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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
For the year ended December 31, 1998
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.
Non-affiliates held 24,511,522 Listed Shares at March 24, 1999.
There are 25,551,794 Listed Shares outstanding at March 24, 1999.
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PART I
Item 1. Business.
Carey Diversified LLC (or the "Company" or "CDC") is a real estate
investment company that acquires and owns commercial properties leased to
companies nationwide, primarily on a triple net basis. As of December 31, 1998,
Carey Diversified's portfolio consisted of 202 properties in the United States
and three properties in Europe and totaling more than 20 million square feet.
Carey Diversified's core investment strategy is to purchase and own
properties leased to a variety of companies on a single tenant net lease basis.
These leases generally place the economic burden of ownership on the tenant by
requiring them to pay the costs of maintenance, insurance, taxes, structural
repairs and other operating expenses.
Carey Diversified also generally seeks to include in its leases:
o clauses providing for mandated rent increases or periodic rent increases
tied to increases in the consumer price index or other indices or, when
appropriate, increases tied to the volume of sales at the property;
o covenants restricting the activity of the tenant to reduce the risk of a
change in credit quality;
o indemnification of Carey Diversified for environmental and other
liabilities; and
o guarantees from parent companies or other entities.
Carey Diversified was formed as a limited liability company under
the laws of Delaware on July 15, 1996. On January 1, 1998, Carey Diversified was
consolidated with nine Corporate Property Associates limited partnerships and
became the General Partner and owner of over 90% of the limited partnership
interests in each partnership. Carey Diversified's shares began trading on the
New York Stock Exchange on January 21, 1998 under the symbol "CDC". On July 15,
1998, each CPA(R) Partnership redeemed the interests of the holdover CPA(R)
limited partners and became the owner of virtually all of the limited
partnership interests in the CPA(R) Partnerships. The former general partners of
each partnership have a right to receive a portion of the distributions made by
each partnership. As a limited liability company, Carey Diversified is not
subject to federal income taxation as long as it satisfies certain requirements
relating to its operations.
Carey Management LLC (the "Manager") provides both strategic and
day-to-day management for Carey Diversified, including acquisition services,
research, investment analysis, asset management, capital funding services,
disposition of assets, investor relations and administrative services. Carey
Management also provides office space and other facilities for Carey
Diversified. The Manager has dedicated senior executives in each area of its
organization so that Carey Diversified functions as a fully integrated operating
company.
Carey Diversified's principal executive offices are located at 50
Rockefeller Plaza, New York, NY 10020 and its telephone number is (212)
492-1100. Carey Diversified's website address is http://www.careydiv.com. As of
March 15, 1999, Carey Diversified employed one person. An affiliate of Carey
Management employs 82 individuals who perform services for Carey Diversified.
Business Objectives and Strategy
Carey Diversified's objective is to increase shareholder value and
its funds from operations through prudent management of its real estate assets
and opportunistic investments. Carey Diversified 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. Carey Diversified will continue to own properties as long as it
believes ownership helps attain its objectives.
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Carey Diversified presently intends to:
o seek additional investment and other opportunities that leverage
core management skills (which include in-depth credit analysis,
asset valuation and sophisticated structuring techniques);
o optimize the current portfolio of properties through expansion of
existing properties, timely dispositions and favorable lease
modifications;
o utilize its size and access to capital to refinance existing debt;
and
o increase its access to capital.
Recent Developments
During 1998, Carey Diversified purchased properties and entered into
net leases with America West Holdings Corporation ("America West"), Federal
Express Corporation ("Federal Express") and Eagle Hardware and Garden, Inc.
("Eagle"); purchased a portfolio of seven properties in Houston, Texas and
assumed 15 leases, purchased a multi-tenant property in Pantin, France;
purchased a property in Mont Saint Aignan, France leased to Tellit Assurance
("Tellit") and purchased and completed a build-to-suit project in Rio Rancho,
New Mexico leased to Sprint Spectrum L.P. ("Sprint"). A summary of the
transactions is as follows:
On February 18, 1998, Carey Diversified and an unaffiliated limited
liability company, AWHQ LLC, acquired land in Tempe, Arizona as
tenants-in-common with 80% and 20% interests, respectively. An office building
with an attached parking garage is being constructed on the land pursuant to
construction agency and net lease agreements with America West. Total costs are
estimated to be $37,000,000. America West has the obligation for any costs in
excess of such amount necessary to complete the project. The lease provides for
an initial term of 15 years, commencing May 1, 1999, with two five-year renewal
terms. Annual rent will initially be 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%.
On March 17, 1998, the Company acquired approximately 46 acres of
land in Collierville, Tennessee upon which four office buildings are being
constructed. At the end of the construction period, the buildings will be
occupied by Federal Express. In connection with the acquisition of the land,
Carey Diversified 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 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 Company an exclusive option to acquire FEEC's
leasehold estate in the Federal Express net lease, 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, including exercise of the
option, will not exceed $77,000,000. The Company intends to exercise its option
to 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 up
to a maximum of $6,628,000. 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 tenant.
On April 23, 1998, the Company acquired a retail property in
Bellevue, Washington leased to Eagle, in exchange for 721,695 shares of Carey
Diversified. Based on the value of the shares issued, the cost of acquiring the
property was $15,065,000. The lease with Eagle has a remaining term of 19 years
and currently provides for annual rent of $1,058,000 with annual increases based
on a formula indexed to increases in the CPI. In addition, for each lease year,
Eagle is required to pay 1.50% of gross sales in excess of a stated amount. Such
percentage rents currently approximate $300,000 annually. If gross sales at the
Eagle property reach levels of $50,000,000 in any twelve month period, the
Company will be obligated to issue the sellers of
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the property an additional 17,504 shares of Carey Diversified and up to 50,001
shares if gross sales reach $57,500,000.
On May 27, 1998, the Company, through its 75% majority interest in a
newly-formed subsidiary, acquired an office building in Pantin, France, located
in the Paris metropolitan area. The purchase price for the property was
$10,269,000 and was financed by a limited recourse mortgage loan of $8,343,000.
The building is leased to four tenants. Annual rent from these leases
approximates $1,007,000. The leases have initial terms of six years and expire
between March 2004 and August 2004 with each tenant having a six-year renewal
option. The $8,343,000 mortgage loan collateralized by the Pantin property has a
15-year term with 75% of the balance amortizing over that period with a balloon
payment of approximately $2,086,000 scheduled on the maturity date. The loan
bears annual interest of 5.50% during the first five years with the rate to be
reset based on the then prevailing interest rates.
On June 10, 1998, the Company, through its 75% majority interest in
a newly-formed subsidiary, purchased land for $265,000 in Mont Saint Aignan,
France upon which an office facility was constructed pursuant to a lease with
Tellit. Construction was completed in August 1998 at a total cost of $5,458,000.
The Tellit lease has a term of 12 years and provides initially for annual rent
of approximately $554,000 with annual rent increases based on increases in the
INSEE index. Tellit has an option to terminate the lease at the end of the ninth
lease year. The lease obligations of Tellit are unconditionally guaranteed by
its parent company, Sun Alliance Assurances S.A., a subsidiary of Royal Sun
Alliance Insurance Group plc. In connection with the Tellit property purchase,
the subsidiary obtained a limited recourse mortgage of $4,401,000. The loan, has
a 15-year term and provides for an annual interest rate at a floating rate of
.85% above the Paris InterBank Offered Rate to a maximum annual interest rate of
7% during the first five years. 75% of the loan balance will amortize over the
term of the loan with a balloon payment of approximately $1,100,000 due on the
maturity date.
On June 15, 1998, the Company acquired a portfolio of seven
properties in the Houston, Texas metropolitan area from J. A. Billipp
Development Corporation and certain of its affiliates ("Billipp") for $9,845,000
in cash, assumption of $13,593,000 of mortgage debt and 62,474 shares of Carey
Diversified with a value of $1,312,000 on that date. In connection with the
purchase, Billipp assigned and the Company assumed, as lessor, 15 leases. Annual
rents from the assumed leases aggregate approximately $2,345,000. Among the
lessees are Sears Roebuck & Co., Chrysler Corporation, Lockheed Martin
Corporation, Continental Airlines, Inc. and Honeywell, Inc. The initial lease
terms are scheduled to expire between January 1999 and June 2006. Subsequent to
the purchase of the properties, the Company paid off $3,097,000 of the mortgage
debt assumed. The remaining mortgage debt of $10,496,000 is comprised of three
loans. The loans are scheduled to mature between January 2002 and October 2006
at which time balloon payments ranging from $1,442,000 to $4,918,000 will be
due. The loans bear annual interest ranging from 7.75% to 9.125% and provide for
combined monthly principal and interest payments of $98,000.
On July 1, 1998, the Company purchased land in Rio Rancho, New
Mexico for $1,120,000 upon which a building was constructed pursuant to a
construction management agreement with Teleservices Development International
LLC ("Teleservices"). In connection with the purchase, Teleservices assigned its
lessor's interest in its lease with Sprint Spectrum L.P. ("Sprint") to Carey
Diversified. The construction was completed in October 1998 at a total cost of
$7,891,000 at which time a ten-year lease with Sprint commenced. The lease
provides for two five-year renewal terms with Sprint having an option to
terminate the lease on the seventh anniversary of the lease commencement in
consideration for an amount equal to all base rent payable for the remainder of
the initial term. Annual rent during the initial term is $1,154,000.
On April 1, 1998 Simplicity Manufacturing, Inc. purchased its leased
property in Port Washington, Wisconsin for $9,684,000 pursuant to a purchase
option exercised in 1997. Annual cash flow (rent less mortgage debt service on
the property) from Simplicity was $934,000.
Since September 30, 1998, Carey Diversified has purchased an office
building in Rouen, France leased to Direction Regional des Affaires Sanitaires
et Sociales and sold a property in Pittsburgh Pennsylvania leased to NVR, Inc.
On November 16, 1998, Carey Diversified purchased the Rouen property for
$2,336,000, of which $1,788,000 was financed by a limited recourse mortgage
loan. The lease has a nine-year term and provides for annual rent of $243,000.
The NVR property was sold in December 1998 for $12,193,000 pursuant to NVR's
exercise of a purchase option. These transactions are described in Note 17 and
Note 11,
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respectively, in Item 8. Additionally the Company has obtained $11,000,000 of
mortgage financing on the Eagle property.
During 1998, Carey Diversified obtained a $185,000,000 credit
facility from which it has used $129,000,000, including $101,553,000 used to
prepay mortgage loans and meet scheduled balloon payments.
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. Carey Diversified takes advantage of 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 Carey Diversified, 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. Carey
Diversified 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. Carey Diversified
believes that the experience of the Manager's 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
Carey Diversified 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 investments by tenant, type of
facility, geographic location and tenant industry; and
(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, Carey Diversified uses
leverage when available on favorable terms. Carey Diversified has in place a
$185,000,000 credit facility, which it has used and intends to continue to use
in connection with acquiring additional properties, funding build-to-suit
projects and refinancing existing debt. As of December 31, 1998, Carey
Diversified also had approximately $139,000,000 in property level debt
outstanding. The Manager continually seeks opportunities and considers
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 Carey Diversified'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 these types of tenants, Carey Diversified can
generally charge rent that is higher than the rent charged to
tenants with recognized credit and, thereby, enhance its current
return from these properties as compared with properties leased to
companies
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whose credit potential has already been recognized by the market.
Furthermore, if a tenant's credit does improve, the value of Carey
Diversified's properties leased to that tenant 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.
This credit enhancement provides Carey Diversified with additional
financial security.
Leases with Increasing Rents. The Manager seeks to include clauses in
Carey Diversified'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
through other methods. Carey Diversified seeks to avoid entering
into leases that provide for contractual reductions in rents during
their primary term (other than reductions related to reductions in
debt service).
Properties Important to Tenant Operations. The Manager, on behalf of Carey
Diversified, generally seeks to acquire properties with operations
that are essential or important to the ongoing operations of the
tenant. Carey Diversified believes that these properties provide
better protection in the event that tenants file for bankruptcy,
because leases on properties essential or important to the
operations of a bankrupt tenant are less likely to be rejected and
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, Carey Diversified 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 Carey Diversified's leases
that require Carey Diversified's consent to certain tenant
activities 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 Carey Diversified 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 Carey
Diversified or could reduce the value of Carey Diversified's
Properties.
Diversification. The Manager tries to diversify Carey Diversified's
portfolio of properties to avoid dependence on any one particular
tenant, type of facility, geographic location and tenant industry.
By diversifying its portfolio, Carey Diversified reduces the adverse
effect on Carey Diversified of a single underperforming investment
or a downturn in any particular industry or geographic location.
The Manager employs a variety of other strategies and practices in
connection with Carey Diversified's acquisitions. These strategies include
attempting to obtain equity enhancements in connection with transactions.
Typically, these 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, Carey Diversified 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.
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
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that it satisfies Carey Diversified'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.
Carey Diversified 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 19 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.
Nathaniel S. Coolidge previously served as Senior Vice President - Head of
Bond & Corporate Finance Department of the John Hancock Mutual Life
Insurance Company. His responsibilities included overseeing $21
billion of fixed income investments for Hancock, its affiliates and
outside clients.
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.
Dr. Klein serves as an alternate member of the Investment Committee
Asset Management
Carey Diversified 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 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. Monitoring involves 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.
Competition
Carey Diversified faces competition for the acquisition of office
and industrial properties in general, and such properties net leased to major
corporations in particular, from insurance companies, credit companies, pension
funds, private individuals, investment companies and REITs. Carey Diversified
also faces competition from institutions that provide or arrange for other types
of commercial financing through private or
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public offerings of equity or debt or traditional bank financings. Carey
Diversified believes its management's experience in real estate, credit
underwriting and transaction structuring will allow Carey Diversified to compete
effectively for office and industrial properties.
Environmental Matters
Under various federal, state and local environmental laws,
regulations and ordinances, current or former owners of real estate, as well as
certain other categories of parties, may be required to investigate and clean up
hazardous or toxic chemicals, substances or waste or petroleum product or waste
(collectively, "Hazardous Materials") releases on, under, in or from such
property, and may be held liable to governmental entities or to third parties
for certain damage and for investigation and cleanup costs incurred by such
parties in connection with the release or threatened release of Hazardous
Materials. Such laws typically impose responsibility and liability without
regard to whether the owner knew of or was responsible for the presence of
Hazardous Materials, and the liability under such laws has been interpreted to
be joint and several under certain circumstances. Carey Diversified's leases
often provide that the tenant is responsible for all environmental liability and
for compliance with environmental regulations relating to the tenant's
operations.
Carey Diversified typically undertakes an investigation of potential
environmental risks when evaluating an acquisition. Phase I assessments are
performed by independent environmental consulting and engineering firms for all
acquisitions. Where warranted, Phase II assessments are performed. Phase I
assessments do not involve subsurface testing, whereas Phase II assessments
involve some degree of soil and/or groundwater testing. Carey Diversified may
acquire a property which is known to have had a release of Hazardous Materials
in the past, subject to a determination of the level of risk and potential cost
of remediation. Carey Diversified normally requires property sellers to fully
indemnify it against any environmental problem existing as of the date of
purchase. Additionally, Carey Diversified often structures its leases to require
the tenant to assume most or all responsibility for environmental compliance or
environmental remediation relating to the tenants operations and to provide that
non-compliance with environmental laws is deemed a lease default. In certain
instances, Carey Diversified may also require a cash reserve, a letter of credit
or a guarantee from the tenant, the tenant's parent company or a third party to
assure lease compliance and funding of remediation. The value of any of these
protections depends on the amount of the collateral and/or financial strength of
Carey Diversified providing the protection. Such a contractual arrangement does
not eliminate Carey Diversified's statutory liability or preclude claims against
Carey Diversified by governmental authorities or persons who are not a party to
such an arrangement. Contractual arrangements in Carey Diversified's leases may
provide a basis for Carey Diversified to recover from the tenant damages or
costs for which Carey Diversified has been found liable.
Some of the properties are located in urban and industrial areas
where fill or current or historic industrial uses of the areas may have caused
site contamination at the properties. In addition, Carey Diversified is aware of
environmental conditions at certain of the properties that require some degree
of remediation. All such environmental conditions are primarily the
responsibility of the respective tenants under their leases. Carey Diversified
and its consultants estimate that the majority of the aggregate cost of
addressing environmental conditions known to require remediation at the
properties is covered by existing letters of credit and corporate guarantees.
Carey Diversified believes that its tenants are taking or will soon be taking
all required remedial action with respect to any material environmental
conditions at the properties. However, Carey Diversified could be responsible
for some or all of these costs if one or more of the tenants fails to perform
its obligations or to indemnify Carey Diversified. Furthermore, no assurance can
be given that the environmental assessments that have been conducted at the
properties disclosed all environmental liabilities, that any prior owner did not
create a material environmental condition not known to the Company, or that a
material condition does not otherwise exist as to any of the properties.
Operating Segments
Carey Diversified operates in two operating segments, real estate
operations, with investments in the United States and Europe, and hotel
operations. For the year ended December 31, 1998, no lessee represented 10% or
more of the total operating revenue of Carey Diversified.
Factors Affecting Future Operating Results
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The provisions of the Private Securities Litigation Reform Act of
1995 (the "Act") became effective in December 1995. The Act provides a "safe
harbor" for companies which make forward-looking statements providing
prospective information. The "safe harbor" under the Act relates to protection
for companies with respect to litigation filed on the basis of such
forward-looking statements.
Carey Diversified wishes to take advantage of the "safe harbor"
provisions of the Act and is therefore including this section in its Annual
Report on Form 10-K. The statements contained in this Annual Report, if not
historical, are forward-looking statements and involve risks and uncertainties
which are described below that could cause actual results to differ materially
from the results, financial or otherwise, or other expectations described in
such forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
Carey Diversified's future results may be affected by certain risks
and uncertainties including the following:
Single Tenant Leases Increases Exposure to Failure of Tenant
We focus our acquisition activities on net leased real properties or
interests therein. Due to the fact that our net leased real properties are
leased to single tenants, the financial failure of or other default by a tenant
resulting in the termination of a lease is likely to cause a reduction in the
operating cash flow of Carey Diversified and might decrease the value of the
property leased to such tenant.
Dependence on Major Tenants
Revenues from several of our tenants and/or their guarantors
constitute a significant percentage of our consolidated rental revenues. Our
five largest tenants/guarantors, which occupy 11 properties, represent 23% of
annualized revenues. The default, financial distress or bankruptcy of any of the
tenants of such Properties could cause interruptions in the receipt of lease
revenues from such tenants and/or result in vacancies in the respective
Properties, which would reduce our revenues until the affected property is
re-let, and could decrease the ultimate sale value of each such property. Upon
the expiration of the leases that are currently in place with respect to these
Properties, we may not be able to re-lease the vacant property at a comparable
lease rate or without incurring additional expenditures in connection with such
re-leasing.
There Are No Limits on the Amounts We Can Borrow
We have incurred, and may continue to incur, indebtedness (secured
and unsecured) in furtherance of our activities. Neither the Operating Agreement
nor any policy statement formally adopted by the Board of Directors limits
either the total amount of indebtedness or the specified percentage of
indebtedness (based upon the total market capitalization of Carey Diversified)
which may be incurred. Accordingly, we could become more highly leveraged,
resulting in increased risk of default on our obligations and in an increase in
debt service requirements which could adversely affect our financial condition
and results of operations and our ability to pay distributions. Our current
unsecured revolving credit facility with Chase Manhattan Bank, as agent,
contains various covenants which limit the amount of secured and unsecured
indebtedness we may incur.
