
Basic and diluted earnings per share $ .76 $ .81
=========== ===========
</TABLE>
-7-
<PAGE> 9
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 $376 and $185 for the three-month periods ended June 30,
1999 and 1998, respectively and $751 and $369 for the six-month periods ended
June 30, 1999 and 1998, respectively. Carey Management participates in the
Company's dividend reinvestment plan. Currently it has opted to take all of its
dividends in stock of the Company. Management fees, net of distributions paid to
special limited partners, were $360 and $262 for the three-month periods ended
June 30, 1999 and 1998, respectively, and $728 and $531 for the six-month
periods ended June 30, 1999 and 1998, respectively. General and administrative
expense reimbursements were $372 and $375 for the three-month periods ended June
30, 1999 and 1998, respectively, and $729 and $727 for the six months ended June
30, 1999 and 1998, respectively.
-8-
<PAGE> 10
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(dollars in thousands, except per share amounts)
Note 4. Lease Revenues:
For the six months ended June 30, 1999 and 1998, the Company earned its net
leasing revenues (i.e., rental income and interest income from direct financing
leases) from more than 80 lessees. A summary of net leasing revenues is as
follows:
<TABLE>
<CAPTION>
1999 % 1998 %
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dr Pepper Bottling Company of Texas $ 1,999 5% $ 1,999 5%
Gibson Greetings, Inc. 1,966 5 1,926 5
Detroit Diesel Corporation 1,829 5 1,829 5
Sybron International Corporation 1,813 5 1,656 4
Livho, Inc. 1,613 4 1,344 4
Quebecor Printing, Inc. 1,230 3 1,285 3
Furon Company 1,207 3 1,208 3
AutoZone, Inc. 1,179 3 1,163 3
Thermadyne Holdings Corporation 1,117 3 1,117 3
Orbital Sciences Corporation 1,116 3 1,077 3
The Gap, Inc. 1,102 3 1,094 3
Copeland Beverage Group, Inc. 900 2 300 1
Unisource Worldwide, Inc. 862 2 848 2
Lockheed Martin Corporation 828 2 802 2
AP Parts International, Inc. 809 2 918 2
CSS Industries, Inc. 793 2 789 2
Brodart, Co. 760 2 672 2
Peerless Chain Company 732 2 732 2
Red Bank Distribution, Inc. 700 2 700 2
Eagle Hardware & Garden, Inc. 675 2
High Voltage Engineering Corporation 664 2 587 2
Duff-Norton Company, Inc. 582 1 582 2
Sprint Spectrum, L.P. 577 1
United States Postal Service 545 1 545 1
America West Holdings Corp. 521 1
DeVlieg Bullard, Inc. 477 1 477 1
Anthony's Manufacturing Company, Inc. 473 1 443 1
Wal-Mart Stores, Inc. 446 1 446 1
Hotel Corporation of America 424 1 424 1
Material Sciences Corporation 414 1 1,219 3
Continental Casualty Company 386 1 386 1
AT&T Corporation 380 1 380 1
Winn-Dixie Stores, Inc. 312 1 312 1
Family Dollar Stores, Inc. 306 1 106
Exide Electronics Corporation 286 1 285 1
Excel Communications, Inc. 266 1 266 1
Other 9,218 23 10,489 27
------- ------- ------- -------
$39,507 100% $38,406 100%
======= ======= ======= =======
</TABLE>
-9-
<PAGE> 11
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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 $3,093,388 and shareholders' equity of $1,126,832 as of March 31, 1999 and
revenues of $64,093 and net income of $267 for the three months then ended. As
of July 28, 1999, Meristar's quoted share price was $19.50 resulting in an
aggregate value of the Company's units of approximately $15,215 if converted.
The carrying value of the equity interest in Meristar operating partnership as
of June 30, 1999 was $23,703.