Possible Inability to Refinance Balloon Payment on Mortgage Debt
A significant number of our properties are subject to mortgages with
balloon payments. Scheduled balloon payments for the next five years are as
follows:
<TABLE>
<S> <C>
1999 - $ 8 million;
2001 - $13 million;
2003 - $ 3 million;
</TABLE>
Our credit facility matures in 2001. As of December 31, 1998, the Company had
$129,000,000 drawn from the line of credit. An additional $29,000,000 was drawn
from the line of credit through March 22, 1999. Our ability to make such balloon
payments will depend upon our ability either to refinance the mortgage related
thereto,
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<PAGE> 10
invest additional equity in the property or to sell the related property. Our
ability to accomplish these goals will be affected by various factors existing
at the relevant time, such as the state of the national and regional economies,
local real estate conditions, available mortgage rates, our equity in the
mortgaged properties, our financial condition, the operating history of the
mortgaged properties and tax laws.
There are Uncertainties Relating to Lease Renewals and Re-letting of Space
We will be subject to the risks that, upon expiration of leases, the
premises may not be re-let or the terms of re-letting (including the cost of
concessions to tenants) may be less favorable than current lease terms. If we
are unable to re-let promptly all or a substantial portion of our properties or
if the rental rates upon such re-letting were significantly lower than current
rates, our net income and ability to make expected distributions to our
shareholders would be adversely affected. There can be no assurance that we will
be able to retain tenants in any of our properties upon the expiration of their
leases. Our scheduled lease expirations, as a percentage of annualized revenues
for the next five years, are as follows:
<TABLE>
<S> <C>
1999 - 3%
2000 - 2%
2001 - 3%
2002 - 1%
2003 - 4%
</TABLE>
Possible Liability Relating to Environmental Matters
We own industrial and commercial properties and are subject to the
risk of liabilities under federal, state and local environmental laws. Some of
these laws could impose the following on Carey Diversified:
o Responsibility and liability for the cost of investigation and removal or
remediation of hazardous substances released on our property, generally
without regard to our knowledge or responsibility of the presence of the
contaminants;
o Liability for the costs of investigation and removal or remediation of
hazardous substances at disposal facilities for persons who arrange for
the disposal or treatment of such substances; and
o Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
We May be Unable to Make Acquisitions on an Advantageous Basis
A significant element of our business strategy is the enhancement of
our portfolio through acquisitions of additional properties. The consummation of
any future acquisition will be subject to satisfactory completion of our
extensive analysis and due diligence review and to the negotiation of definitive
documentation. There can be no assurance that we will be able to identify and
acquire additional properties or that we will be able to finance acquisitions in
the future. In addition, there can be no assurance that any such acquisition, if
consummated, will be profitable for us. If we are unable to consummate the
acquisition of additional properties in the future, there can be no assurance
that we will be able to increase the cash available for distribution to our
shareholders.
We May Suffer Uninsured Loss
We require most of our tenants to carry comprehensive liability,
fire, extended coverage [and carry rent loss insurance] on most of our
Properties, with policy specifications and insured limits customarily carried
for similar properties. Carey Diversified carries similar insurance coverages
for properties if the tenant is not required to do so. Carey Diversified also
has obtained contingent property and liability coverages. However, there are
certain types of losses (such as due to wars or acts of God) that generally are
not insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, we could
lose capital invested in a property, as well as the anticipated future revenues
from a property, while remaining obligated for any mortgage indebtedness or
other financial obligations related to the property. Any such loss would
adversely affect our financial condition. We believe that the Properties are
adequately insured in accordance with industry standards.
-9-
<PAGE> 11
Changes in Market Interest Rates Could Cause Our Stock Price to Go Down
The trading prices of equity securities issued by real estate
companies have historically been affected by changes in broader market interest
rates, with increases in interest rates resulting in decreases in trading
prices, and decreases in interest rates resulting in increases in such trading
prices. An increase in market interest rates could therefore adversely affect
the trading prices of any equity securities issued by us.
We Face Intense Competition
The real estate industry is highly competitive. Our principal
competitors include national REITs, many of which are substantially larger and
have substantially greater financial resources than us.
The Value of our Real Estate is Subject to Fluctuation
We are subject to all of the general risks associated with the
ownership of real estate. In particular, we face the risk that rental revenue
from the properties will be insufficient to cover all corporate operating
expenses and debt service payments on indebtedness we incur. Additional real
estate ownership risks include:
o Adverse changes in general or local economic conditions,
o Changes in supply of or demand for similar or competing properties,
o Changes in interest rates and operating expenses,
o Competition for tenants,
o Changes in market rental rates,
o Inability to lease properties upon termination of existing leases,
o Renewal of leases at lower rental rates,
o Inability to collect rents from tenants due to financial hardship,
including bankruptcy
o Changes in tax, real estate, zoning and environmental laws that may have
an adverse impact upon the value of real estate,
o Uninsured property liability, property damage or casualty losses,
o Unexpected expenditures for capital improvements or to bring properties
into compliance with applicable federal, state and local laws, and
o Acts of God and other factors beyond the control of our management.
Our Systems May Not Be Year 2000 Compliant
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. Substantially This shortcoming
could result in the failure of major systems or miscalculations causing major
disruptions to business operations. The Company has no computer systems of its
own, but is dependent upon the systems maintained by an affiliate of its Manager
and certain other third parties including its bank and transfer agent.
The Company and its affiliates are actively evaluating their
readiness relating to the Year 2000 issue. In 1998, the Company, its Manager,
and affiliates commenced an assessment of their local area network of personal
computers and related equipment and are in the process of replacing or upgrading
the equipment that has been identified as not being Year 2000 compliant. The
program is expected to be substantially completed in the second quarter of 1999.
The Company and its affiliates have also engaged outside consultants experienced
in detecting and addressing Year 2000 issues, and they currently are remediating
certain of the affiliate's applications and systems.
At the same time, the Company, its Advisor, and affiliates are
evaluating their applications software, all of which are commercial "off the
shelf" programs that have not been customized. During 1998, the Company
commenced a project to select a comprehensive integrated real estate accounting
and asset management software package to replace its existing applications. A
commercial Windows-based integrated accounting and asset management based
application is being tested and installation is scheduled to be completed during
the third quarter of 1999. This software has been designed to use four digits to
define a year. Because the Company's primary operations consist of investing in
and receiving rents on long-term net leases of real estate, while the failure of
the Manager and its affiliates to correct fully Year 2000 issues could disrupt
its
-10-
<PAGE> 12
administrative operations, the resulting disruptions would not likely have a
material impact on the Company's results of operations, financial condition or
liquidity.
Contingency plans to address potential disruptions are in the
process of being developed. The Company's share of costs associated with
required modifications to become Year 2000 compliant is not expected to be
material to the Company's financial position. The Company's share of the
estimated total cost of the Year 2000 project is expected to be approximately
$280,000, of which $215,000 have been incurred to date.
Although the Company believes that it will address its internal Year
2000 issues in a timely manner, there is a risk that the inability of
third-party suppliers and lessees to meet Year 2000 readiness issues could have
an adverse impact on the Company. The Company and its affiliates have identified
their critical suppliers and are requiring that these suppliers communicate
their plans and progress in addressing Year 2000 readiness. The most critical
processes provided by third-party suppliers are the Company's bank and transfer
agent. The Company's operations may be significantly affected if such providers
are ineffective or untimely in addressing Year 2000 issues.
The Company contacted each of its lessees regarding Year 2000
readiness and has emphasized the need to address Year 2000 issues. Generally,
lessees 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 lessees rather than the Company. The major risk to the
Company is that Year 2000 issues have such an adverse effect on the financial
condition of a lessee 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.
We Depend on Key Personnel for Our Future Success
We depend on the efforts of the executive officers and key employees
of the merger. The loss of the services of these executive officers and key
employees could have a material adverse effect on our operations.
The risk factors may have affected, and in the future could affect,
our actual operating and financial results and could cause such results to
differ materially from those in any forward-looking statements. You should not
consider this list exhaustive. New risk factors emerge periodically, and we
cannot completely assure you that the factors we describe above list all
material risks to Carey Diversified at any specific point in time. We have
disclosed many of the important risk factors discussed above in our previous
filings with the Securities and Exchange Commission.
-11-
<PAGE> 13
Item 2. PROPERTIES
Set forth below is certain information relating to the Company's properties
owned as of March 15, 1999:
<TABLE>
<CAPTION>
Property Square Current Increase Lease Maximum
Lessee/Guarantor Location Footage Annual Rent Factor Expiration Term
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dr Pepper Bottling Company of Texas Irving, TX 459,497
Houston, TX 262,450
-----------------------------
721,947 $3,998,000 CPI Jun-14 Jun-14
Detroit Diesel Corporation Detroit, MI 2,730,750 3,658,060 PPI Jun-10 Jun-30
Sybron International Corporation Dubuque, IA 144,300 496,161
Glendora, CA 25,000 404,401
Portsmouth, NH 95,000 588,285
Rochester, NY 221,600 1,079,369
Romulus, MI 220,000 1,058,694
------------------------------
705,900 3,626,910 CPI Dec-13 Dec-38
Gibson Greetings, Inc. Cincinnati, OH 593,340
Berea, KY 601,500
-----------------------------
1,194,840 3,100,000 Stated Nov-13 Nov-23
Livho, Inc. Livonia, MI 158,000 2,923,038 Stated Jan-08 Jan-28
Quebecor Printing Inc. Doraville, GA 432,559 1,522,498 CPI Dec-09 Dec-34
Olive Branch, MS 270,500 980,643 CPI Jun-08 Jun-33
-----------------------------
703,059 2,503,141
Furon Company New Haven, CT 110,389
Mickleton, NJ 86,175
Aurora, OH 147,848
Mantua, OH 150,544
Bristol, RI 105,642
Aurora, OH 26,692
-----------------------------
627,290 2,416,050 PPI Jul-12 Jul-37
AutoZone, Inc. 31 Locations: 185,990 1,321,568 % Sales Jan-11 Feb-26
NC, TX, AL, GA,
IL, LA, MO
AutoZone, Inc. 13 Locations: 70,425 393,599 % Sales Aug-12 Aug-37
FL, LA, MO,
NC, TN
AutoZone, Inc. 11 Locations: 54,000 524,390 % Sales Aug-13 Aug-38
FL, GA, NM,
SC, TX
-----------------------------
310,415 2,239,557(5)
</TABLE>
-12-
<PAGE> 14
<TABLE>
<CAPTION>
Property Square Current Increase Lease Maximum
Lessee/Guarantor Location Footage Annual Rent Factor Expiration Term
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thermadyne Holdings Corp. Industry, CA 325,800 $2,234,191 CPI Feb-10 Feb-35
The Gap, Inc. Erlanger, KY 391,000 1,252,636 CPI Feb-03 Feb-43
Erlanger, KY 362,750 952,749 CPI Feb-03 Feb-43
-----------------------------
753,750 2,205,385
Orbital Sciences Corporation Chandler, AZ 280,000 2,153,740 CPI Sep-09 Sep-29
Copeland Beverage, Inc. Los Angeles, CA 390,000 1,800,000 CPI Apr-07 Apr-07
United States Postal Service Bloomingdale, IL 116,000 1,089,982 Stated Apr-06 Apr-06
Comark Inc. Bloomingdale, IL 36,967 268,396 Stated May-00 May-00
-----------------------------
152,967 1,358,378
Lockheed Martin Corporation King of Prussia, PA 88,578 974,358 Market Jul-03 Jul-08
Glen Burnie, MD 45,804 333,333 Stated Apr-01 Apr-21
-----------------------------
134,382 1,307,691
AP Parts International, Inc. Toledo, OH 1,160,000 1,617,252 CPI Dec-07 Dec-22
Unisource Worldwide, Inc. Commerce, CA 411,579 1,292,800 Stated Apr-10 Apr-30
Anchorage, AK 44,712 312,700 Stated Dec-09 Dec-29
-----------------------------
456,291 1,605,500
Brodart Company Williamsport, PA 309,030
Williamsport, PA 212,201
-----------------------------
521,231 1,519,229 CPI Jun-08 Jun-28
Cleo Inc/CSS Industries, Inc.. Memphis, TN 1,006,566 1,500,000 CPI Dec-05 Dec-15
Peerless Chain Company Winona, MN 357,760 1,463,425 CPI Jun-11 Jun-26
Information Resources, Inc. Chicago, IL 159,600
Chicago, IL 92,400
-----------------------------
252,000 1,457,934(6) CPI Oct-10 Oct-15
Red Bank Distribution, Inc. Cincinnati, OH 589,150 1,400,567 CPI Jul-15 Jul-35
High Voltage Engineering Corp. Lancaster, PA 70,712 679,088
Sterling, MA 70,000 649,544
-----------------------------
140,712 1,328,632 CPI Nov-13 Nov-30
Duff-Norton Company, Inc. Forrest City, AR 265,000 1,164,280 CPI Dec-12 Dec-32
Sprint Spectrum, Inc. Albuquerque, NM 74,714 1,154,331 CPI Sep-08 Sep-08
Eagle Hardware & Garden, Inc. Bellevue, WA 127,360 1,086,864(5) CPI & Sep-17 Sep-17
%sales
</TABLE>
-13-
<PAGE> 15
<TABLE>
<CAPTION>
Property Square Current Increase Lease Maximum
Lessee/Guarantor Location Footage Annual Rent Factor Expiration Term
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lockheed Martin Services Group Houston, TX 60,364 $ 526,270 Stated Jul-04 Jul-04
Johnson Engineering Corporation Houston, TX 48,214 476,964 Stated Jun-03 Jun-03
-----------------------------
108,578 1,003,234
DeVlieg-Bullard, Inc. McMinnville, TN 276,991
Frankenmuth, MI 132,400
-----------------------------
409,391 953,803 CPI Apr-06 Apr-26
Anthony's Manufacturing Company, San Fernando, CA 95,420
Inc. San Fernando, CA 7,220
San Fernando, CA 40,285
San Fernando, CA 39,920
-----------------------------
182,845 945,444 CPI May-07 May-12
United Stationers Supply Company New Orleans, LA 59,000
Memphis, TN 75,000
San Antonio, TX 63,321
-----------------------------
197,321 915,834 CPI Mar-10 Mar-30
Wal-Mart Stores, Inc. West Mifflin, PA 118,125 891,129 CPI Jan-07 Jan-37
Hotel Corporation of America Topeka, KS 117,590 842,184 Stated Sep-03 Sep-03
Pre Finish Metals Incorporated Walbridge, OH 313,704 828,506 CPI Jun-03 Jun-28
IMO Industries, Inc. Garland, TX 150,203 822,750 Stated Sep-02 Sep-07
Continental Casualty Company College Station, TX 97,567 771,666 Stated Dec-99 Oct-03
Verifications Nationales et
Internationales des Imports (2) Pantin, France
National Pour L'Emploi (2) Pantin, France
Direction Departmentale du Travail et
de L'Equipment (2) Pantin, France
Hoechst Roussel Vet (2) Pantin, France
-----------------------------
51,714 755,358 INSEE(4) Jun-04 Jun-04
Winn-Dixie Stores, Inc. Montgomery, AL 32,690 191,534 % Sales Mar-08 Mar-38
Panama City, FL 34,710 170,399 % Sales Mar-08 Mar-38
Leeds, AL 25,600 144,713 % Sales Mar-04 Mar-34
Bay Minette, AL 34,887 128,472 % Sales Jun-07 Jun-37
Brewton, AL 30,625 134,500 % Sales Oct-10 Oct-30
------------------------------
158,512 769,618(5)
AT&T Corporation Bridgeton, MO 55,810 757,846 Stated Nov-01 Nov-11
</TABLE>
-14-
<PAGE> 16
<TABLE>
<CAPTION>
Property Square Current Increase Lease Maximum
Lessee/Guarantor Location Footage Annual Rent Factor Expiration Term
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NV Ryan, Inc.. Thurmont, MD 150,468
Farmington, NY 29,273
-----------------------------
179,741 $ 729,114 CPI Mar-14 Mar-30
Harcourt General, Inc. Burnsville, MN 31,837 467,500 % Sales Jul-06 Jul-31
Canton, MI 29,818 233,750 % Sales Jul-05 Jul-30
-----------------------------
61,655 701,250(5)
KSG, Inc. St. Louis, MO 148,100 690,849 CPI (9)
Bell South Entertainment, Inc. Ft. Lauderdale, FL 80,540 655,066(10) CPI Jul-06 Jul-09
Family Dollar Service, Inc. Salisbury, NC 311,182 662,400 Stated Jan-00 Jan-00
Motorola, Inc. Urbana, IL 46,350 600,000 Stated (9)
Various Broomfield, CO 60,660 267,491 CPI May-02 May-02
Broomfield, CO 40,440 268,122 CPI Dec-01 Dec-01
------------------------------
101,100 535,613
Western Union Financial Services, Inc. Bridgeton, MO 78,080 573,221 Stated Nov-01 Nov-11
Exide Electronics Corporation Raleigh, NC 27,770 572,130 CPI Jul-06 Jul-06
Lockheed Martin Corporation Oxnard, CA 142,796 369,600 Stated Aug-00 Aug-02
Merchants Home Delivery, Inc. Oxnard, CA 22,716 189,000(10) Stated Jan-04 Jan-14
-----------------------------
165,512 558,600
United Space Alliance LLC Webster, TX 88,200 505,020 Stated Sep-06 Sep-06
Caleb Brett USA, Inc. Webster, TX 3,600 34,992 Stated Jun-00 Jun-00
-----------------------------
91,800 540,012
Excel Communications, Inc. Reno, NV 53,158 532,802 Stated Dec-06 Dec-20
Stoody Deloro Stellite, Inc./ Goshen, IN 54,270 500,212 CPI Feb-10 Feb-35
DS Group Limited
Wozniak Industries, Inc. Schiller Park, IL 84,197 497,400 Stated Aug-05 Dec-23
Titan Corporation San Diego, CA 166,403 485,084(7) CPI Jul-07 Jul-31
Swiss-M-Tex, L.P. Travelers Rest, SC 178,693 480,000 CPI Aug-07 Aug-17
CSK Auto, Inc. Denver, CO 8,129 58,910 CPI Jan-08 Jan-38
Glendale, AZ 3,406 66,720 CPI Jan-02 Jan-22
Apache Junction, AZ 5,055 49,348 CPI Jan-02 Jan-22
Casa Grande, AZ 11,588 64,590 CPI Jan-02 Jan-22
Scottsdale, AZ 8,000 135,100 CPI Jan-02 Jan-22
Mesa, AZ 3,401 68,304 CPI Jan-02 Jan-22
-----------------------------
39,579 442,972
</TABLE>
-15-
<PAGE> 17
<TABLE>
<CAPTION>
Property Square Current Increase Lease Maximum
Lessee/Guarantor Location Footage Annual Rent Factor Expiration Term
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tellit Assurances (2) Rouen, France 27,593 $ 415,283 INSEE(4) Aug-04 Aug-09
Childtime Childcare, Inc. 12 Locations: 83,694 413,638(8) CPI Jan-16 Jan-41
AZ, CA, MI,TX
Petrocon Engineering, Inc. Beaumont, TX 48,700 363,516 Stated Jan-99 Jan-00
Olmstead Kirk Paper Company Beaumont, TX 5,760 36,000 Stated Jan 03 Jan 03
-----------------------------
54,460 399,516
Yale Security Inc. Lemont, IL 130,000 399,000 Stated Apr-11 Apr-11
Penn Crusher Corporation Cuyahoga Falls, OH 80,445 197,234
Broomall, PA 22,810 180,000
-----------------------------
103,255 377,234 Market Jan-05 Jan-20
B&G Contract Packaging, Inc. Maumelle, AR 160,000 339,120 Stated Dec-99 Dec-03
Honeywell, Inc. Houston, TX 32,320 211,200
Honeywell, Inc. (2 acres land) Houston, TX 124,284
-----------------------------
32,320 335,484 Stated Sep-02 Sep-02
Adaptive Controls, Inc. Houston, TX 18,058 104,280 Stated Nov-00 Nov-00
AdPlex, Inc. Houston, TX 13,698 92,280 Stated May-01 May-01
Work Ready, Inc Houston, TX 7,306 59,640 Stated Aug-01 Aug-01
Chrysler Corporation Houston, TX 7,248 18,844 Stated Apr-99 Apr-99
The Terminex International Company, Inc. Houston, TX 3,330 25,980 Stated Sep-00 Sep-00
-----------------------------
49,640 301,024
Kobacker Stores, Inc. Fontana, CA 4,500
Rialto, CA 4,500
Reynoldsburg, OH 3,840
Tallmadge, OH 4,000
Anderson, IN 4,500
Cuyahoga Falls, OH 3,792
Marion, OH 3,900
Fremont, OH 4,000
Merced, CA 4,500
Sacramento, CA 4,400
Stockton, CA 4,500
Sacramento, CA 4,400
-----------------------------
50,832 267,314 None Dec-06 Dec-36
Sears Roebuck and Co. Houston, TX 21,069 200,372 Stated Sep-05 Sep-05
Bike Barn Holding Company, Inc. Houston, TX 6,216 59,160 Stated Aug-05 Aug-05
-----------------------------
27,285 259,532
Direction Regional des Affaires
Sanitaires et Sociales (3) Rouen, France 25,228 239,122 INSEE(4) Oct-04 Oct-04
Bell Atlantic Corporation Milton, VT 30,624 231,000 Stated Feb-03 Feb-13
</TABLE>
-16-
<PAGE> 18
<TABLE>
<CAPTION>
Property Square Current Increase Lease Maximum
Lessee/Guarantor Location Footage Annual Rent Factor Expiration Term
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Northern Tube, Inc. Pinconning, MI 220,588 $219,282 CPI Dec-07 Dec-22
Penberthy Products, Inc. Prophetstown, IL 161,878 209,507 CPI Apr-06 Apr-26
Allied Plywood Corporation Manassas, VA 60,446 200,683 Stated Mar-02 Mar-02
Rochester Button Company South Boston, VA 43,387
Kenbridge, VA 38,000
-----------------------------
81,387 180,000 None Dec-16 Dec-36
Sunds Defibrator Woodhandling, Inc. Carthage, NY 76,000 144,239 CPI Aug-05 Jul-07
Federal Express Corporation Corpus Christi, TX 30,212 79,160 Market May-99 May-09
College Station, TX 12,080 63,610 Market Feb-02 Feb-09
-----------------------------
42,292 142,770
Continental Airlines, Inc. Houston, TX 25,125 132,000 Stated Jul-03 Jul-03
Pepsi-Cola Metropolitan Bottling
Company, Inc. Houston, TX 17,725 99,899 Stated Oct-04 Oct-04
Popular Stores, Inc. Scottsdale, AZ 11,800 94,266(5) % Sales Jul-00 Jul-10
Stair Pans of America, Inc. Fredericksburg, VA 45,821 92,055 Stated Jul-07 Jul-07
Lockheed Martin Services. Webster, TX 10,960 82,200 Stated Jul-00 Jul-00
Lutz Bagels LLC Canton, OH 4,800 76,800 Stated Dec-07 Dec-17
Penn Virginia Coal Company Duffield, VA 12,804 74,000 CPI Nov-04 Nov-04
Cents Stores, Inc. Mesa, AZ 11,039 55,485 Stated Jan-13 Jan-13
Family Bargain Center Colville, WA 15,300 50,733 CPI Jan-00 Jan-15
The Crafters Mall, Inc. Glendale, AZ 11,760 47,964 None Quarterly
Renewals
Capin Mercantile Corporation Silver City, NM 11,280 36,660 None May-00 May-05
Kinko's of Ohio, Inc. Canton, OH 1,700 26,010(5) % Sales Aug-00 Aug-10
Reclamation Foods, Inc. Apache Junction, AZ 9,945 24,029 CPI Jun-01 Jun-06
Wexler & Wexler New Orleans, LA 1,641 19,692(5) % Sales Oct-05 Oct-15
Scallon's Carpet Castle, Inc. Casa Grande, AZ 3,134 18,480 Stated Dec-03 Dec-03
</TABLE>
-17-
<PAGE> 19
<TABLE>
<CAPTION>
Property Square Current Increase Lease Maximum
Lessee/Guarantor Location Footage Annual Rent Factor Expiration Term
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. Jones Greensboro, NC 1,700 $ 3,575 CPI Apr-99 Apr-01
Alpena Holiday Inn Alpena, MI 96,333 785,530(1)
Petoskey Holiday Inn Petoskey, MI 83,462 383,469(1)
</TABLE>
(1) The Company operates a hotel business at this property. Dollar amounts are
net operating income for 1998 for the hotel business.