The Company owns equity interests as a limited partner in two limited
partnerships that each own real estate net leased to a single tenant. Corporate
Property Associates 10 Incorporated, an affiliate, owns the remaining
controlling interests as a general partner in each partnership. The Company also
owns a 50% interest in a limited liability company with Corporate Property
Associates 14 ("CPA(R):14"), an affiliate, owning a 50% interest, that purchased
property in June 1999 (see Note 6). Combined financial information of the two
limited partnerships and the limited liability company is summarized as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Assets (primarily real estate) $77,792 $46,391
Liabilities (primarily mortgage notes payable) 48,934 32,399
Partner's capital 28,858 13,992
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------- -------
<S> <C> <C>
Revenues (primarily rental income) $ 3,687 $ 3,495
Expenses (primarily interest on mortgages
and depreciation) (2,273) (2,274)
------- -------
Net income $ 1,414 $ 1,221
======= =======
</TABLE>
Note 6. Acquisitions:
On June 3, 1999, the Company and CPA(R):14, Inc., both through 50% ownership
interests in a limited liability company, purchased land and building in
Norcross, Georgia for $30,785 and assumed existing net leases with CheckFree
Corporation, Inc. ("CheckFree"). CheckFree's lease obligations have been
unconditionally guaranteed by its parent company, CheckFree Holdings, Inc.
The CheckFree leases have remaining terms through December 31, 2015. The annual
combined rent on the leases is currently $2,565. The land lease with CheckFree
provides for annual rent of $77 with stated rent increases effective January
2000, 2005 and 2010. Annual rent on the building lease is $2,488 with rent
increases scheduled for January 2004 and each year thereafter based on a formula
indexed to increases in the Consumer Price Index ("CPI"), capped at 2.5% per
year.
The purchase of the CheckFree property was financed with a limited recourse
mortgage loan of $15,800 collateralized by a deed of trust on the CheckFree
property and lease assignments. The loan bears interest at an annual variable
rate of interest equal to the sum of the London InterBank Offered Rate ("LIBOR")
and 2.5% and provides for scheduled principal payments that approximate a
twenty-five year amortization schedule. The loan is scheduled to mature on June
1, 2006 at which time a balloon payment will be due. The loan is prepayable at
any time without premium.
-10-
<PAGE> 12
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company and CPA(R):14 also assumed an existing agreement to construct an
additional office building at the CheckFree property on a build-to-suit basis at
a cost not to exceed $11,061. Upon completion of construction, which is
scheduled for June, 2000, CheckFree's annual rent will increase by approximately
$1,550. The Company and CPA(R):14 have obtained limited recourse mortgage
financing of $7,500 that will be used to fund the construction. The loan bears
interest at an annual variable rate equal to the sum of LIBOR and 2.5% with
principal payment installments, effective August 1, 2000, based on a twenty-five
year amortization schedule. This loan will also mature on August 1, 2006 at
which time a balloon payment will be due.
The Company will account for its interest in the CheckFree limited liability
company under the equity method of accounting.
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. The Cendant lease
became effective upon completion of the property's renovation on May 17, 1999.
The Cendant lease provides for a five-year term at an initial annual rent of
$1,016 with annual stated increases of 2.5%. The minority owner of the
subsidiary Matrix Realty, Inc. ("Matrix"), is a real estate developer that
supervised the renovation.
The agreement with Matrix provides that the Company receive a preferred return
on its capital contributions, as defined, with any remaining cash flow allocated
75% to the Company. The Company has an obligation to purchase Matrix's interest
within one year of the inception of the Cendant lease. The purchase price will
be based on the fair value of the property, subject to a minimum and maximum
purchase price for the minority interest of $500 and $250, respectively.
Note 8. 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 on the option of 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 with regard
to the interpretation of the terms of the calculation. The Company and KSG have
resumed their discussions relating to the purchase price.