(2) CD owns 75% of this property and rents are collected in French Francs,
conversion rate at December 31, 1998 used.
(3) CD owns 99% of this property and rents are collected in French Francs,
conversion rate at December 31, 1998 used.
(4) INSEE construction index, an index published quarterly by the French
Government.
(5) Current annual rent amount before any percentage of sales rent.
(6) Current annual rent represents the 33.33% ownership interest in this
property.
(7) Current annual rent represents the 18.54% ownership interest in this
property.
(8) Current annual rent represents the 33.93% ownership interest in this
property.
(9) Purchase option has been exercised by the lessee.
(10) Annualized rent for leases commencing after April 1, 1999.
-18-
<PAGE> 20
Item 3. Legal Proceedings.
As of the date hereof, the Company is not a party to any material
pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended
December 31, 1998 to a vote of security holders, through the solicitation of
proxies or otherwise.
-19-
<PAGE> 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Listed Shares are listed on the New York Stock Exchange. Trading commenced
on January 21, 1998.
As of December 31, 1998 there were 22,224 shareholders of record.
Dividend Policy
Quarterly cash dividends are usually declared in December, March, June and
September and paid in January, April, July and October. Quarterly cash dividends
have been paid since April 1998.
Cash dividends declared per share:
<TABLE>
<CAPTION>
Quarter 1998
- ------- ----
<S> <C>
1 $ .4125
2 .4125
3 .4125
4 .4125
----------
Total $ 1.6500
</TABLE>
Listed Shares
The high, low and closing prices on the New York Stock Exchange for a
Listed Share for each fiscal quarter of 1998 were as follows (in dollars):
<TABLE>
<CAPTION>
1998 High Low Close
- ---- ---- --- -----
<S> <C> <C> <C>
First Quarter $22.3750 $20.1250 $20.1250
Second Quarter 22.2500 19.7500 19.7500
Third Quarter 20.9375 18.5000 19.8750
Fourth Quarter 21.3125 18.1875 19.6875
</TABLE>
-20-
<PAGE> 22
Item 6. Selected Financial Data.
The following table sets forth selected combined operating and
balance sheet information on a combined historical basis for the CPA(R)
Partnerships for the years 1994 through 1997. The 1998 data sets forth
consolidated operating and balance sheet data on a consolidated basis for the
Company which commenced operations on January 1, 1998. The following information
should be read in conjunction with the financial statements and notes thereto
for the Company included in Item 8. The combined historical operating and
balance sheet information of the CPA(R) Partnerships as of December 31, 1997,
1996, and 1995, and for the years ended December 31, 1997, 1996, 1995, and 1994
have been derived from the historical Combined Financial Statements audited by
PricewaterhouseCoopers LLP, independent accountants. The combined historical
balance sheet information as of December 31, 1994, has been derived from the
unaudited combined financial statements of the Company.
(in thousands, except per share data)
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
------------ ---------------------------------------------------------
Operating Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 85,330 $ 96,271 $ 101,576 $ 107,946 109,137
Income before extraordinary items 39,085 40,561 45,547 49,363 38,456
Basic and diluted earnings per Listed Share 1.55
Cash distributions (1) 30,820 43,620 34,173 57,216 35,589
Cash provided by operating activities 51,944 51,641 53,317 63,276 45,131
Cash (used in) provided by investing
activities (71,525) (273) 19,545 24,327 37,136
Cash provided by (used) in financing
activities 6,668 (61,335) (72,020) (105,578) (70,045)
Cash dividends declared per Listed Share 1.65
Balance Sheet Data:
Real estate, net (2) $ 453,181 $ 240,498 $ 271,660 $ 301,505 $ 330,671
Investment in direct financing leases 295,826 216,761 215,310 218,922 244,746
Total assets 813,264 523,420 544,728 582,324 659,047
Long-term obligations (3) 254,827 150,907 187,414 233,300 284,291
</TABLE>
(1) 1998 amount represents cash distributions to holders of Listed Shares.
(2) Includes real estate accounted for under the operating method, operating
real estate and real estate under construction leased to others net of
accumulated depreciation.
(3) Represents mortgage and note obligations and deferred acquisition fees due
after more than one year.
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<PAGE> 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(dollar amounts in thousands)
Overview
The following discussion and analysis of financial condition and
results of operations of Carey Diversified LLC ("CDC") should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1998. The following discussion includes forward looking
statements. Forward looking statements, which are based on certain assumptions,
describe future plans, strategies and expectations of CDC. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievement of CDC to be materially different
from the results of operations or plan expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by CDC that the results or conditions described in such
statements or objectives and plans of CDC will be achieved.
CDC was organized to combine and continue the business of the nine
Corporate Property Associates real estate limited partnerships (the "CPA(R)
Partnerships") and began trading on the New York Stock Exchange on January 21,
1998. CDC owns and manages a diverse portfolio of real properties, generally
leased to corporate tenants under long-term net leases. CDC intends to continue
to expand the existing net lease portfolio and, as appropriate, engage in new
lines of business. During 1998, CDC expanded its scope of operations into Europe
with three property acquisitions in France.
From 1979 through 1990, 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 each limited partner 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 no
additional equity would be raised after the initial offering, nor, would there
be 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 CPA(R)
Partnership disposed of properties, its asset base and income from continuing
operations decreased. Further, the stated objective of each CPA(R) Partnership
was to use its cash flow to pay distributions at an increasing rate rather than
for reinvestment. In contrast, CDC is an infinite life entity that has the
ability to raise additional capital and acquire additional properties either
through stock or debt offerings or by exchanging shares in CDC for properties.
Accordingly, the comparison of historical results of operations for 1997 and
1996 with 1998 is limited because of (i) the limitations imposed by the
Partnership structure as reflected in 1997 and 1996 and (ii) the change in the
basis of accounting as of January 1, 1998 due to the application of purchase
accounting.
The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, Disclosure about Segments of
Enterprise and Related Information, which is effective for fiscal years
beginning after December 15, 1997. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. CDC's management evaluates the performance of its
portfolio as a whole, but allocates its resources between two operating
segments: Real estate operations, with domestic and international investments,
and hotel operations.
In 1991 and 1992, the CPA(R) Partnerships assumed the operations of
five hotels when the financial difficulties of two tenant companies resulted in
lease terminations on these properties. Accordingly, the decision to engage in
the hotel operating segment was created by the inability of the tenant companies
to meet their obligations rather than by a decision by management to allocate
resources for the purpose of engaging in a new business. In 1996, CDC sold one
of the hotels and exchanged its ownership interest in another of its hotels for
limited partnership units in the operating partnership of a publicly-traded real
estate investment trust. During 1998, the operations of its hotel in Livonia,
Michigan were transferred to an affiliate, which entered into a long-term net
lease with CDC. With the transfer of the Livonia hotel, CDC has reduced its
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<PAGE> 24
hotel operating segment to two hotel properties. To retain publicly-traded
partnership status for federal tax purposes, CDC is limited in the amount of
gross revenues it can generate from actively participating in operating
businesses. CDC, therefore, intends to allocate to its hotel operating segment
only resources sufficient to maintain the hotel business at its two existing
properties, and does not intend to expand the hotel business. Over the past
three years, hotel revenues as a percentage of overall revenues has decreased
from 21.6% to 7.4%. CDC has not made a strategic decision to discontinue its
activities in this operating segment, but it is actively seeking to minimize
revenues from operating businesses.
During 1998, CDC purchased three properties in France. CDC is
actively evaluating other opportunities internationally and expects its
activities outside of the United States to grow significantly over the next
several years. Because the first of the acquisitions in France occurred in June
1998, international real estate investments did not significantly contribute to
1998 revenues or earnings.
Results of Operations:
Year-Ended December 31, 1998 Compared to Year-Ended December 31,
1997
Net income for 1998 is not fully comparable to net income for 1997.
CDC commenced operations on a consolidated basis as an ongoing and growing
business on January 1, 1998, while the prior year's reflect the results of a
combination of static and liquidating Partnership portfolios.
In addition, the results for 1997 reflect several nonrecurring
items. During that period, CDC recognized other income of $2,859 primarily in
connection with bankruptcy claims and revenues of $1,600 in excess of market
rates for a property under a lease with Advanced System Applications, Inc.
("ASA") that ended in June 1997. That lease represented 3% of 1997 revenues
(rental income and interest income from direct financing leases), and had been
renegotiated in 1994 to allow the lessee to terminate the lease in 1997 rather
than 2003. The rents received during the abbreviated term were intended to
provide a significant portion of the rents that would have been due over the
remainder of the original lease term.
Lease revenues decreased by $319 for 1998. The decrease was
primarily a result of the termination of the ASA lease in June 1997 and the
termination of the Hughes Markets, Inc. lease. Lease revenues from ASA and
Hughes for 1997 were $2,267 and $5,784, respectively. This was offset, in part,
by $2,958 from lease revenues in 1998 from rentals on the Livonia, Michigan
hotel property, which has been leased since February 1, 1998 and an increase of
annualized revenue of $6,653 from leases on the properties acquired in 1998 with
(i) Eagle Hardware & Garden, Inc., (ii) properties in Houston, Texas,(iii) the
French properties and (iv) the commencement of the lease with Sprint Spectrum LP
subsequent to the completion of construction.
On April 30, 1998, CDC's two-year extension term with Hughes Markets
for a dairy processing plant in Los Angeles, California at above-market rental
rates ended, and a new lease for the property with Copeland Beverage Group, Inc.
became effective. The Hughes Market lease had been renegotiated at the end of
the initial lease term in 1996 for a two-year period because Hughes needed a
holdover period to complete its new dairy processing plant. Annual rentals from
Copeland will approximate the rents that were in effect before Hughes' two-year
extension term. In April 1998, CDC received a final rent payment of $3,500 from
Hughes. At the time the extension term was negotiated, management had
anticipated that the funds would be used to retrofit the property for
alternative uses and to cover carrying costs during a period of vacancy. As a
result of entering into the Copeland lease, no significant expenditures were
required.
The decrease in hotel revenues and related operating expenses
resulted from the change in status of the Livonia property in February 1998 to a
leased property. As a result, the percentage of hotel revenues has decreased to
7% of overall revenues. The hotel operating income of the two remaining hotels
increased by over $115 or 11% in 1998 as compared to 1997. The increase was
primarily attributable to an increase in the average room rates. Occupancy
levels were stable.
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<PAGE> 25
Interest expense has continued to decrease as a result of paying off
several mortgage loans in 1997, the continuing amortization of mortgage debt and
the June 1997 refinancing of a $12,700 limited recourse mortgage loan
collateralized by properties leased to Furon Company at a lower rate of
interest. Additionally, CDC has used draws from its $185,000 line of credit from
a syndicate of banks to refinance high interest debt and fund acquisitions on a
transitional basis. In connection with paying off three mortgage loans with
funds advanced from the line of credit, CDC incurred an extraordinary charge on
the early extinguishment of debt of $621. Limited recourse mortgage debt
financing will remain an integral part of CDC's financing strategy. In addition
to obtaining $11,000 of mortgage financing on the Eagle property in December
1998, CDC continues to evaluate opportunities for re-leveraging certain of its
properties with limited recourse mortgage debt. A portion of any new mortgage
debt may be used to pay down advances under the line of credit, thereby
increasing the availability under the line of credit. CDC is currently seeking
new mortgage financing in excess of $70,000 on existing properties.
The increase in general and administrative expense was due, in part,
to CDC's transition from a collection of static finite-life entities to a
publicly-traded infinite-life entity. These expenses include the cost of a
full-time chief executive officer and additional professional fees. As an
infinite-life and growing entity, CDC will continue to incur business
development and acquisition expenses that had not been necessary or appropriate
in the past. The decrease in property expenses resulted from a lower provision
for potential future uncollected rents, lower legal costs in connection with
lease disputes, all of which were partially offset by higher overall management
and performance fees. Management and performance fees are now based on the
market capitalization of CDC. CPA(R) Partnership management fees were based on
operating cash flow and/or rent collections. As a result, fees for CDC are not
comparable with fees for the Predecessor.
Noncash charges for property writedowns to fair value of $1,585 in
1998 included CDC's writedown of a property in Urbana, Illinois. The writedown
on the Urbana property was based on the expected sales price pursuant to the
exercise of a purchase option by the tenant, Motorola Inc. The $1,512 gain on
sales of real estate resulted from the sales of the Simplicity and NVR
properties in Port Washington, Wisconsin and Pittsburgh, Pennsylvania,
respectively. The $958 of other income resulted primarily from proceeds from
bankruptcy claims and reimbursements from a tenant in connection with a lease
dispute.
Income from equity investments decreased $239 primarily due to lower
earnings from CDC's investment in the operating partnership of Meristar
Hospitality Corporation, a publicly traded real estate investment trust
specializing in hotels. The decreased earnings for Meristar for 1998 include an
extraordinary charge and one-time restructuring charges. CDC has the right to
exchange its Meristar units on a one-for-one basis for shares of Meristar common
stock. Conversion of units to shares would be taxable to holders of Listed
Shares of CDC. CDC, therefore, would likely convert only in connection with the
disposition of this investment. The quoted market value of a share of common
stock at December 31, 1998 was $18.56 resulting in an aggregate value as of that
date of approximately $14,484, if converted.
Year-Ended December 31, 1997 Compared to Year-Ended December 31,
1996
Net income for 1997 decreased by $4,734 as compared with 1996. The
decrease was due to increases in general and administrative and property
expenses, property writedowns, a decrease in earnings from hotel operations and
lower gains from 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 for 1997 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, (ii) increased legal fees as a result of the CPA(R) Partnerships' seeking
to preserve their interests in 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 were not subject to net leases and (v) charges incurred in
connection with increasing 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 sales
proceeds and the evaluation of the fair value on
-24-
<PAGE> 26
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, 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
sale of properties in 1996 and the expiration of the ASA lease at the
Bloomingdale property during 1997.
The decrease in earnings from hotel operations in 1997 resulted from
the disposition of two hotel properties in 1996. Earnings for the three hotels
operated by CDC in 1997 located in Alpena, Petosky and Livonia, Michigan
increased. Operating earnings from these hotels increased by more than $400, or
approximately 12%, as a result of a 3.5% increase in revenues with no change in
operating expenses. The increase in revenues resulted from moderate increases in
both overall occupancy levels and average room rates. Other income included
$2,467, received as distributions in bankruptcy claims from former tenants.
Equity income of $2,076 included $1,472 from CDC's equity interest in the former
operating partnership of American General Hospitality Corporation, now Meristar.
The decrease in interest expense was the result of decreasing mortgage balances
resulting from both prepayments and amortizing mortgage debt. The decrease in
depreciation was due to the disposition of properties in both 1997 and 1996.