-11-
<PAGE> 13
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9. Segment Reporting:
The Company operates in two business segments - real estate and hotel
operations. The two segments are summarized as follows:
<TABLE>
<CAPTION>
Six months ended June 30, Real Estate Hotel Total Company
------------------------- ----------- ----- -------------
<S> <C> <C> <C>
Revenues:
1999 $ 40,329 $ 2,662 $ 42,991
1998 39,091 3,246 42,337
Operating and interest expenses:
(excluding depreciation and
amortization)
1999 $ 15,748 $ 2,211 $ 17,959
1998 14,821 2,671 17,492
Income from equity investments:
1999 $ 827 $ 827
1998 1,116 1,116
Net operating income (1):
1999 $ 19,035 $ 451 $ 19,486
1998 19,747 575 20,322
Total assets:
June 30, 1999 $850,131 $ 8,996 $859,127
December 31, 1998 804,755 8,509 813,264
</TABLE>
(1) Represents income before extraordinary items.
Note 10. Subsequent Events:
A. On July 15, 1999 the Company obtained $25,000 of limited recourse mortgage
financing collateralized by a deed of trust and a lease assignment on a
property in Tempe, Arizona net leased to America West Holdings Corporation
("America West"). The loan provides for monthly payments of interest and
principal of $180 at an annual interest rate of 7.23% based on a 25-year
amortization schedule. The loan is scheduled to mature in August 2009 at
which time a balloon payment of approximately $20,546 will be due. During the
first four loan years, the loan is prepayable only in limited circumstances
and is prepayable thereafter, subject to a prepayment premium.
On May 1, 1999, a lease with an initial term of 15 years with America West
commenced. The America West lease provides for annual rent of $3,404 with
rent increases in May 2003, 2008 and 2013 based on a formula indexed to
increases in the CPI, with each increase capped at 11.77%.
The Company owns its interest in the America West property pursuant to a
co-tenancy agreement. With the distribution of the entire $25,000 proceeds of
the mortgage loan to the Company, the Company's undivided ownership interest
in the property was adjusted to 74.583%. The Company's share of annual cash
flow (rent less mortgage debt service) is currently $924.
B. On July 26, 1999, the Company obtained $17,090 of limited recourse mortgage
financing consisting of four mortgage loans and collateralized by retail
properties leased to AutoZone, Inc. ("AutoZone"). The AutoZone mortgage loans
bear interest at an annual rate of 6.85% and mature between January 2011 and
August 2013.
-12-
<PAGE> 14
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 June 30,
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-month and six-month periods ended June 30, 1999
decreased by $367 and $254, respectively, as compared with the three-month and
six-month periods ended June 30, 1998. Excluding a gain on sale and
extraordinary charges on the extinguishment of debt, the decreases in net income
for the three-month and six-month periods were $329 and $746. The decreases were
primarily attributable to a decrease in equity income, increases in depreciation
and amortization and property expenses and, to a lesser extent, a $158 noncash
charge on a writedown to fair value on the Company's property leased to
Motorola, Inc. which is held for sale. The three-month period was also affected
by an increase in interest expense.
The decrease in equity income was due to a substantial decrease in income
from the Company's investment in the operating partnership of Meristar
Hospitality Corporation. The decrease in Meristar's earnings was due to a change
by Meristar in its method of accounting for contingent (i.e., percentage) rents
in interim financial periods. Meristar had previously accounted for contingent
rents ratably throughout the year based on its best estimates and historical
trends. In accordance with a new accounting pronouncement, Meristar is deferring
recognition of contingent rental income until specified targets on each
identified lease are met. The increase in depreciation and amortization was due
to the purchases of properties in 1998 and the completion of the America West
Holdings Corp. build-to-suit project and the renovation of the Moorestown, New
Jersey property leased to Cendant Operations, Inc. in May 1999. The increase in
property expenses was due to higher management and performance fee expenses. The
increase in interest expense for the comparable three-month periods was due to
the benefit realized during the quarter ended June 30, 1998 from using the newly
acquired credit line to pay off higher interest mortgage debt at the end of the
first quarter of 1998 and during the subsequent quarter. The Company, however,
has since that time obtained or assumed additional limited recourse mortgage
debt in connection with the acquisition of properties, including a portfolio of
properties in Houston, Texas, the property leased to Eagle Hardware & Garden,
Inc. and three properties in France in 1998. The Company also incurred increased
charges from its credit line relating to the America West property until it
obtained long-term mortgage financing in July 1999. The effects of the new
mortgage financings and interest charges from the transitional financing on the
America West property contributed to the increase in interest expense.