Because of the long-term nature of CDC's net leases, inflation and
changing prices should not unfavorably affect revenues and net income or have an
impact on the continuing operations of CDC's properties. CDC's leases usually
have rent increases based on the consumer price index and other similar indexes
and may have caps on such increases, or sales overrides, which should increase
operating revenues in the future. The moderate increases in the consumer price
index over the past several years will affect the rate of such future rent
increases. Management believes that hotel operations will not be significantly
impacted by changing prices. In addition, management believes that reasonable
increases in hotel operating costs may be partially or entirely offset by
increases in room rates.
Financial Condition:
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 mortgage debt service and to fund quarterly distributions to partners,
generally at an increasing rate each quarter. Net proceeds from the sale of
assets and lump sums received in the settlement of bankruptcy and other claims
were used to pay off high rate mortgage debt or to fund special distributions to
partners.
CDC has to date distributed a significant portion of its cash flow
to shareholders, but will review from time to time whether a greater benefit to
shareholders may be realized by reinvesting rather than distributing a greater
or smaller proportion of its available excess cash flow. In March 1999, the
annual dividend rate was increased by 1.2%. CDC now has more flexibility in
structuring its debt and lowering debt service such as through the use of
non-amortizing and unsecured debt, issued in the private or public markets. In
March 1998, CDC entered into a three year revolving credit agreement which
provided CDC with a line of credit of $150,000. In October 1998, the revolving
credit agreement was amended to increase capacity available under the line of
credit to $185,000 and to increase the number of lenders participating in the
syndication from three to eight. CDC has used the line to fund acquisitions and
build-to-suit projects, to pay off higher interest and/or maturing debt and for
certain working capital purposes. Since December 31, 1998 CDC, has drawn an
additional $29,000 from its line of credit to pay for construction draws on
build-to-suit properties. The use of unsecured financing requires CDC to comply
with certain financial covenant requirements. The requirements include
maintaining defined net worth levels, as well as operating cash flow and
interest coverage ratios.
During 1998, CDC's other significant financing activities included
raising additional equity capital of $7,304 from its dividend reinvestment and
stock purchase plan, paying scheduled principal payments of $6,627 on CDC's
limited recourse mortgage debt and paying preferred distributions of $4,422 to
the former general partners of the CPA(R) Partnerships. The payment of the
preferred distributions was a one-time
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<PAGE> 27
contractual obligation and was based upon cumulative proceeds from the sale of
the assets of each Partnership (see Note 3 to the accompanying consolidated
financial statements). There is a remaining preferred distribution obligation of
$1,423, which will only be paid when CDC's stock price reaches a specified
closing price for five consecutive days. In July 1998, CDC used $8,377 to redeem
the subsidiary partnership units of the CPA(R) Partnerships. Management believes
that their redemption provides CDC with greater operational flexibility than
previously available because the objectives of its shareholders and subsidiary
partnership unitholders differed.
CDC's investing activities consisted primarily of using cash and the
issuance of shares. In 1998, CDC used (i) $8,086 of cash in connection with
build-to-suit projects, (ii) $14,040 of cash in connection with the purchase of
a portfolio of properties in Houston, Texas and for three properties in France,
(iii) assumed mortgage debt of $13,593 in connection with the Houston, Texas
acquisition and (iv) issued 784,169 shares in connection with the acquisition of
the Houston properties and the Eagle Hardware property in Bellevue, Washington.
In April 1998, CDC registered 4,500,000 shares with the Securities and Exchange
Commission. In 1998, CDC sold the properties leased to Simplicity Manufacturing,
Inc. and NVR, Inc. for $9,684 and $12,193, respectively, pursuant to the
tenants' exercise of purchase options.
CDC has a build-to-suit project for four buildings in Colliersville,
Tennessee leased to Federal Express Corporation, and has undertaken another for
an office building complex in Tempe, Arizona leased to America West Holdings.
Completion of the construction of the first two projects is scheduled for May
and the first quarter of 2000, at which time CDC's share of annual rent will be
$9,989, assuming maximum project costs of $107,354 are incurred. Project costs
incurred through March 15, 1999 on the Federal Express and America West projects
total $69,177. Generally accepted accounting principles requires that rents
received and interest paid during the construction period be capitalized to the
project rather than reflected in earnings even though CDC generated a positive
return from these projects in 1998.
CDC completed the retrofit of a property in Salisbury, North
Carolina in October 1998 that is now leased on a short-term basis to Family
Dollar Stores, Inc. CDC is now actively seeking a long-term lease on the
property. Annualized rent from Family Dollar is $662. In February 1999, CDC
entered into a joint venture to redevelop its property in Moorestown, New Jersey
that had been vacant for a number of years. In 1998, CDC accepted a lease
termination settlement from Sports & Recreation, Inc. Sports & Recreation had
leased the Moorestown property since 1995 at an annual rent of $308 but had
never occupied it. The joint venture has entered into a five-year lease for the
property with Cendant Operations, Inc. at an annual rent of $1,016. In
connection with entering into this lease, CDC has committed to fund improvements
to the property of $3,100. In addition CDC is also funding a $2,225 expansion of
its property in Chandler, Arizona leased to Orbital Sciences Corporation. After
the construction is completed, Orbital Sciences annual rent will increase by
$245. CDC also has budgeted commitments of $2,183 in 1999 for the Livonia
property. The Sprint Spectrum build-to-suit project in Rio Rancho, New Mexico
was completed in October 1998. Sprint Spectrum's annual rent is $1,154. In
September 1998, CDC also completed construction of a property in Rouen, France
at a cost of $5,638, of which $4,636 was financed by a limited recourse mortgage
loan.
During 1998, CDC purchased three properties in France. All of the
transactions use the local currency, French Francs, as the functional currency.
Because the transactions are also leveraged with mortgage debt denominated in
French Francs of at least 75% of the purchase price, CDC believes that its
exposure to foreign currency fluctuations is mitigated. CDC is actively
evaluating additional real estate investments internationally that have higher
yields and acceptable risk profiles.
Since December 31, 1997, cash balances have decreased by $12,913 to
$5,673. Cash flow from operations of $51,994 was sufficient to fund three
quarterly distributions of $30,820 and scheduled mortgage principal payments of
$6,627. The reduction in debt service through the use of the line of credit to
pay off higher interest rate debt as well as rent from the acquisitions of the
Eagle Hardware retail property, the portfolio of properties in Houston, Texas,
the French properties and Sprint Spectrum property have had a positive impact on
operating cash flow. CDC expects to meet its short-term liquidity requirements,
including payment of scheduled debt service obligations and meeting its dividend
objective, from cash generated from
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<PAGE> 28
operations and from existing cash balances. Cash flow from operations will
increase as (i) the build-to-suit projects are completed and (ii) rents from the
Cendant lease commence.
In the case of limited recourse mortgage financing that does not
fully amortize over its term or is currently due, CDC is responsible for the
balloon payment only to the extent of its interest in the encumbered property
because the holder has recourse only to the collateral. In the event that
balloon payments come due, CDC may seek to refinance the loans, restructure the
debt with the existing lenders or evaluate its ability to satisfy the obligation
from its existing resources including its line of credit to satisfy the mortgage
debt. To the extent the remaining initial lease term on any property remains in
place for a number of years beyond the balloon payment date, CDC believes that
the ability to refinance balloon payment obligations is enhanced. CDC also
evaluates all its outstanding loans for opportunities to refinance debt at lower
interest rates that may occur as a result of decreasing interest rates or
improvements in the credit rating of tenants. There are scheduled balloon
payments of approximately $7,850 in 1999 and $12,925 in 2001.
On March 1, 1999, Armel, Inc. and CDC finalized an agreement to
terminate Armel's lease for a property in Ft. Lauderdale, Florida. Under the
termination agreement, Armel is paying termination fees of $1,540. The Armel
lease had a term through September 2001 and provided for annual rent of $965.
CDC believes that the termination of the lease and the settlement were in its
best interest. CDC has entered into a lease for the property with Bell South
Entertainment, Inc., effective July 1999 for a ten year term. Annual rent will
initially be $300 increasing to $630 by the end of the term . Bell South has the
right to cancel the lease if it does not receive municipal approvals for certain
improvements to be made to the property.
In 1998, Swiss M-Tex, L.P. experienced financial difficulties and is
not paying its rent currently. CDC is evaluating several alternatives including
a restructuring of the tenant's lease or evicting the tenant and seeking a
replacement tenant. There is no mortgage debt on the Swiss M-Tex property.
Annual rent from Swiss M-Tex is $480.
In connection with the purchase of many of its properties, CDC
required the sellers to perform environmental reviews. Management believes,
based on the results of such reviews, that CDC's properties were in substantial
compliance with Federal and state environmental statutes at the time the
properties were acquired. However, portions of certain properties have been
subject to some degree of contamination, principally in connection with leakage
from underground storage tanks, surface spills or historical on-site activities.
In most instances where contamination has been identified, tenants are actively
engaged in the remediation process and addressing identified conditions. Tenants
are generally subject to environmental statutes and regulations regarding the
discharge of hazardous materials and any related remediation obligations. In
addition, CDC's leases generally require tenants to indemnify CDC from all
liabilities and losses related to the leased properties with provisions of such
indemnification specifically addressing environmental matters. The leases
generally include provisions that allow for periodic environmental assessments,
paid for by the tenant, and allow CDC to extend leases until such time as a
tenant has satisfied its environmental obligations. Certain of the leases allow
CDC to require financial assurances from tenants such as performance bonds or
letters of credit if the costs of remediating environmental conditions are, in
the estimation of CDC, in excess of specified amounts. Accordingly, Management
believes that the ultimate resolution of environmental matters will not have a
material adverse effect on CDC's financial condition, liquidity or results of
operations.
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. CDC has no computer systems of its own, but is dependent
upon the systems maintained by an affiliate of its Manager, Carey Management
LLC, and certain other third parties including its banks and transfer agent.
CDC and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. In 1998, CDC, its Advisor and affiliates
commenced an assessment of their local area network of personal computers and
related equipment and are in the process of replacing or upgrading the equipment
that has been identified as not being Year 2000 compliant. The program is
expected to be substantially completed in the second quarter of 1999. CDC and
its affiliates have also engaged outside consultants experienced in diagnosing
systems and software applications and addressing Year 2000 issues, and with the
help of these consultants, its Manager and affiliates currently are remediating
as necessary.
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<PAGE> 29
At the same time, CDC, its Manager, and affiliates are evaluating
their applications software, all of which are commercial "off the shelf"
programs that have not been customized. During 1998, CDC commenced a project to
select a comprehensive integrated real estate accounting and asset management
software package to replace its existing applications. A commercial
Windows-based integrated accounting and asset management based application is
being tested and installation is scheduled to be completed during the third
quarter of 1999. This software has been designed to use four digits to define a
year. Because CDC's primary operations consist of investing in and receiving
rents on long-term net leases of real estate, while the failure of the Manager
and its affiliates to correct fully Year 2000 issues could disrupt CDC's
administrative operations, the resulting disruptions would not likely have a
material impact on its results of operations, financial condition or liquidity.
Contingency plans to address potential disruptions are in the process of being
developed. CDC's share of costs associated with required modifications to become
Year 2000 compliant is not expected to be material to CDC's financial position.
CDC's share of the estimated total cost of the Year 2000 project is expected to
be approximately $280, of which $215 have been incurred to date.
Although CDC believes that it will address its internal Year 2000
issues in a timely manner, there is a risk that the inability of third-party
suppliers and lessees to meet Year 2000 readiness issues could have an adverse
impact on CDC. CDC and its affiliates have identified their critical suppliers
and are requiring that these suppliers communicate their plans and progress in
addressing Year 2000 readiness. The most critical processes provided by
third-party suppliers are CDC's banks and transfer agent. CDC's operations may
be significantly affected if such providers are ineffective or untimely in
addressing Year 2000 issues.
CDC has contacted each of its lessees regarding Year 2000 readiness
and emphasized the need to address Year 2000 issues. Generally, lessees 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, CDC 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 lessees rather than CDC. The major risk to CDC is that Year 2000 issues have
such an adverse effect on the financial condition of a lessee that its ability
to meet its lease obligations, including the timely payment of rent, is
impaired. In such an event, CDC may ultimately incur the costs for Year 2000
readiness at the affected properties. The potential materiality of any such
impact is not known at this time.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 1999. CDC believes the adoption of SFAS No. 133 will
not have a material impact on the consolidated financial statements.
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<PAGE> 30
Item 7A.Quantitative and Qualitative Disclosures about Market Risk:
(in thousands)
$109,539 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 December 31, 1998 ranged
from 4.85% to 10.00%.
Advances from the line of credit bear interest at an annual rate of
either (i) the one, two, three or six-month LIBOR, 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 of up to .125% depending on CDC's leverage.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $10,851 $4,947 $ 8,701 $7,285 $7,614 $70,141 $109,539 $110,316
Average
interest
rate 7.58% 8.00% 7.86% 7.88% 7.97% 7.88%
Variable rate $ 8,757 $ 805 $138,888 $ 605 $ 639 $12,065 $161,759 $161,759
</TABLE>
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<PAGE> 31
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Carey Diversified LLC and Subsidiaries:
In our opinion, the consolidated / combined financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Carey Diversified LLC and Subsidiaries (the "Company") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated / combined financial statements. 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 of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
January 26, 1999
-30-
<PAGE> 32
CAREY DIVERSIFIED LLC and SUBSIDIARIES
CONSOLIDATED / COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
December 31, December 31,
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS:
Real estate leased to others:
Accounted for under the
operating method, net $ 390,312 $ 217,165
Net investment in direct financing leases 295,826 216,761
--------- ---------
Real estate leased to others 686,138 433,926
Operating real estate, net of accumulated depreciation
of $300 and $14,627 at December 31, 1998 and 1997 7,013 23,333
Real estate under construction leased to others 55,856
Assets held for sale 12,842 14,382
Cash and cash equivalents 5,673 18,586
Equity investments 29,532 13,415
Other assets, net of accumulated amortization of
$375 and $2,109 at December 31, 1998 and
1997 and reserve for uncollected rent of
$1,353 and $1,103 at December 31, 1998 and 1997 16,210 19,778
--------- ---------
Total assets $ 813,264 $ 523,420
========= =========
LIABILITIES:
Mortgage notes payable $ 138,964 $ 182,718
Notes payable to affiliate 200
Notes payable 132,334 24,709
Accrued interest payable 2,128 1,798
Dividends payable 10,447
Accounts payable to affiliates 7,013 8,792
Other liabilities 11,771 10,565
--------- ---------
Total liabilities 302,657 228,782
--------- ---------
Minority interest (3,626) (6,250)
--------- ---------
Commitments and contingencies
PARTNERS' CAPITAL/
MEMBERS' EQUITY:
Partners' capital 300,888
---------
Listed Shares, no par value, 25,343,402
Shares issued and outstanding 517,755
Dividends in excess of accumulated earnings (2,803)
---------
Accumulated other comprehensive income (719)
---------
Total members' equity 514,233
Total liabilities and
partners' capital/members' equity $ 813,264 $ 523,420
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-31-
<PAGE> 33
CAREY DIVERSIFIED LLC and SUBSIDIARIES
CONSOLIDATED / COMBINED STATEMENTS of INCOME
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
The Company Consolidated The Predecessor Combined
For the Year Ended For the Years Ended
December 31, December 31,
------------------------- --------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income $ 42,771 $ 43,045 $ 44,576
Interest income from direct
financing leases 34,529 34,574 32,644
Other interest income 783 1,270 1,681
Other income 958 2,859 746
Revenues of hotel operations 6,289 14,523 21,929
------------ ------------ ------------
85,330 96,271 101,576
------------ ------------ ------------
Expenses:
Interest 18,266 19,888 23,200
Depreciation and amortization 8,406 10,628 11,274
General and administrative 6,660 5,275 3,747
Property expenses 5,059 6,430 4,008
Writedowns to fair value 1,585 3,806 1,300
Operating expenses of hotel operations 4,956 10,748 15,947
------------ ------------ ------------
44,932 56,775 59,476
------------ ------------ ------------
Income before income from equity investments,
net gains, minority interest in income
and extraordinary items 40,398 39,496 42,100
Income from equity investments 1,837 2,076 1,155
------------ ------------ ------------
Income before net gains, minority interest in
income and extraordinary items 42,235 41,572 43,255
Gain on sales of real estate and
securities, net 1,512 1,565 5,474
------------ ------------ ------------
Income before minority interest in
income and extraordinary items 43,747 43,137 48,729
Minority interest in income (4,662) (2,576) (3,182)
------------ ------------ ------------
Income before extraordinary
items 39,085 40,561 45,547
Extraordinary losses on extinguishment
of debt, net of minority interest of
$79 and $3 in 1998 and 1996 (621) (252)
------------ ------------ ------------
Net income $ 38,464 $ 40,561 $ 45,295
============ ============ ============
Basic and diluted earnings per Listed Share:
Earnings before
extraordinary item $ 1.57
Extraordinary item (.02)
------------
1.55
============
Weighted average listed shares outstanding:
Basic 24,866,225
============
Diluted 24,869,570
============
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-32-
<PAGE> 34
CAREY DIVERSIFIED LLC and SUBSIDIARIES
CONSOLIDATED
STATEMENT of MEMBERS' EQUITY
For the year ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Dividends Accumulated
In Excess Of Other
Listed Paid-in Accumulated Comprehensive
Shares Capital Earnings Income Total
------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 23,959,101 $490,820 $490,820
Cash proceeds on issuance
of Listed Shares, net 384,708 6,191 6,191
Listed Shares issued in
connection with
services rendered and
properties acquired 999,593 20,744 20,744
Dividends $(41,267) (41,267)
Net income 38,464 38,464
Other comprehensive
income $(719) (719)
---------- -------- ------- ----- --------
Balance at
December 31, 1998 25,343,402 $517,755 $(2,803) $(719) $514,233
========== ======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-33-
<PAGE> 35
CAREY DIVERSIFIED LLC
COMBINED STATEMENTS of
PARTNERS' CAPITAL
For the years ended December 31, 1996 and 1997
(In thousands)
<TABLE>
<CAPTION>
The Predecessor
Company
-------
<S> <C>
Balance, January 1, 1996 $ 292,896
Distributions to partners (34,173)
Purchase of Limited Partnership Units (17)
Change in unrealized appreciation,
marketable securities 44
Net income 45,295
---------
Balance, December 31, 1996 304,045
Distributions to partners (43,620)
Change in unrealized appreciation
of marketable securities (98)
Net income 40,561
Balance, December 31, 1997 $ 300,888
=========
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-34-
<PAGE> 36
CAREY DIVERSIFIED LLC and SUBSIDIARIES
COMBINED / CONSOLIDATED STATEMENTS of
COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated For Combined
the Year Ended For the Years Ended
December 31, December 31,
-------------- -------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 38,464 $ 40,561 $ 45,295
Change in unrealized depreciation
of marketable securities (233) (98) 44
Foreign currency translation
adjustments (486)
-------- --------- ---------
Other comprehensive income (719) (98) 44
-------- -------- --------
Comprehensive income $ 37,745 $ 40,463 $ 45,339
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-35-
<PAGE> 37
CAREY DIVERSIFIED LLC
CONSOLIDATED / COMBINED
STATEMENTS of CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
For the Year For the Years
Ended Ended
December 31, December 31,
------------ ------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 38,464 $ 40,561 $ 45,295
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 7,442 10,280 10,905
Extraordinary loss 621 252
Gain on sales, net (1,512) (1,565) (5,474)
Securities received in connection with settlement (1,690)
Minority interest in income 4,662 2,576 3,182
Straight-line rent adjustments and
other noncash rent adjustments (2,642) (2,310) (1,343)
Writedowns to fair value 1,585 3,806 1,300
Provision for uncollected rents 682 1,576 247
Payment of deferred management fees (1,509)
Compensation costs paid by issuance of shares 881
Equity income from equity investments in excess
of distributions received (107)
Net changes in operating assets
and liabilities and other 3,270 (1,593) (940)
-------- -------- --------
Net cash provided by operating
activities 51,944 51,641 53,317
-------- -------- --------
Cash flows from investing activities:
Purchases of real estate (89,650)
Additional capital expenditures (5,156) (1,955) (3,420)
Proceeds from sales of real estate
and securities 21,567 1,242 23,394
Accrued disposition fees payable 1,007
Purchase of marketable securities (65)
Distributions received from equity investments in
excess of equity income 763 245
Other 9 195 (429)
-------- -------- --------
Net cash (used in) provided by
investing activities $(71,525) $ (273) $ 19,545
-------- -------- --------
</TABLE>
(Continued)
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-36-
<PAGE> 38
CAREY DIVERSIFIED LLC
CONSOLIDATED / COMBINED
STATEMENTS of CASH FLOWS, Continued
(In thousands)
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
For the Year For the Years
Ended Ended
December 31, December 31,
------------ ------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends paid (30,820)
Distributions to partners (43,620) (34,173)
Payment of accrued preferred distributions (4,422)
Distributions paid to special limited partners (1,903) (2,327) (2,334)
Accrued distributions paid (596)
Distributions to and redemptions of
subsidiary partnership unitholders (8,789)
Payments of mortgage principal (6,627) (27,565) (63,171)
Proceeds from mortgages and
notes payable 157,823 12,700 28,189
Prepayments of mortgages and notes payable (101,555)
Prepayment charges (700)
Proceeds from notes payable to affiliate 200 1,000
Payments of notes payable to affiliate (200) (500) (3,050)
Deferred financing costs (1,963) (66) (603)
Issuance of Listed Shares 7,304
Other (884) (157) 2,122
--------- --------- ---------
Net cash provided by (used in) financing
activities 6,668 (61,335) (72,020)
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (12,913) (9,967) 842
Cash and cash equivalents, beginning
of year 18,586 28,553 27,711
--------- --------- ---------
Cash and cash equivalents,
end of year $ 5,673 $ 18,586 $ 28,553
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-37-
<PAGE> 39
CAREY DIVERSIFIED LLC
CONSOLIDATED/COMBINED
STATEMENTS of CASH FLOWS, Continued
Supplemental schedule of noncash investing and financing activities:
1998
A. The Company issued 215,424 restricted shares valued at $4,367 to certain
directors, officers and affiliates as consideration for services rendered,
including performance fee (see Note 3).
B. In connection with the acquisition of properties, the Company assumed
mortgage obligations of $13,593 and issued 784,169 shares valued at
$16,377, before issuance costs.
C. Deferred acquisition fees payable to an affiliate at December 31, 1998 are
$3,137.
1997
In connection with foreclosure of a property, the Company 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
(see Note 11):
<TABLE>
<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>
1996
In July, the Company exchanged its interest in a hotel property and related
assets and liabilities for units in the operating partnership of a
publicly-traded real estate investment trust (see Note 14). The assets and
liabilities transferred were as follows:
<TABLE>
<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>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
-38-
<PAGE> 40
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS
(All amounts in thousands except share and per share amounts)
1. Organization and Basis of Consolidation:
A. The combined financial statements for years ended December 31, 1997 and
1996 have been presented as those of a predecessor company consisting 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 "Company"). The financial statements have been
presented on a combined basis at historical cost because of affiliated
general partners, common management and common control and because the
majority ownership interests in the CPA(R)Partnerships were transferred to
Carey Diversified effective January 1, 1998, pursuant to a consolidation
transaction described below. The consolidated financial statements for the
year ended December 31, 1998 are those of Carey Diversified and its
wholly-owned and majority-owned subsidiaries including the nine CPA
Partnerships. All material inter-entity transactions have been eliminated.
The former General Partners' interest in the CPA(R)Partnerships is
classified under minority interest because that interest was retained
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").
B. In 1997, each limited partner of the CPA(R)Partnerships was asked to
approve the merger of the Partnerships with Carey Diversified, and had the
option of either exchanging his or her limited partnership interests for
an interest in Carey Diversified or retaining a limited partnership
interest in the applicable subsidiary partnership. On January 1, 1998,
23,225,967 shares were issued in exchange for limited partnership units.
The shares commenced public trading on the New York Stock Exchange on
January 21, 1998. The former General Partners received 733,134 shares for
their share of the appreciation in the Company's properties. W.P. Carey &
Co., Inc. ("W. P. Carey"), received warrants to purchase 2,284,800 shares
at $21 per share and 725,930 shares at $23 per share as compensation for
investment banking services performed in connection with structuring the
consolidation. The warrants are exercisable for 10 years beginning January
1, 1999 (see Note 20).
Effective January 1, 1998, the exchange of CPA(R) Partnership limited partner
interests for interests in Carey Diversified has been accounted for as a
purchase with the limited partner interests recorded at the fair value of
the shares exchanged. The excess of fair value over the related historical
cost basis of $189,932 was allocated principally to real estate under
operating leases, net investment in direct financing leases and equity
investments. The exchange of the former General Partners' interests for
shares has been accounted for at their historical cost basis. As a result
of the Consolidation transaction, the results of operations of the Company
are not directly comparable to those of any prior period of the
Predecessor.
C. Limited partners who did not elect to receive shares retained a direct
ownership interest in the applicable Partnership as subsidiary partnership
unitholders. The Company had an obligation to redeem in cash all
subsidiary partnership units of each Partnership by no later than a
specified date. On July 15, 1998, the Company redeemed all subsidiary
partnership units for $8,377. The redemption values were determined by an
independent valuation of each of the CPA(R) Partnerships as of May 31,
1998. The redemption amounts approximated the carrying amount of the
subsidiary partnership units and, accordingly, no purchase accounting
adjustment was required. The subsidiary partnership unitholders' share of
income in 1998 is included in minority interest in income in the
accompanying consolidated financial statements.
-39-
<PAGE> 41
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
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 Company diversifies its real estate investments among various
corporate tenants engaged in different industries and by property
type. No lessee currently represents 10% or more of total leasing
revenues (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
Company's net investment in the lease.
Operating method - Real estate is recorded at cost, rental revenue
is recognized on a straight-line basis over the term of the related
leases and expenses (including depreciation) are charged to
operations as incurred.
Substantially all of the Company's leases provide for either scheduled
rent increases, periodic rent increases based on formulas indexed to
increases in the Consumer Price Index or sales overrides.
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.
Real Estate Under Construction, Leased to Others:
For properties under construction, interest charges are capitalized rather
than expensed and rentals received are recorded as a reduction of
capitalized project (i.e., construction) costs.
The amount of interest capitalized is determined by applying the interest
rate applicable to outstanding borrowings on the line of credit to
the average amount of accumulated expenditures for properties under
construction during the period.
-40-
<PAGE> 42
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
Assets Held for Sale:
Assets held for sale are accounted for at the lower of cost or fair
value, less costs to dispose.
The Company recognizes gains and losses on the sale of properties
when among other criteria, the parties are bound by terms of the
contract, all consideration has been exchanged and all conditions
precedent to closing have been performed. At the time the sale is
consummated, a gain or loss is recognized as the difference between
the sales price less any closing costs and the carrying value of the
property.
Long-Lived Assets:
The Company assesses the recoverability of its long-lived assets,
including residual interests of real estate assets and
investments, based on projections of undiscounted cash flows
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, (generally forty
years) and for furniture, fixtures and equipment (generally
seven years).
Foreign Currency Translation:
The Company consolidates its real estate investments in France. The
functional currency for these investments is the French Franc.
The translation from the French Franc to U.S. dollars is
performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during
the period. The gains and losses resulting from such
translation are included in other comprehensive income as part
of members' equity.
Cash Equivalents:
The Company considers all short-term, highly liquid investments
that are both readily convertible to cash and have a maturity
of generally three months or less at the time of purchase to
be cash equivalents. Items classified as cash equivalents
include commercial paper and money market funds. Substantially
all of the Company's cash and cash equivalents at December 31,
1998 and 1997 were held in the custody of four and three
financial institutions, respectively, and which exceed
federally insurable limits. The Company mitigates this risk by
depositing funds with major financial institutions.
Other Assets and Liabilities:
Included in other assets are accrued rents and interest receivable,
deferred rental income, deferred charges and marketable
securities. Included in other liabilities are accrued interest
payable, accounts payable and accrued expenses and deferred
gains.
Deferred charges include costs incurred in connection with debt
financing and refinancing and are amortized over the terms of
the obligations.
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 in deferred rental income are lease restructuring
fees received which are recognized over the remainder of the
initial lease terms.
Deferred gains consisted of (a) the excess assets acquired over the
liabilities assumed in connection with the acquisition of
certain hotel operations and (b) certain funds received in
connection with two loan refinancings, and which were being
amortized into income. All unamortized deferred gain balances
as of December 31, 1997 were written off in connection with
purchase accounting.
Marketable securities are classified as available-for-sale
securities and reported at fair value with the Company's
interest in unrealized gains and losses on these securities
reported as a component of other comprehensive income. Such
marketable securities had a cost basis of $1,800 and reflected
a fair value of $1,513 at December 31, 1998.
Equity Investments:
The Company's limited partner interests in two real estate limited
partnerships in which the Company's ownership is less than 50%
are accounted for under the equity method, i.e., at cost,
increased or decreased by the Company's pro rata share of
earnings or losses, less distributions. The Company is the
sole limited partner in the two partnerships both of which own
net leased properties.
-41-
<PAGE> 43
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
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.
Accounts Payable to Affiliates:
Included in accounts payable to affiliates are deferred acquisition
fees which are payable for services provided by Carey
Management, relating to the identification, evaluation,
negotiation, financing and purchase of properties. The fees
are payable in eight annual installments, beginning January 1
following the first anniversary of the date a property was
purchased, with each installment equal to .25% of the purchase
price of the property.
Income Taxes:
The Company is a limited liability company and has elected
partnership status for federal income tax purposes. The
Company is not liable for Federal income taxes as each member
recognizes his or her proportionate share of income or loss in
his or her tax return. Accordingly, no provision for income
taxes is recognized for financial statement purposes. The
Company is subject to certain state and local taxes.
Earnings Per Share:
In accordance with the Statement of Financial Accounting Standards
("SFAS") No. 128, the Company presents both basic and diluted
earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing net income available to shareholders by
the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue shares were
exercised or converted into common stock, where such exercise
or conversion would result in a lower EPS amount.
Stock Based Compensation:
The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations ("APB No. 25"). Under
APB No. 25, compensation cost is measured as the excess, if
any, of the quoted market price of the Company's shares at the
date of grant over the exercise price of the option granted.
Compensation cost for stock options, if any, is recognized
ratably over the vesting period. No compensation cost was
recognized in 1998 in connection with the Company's share
option plans. The Company provides additional pro forma
disclosures as required under SFAS No. 123, "Accounting for
Stock Based Compensation" (see Note 20).
All transactions with non-employees in which the Company issues
stock as consideration for services received are accounted for
based on the fair value of the stock issued or services
received whichever is more reliably determinable.
Reclassification:
Certain 1997 and 1996 amounts have been reclassified to conform to
the 1998 financial statement presentation.
3. Transactions with Related Parties:
Through December 31, 1997, the Partnership agreements of each of the
Company's Partnerships provided that the former 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 and distributable cash from operations, as
defined, and the Limited Partners were allocated between 90%
and 99% of the profits and losses as well as
-42-
<PAGE> 44
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
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 as provided in
the Partnership agreements. As a result of the merger of the
CPA(R) Partnerships into subsidiary partnerships of Carey
Diversified, Carey Diversified is the sole general partner of
the nine CPA(R) Partnerships. The allocation of profits and
losses and cash distributions provided in the Partnership
agreements as amended effective January 1, 1998, are on
essentially on the same terms as prior to the Consolidation.
Carey Diversified is allocated between 90% and 99% of the
profits and losses and distributable cash from operations, 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 from operations. Until the subsidiary
partnership interests, held by the limited partners of the
CPA(R) Partnerships were redeemed in July 1998, that portion
of the Company's share of profits and losses applicable to
each Partnership was allocated to subsidiary partnership
unitholders in proportion to their ownership interests.
In connection with the merger of the CPA(R) Partnerships with
Carey Diversified and the listing of shares of Carey
Diversified on the New York Stock Exchange, the former
Corporate General Partners of eight of the CPA(R) Partnerships
satisfied provisions for receiving a subordinated preferred
return from the Partnerships totaling $4,422 based upon the
cumulative proceeds from the sale of the assets of each
Partnership from inception through the date of the
Consolidation. Payment of this preferred return, paid in 1998,
was based on achieving a specified cumulative return to
limited partners. For the Partnership that has not yet
achieved the specified cumulative return, its subordinated
preferred return of $1,423 is included in accounts payable to
affiliates as of both December 31, 1998 and 1997. To satisfy
the conditions for receiving this remaining preferred return,
the shares of Carey Diversified must achieve a closing price
equal to or in excess of $23.11 for five consecutive trading
days.
Under the Partnership agreements, certain affiliates were entitled
to receive property management fees and reimbursement of
certain expenses incurred in connection with the Company's
operations. General and administrative reimbursements consist
primarily of the actual cost of personnel needed in providing
administrative services to the Company. Property management
fees in 1998, 1997 and 1996 were $1,288, $1,139 and $916,
respectively. General and administrative reimbursements in
1998, 1997 and 1996 were $1,540, $1,788 and $911,
respectively. Effective January 1, 1998, the fees and
reimbursements are payable to Carey Management.
The Company's management and performance fees are payable, each at
an annual rate of 1/2% of the total market capitalization of
the Company. The Management Agreement, effective January 1,
1998, provides that the performance fee is payable in the form
of restricted shares issued by the Company which vest ratably
over a five-year period. Performance fees were $757 for 1998.
The Company's management fee was $156 for 1998. The management
fee reflects a dollar-for-dollar reduction for quarterly
distributions paid to special limited partners and property
management fees paid by the Partnerships to Carey Management.
Carey Management performs certain services for the Company including
the identification, evaluation, negotiation, purchase and
disposition of property. Carey Management and certain
affiliates receive fees and compensation in connection with
these services, including acquisition and structuring and
development fees, loan refinancing fees and disposition fees.
In connection with performing services related to the
Company's real estate purchases in 1998, W. P. Carey received
structuring and development fees of $2,502. Fees are paid only
in connection with completed transactions. The affiliate is
entitled to receive deferred acquisition fees of $3,137 in
equal annual installments over a period of no less than eight
years. Unpaid deferred acquisition fees bear interest at an
annual rate of 7%. In connection with the sale of three
properties in 1998, the Company incurred disposition fees of
$1,007, payable to an affiliate. The fees were paid in
February 1999 and are included in accounts payable to
affiliates in the accompanying consolidated financial
statements as of December 31, 1998.
-43-
<PAGE> 45
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
For the years ended December 31, 1998, 1997 and 1996, fees
aggregating $904, $664 and $902, respectively, were incurred
for legal services in connection with the Company's operations
and were provided by a law firm in which the Secretary, until
July 1997, of the former Corporate General Partners of the
CPA(R) Partnerships is a partner.
The Company 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 Company, other affiliated
real estate entities and W.P. Carey and sharing the associated
costs. Pursuant to the terms of the agreement, the Company's
share of rental, occupancy and leasehold improvement costs is
based on adjusted gross revenues, as defined. Expenses
incurred in 1998, 1997 and 1996 were $558, $590 and $720,
respectively.
An independent director of the Company has an ownership interest
in companies that own the minority interest in the Company's
three French majority-owned subsidiaries. The director is not
involved in the management of the three companies, and his
ownership is subject to the same terms as all other ownership
interests in the subsidiary companies. The Chairman of the
Board of the Company is the sole shareholder of Livho, Inc., a
lessee of the Company (see Note 6).
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,
------------
1998 1997
---- ----
The The
Company Predecessor
------- -----------
<S> <C> <C>
Land $ 88,731 $ 69,154
Buildings 309,198 241,601
-------- --------
397,929 310,755
Less: Accumulated depreciation 7,617 93,590
-------- --------
$390,312 $217,165
======== ========
</TABLE>
The scheduled future minimum rents, exclusive of renewals, under
noncancellable operating leases amount to $42,902 in 1999,
$40,089 in 2000, $38,346 in 2001, $36,808 in 2002, $32,678 in
2003 and aggregate $334,621 through 2017.
Contingent rentals were $614, $2,022 and $1,697 in 1998, 1997 and
1996, respectively.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
The The
Company Predecessor
------- -----------
<S> <C> <C>
Minimum lease payments
receivable $398,520 $402,530
Unguaranteed residual value 294,891 210,887
-------- --------
693,411 613,417
Less: Unearned income 397,585 396,656
-------- --------
$295,826 $216,761
======== ========
</TABLE>
The scheduled future minimum rents, exclusive of renewals, under
noncancellable direct financing leases amount to $32,145 in
1999, $31,138 in 2000, $31,624 in 2001, $30,404 in 2002,
$30,402 in 2003 and aggregate $398,520 through 2016.
Contingent rentals were approximately $320, $4,533 and $3,444 in
1998, 1997 and 1996, respectively.
-44-
<PAGE> 46
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
6. Operating Real Estate:
The Company currently owns hotel properties in Alpena and
Petoskey, Michigan that are operated as Holiday Inns. A hotel
in Rapid City, South Dakota was sold in 1996, and a hotel in
Livonia, Michigan was operated by the Company through January
1998. In January 1998, the Company transferred the operations
to and entered into a lease with Livho, Inc. ("Livho"). The
Livonia hotel was leased to Livho to enable the Company to
elect publicly-traded partnership status for Federal income
tax purposes. As a publicly traded partnership, at least 90%
of revenues must derive from passive activities. Based on its
revenue projections, the Company concluded that meeting the
passive income criterion could become an issue if it had
retained the Livonia hotel operation.
In connection with the transfer of the property in Livonia,
Michigan, $16,563 of operating real estate was reclassified to
real estate accounted for under the operating method.
7. Mortgage Notes Payable and 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 carrying value of
approximately $254,865. As of December 31, 1998, mortgage
notes and notes payable have interest rates varying from 4.85%
to 10.00% per annum and mature from 1999 to 2015.
On March 26, 1998, the Company obtained a line of credit of
$150,000 pursuant to a revolving credit agreement with The
Chase Manhattan Bank. The agreement was amended on October 15,
1998 to increase of the line of credit to $185,000 with the
number of lenders participating in the syndication increased
from three to eight. The revolving credit agreement has a term
of three years and all advances are prepayable at any time. As
of December 31,1998, the Company had $129,000 drawn from the
line of credit. Additional advances of $29,000 were drawn from
the line of credit in 1999.
Advances made bear interest at an annual rate of either (i) the one,
two, three or six-month LIBOR, as defined, plus a spread which
ranges from 0.6% to 1.45% depending on leverage or corporate
credit rating or (ii) the greater of the bank's Prime Rate and
the Federal Funds Effective Rate, plus .50%, plus a spread of
up to .125% depending upon the Company's leverage. 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
always been in compliance with the financial covenants.
-45-
<PAGE> 47
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
Scheduled principal payments for the mortgage notes and notes
payable during each of the next five years following December
31, 1998 and thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999 $ 19,608
2000 5,752
2001 147,589
2002 7,890
2003 8,253
Thereafter 82,206
--------
$271,298
========
</TABLE>
Interest paid by the Company on mortgages and notes payable
aggregated approximately $17,936, $19,534 and $23,805 in 1998,
1997 and 1996 respectively. Capitalized interest paid by the
Company was $910 for 1998.