The decrease in hotel earnings for the comparable six-month period was due
to the transfer of the hotel operations and commencement of a lease for the
Livonia hotel effective February 1, 1999. Earnings for the remaining hotel
properties increased by 10% for the comparable six-month periods due to a 1%
increase in occupancy rates and a moderate increase in average room rental
rates. Earnings were stable for the comparable three month periods. The earnings
of the hotels are seasonal in nature with occupancy rates highest during the
third quarter.
Lease revenues (rental income and interest from direct financing leases)
have increased as the result of 1998 acquisitions and the commencement of new
leases in May 1999 with America West and Cendant Operations, Inc. Solely as a
result of these two leases annual cash flow (rent less mortgage debt service)
will increase by $1,940. In addition, the Company's share of annual cash flow
from its equity investment, purchased in June, 1999, in a property net leased to
CheckFree Corporation will initially be approximately $550. In July 1999,
DeVlieg Bullard, Inc., a lessee of two properties, filed a petition of voluntary
bankruptcy. The Company has not been informed by DeVlieg Bullard as to whether
DeVlieg Bullard will seek to affirm its lease. Annual rent from the DeVlieg
Bullard lease is $1,908.
-13-
<PAGE> 15
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 condition
since December, 31, 1998. Cash flow from operations and distributions from
equity investments of $24,740 was sufficient to fund dividends and distributions
to minority interests of $21,111 and $1,309, respectively.
The Company's investing activities included using $43,905 to complete
construction of the America West project, to complete renovations of a property
leased to Cendant, to complete an expansion of the property leased to Orbital
Sciences Corporation, to purchase a 50% equity interest in a property leased to
CheckFree Corporation and to advance additional funds for build-to-suit projects
with Federal Express Corporation and three properties in France. The Company
also used $3,676 to purchase a mortgage receivable in which it has a
participating interest. Current capital commitments include $1,400 for capital
improvements at the hotel property leased to Livho, Inc. and the two hotel
properties operated by the Company and $28,500 toward the completion of the
build-to-suit project leased to Federal Express Corporation. In connection with
CheckFree acquisition, the Company has a commitment to fund $1,781 toward the
completion of a build-to-suit project at the CheckFree property. The Company
also paid disposition fees of $1,007 to an affiliate in connection with sales of
properties in 1998.
In addition to paying dividends to shareholders and distributions, the
Company's financing activities included prepaying mortgage balances of $3,954,
paying scheduled mortgage principal installments, refinancing its property
leased to Orbital Sciences with limited recourse mortgage financing of $15,000
and drawing additional advances of $37,000 from its line of credit to increase
the total outstanding on the line of credit to $166,000 as of June 30, 1999.
Since June 30, 1999, the Company has obtained new limited recourse mortgage
financing of $25,000 and $17,000 on the America West property and properties
leased to Autozone, Inc., respectively, and is using the such proceeds to reduce
the outstanding balance on the line of credit. As of August 9, 1999, there was
approximately $153,000 outstanding on the line of credit. The Company remains in
compliance with the financial covenants relating to the credit agreement on the
line of credit.
YEAR 2000 ISSUES:
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 properly process dates. This shortcoming could result in the
failure of major systems or miscalculations causing major disruptions to
business operations. The Company has no information technology systems of its
own, but is dependent upon systems maintained by an affiliate of its Manager,
and certain other third parties including banks and its transfer agent.