In connection with the placement of mortgages, fees of $1,001
were paid to an affiliate of the Company in 1998.
8. Distributions and Dividends:
Dividends paid to shareholders for 1998 are summarized as follows
<TABLE>
<CAPTION>
1998:
<S> <C> <C>
Quarterly $30,820
=======
</TABLE>
The Company declared a quarterly dividend of $.4125 per share on
December 16, 1998 payable to shareholders of record as of
December 31, 1998. The dividend was paid in January 1999.
Distributions paid to partners for 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997:
<S> <C> <C>
Quarterly $42,828
Special 792
-------
$43,620
=======
<CAPTION>
1996:
<S> <C> <C>
Quarterly $33,350
Special 823
-------
$34,173
=======
</TABLE>
-46-
<PAGE> 48
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
9. Earnings Per Share:
Basic and diluted earnings per share for the year ended December 31,1998 were
calculated as follows:
<TABLE>
<CAPTION>
Weighted
Income Average Per
Available to Listed Shares Share
To Members Outstanding Amount
---------- ----------- ------
<S> <C> <C> <C>
Basic earnings before extraordinary item $ 39,085 24,866,225 $ 1.57
Extraordinary item (621) (.02)
----------- -----------
Basic earnings $ 38,464 24,866,225 $ 1.55
=========== ===========
Effect of dilutive securities - options for shares 3,345
----------
Diluted earnings before extraordinary item $ 39,085 24,869,570 $ 1.57
Extraordinary item (621) (.02)
----------- -----------
Diluted earnings $ 38,464 24,869,570 $ 1.55
=========== ===========
</TABLE>
10. Lease Revenues:
For the years ended December 31, 1998, 1997 and 1996, the Company
earned its net leasing revenues (i.e., rental income and
interest income from direct financing leases) from over 75
lessees. A summary of net leasing revenues including all
current lease obligors with more than $1,000 in annual
revenues is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1998 % 1997 % 1996 %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Dr Pepper Bottling Company of Texas $ 3,998 5% $ 3,998 5% $ 3,998 5%
Gibson Greetings, Inc. 3,870 5 3,466 5 3,384 4
Detroit Diesel Corporation 3,658 5 3,645 5 3,645 5
Sybron International Corporation 3,311 4 3,311 4 3,311 4
Livho, Inc. 2,958 4
Quebecor Printing Inc. 2,523 3 2,618 4 2,533 3
AutoZone, Inc. 2,469 3 2,512 3 2,304 3
Furon Company 2,415 3 2,416 3 2,528 3
Stoody Deloro Stellite, Inc. (a) 2,234 3 2,725 4 2,624 3
The Gap, Inc. 2,199 3 2,154 3 2,154 3
Orbital Sciences Corporation 2,154 3 2,154 3 2,154 3
Hughes Markets, Inc. 1,928 3 5,784 7 4,463 6
AP Parts International, Inc. 1,783 2 1,837 2 1,729 2
NVR, Inc. 1,721 2 1,819 2 1,814 2
Unisource Worldwide, Inc. 1,714 2 1,654 2 1,646 2
Pre Finish Metals Incorporated 1,636 2 2,421 3 2,408 3
Lockheed Martin Corporation 1,621 2 1,131 1 1,035 1
CSS Industries, Inc./Cleo, Inc. 1,580 2 1,844 2 1,793 2
Peerless Chain Company 1,463 2 1,709 2 1,611 2
Brodart, Co. 1,432 2 1,308 2 1,314 2
Red Bank Distribution, Inc. 1,401 2 1,401 2 1,401 2
Copeland Beverage Group, Inc.. 1,200 2
High Voltage Engineering Corp. 1,187 2 1,174 2 1,179 2
Duff-Norton Company, Inc. 1,164 2 1,021 1 1,021 1
United States Postal Service 1,090 1 894 1 482 1
Other 24,591 31 24,623 32 26,689 36
------- ---- ------- ---- ------- ----
$77,300 100% $77,619 100% $77,220 100%
======= ==== ======= ==== ======= ====
</TABLE>
(a) Stoody Deloro Stellite, Inc. assigned its leases in 1997. Leases were
assigned to DS Company, Ltd. and Thermodyne Holdings Corp., respectively.
-47-
<PAGE> 49
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
11. Gains and Losses on Disposition of Properties:
Significant sales of properties are summarized as follows:
1998
On April 1, 1998 Simplicity Manufacturing, Inc. purchased its
leased property in Port Washington, Wisconsin for $9,684
pursuant to a purchase option exercised in 1997. A loss of
$291 was recognized on the sale. The carrying value of the
Simplicity property of $9,684 was included in assets held for
sale in the accompanying balance sheet at December 31, 1997
and the Company recognized a noncash charge of $2,316 in 1997
on the writedown of the property to the purchase option price.
In December 1998, NVR, Inc. purchased its leased property in
Pittsburgh, Pennsylvania for $12,193 pursuant to a purchase
option exercised in 1998. A gain of $1,754 was recognized on
the sale. In accordance with the partnership agreement of the
Partnership that owned the NVR property, the gain was first
allocated to a special limited partner with a negative capital
balance until the negative balance was eliminated. As a
result, $1,381 of the gain was allocated to that partner for
financial reporting purposes.
1997
In 1997, the Company sold a property in Louisville, Kentucky
leased to Winn-Dixie Stores, Inc. for $1,100 and recognized a
gain on sale of $608.
The Company 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 Company 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 November 1997 the lender foreclosed on the
properties and the ownership of the Arley properties was
transferred to the lender. In connection with the foreclosure,
the Company recognized a gain of $957 representing the
difference between liabilities forgiven and assets
surrendered.
1996
In January 1996, the Company sold a multi-tenant property in
Helena, Montana with IBM Corporation as the primary tenant for
$4,800 and recognized a gain on the sale of $90. All of the
Company's leases at the Helena property, including the IBM
lease, were assigned to the purchaser.
In April 1996, the Company sold its warehouse property in
Hodgkins, Illinois leased to GATX Logistics, Inc. ("GATX") for
$13,200, assigned the GATX lease to the purchaser and
recognized a gain on the sale of $4,408.
In 1985, the Company purchased a hotel in Rapid City, South
Dakota, operated as a Holiday Inn, with $6,800 of tax-exempt
bonds supported by a letter of credit issued by a third party.
In September 1994, the Company was advised by Holiday Inn that
it would need to upgrade the hotel's physical plant by January
1997 in order to meet Holiday Inn's modernization requirements
or surrender its Holiday Inn license. Management concluded
that the required additional investment was not in the best
interests of the Company and decided to sell the property. In
1995, the Company reevaluated the fair value of the property
and recognized a noncash charge of $1,000. In 1996, the
Company recognized an additional charge of $1,300 as a
writedown to fair value.
-48-
<PAGE> 50
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
In October 1996, the Company sold the property along with certain
operating assets and liabilities of the hotel for $4,105 and
recognized a gain on the sale of $785.
12. Extraordinary Gains and Losses on Extinguishment of Debt:
1998
In connection with the prepayment of high interest loans
collateralized by properties leased to Dr Pepper Bottling
Company of Texas, Orbital Sciences Corporation and Simplicity
Manufacturing, Inc., the Company incurred $700 in prepayment
charges resulting in an extraordinary loss on the
extinguishment of debt of $621, net of $79 attributable to
minority interests.
1996
In 1996, the Company 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 recognized as an extraordinary loss on the extinguishment
of debt, net of $3 attributable to minority interests.
13. Writedowns to Fair Value:
Significant writedowns of properties to fair value are summarized as
follows:
1998
The Company owns a property in Urbana, Illinois net leased to
Motorola, Inc. ("Motorola"). During 1998, Motorola notified
the Company of its intention to exercise its option to
purchase the property. The exercise price is determined based
on independent appraisals performed on behalf of the Company
and Motorola. Based on the appraisal prepared for the Company,
the Company believes the fair value of the property, less
costs to sell, is $3,012 resulting in a writedown of $1,575.
1997
As described in Note 11, Simplicity Manufacturing, Inc.
("Simplicity") in connection with the exercise of its option
to purchase the property it leased from the Company in Port
Washington, Wisconsin on or before April 1, 1998, the Company
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 Company recognized a noncash charge
of $2,316 on the writedown of the property to the anticipated
exercise price.
The Company owned two properties in Sumter and Columbia, South
Carolina leased to Arley. As more fully described in Note 11,
the Company reevaluated the fair value of the property in
connection with the termination of the Arley lease and
recognized a noncash charge of $1,350.
1996
The Company owned a hotel property in Rapid City, South Dakota that
it sold in October 1996. As more fully described in Note 11,
the Company reevaluated the fair value of the property in 1996
and recognized a noncash charge of $1,300 on the writedown.
-49-
<PAGE> 51
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
14. Equity Investments:
The Company purchased a hotel property in Kenner, Louisiana, in June
1988. The Company assumed operating control of the hotel in 1992
after evicting the lessee as a result of its financial
difficulties. On July 30, 1996, the Company exchanged the hotel
for a partnership interest in American General Hospitality
Operating Partnership L.P. the operating partnership of a real
estate investment trust, American General Hospitality
Corporation, ("AGH"). In connection with the exchange, the
Company and the AGH operating partnership assumed the $7,304
mortgage loan obligation collateralized by the hotel property.
The exchange of the hotel property for limited partnership units
was treated as a nonmonetary exchange for tax and financial
reporting purposes. As the result of the August 1998 merger of
AGH with Meristar Hospitality Corporation ("Meristar") and
CapStar Hotel Co., the Company's 920,672 units of the operating
partnership of AGH were exchanged for 780,269 units of the
operating partnership of Meristar.
The Company's interest in the Meristar operating partnership is being
accounted for under the equity method. The Company has the right
to convert its equity interest in the Meristar operating
partnership to shares of common stock in Meristar at any time on
a one-for-one basis. The exchange of operating partnership units
for common stock would be taxable in the year of the exchange.
The Company's carrying value for the operating 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
AGH operating partnership, cash contributed and costs incurred to
complete the exchange.
As of December 31, 1998, the audited consolidated financial
statements of Meristar filed with the United States Securities
and Exchange Commission ("SEC") reported total assets of
$2,998,460 and shareholders' equity of $1,150,992 and revenues of
$525,297 and net income of $43,707 for the year then ended. As of
December 31, 1997 and 1996, the audited consolidated financial
statements of AGH filed with the SEC reported total assets of
$585,088 and $243,115 and stockholders' equity of $443,250 and
$127,461, respectively, and revenues of $61,912 and $13,496 and
net income of $23,485 and $5,129 for the year ended December 31,
1997 and the period from July 31, 1996 (inception) to December
31, 1996, respectively.
As of December 31, 1998, Meristar's quoted per share market value
was $18.56 resulting in an aggregate value of approximately
$14,484, if converted. The carrying value of the equity interest
in the Meristar operating partnership as of December 31, 1998 was
$24,070.
The Company owns equity interests in two limited partnerships that
own net leased real estate as a limited partner with Corporate
Property Associates 10 Incorporated, an affiliate, that owns the
remaining controlling interests as a general partner. Summarized
combined financial information of the two limited partnerships is
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Assets $46,391 $47,666
Liabilities 32,399 32,986
Capital 13,992 14,680
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue $6,990 $6,909 $6,852
Expenses 4,536 4,593 4,647
Net income 2,454 2,316 2,205
</TABLE>
-50-
<PAGE> 52
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
15. Assets 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 have not been able
to reach an agreement as to the determination of the exercise
price between a minimum exercise price of $9,000 and a maximum
exercise price of $11,500, but have agreed that the
determination of the final exercise price is contingent on the
resolution of a dispute regarding the interpretation of the
lease. All rental payments due under the lease with KSG are
current. The carrying value of the KSG property at December
31, 1998 and 1997 was $9,860 and $4,698 respectively.
As described in Note 13, Motorola has exercised its option to
purchase the property it leases in Urbana, Illinois. The sale
of the property is scheduled to occur no later than January
2000.
16. Disclosures About Fair Value of Financial Instruments:
The carrying amounts of cash, accounts receivable, accounts payable
and accrued expenses approximate fair value because of the
short maturity of these items.
The Company estimates that the fair value of mortgage notes payable
and other notes payable approximated the carrying amounts for
such loans at December 31, 1997 and was $272,075 at December
31, 1998. The fair value of debt instruments was evaluated
using a discounted cash flow model with discount rates that
take into account the credit of the tenants and interest rate
risk.
17. Purchase of Real Estate:
Purchases of real estate for the quarter ended December 31, 1998
were as follows:
On November 16, 1998, the Company purchased land and an office
building in Rouen, France for approximately $2,336 with
financing of $1,788 obtained from a limited recourse mortgage
loan. The property is leased to a governmental agency,
Direction Regional des Affaires Sanitaires et Sociales, at an
initial annual rent of $243. Rent will increase annually based
on increases in the INSEE index, an index of increases in
construction costs published by the French government. The
lease has a term of nine years.
The mortgage loan is collateralized by the Rouen property, and has a
15-year term with 85% of the balance amortizing over the term
of the loan, and a balloon payment of approximately $268 due
on the maturity date. The loan bears annual interest at 5.16%
during the first five years with the rate to be reset based on
the then prevailing interest rates.
In connection with performing services relating to the Company's
real estate purchases in 1998, an affiliate of the Company
received acquisition fees of $1,001 in 1998.
18. Subsequent Events:
In 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 15,
1999, $3,629 has been funded with a commitment to fund the
remaining $471 after certain conditions are met. The $4,100 of
mortgage loans are collateralized by deed of trust on a
property located in Austin, Texas and a lease assignment. The
loans provide 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, at an annual rate of 12%
during the deferral period. In connection with providing the
limited recourse mortgage financing, Billipp granted the
-51-
<PAGE> 53
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
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 and
payment in full of the loan. The Company also received an
option to purchase the collateralized property.
In February 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. Cendant will occupy the property upon
completion of the property's renovation, which is expected to
occur in the third quarter of 1999. The minority owner of the
subsidiary is a real estate developer who will oversee the
renovation. The Company has contributed the property to the
subsidiary and will fund up to an additional $3,100 for
renovations to the property. Cendant is obligated to pay $472
of the renovation costs. The contribution of the property to
the majority-owned subsidiary will be recorded at its
historical cost.
The agreement with the real estate developer 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 the minority owner.
The minority owner will receive up to $150 for 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 that commences upon substantial completion of
renovations. Annual rents will initially be $1,016 with stated
increases every year.
On March 1, 1999, the Company and Armel, Inc., a tenant of a Company
property in Ft. Lauderdale, Florida, agreed to a lease
termination. Although the lease was scheduled to expire in
August 2001, the Company agreed to an early termination in
consideration for payments of $1,540, representing
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. has entered into a ten-year lease
for the property, commencing July 1999, at an annual rent of
$300 with stated increases every year. The termination will be
amortized into revenue over the remaining life of the Armel
lease, which approximately 30 months, as a result of reduced
rents under the new lease.
19. Selected Quarterly Financial Data (unaudited):
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months Year
ended ended ended ended ended
March 31, June 30, September 30, December 31, December 31,
1998 1998 1998 1998 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $21,701 $20,636 $21,306 $21,687 $85,330
Expenses 11,044 10,339 10,646 12,903 44,932
Income before extraordinary
items 10,283 9,987 10,138 8,625 39,085
Net income 9,714 9,987 10,138 8,625 38,464
Net income per share -
basic and diluted .40 .40 .40 .35 1.55
Dividends declared
per share .4125 .4125 .4125 .4125 1.65
</TABLE>
20. Stock Options and Warrants:
W. P. Carey was granted warrants for 2,284,800 shares exercisable
at $21 per share and 725,930 shares exercisable at $23 per
share as compensation for investment banking services in
connection with structuring the consolidation (see Note 1).
The warrants are exercisable over 10 years beginning January
1999.
-52-
<PAGE> 54
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
The Company maintains stock option plans pursuant to which share
options may be issued. The 1997 Share Incentive Plan (the
"Incentive Plan") authorizes the issuance of up to 700,000
shares. The Company Non-Employee Directors' Plan (the
"Directors' Plan") authorizes the issuance of up to 300,000
shares.
The Incentive Plan provides for the grant of (i) share options
which may or may not qualify as incentive stock options, (ii)
performance shares, (iii) dividend equivalent rights and (iv)
restricted shares. On January 1, 1998, share options for
113,500 shares at an exercise price of $20 per share were
granted. The options granted under the Incentive Plan have a
10-year term and are exercisable for one-third of the granted
options on the first, second and third anniversaries of the
date of grant. The vesting of grants; however, may be
accelerated upon a change in control of the Company.
The Directors' Plan provides for the same terms as the Incentive
Plan. In January 1998, 23,846 share options were granted at an
exercise price of $20 per share.
Share option and warrant activity is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
------ ---------
<S> <C> <C>
Balance at January 1, 1998 --
Granted 3,148,076 $ 21.42
Exercised
Forfeited
--------- ---------
Balance at December 31, 1998 3,148,076 $ 21.42
========= =========
</TABLE>
At December 31, 1998, the range of exercise prices and
weighted-average remaining contractual life of outstanding
share options and warrants was $20 to $23 and ten years,
respectively.
The per share weighted average fair value of share options and
warrants issued during 1998 were estimated to be $1.45 using a
binomial option pricing formula. The more significant
assumptions underlying the determination of the weighted
average fair value include a risk-free interest rate of 5.36%,
a volatility factor of 18.16% and a dividend yield of 7.33%
and an expected life of ten years.
The Company has elected to adopt the disclosure only provisions of
SFAS No. 123. If stock based compensation cost had been
recognized based upon fair value at the date of grant for
options awarded under the two plans in accordance with the
provisions of SFAS No. 123, pro forma net income for 1998
would have been $38,299 and pro forma basic and diluted
earnings per share would have been $1.54.
38,500 and 3,302 share options were granted under the Incentive Plan
and Directors' Plan, respectively, in January 1999.
-53-
<PAGE> 55
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
21. Segment Reporting:
The Company has adopted Statement of Financial Accounting Standards
("FASB") No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports.
The Company operates in two business segments - real estate
operations with domestic and international investments and hotel
operations. The two segments are summarized as follows:
<TABLE>
<CAPTION>
Real Estate Hotel Total Company
----------- ----- -------------
<S> <C> <C> <C>
Revenues:
1998 $ 79,041 $ 6,289 $ 85,330
1997 81,748 14,523 96,271
1996 79,647 21,929 101,576
Operating and interest expenses:
(excluding depreciation and
amoritization)
1998 $ 31,570 $ 4,956 $ 36,526
1997 35,399 10,748 46,147
1996 32,255 15,947 48,202
Income from equity investments:
1998 $ 1,837 $ 1,837
1997 2,076 2,076
1996 1,155 1,155
Net operating income (1):
1998 $ 36,320 $ 1,253 $ 37,573
1997 35,447 3,549 38,996
1996 34,450 5,623 40,073
Total assets:
1998 $804,755 $ 8,509 $813,264
1997 497,722 25,698 523,420
1996 518,577 26,151 544,728
Total long-lived assets:
1998 $784,368 $ 7,013 $791,381
1997 461,723 23,333 485,056
1996 476,984 24,080 501,064
</TABLE>
The Company acquired its first international real estate
investment in 1998. For 1998, geographic information is as follows:
<TABLE>
<CAPTION>
Domestic International Total Company
-------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 84,503 $ 827 $ 85,330
Operating and interest expense 35,982 544 36,526
Net operating income 37,477 96 37,573
Total assets 789,884 23,380 813,264
Total long-lived assets 772,413 18,968 791,381
</TABLE>
(1) Net operating income represents income before gains and extraordinary
items.
-54-
<PAGE> 56
CAREY DIVERSIFIED LLC
NOTES to CONSOLIDATED/COMBINED
FINANCIAL STATEMENTS, Continued
22. Accounting Pronouncement:
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for
all quarters of fiscal years beginning after June 15, 1999
(January 1, 2000 for the Company). The Company believes that
adoption of SFAS No. 133 will not have a material impact on
the consolidated financial statements.
-55-
<PAGE> 57
Item 9. Disagreements on Accounting and Financial Disclosure.
NONE
-56-
<PAGE> 58
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in Company's definitive Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in Company's definitive Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in Company's definitive Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in Company's definitive Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference.
-57-
<PAGE> 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following financial statements are filed as a part of this
Report:
Consolidated/Combined Report of Independent Accountants.
Consolidated/Combined Balance Sheets, December 31, 1998 and 1997.
Consolidated/Combined Statements of Income for the years ended December
31, 1998, 1997 and 1996.
Consolidated Statement of Members' Equity for the year ended December 31,
1998.
Consolidated/Combined Statements of Partners' Capital for the years ended
December 31, 1996 and1997.
Consolidated/Combined Statements of Comprehensive Income for the years
ended December 31, 1996, 1997 and 1998.
Consolidated/Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated/Combined Financial Statements.
(a) 2. Financial Statement Schedule:
The following schedule is filed as a part of this Report:
Schedule III - Real Estate and Accumulated Depreciation as of December 31,
1998.
Notes to Schedule III.
Financial Statement Schedules other than those listed above are
omitted because the required information is given in the Financial Statements,
including the Notes thereto, or because the conditions requiring their filing do
not exist.
-58-
<PAGE> 60
(a) 3 Exhibits:
The following exhibits are filed as part of this Report. Documents
other than those designated as being filed herewith are incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- ---------------------------
<S> <C> <C>
3.1 Amended and Restated Limited Liability Company Exhibit 3.1 to Registration
Agreement of Carey Diversified LLC. Statement on Form S-4
(No. 333-37901)
3.2 Bylaws of Carey Diversified LLC. Exhibit 3.2 to Registration
Statement on Form S-4
(No. 333-37901)
4.1 Form of Listed Share Stock Certificate. Exhibit 4.1 to Registration
Statement on Form S-4
(No. 333-37901)
10.1 Management Agreement Between Carey Management LLC Exhibit 10.1 to Registration
and the Company. Statement on Form S-4
(No. 333-37901)
10.2 Non-Employee Directors' Incentive Plan. Exhibit 10.2 to Registration
Statement on Form S-4
(No. 333-37901)
10.3 1997 Share Incentive Plan. Exhibit 10.3 to Registration
Statement on Form S-4
(No. 333-37901)
10.4 Investment Banking Engagement Letter between Exhibit 10.4 to Registration
W. P. Carey & Co. and the Company. Statement on Form S-4
(No. 333-37901)
10.5 Non-Statutory Listed Share Option Agreement. Exhibit 10.5 to Registration
Statement on Form S-4
(No. 333-37901)
10.6 Credit Agreement by and among Carey Diversified LLC, Exhibit 10.1 to Form 8-K
Chase Manhattan Bank, and the Bank of New York, dated dated May 15, 1998.
March, 26, 1998
21.1 List of Registrant Subsidiaries Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
99.13 Amended and Restated Agreement of Limited Partnership Exhibit 99.13 to Registration
of CPA(R):1. Statement on Form S-4
(No. 333-37901)
99.14 Amended and Restated Agreement of Limited Partnership Exhibit 99.14 to Registration
of CPA(R):2. Statement on Form S-4
(No. 333-37901)
</TABLE>
-59-
<PAGE> 61
<TABLE>
<CAPTION>
Exhibit Method of
No. Description Filing
- ------- ----------- ---------------------------
<S> <C> <C>
99.15 Amended and Restated Agreement of Limited Partnership Exhibit 99.15 to Registration
of CPA(R):3. Statement on Form S-4
(No. 333-37901)
99.23 Press Release from Carey Diversified LLC Exhibit 99.1 to Form 8-K
(March 26, 1998) dated May 15, 1998
99.16 Amended and Restated Agreement of Limited Partnership Exhibit 99.16 to Registration
of CPA(R):4. Statement on Form S-4
(No. 333-37901)
99.17 Amended and Restated Agreement of Limited Partnership Exhibit 99.17 to Registration
of CPA(R):5. Statement on Form S-4
(No. 333-37901)
99.18 Amended and Restated Agreement of Limited Partnership Exhibit 99.18 to Registration
of CPA(R):6. Statement on Form S-4
(No. 333-37901)
99.19 Amended and Restated Agreement of Limited Partnership Exhibit 99.19 to Registration
of CPA(R):7. Statement on Form S-4
(No. 333-37901)
99.20 Amended and Restated Agreement of Limited Partnership Exhibit 99.20 to Registration
of CPA(R):8. Statement on Form S-4
(No. 333-37901)
99.21 Amended and Restated Agreement of Limited Partnership Exhibit 99.21 to Registration
of CPA(R):9. Statement on Form S-4
(No. 333-37901)
99.22 Listed Share Purchase Warrant. Exhibit 99.22 to Registration
Statement on Form S-4
(No. 333-37901)
99.23 Press release from Carey Diversified LLC Exhibit 99.1 to Form 8-K
(March 26, 1998) dated May 15, 1998
</TABLE>
-60-
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
5/1/00 BY: /s/ John J. Park
---------- ------------------------------------------------------
Date John J. Park
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
BY: CAREY DIVERSIFIED LLC
5/1/00 BY: /s/ John J. Park
---------- ------------------------------------------------------
Date John J. Park
Executive Vice President, Chief Financial Officer and
Treasurer
(Principal Financial Officer)
5/1/00 BY: /s/ Claude Fernandez
---------- ------------------------------------------------------
Date Claude Fernandez
Executive Vice President, Chief Administrative Officer
(Principal Accounting Officer)
-61-
<PAGE> 63
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<TABLE>
<CAPTION>
Initial Cost to Company Cost Increase
------------------------------------- Capitalized (Decrease)
Personal Subsequent to in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investment (b)
----------- ------------ ---- --------- -------- --------------- --------------
<S> <C> <C> <C>
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various tenants
in Broomfield, Colorado $2,090,065 $ 247,993 $ 2,538,263
Office and manufacturing
building leased to IMO
Industries Inc. 1,718,172 814,267 4,761,042
Distribution facilities
and warehouses
leased to
The Gap, Inc. 5,728,660 1,525,593 21,427,148
Supermarkets
leased to Winn-Dixie
Stores, Inc. 855,196 6,762,374
Land leased to
Kobacker Stores, Inc. 1,186,443
Warehouse and manufac-
turing plant
leased to Pre Finish
Metals Incorporated 324,046 8,408,833
Retail store leased
to A. Jones 16,452 80,937
Retail store leased
to Wexler & Wexler 73,267 116,019
Retail stores leased to
Kinko's of Ohio, Inc. 14,844 185,541
Warehouse and distribution
center leased to, B&G
Contract Packaging, Inc. 201,721 2,870,928
<CAPTION>
Gross Amount at which Carried at Close of Period (c)
--------------------------------------------------------------
Personal Accumulated
Description Land Buildings Property Total Depreciation
----------- ---- --------- -------- ----- ------------
<S> <C> <C> <C> <C>
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various tenants
in Broomfield, Colorado $ 247,993 $ 2,538,263 $ 2,786,256 $ 63,457
Office and manufacturing
building leased to IMO
Industries Inc. 814,267 4,761,042 5,575,309 119,026
Distribution facilities
and warehouses
leased to
The Gap, Inc. 1,525,593 21,427,148 22,952,741 535,678
Supermarkets
leased to Winn-Dixie
Stores, Inc. 855,196 6,762,374 7,617,570 169,059
Land leased to
Kobacker Stores, Inc. 1,186,443 1,186,443
Warehouse and manufac-
turing plant
leased to Pre Finish
Metals Incorporated 324,046 8,408,833 8,732,879 210,222
Retail store leased
to A. Jones 16,452 80,937 97,389 2,023
Retail store leased
to Wexler & Wexler 73,267 116,019 189,286 2,900
Retail stores leased to
Kinko's of Ohio, Inc. 14,844 185,541 200,385 4,638
Warehouse and distribution
center leased to, B&G
Contract Packaging, Inc. 201,721 2,870,928 3,072,649 71,773
<CAPTION>
Life on which
Depreciation In Latest
Statement of Income
Description Date Acquired is Computed
----------- ------------- -----------------------
<S> <C> <C>
Operating Method:
Office, warehouse and
manufacturing buildings
leased to various tenants
in Broomfield, Colorado January 1, 1998 40 yrs.
Office and manufacturing
building leased to IMO
Industries Inc. January 1, 1998 40 yrs.
Distribution facilities
and warehouses
leased to
The Gap, Inc. January 1, 1998 40 yrs.
Supermarkets
leased to Winn-Dixie
Stores, Inc. January 1, 1998 40 yrs.
Land leased to
Kobacker Stores, Inc. January 1, 1998 N/A
Warehouse and manufac-
turing plant
leased to Pre Finish
Metals Incorporated January 1, 1998 40 yrs.
Retail store leased
to A. Jones January 1, 1998 40 yrs.
Retail store leased
to Wexler & Wexler January 1, 1998 40 yrs.
Retail stores leased to
Kinko's of Ohio, Inc. January 1, 1998 40 yrs.
Warehouse and distribution
center leased to, B&G
Contract Packaging, Inc. January 1, 1998 40 yrs.
</TABLE>
-62-
<PAGE> 64
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<TABLE>
<CAPTION>
Initial Cost to Company Cost Increase
------------------------------------- Capitalized (Decrease)
Personal Subsequent to in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investment (b)
----------- ------------ ---- --------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Land leased to Unisource
Worldwide, Inc. 2,056,876 4,573,360
Centralized telephone
bureau leased to Excel
Communications, Inc. 925,162 4,023,627
Dairy processing
facility leased to
Copeland Beverage
Group, Inc. 2,283,470 10,911,060 $ 373,503
Office building in
Beaumont, Texas
leased to Petrocon
Engineering, Inc. and
Olmstead Kirk Paper Company 164,113 2,343,849
Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,389,951 5,337,002
Warehouse and
distribution center
in Salisbury,
North Carolina leased
to Family Dollar Services, Inc. 246,949 5,034,911 1,214,451
Manufacturing and office
buildings leased to Penn
Virginia Corporation 652,668 4,074,346
Land leased to
Exide Electronics
Corporation 1,638,012
Motion picture theaters leased
to Harcourt General
Corporation 1,739,087 1,527,425 5,709,495
<CAPTION>
Gross Amount at which Carried at Close of Period (c)
--------------------------------------------------------------
Personal Accumulated
Description Land Buildings Property Total Depreciation
----------- ---- --------- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Land leased to Unisource
Worldwide, Inc. 4,573,360 4,573,360
Centralized telephone
bureau leased to Excel
Communications, Inc. 925,162 4,023,627 4,948,789 100,590
Dairy processing
facility leased to
Copeland Beverage
Group, Inc. 2,656,973 10,911,060 13,568,033 272,776
Office building in
Beaumont, Texas
leased to Petrocon
Engineering, Inc. and
Olmstead Kirk Paper Company 164,113 2,343,849 2,507,962 58,596
Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,389,951 5,337,002 6,726,953 133,425
Warehouse and
distribution center
in Salisbury,
North Carolina leased
to Family Dollar Services, Inc. 246,949 6,249,362 6,496,311 131,999
Manufacturing and office
buildings leased to Penn
Virginia Corporation 652,668 4,074,346 4,727,014 101,858
Land leased to
Exide Electronics
Corporation 1,638,012 1,638,012
Motion picture theaters leased
to Harcourt General
Corporation 1,527,425 5,709,495 7,236,920 142,737
<CAPTION>
Life on which
Depreciation In Latest
Statement of Income
Description Date Acquired is Computed
----------- ------------- ----------------------
<S> <C> <C>
Operating Method (continued):
Land leased to Unisource
Worldwide, Inc. January 1, 1998 N/A
Centralized telephone
bureau leased to Excel
Communications, Inc. January 1, 1998 40 yrs.
Dairy processing
facility leased to
Copeland Beverage
Group, Inc. January 1, 1998 40 yrs.
Office building in
Beaumont, Texas
leased to Petrocon
Engineering, Inc. and
Olmstead Kirk Paper Company January 1, 1998 40 yrs.
Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company January 1, 1998 40 yrs.
Warehouse and
distribution center
in Salisbury,
North Carolina leased
to Family Dollar Services, Inc. January 1, 1998 40 yrs.
Manufacturing and office
buildings leased to Penn
Virginia Corporation January 1, 1998 40 yrs.
Land leased to
Exide Electronics
Corporation January 1, 1998 N/A
Motion picture theaters leased
to Harcourt General
Corporation January 1, 1998 40 yrs.
</TABLE>
-63-
<PAGE> 65
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<TABLE>
<CAPTION>
Initial Cost to Company Cost Increase
------------------------------------- Capitalized (Decrease)
Personal Subsequent to in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investment (b)
----------- ------------ ---- --------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Warehouse/ office research
and manufacturing
facilities leased to
Lockheed Martin
Corporation 2,617,330 14,752,353 525,034
Warehouse and office
facility leased to
Kinney Shoe Corporation/
Armel, Inc. 1,173,108 3,368,141
Manufacturing and office
facility leased to
Yale Security, Inc. 345,323 3,913,657
Manufacturing facilities
leased to AP Parts
International, Inc. 4,412,037 447,170 12,337,106
Manufacturing facilities
leased to Northern Tube,
Inc. 620,000 31,725 1,691,580
Manufacturing facilities
leased to Anthony's
Manufacturing Company, Inc. 2,051,769 5,321,776
Manufacturing facilities
leased to Swiss
M-Tex, L.P. 263,618 4,046,406
Land leased to
AutoZone, Inc. 9,382,198
Retail stores leased to
Northern Auto, Inc. 3,202,467 2,711,994
Retail stores leased tp
General Textiles, Inc. 129,173 313,107
<CAPTION>
Gross Amount at which Carried at Close of Period (c)
-------------------------------------------------------------
Personal Accumulated
Description Land Buildings Property Total Depreciation
----------- ---- --------- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Warehouse/ office research
and manufacturing
facilities leased to
Lockheed Martin
Corporation 2,617,330 15,277,387 17,894,717 373,026
Warehouse and office
facility leased to
Kinney Shoe Corporation/
Armel, Inc. 1,173,108 3,368,141 4,541,249 84,203
Manufacturing and office
facility leased to
Yale Security, Inc. 345,323 3,913,657 4,258,980 97,842
Manufacturing facilities
leased to AP Parts
International, Inc. 447,170 12,337,106 12,784,276 308,428
Manufacturing facilities
leased to Northern Tube,
Inc. 31,725 1,691,580 1,723,305 42,290
Manufacturing facilities
leased to Anthony's
Manufacturing Company, Inc. 2,051,769 5,321,776 7,373,545 133,045
Manufacturing facilities
leased to Swiss
M-Tex, L.P. 263,618 4,046,406 4,310,024 101,160
Land leased to
AutoZone, Inc. 9,382,198 9,382,198
Retail stores leased to
Northern Auto, Inc. 3,202,467 2,711,994 5,914,461 67,800
Retail stores leased tp
General Textiles, Inc. 129,173 313,107 442,280 7,828
<CAPTION>
Life on which
Depreciation In Latest
Statement of Income
Description Date Acquired is Computed
----------- ------------- ----------------------
<S> <C> <C>
Operating Method (continued):
Warehouse/ office research
and manufacturing
facilities leased to
Lockheed Martin
Corporation January 1, 1998 40 yrs.
Warehouse and office
facility leased to
Kinney Shoe Corporation/
Armel, Inc. January 1, 1998 40 yrs.
Manufacturing and office
facility leased to
Yale Security, Inc. January 1, 1998 40 yrs.
Manufacturing facilities
leased to AP Parts
International, Inc. January 1, 1998 40 yrs.
Manufacturing facilities
leased to Northern Tube,
Inc. January 1, 1998 40 yrs.
Manufacturing facilities
leased to Anthony's
Manufacturing Company, Inc. January 1, 1998 40 yrs.
Manufacturing facilities
leased to Swiss
M-Tex, L.P. January 1, 1998 40 yrs.
Land leased to
AutoZone, Inc. January 1, 1998 N/A
Retail stores leased to
Northern Auto, Inc. January 1, 1998 40 yrs.
Retail stores leased tp
General Textiles, Inc. January 1, 1998 40 yrs.
</TABLE>
-64-
<PAGE> 66
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<TABLE>
<CAPTION>
Initial Cost to Company Cost Increase
------------------------------------- Capitalized (Decrease)
Personal Subsequent to in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investment (b)
----------- ------------ ---- --------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Retail stores leased to
Fact 2U, Inc. 77,099 236,231
Office facility leased to
Bell Atlantic Corporation 219,548 1,578,592
Land leased to Sybron
International Corporation 1,135,003
Office facility leased
to United States
Postal Service and
Comark, Inc. 1,074,640 11,452,967 2,530
Manufacturing and office
facility leased to
Allied Plywood, Inc. 459,593 1,351,737
Manufacturing and office
facility leased to StairPans
of America, Inc. 139,004 1,758,648
Manufacturing facilities
leased to Quebecor
Printing Inc. 9,773,836 4,458,047 18,695,004
Land leased to High
Voltage Engineering
Corp. 1,954,882
Manufacturing facility
leased to
Wozniak Industries, Inc./
Mayfair Molded
Products Corporation 864,638 2,677,512 1,745
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331
<CAPTION>
Gross Amount at which Carried at Close of Period (c)
--------------------------------------------------------------
Personal Accumulated
Description Land Buildings Property Total Depreciation
----------- ---- --------- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Retail stores leased to
Fact 2U, Inc. 77,099 236,231 313,330 5,906
Office facility leased to
Bell Atlantic Corporation 219,548 1,578,592 1,798,140 39,465
Land leased to Sybron
International Corporation 1,135,003 1,135,003
Office facility leased
to United States
Postal Service and
Comark, Inc. 1,074,640 11,455,497 12,530,137 286,379
Manufacturing and office
facility leased to
Allied Plywood, Inc. 459,593 1,351,737 1,811,330 33,794
Manufacturing and office
facility leased to StairPans
of America, Inc. 139,004 1,758,648 1,897,652 43,966
Manufacturing facilities
leased to Quebecor
Printing Inc. 4,458,047 18,695,004 23,153,051 467,375
Land leased to High
Voltage Engineering
Corp. 1,954,882 1,954,882
Manufacturing facility
leased to
Wozniak Industries, Inc./
Mayfair Molded
Products Corporation 864,638 2,679,257 3,543,895 66,979
Distribution and office
facilities leased to
Federal Express
Corporation 335,189 1,839,331 2,174,520 45,983
<CAPTION>
Life on which
Depreciation In Latest
Statement of Income
Description Enc Date Acquired is Computed
----------- ------------- ----------------------
<S> <C> <C>
Operating Method (continued):
Retail stores leased to
Fact 2U, Inc. January 1, 1998 40 yrs.
Office facility leased to
Bell Atlantic Corporation January 1, 1998 40 yrs.
Land leased to Sybron
International Corporation January 1, 1998 N/A
Office facility leased
to United States
Postal Service and
Comark, Inc. January 1, 1998 40 yrs.