The Company and its affiliates have been evaluating their readiness
relating to Year 2000 issues since 1998. The affiliates' core information
technology systems used in administering the Company's business operations have
been upgraded or replaced, as needed, to become Year 2000 compliant. These
systems include desktop computers, network servers, operating systems and
applications software. A new, compliant, integrated accounting and asset
management system is currently being installed and is expected to be functional
in the fourth quarter of this year. Compliance of these systems with Year 2000
requirements has been determined through a combination of internal testing,
where feasible, and vendor representations. Non-core information technology
systems are currently being reviewed for compliance with Year 2000 requirements.
Such systems, although not critical to the Company's business operations, are
expected to be substantially upgraded or replaced before the end of 1999.
The Company has contacted and is evaluating documentation from its
critical third party vendors and suppliers including banks, transfer agents and
telecommunications service providers regarding their Year 2000 compliance. The
responses received have generally been positive although the Company cannot be
assured that such providers have adequately considered the impact of Year 2000
issues on their systems.
-14-
<PAGE> 16
CAREY DIVERSIFIED LLC
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company has contacted its tenants regarding Year 2000 readiness and
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.
The Company will continue to monitor critical third party vendors and
suppliers to determine its vulnerability to potential disruptions caused by year
2000 issues. Limited scope contingency plans are currently being developed to
address potential disruptions of a temporary nature that may affect the Company.
Because it is not possible to anticipate all of the possible disruptions that
may be caused by Year 2000 events, there can be no assurance that the Company
will not be adversely affected if such disruptions occur.
-15-
<PAGE> 17
CAREY DIVERSIFIED LLC
PART II
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
$121,809 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 June 30, 1999 ranged
from 4.85 % to 10.00%.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $ 8,227 $ 5,172 $ 8,943 $ 7,544 $ 7,895 $ 84,028 $121,809 $122,673
Average
interest rate 7.49% 7.97% 7.85% 7.86% 7.95% 7.80%
Variable rate $ 4,864 $ 739 $175,820 $ 536 $ 565 $ 10,679 $193,203 $193,203
</TABLE>
As of June 30, 1999, the Company had no other material exposure to
market risk.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual shareholders meeting was held on June 7, 1999, at which time a
vote was held to elect two Class II directors for the company. The vote
was held through the solicitation of proxies. The following directors were
elected for a three year term:
<TABLE>
<CAPTION>
Total Shares Shares Shares
Name Of Director Voting Voting Yes Voting No
---------------- ------ ---------- ---------
<S> <C> <C> <C>
Francis J. Carey 19,743,689 19,416,808 326,881
Eberhard Faber IV 19,743,689 19,442,024 301,665
</TABLE>
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended June 30, 1999 the Company was not
required to file any reports on Form 8-K.
-16-
<PAGE> 18
CAREY DIVERSIFIED LLC
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
08/10/99 By: /s/ John J. Park
-------- ------------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
08/10/99 By: /s/ Claude Fernandez
-------- ------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,615
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,615
<PP&E> 746,302
<DEPRECIATION> 12,404
<TOTAL-ASSETS> 859,127
<CURRENT-LIABILITIES> 17,429
<BONDS> 315,012
0
0
<COMMON> 0
<OTHER-SE> 518,913
<TOTAL-LIABILITY-AND-EQUITY> 859,127
<SALES> 0
<TOTAL-REVENUES> 42,991
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,478
<LOSS-PROVISION> 458
<INTEREST-EXPENSE> 8,835
<INCOME-PRETAX> 19,486
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,486
<DISCONTINUED> 0
<EXTRAORDINARY> (39)
<CHANGES> 0
<NET-INCOME> 19,447
<EPS-BASIC> .76
<EPS-DILUTED> .76
</TABLE>