Manufacturing and office
facility leased to
Allied Plywood, Inc. January 1, 1998 40 yrs.
Manufacturing and office
facility leased to StairPans
of America, Inc. January 1, 1998 40 yrs.
Manufacturing facilities
leased to Quebecor
Printing Inc. January 1, 1998 40 yrs.
Land leased to High
Voltage Engineering
Corp. January 1, 1998 N/A
Manufacturing facility
leased to
Wozniak Industries, Inc./
Mayfair Molded
Products Corporation January 1, 1998 40 yrs.
Distribution and office
facilities leased to
Federal Express
Corporation January 1, 1998 40 yrs.
</TABLE>
-65-
<PAGE> 67
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<TABLE>
<CAPTION>
Initial Cost to Company Cost Increase
------------------------------------- Capitalized (Decrease)
Personal Subsequent to in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investment (b)
----------- ------------ ---- --------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Land leased to Dr Pepper
Bottling Company
of Texas 9,795,193
Manufacturing facility
leased to Detroit Diesel
Corporation 21,491,461 5,967,620 31,730,547
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 5,034,749 18,956,971 408,132
Distribution
facility leased to
PepsiCo, Inc. 166,745 884,772
Land leased to Childtime
Childcare, Inc. 508,692 1,673,925
Hotel Complex leased to
Hotel Corporation of
America 8,247,292 737,407 4,564,671 $3,401,744
Hotel leased to Livho, Inc. 2,765,094 11,086,650 2,711,519 2,087,322
Retail store leased to
Eagle Hardware and
Garden, Inc. 11,000,000 4,125,000 11,811,641
Office building in Pantin,
France leased to
four lessees 8,651,444 2,674,914 8,210,990
Office facility leased to
Tellit Assurances 4,580,153 542,968 5,286,915
Portfolio of seven properties
In Houston, Texas
leased to 15 lessees 10,361,643 3,260,000 22,324,073
<CAPTION>
Gross Amount at which Carried at Close of Period (c)
--------------------------------------------------------------
Personal Accumulated
Description Land Buildings Property Total Depreciation
----------- ---- --------- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Land leased to Dr Pepper
Bottling Company
of Texas 9,795,193 9,795,193
Manufacturing facility
leased to Detroit Diesel
Corporation 5,967,620 31,730,547 37,698,167 793,263
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation 5,034,749 19,365,103 24,399,852 473,925
Distribution
facility leased to
PepsiCo, Inc. 166,745 884,772 1,051,517 22,120
Land leased to Childtime
Childcare, Inc. 1,673,925 1,673,925
Hotel Complex leased to
Hotel Corporation of
America 737,407 4,564,671 3,401,744 8,703,822 600,080
Hotel leased to Livho, Inc. 2,765,094 11,587,712 4,297,779 18,650,585 631,878
Retail store leased to
Eagle Hardware and
Garden, Inc. 4,125,000 11,811,641 15,936,641 209,002
Office building in Pantin,
France leased to
four lessees 2,674,914 8,210,990 10,885,904 122,278
Office facility leased to
Tellit Assurances 542,968 5,286,915 5,829,883 37,315
Portfolio of seven properties
In Houston, Texas
leased to 15 lessees 3,260,000 22,324,073 25,584,073 302,166
<CAPTION>
Life on which
Depreciation In Latest
Statement of Income
Description Date Acquired is Computed
----------- ------------- ----------------------
<S> <C> <C>
Operating Method (continued):
Land leased to Dr Pepper
Bottling Company
of Texas January 1, 1998 N/A
Manufacturing facility
leased to Detroit Diesel
Corporation January 1, 1998 40 yrs.
Engineering and
Fabrication facility
leased to Orbital
Sciences Corporation January 1, 1998 40 yrs.
Distribution
facility leased to
PepsiCo, Inc. January 1, 1998 40 yrs.
Land leased to Childtime
Childcare, Inc. January 1, 1998 N/A
Hotel Complex leased to
Hotel Corporation of
America January 1, 1998 7-40 yrs.
Hotel leased to Livho, Inc. January 1, 1998 7-40 yrs.
Retail store leased to
Eagle Hardware and
Garden, Inc. April 23, 1998 40 yrs.
Office building in Pantin,
France leased to
four lessees May 27, 1998 40 yrs.
Office facility leased to
Tellit Assurances June 10, 1998 40 yrs.
Portfolio of seven properties
In Houston, Texas
leased to 15 lessees June 15, 1998 40 yrs.
</TABLE>
-66-
<PAGE> 68
CAREY DIVERSIFIED LLC and Subsidiaries
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<TABLE>
<CAPTION>
Initial Cost to Company Cost Increase
------------------------------------- Capitalized (Decrease)
Personal Subsequent to in Net
Description Encumbrances Land Buildings Property Acquisition (a) Investment (b)
----------- ------------ ---- --------- -------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Office facility leased to
Sprint Spectrum L.P. 1,190,000 6,700,965
Office facility leased to
Direction Regional des
Affaires Sanitaires et
Sociales 1,779,391 303,061 2,109,736
Vacant 1,098,894 2,545,711
------------ ----------- ------------ ---------- ---------- ----------
$94,758,809 $88,358,026 $298,845,159 $6,113,263 $4,612,717 --
=========== =========== ============ ========== ========== ==========
<CAPTION>
Gross Amount at which Carried at Close of Period (c)
--------------------------------------------------------------
Personal Accumulated
Description Land Buildings Property Total Depreciation
----------- ---- --------- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Office facility leased to
Sprint Spectrum L.P. 1,190,000 6,700,965 7,890,965 34,661
Office facility leased to
Direction Regional des
Affaires Sanitaires et
Sociales 303,061 2,109,736 2,412,797 944
Vacant 1,098,894 2,545,711 3,644,605 63,642
----------- ------------- ----------- ------------ ----------
$88,731,529 $301,498,113 $7,699,523 $397,929,165 $7,617,500
=========== ============ ========== ============ ==========
<CAPTION>
Life on which
Depreciation In Latest
Statement of Income
Description Date Acquired is Computed
----------- ------------- ----------------------
<S> <C> <C>
Operating Method (continued):
Office facility leased to
Sprint Spectrum L.P. July 1, 1998 40 yrs.
Office facility leased to
Direction Regional des
Affaires Sanitaires et
Sociales November 16, 1998 40 yrs.
January 1, 1998 and
Vacant July 23, 1998 40 yrs.
</TABLE>
-67-
<PAGE> 69
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<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. $4,125,497 $ 331,910 $12,281,102 $ 108,694
Retail stores leased
to Kobacker Stores,
Inc. 1,938,179
Centralized Telephone
Bureau leased to
Western Union Financial
Services, Inc. 842,233 4,762,302 (16,221)
Computer Center
leased to
AT&T Corporation 269,700 5,099,964 (7,251)
Warehouse and
manufacturing
buildings
leased to Gibson
Greetings, Inc. 3,495,507 34,016,822 770,843
Warehouse and
manufacturing
buildings
leased to CSS Industries,
Inc./ Cleo, Inc. 1,051,005 14,036,912 79,512
<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
Unisource Worldwide, Inc. $12,721,706 January 1, 1998
Retail stores leased
to Kobacker Stores,
Inc. 1,938,179 January 1, 1998
Centralized Telephone
Bureau leased to
Western Union Financial
Services, Inc. 5,588,314 January 1, 1998
Computer Center
leased to
AT&T Corporation 5,362,413 January 1, 1998
Warehouse and
manufacturing
buildings
leased to Gibson
Greetings, Inc. 38,283,172 January 1, 1998
Warehouse and
manufacturing
buildings
leased to CSS Industries,
Inc./ Cleo, Inc. 15,167,429 January 1, 1998
</TABLE>
-68-
<PAGE> 70
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<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. 2,877,273 445,383 11,323,899
Manufacturing facility
to Duff-Norton
Company, Inc. 726,981 8,263,635
Manufacturing facilities
leased to Rochester
Button Company, Inc. 43,753 1,235,328
Manufacturing facilities
leased to Thermadyne
Holdings Corp. 3,789,019 13,163,763
Office and research
facility leased to
Exide Electronics
Corporation 2,844,120
Manufacturing
facilities leased to
DeVlieg Bullard, Inc. 462,295 7,143,644
<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. 11,769,282 January 1, 1998
Manufacturing facility
to Duff-Norton
Company, Inc. 8,990,616 January 1, 1998
Manufacturing facilities
leased to Rochester
Button Company, Inc. 1,279,081 January 1, 1998
Manufacturing facilities
leased to Thermadyne
Holdings Corp. 16,952,782 January 1, 1998
Office and research
facility leased to
Exide Electronics
Corporation 2,844,120 January 1, 1998
Manufacturing
facilities leased to
DeVlieg Bullard, Inc. 7,605,939 January 1, 1998
</TABLE>
-69-
<PAGE> 71
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<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. 70,317 1,476,657
Manufacturing facility
and warehouse leased
to DS Group Limited 238,532 3,339,449
Manufacturing
facilities leased
Sunds Defibrator
Woodhandling, Inc. 47,632 1,288,327 $ 5,320
Retail stores leased to
AutoZone, Inc. 16,416,402
Manufacturing facility
leased to Peerless
Chain Company 1,307,590 11,026,975
Retail store leased to
Wal-Mart Stores, Inc., $3,228,534 1,839,303 6,535,144
Manufacturing and office
facilities leased to Sybron
International Corporation 2,727,958 31,329,955 22,043
Manufacturing and office
facilities leased to
NVR, Inc. 728,683 6,092,840
<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. 1,546,974 January 1, 1998
Manufacturing facility
and warehouse leased
to DS Group Limited 3,577,981 January 1, 1998
Manufacturing
facilities leased
Sunds Defibrator
Woodhandling, Inc. 1,341,279 January 1, 1998
Retail stores leased to
AutoZone, Inc. 16,416,402 January 1, 1998
Manufacturing facility
leased to Peerless
Chain Company 12,334,565 January 1, 1998
Retail store leased to
Wal-Mart Stores, Inc., 8,374,447 January 1, 1998
Manufacturing and office
facilities leased to Sybron
International Corporation 34,079,956 January 1, 1998
Manufacturing and office
facilities leased to
NVR, Inc. 6,821,523 January 1, 1998
</TABLE>
-70-
<PAGE> 72
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<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. 973,328 9,166,104
Office/warehouse
facilities leased to
United Stationers
Supply Company $2,264,154 1,882,372 5,846,214 26,581
Bottling and Distribution
facilities lease to
Dr Pepper Bottling
Company of Texas 27,598,638
Land and industrial/
warehouse/office
facilities leased to
Furon Company 12,213,700 4,221,568 19,676,226
Office/warehouse
facility leased
to Red Bank
Distribution, Inc. 4,852,907 1,629,715 9,396,770
Day care facilities
leased to Childtime
Childcare, Inc. 733,231 2,412,449
----------- ----------- ------------ -------- ---------
$30,295,296 $27,124,784 $267,711,820 $ 53,944 $ 935,577
=========== =========== ============ ======== =========
<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. 10,139,432 January 1, 1998
Office/warehouse
facilities leased to
United Stationers
Supply Company 7,755,167 January 1, 1998
Bottling and Distribution
facilities lease to
Dr Pepper Bottling
Company of Texas 27,598,638 January 1, 1998
Land and industrial/
warehouse/office
facilities leased to
Furon Company 23,897,794 January 1, 1998
Office/warehouse
facility leased
to Red Bank
Distribution, Inc. 11,026,485 January 1, 1998
Day care facilities
leased to Childtime
Childcare, Inc. 2,412,449 January 1, 1998
------------
$295,826,125
============
</TABLE>
-71-
<PAGE> 73
CAREY DIVERSIFIED LLC and SUBSIDIARIES
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1998
<TABLE>
<CAPTION>
Initial Cost to Company Cost
--------------------------------------- Capitalized
Personal Subsequent to
Description Encumbrances Land Buildings Property Acquisition (a)
----------- ------------ ---- --------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Operating real estate:
Hotels located in:
Alpena, Michigan $ 6,955,000 $114,241 $4,256,356 $618,066 $160,717
Petoskey, Michigan 6,955,000 98,326 1,446,757 290,668 328,347
----------- -------- ---------- -------- --------
$13,910,000 $212,567 $5,703,113 $908,734 $489,064
=========== ======== ========== ======== ========
<CAPTION>
Gross Amount at which Carried at Close of Period (c) (d)
-------------------------------------------------------------
Personal Accumulated
Description Land Property Buildings Total Depreciation
----------- ---- -------- --------- ----- ------------
<S> <C> <C> <C> <C> <C>
Operating real estate:
Hotels located in:
Alpena, Michigan $114,241 $ 737,656 $4,297,483 $5,149,380 $201,312
Petoskey, Michigan 98,326 470,259 1,595,513 2,164,098 98,906
-------- ---------- ---------- ---------- --------
$212,567 $1,207,915 $5,892,996 $7,313,478 $300,218
======== ========== ========== ========== ========
<CAPTION>
Life on which
Depreciation In Latest
Statement of Income
Description Date Acquired is Computed
----------- ------------- ----------------------
<S> <C> <C>
Operating real estate:
Hotels located in:
Alpena, Michigan January 1, 1998 7-40 yrs.
Petoskey, Michigan January 1, 1998 7-40 yrs.
</TABLE>
-72-
<PAGE> 74
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) sales of properties, and (iii)
writedowns of properties to fair value.
(c) At December 31, 1998, the aggregate cost of real estate owned by the
Company and its subsidiaries for Federal income tax purposes is
$695,342,780.
Reconciliation of Real Estate Accounted
for Under the Operating Method
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Balance at beginning
of year $ 315,097,546 $ 339,503,452
Additions 4,612,717 1,422,179
Purchases 69,287,712
Sales (3,044,712) (6,458,555)
Writedowns to fair value (1,575,000) (1,489,999)
Reclassification from (to) investment in
direct financing lease 16,563,263 (21,868,468)
Reclassification to real estate
held for sale (3,012,361) (353,377)
------------- -------------
Balance at end of
year $ 397,929,165 $ 310,755,232
============= =============
</TABLE>
-73-
<PAGE> 75
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to Schedule III - Real Estate
and ACCUMULATED DEPRECIATION
Reconciliation of Accumulated Depreciation
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Balance at beginning
of year $ 91,923,183
Depreciation expense $ 7,725,130 8,819,816
Reclassification to real estate
held for sale (104,550) (153,377)
Reclassification to direct financing
lease (4,429,853)
Writeoff resulting from sales
of property (3,080) (2,569,087)
------------ ------------
Balance at end of
year $ 7,617,500 $ 93,590,682
============ ============
</TABLE>
Reconciliation for Operating Real Estate
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Balance at beginning
of year $ 23,387,677 $ 37,426,984
Additions 489,064 532,751
Reclassification to operating
method (16,563,263)
------------ ------------
Balance at close of
year $ 7,313,478 $ 37,959,735
============ ============
</TABLE>
-74-
<PAGE> 76
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>
The Company The Predecessor
Consolidated Combined
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Balance at beginning
of year $13,346,982
Depreciation expense $ 300,218 1,279,766
----------- -----------
Balance at end of year $ 300,218 $14,626,748
=========== ===========
</TABLE>
-75-
<PAGE> 1
EXHIBIT 21.1
-76-
<PAGE> 2
SUBSIDIARIES of REGISTRANT
Corporate Property Associates, a California limited partnership, a
majority-owned subsidiary of Registrant incorporated under the laws of the State
of California and doing business under the name Corporate Property Associates.
Corporate Property Associates 2, a California limited partnership, a
majority-owned subsidiary of Registrant incorporated under the laws of the State
of California and doing business under the name Corporate Property Associates 2.
Corporate Property Associates 3, a California limited partnership, a
majority-owned subsidiary of Registrant incorporated under the laws of the State
of California and doing business under the name Corporate Property Associates 3.
Corporate Property Associates 4, a California limited partnership, a
majority-owned subsidiary of Registrant incorporated under the laws of the State
of California and doing business under the name Corporate Property Associates 4.
Corporate Property Associates 5, a California limited partnership, a
majority-owned subsidiary of Registrant incorporated under the laws of the State
of California and doing business under the name Corporate Property Associates 5.
Corporate Property Associates 6, a California limited partnership, a
majority-owned subsidiary of Registrant incorporated under the laws of the State
of California and doing business under the name Corporate Property Associates 6.
Corporate Property Associates 7, a California limited partnership, a
majority-owned subsidiary of Registrant incorporated under the laws of the State
of California and doing business under the name Corporate Property Associates 7.
Corporate Property Associates 8, L.P., a Delaware limited
partnership, a majority-owned subsidiary of Registrant incorporated under the
laws of the State of Delaware and doing business under the name Corporate
Property Associates 8, L.P.
Corporate Property Associates 9, L.P., a Delaware limited
partnership, a majority-owned subsidiary of Registrant incorporated under the
laws of the State of Delaware and doing business under the name Corporate
Property Associates 9, L.P.
FLY LLC, a Delaware limited liability company, a wholly-owned
subsidiary of Registrant incorporated under the laws of the State of Delaware
and doing business under the name FLY LLC.
RUSH IT LLC, a Delaware limited liability company, a wholly-owned
subsidiary of Registrant incorporated under the laws of the State of Delaware
and doing business under the name RUSH IT LLC.
CALL LLC, a Delaware limited liability company, a majority-owned
subsidiary of Registrant incorporated under the laws of the State of Delaware
and doing business under the name CALL LLC.
UP CD LLC, a Texas limited liability company, a wholly-owned
subsidiary of Registrant incorporated under the laws of the State of Texas and
doing business under the name UP CD LLC.
BILL CD LLC, a Texas limited liability company, a wholly-owned
subsidiary of Registrant incorporated under the laws of the State of Texas and
doing business under the name BILL CD LLC.
CD UP LP, a Texas limited partnership, a wholly-owned subsidiary of
Registrant incorporated under the laws of the State of Texas and doing business
under the name CD UP LP.
-77-
<PAGE> 3
SUBSIDIARIES of REGISTRANT
(continued)
Keystone Capital Company, a Washington real estate investment trust, a
wholly-owned subsidiary of Registrant incorporated under the laws of the State
of Washington and doing business under the name Keystone Capital Company.
Polkinvest SPRL, a Belgium holding company, a majority-owned
subsidiary of Registrant incorporated under the laws of Belgium and doing
business under the name Polkinvest SPRL.
COBC Parcel 18 LLC, a California limited liability company, a
majority-owned subsidiary of Registrant incorporated under the laws of the state
of California and doing business under the name COBC Parcel 18 LLC.
-78-
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Carey Diversified LLC and Subsidiaries on Form S-1 (File No. 333-46257) and Form
S-3 (File No. 333-46083) of our report dated January 26, 1999, on our audits of
the consolidated / combined financial statements and financial statement
schedule of Carey Diversified LLC and Subsidiaries as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996, which report is
included in the Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
January 26, 1999
-80-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,673
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,673
<PP&E> 701,608
<DEPRECIATION> 7,917
<TOTAL-ASSETS> 813,264
<CURRENT-LIABILITIES> 19,588
<BONDS> 271,298
0
0
<COMMON> 0
<OTHER-SE> 514,233
<TOTAL-LIABILITY-AND-EQUITY> 813,264
<SALES> 0
<TOTAL-REVENUES> 85,330
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,081
<LOSS-PROVISION> 1,585
<INTEREST-EXPENSE> 18,266
<INCOME-PRETAX> 39,085
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,085
<DISCONTINUED> 0
<EXTRAORDINARY> (621)
<CHANGES> 0
<NET-INCOME> 38,464
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.55
</TABLE>
