-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SQ+lcvY0J8ITEC1wT9FecPp+scB4OZ0ru5KeCE3Ht1YB6MdTfYZOm/5fRDlXInC3 Jhbw5+12OZHQC7It3+FRKA== 0000950123-00-004227.txt : 20000503 0000950123-00-004227.hdr.sgml : 20000503 ACCESSION NUMBER: 0000950123-00-004227 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAREY DIVERSIFIED LLC CENTRAL INDEX KEY: 0001025378 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133912578 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-13779 FILM NUMBER: 616318 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA STREET 2: 2ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2124921100 MAIL ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA STREET 2: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 FORMER COMPANY: FORMER CONFORMED NAME: CAREY DIVERSIFIED PROPERTIES LLC DATE OF NAME CHANGE: 19961017 10-K405/A 1 AMENDMENT TO FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A #2 For the year ended DECEMBER 31, 1999 of CAREY DIVERSIFIED LLC CD LLC A DELAWARE Limited Liability Company IRS Employer Identification No. 13-3912578 SEC File Number 001-13779 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (212) 492-1100 CD LLC has LISTED SHARES registered pursuant to Section 12(g) of the Act. CD LLC is registered on the NEW YORK STOCK EXCHANGE. CD LLC does not have any Securities registered pursuant to Section 12(b) of the Act. CD LLC is unaware of any delinquent filers pursuant to Item 405 of Regulation S-K. CD LLC (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Non-affiliates held 24,468,901 Listed Shares at March 31, 2000. There are 25,979,383 Listed Shares outstanding at March 31, 2000. 2 PART I Item 1. Business. Carey Diversified LLC ("Carey Diversified" 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, 1999, Carey Diversified's portfolio consisted of 207 properties in the United States and six 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: - - 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; - - covenants restricting the activity of the tenant to reduce the risk of a change in credit quality; - - indemnification of Carey Diversified for environmental and other liabilities; and - - 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. On December 20, 1999, Carey Diversified entered into a merger agreement with Carey Management LLC ("Carey Management" or the "Manager"), the manager of Carey Diversified, pursuant to which the Manager would become a wholly-owned subsidiary of Carey Diversified. The merger is conditioned upon the approval of Carey Diversified shareholders. Upon consummation of the merger, Carey Diversified will change its name to W.P. Carey & Co. LLC and trade on the New York Stock Exchange and Pacific Exchange under the symbol "WPC". See "Recent Developments" below. 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. Following the merger, W.P. Carey & Co. LLC will be a fully integrated company that will continue and expand the real estate investment business of Carey Diversified and the asset and private equity management business of Carey Management. Upon completion of the merger, W.P. Carey & Co. LLC will both own and manage commercial and industrial properties located in 35 states and France, net leased to 125 tenants. In addition, W.P. Carey & Co. LLC will manage more than 175 additional net leased properties on behalf of four real estate investment trusts of which it will be the advisor and manager: Corporate Property Associates 10, Inc., Carey Institutional Properties, Incorporated, Corporate Property Associates 12, Inc., and Corporate Property Associates 14, Inc. 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 31, 2000, Carey Diversified employed one person. An affiliate of Carey Management employs 90 individuals who perform services for Carey Diversified. -1- 3 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. Carey Diversified presently intends to: - - seek additional investment and other opportunities that leverage core management skills (which include in-depth credit analysis, asset valuation and sophisticated structuring techniques); - - optimize the current portfolio of properties through expansion of existing properties, timely dispositions and favorable lease modifications; - - utilize its size and access to capital to refinance existing debt; and - - increase its access to capital. DEVELOPMENTS DURING 1999 On February 19, 1999, Carey Diversified, through a majority owned newly-formed subsidiary, entered into a net lease with Cendant Operations, Inc. at an existing Company property in Moorestown, New Jersey. The Cendant lease became effective upon completion of the property's renovation on May 17, 1999. The Cendant lease provides for a five-year term at an initial annual rent of $1,016,000 with annual stated increases of 2.5%. The minority owner of the subsidiary, Matrix Realty, Inc. ("Matrix"), is a real estate developer that supervised the renovation. The agreement with Matrix provides that Carey Diversified receive a preferred return on its capital contributions, as defined, with any remaining cash flow allocated 75% to Carey Diversified. In March 2000, Carey Diversified fulfilled its obligation to purchase Matrix's interest within one year of the inception of the Cendant lease and bought out Matrix's interest for approximately $500,000. On June 3, 1999, Carey Diversified and Corporate Property Associates 14, both through 50% ownership interests in a limited liability company, purchased land and building in Norcross, Georgia for $31,306,000 and assumed existing net leases with CheckFree Corporation, Inc. CheckFree's lease obligations have been unconditionally guaranteed by its parent company, CheckFree Holdings, Inc. The CheckFree leases have remaining terms through December 31, 2015. The annual combined rent on the leases at December 31, 1999 was $2,564,000 The land lease with CheckFree provides for annual rent of $77,000 with stated rent increases effective January 2000, 2005 and 2010. Annual rent on the building lease is $2,487,000 with rent increases scheduled for January 2004 and each year thereafter based on a formula indexed to increases in the Consumer Price Index, capped at 2.5% per year. The purchase of the CheckFree property was financed with a limited recourse mortgage loan of $15,800,000 collateralized by a deed of trust on the CheckFree property and lease assignments. The loan bears interest at an annual variable rate of interest equal to the sum of the London InterBank Offered Rate ("LIBOR") and 2.5% and provides for scheduled principal payments that approximate a twenty-five year amortization schedule. The loan is scheduled to mature on June 1, 2006 at which time a balloon payment will be due. The loan is prepayable at any time without premium. Carey Diversified and CPA(R):14 also assumed an existing agreement to construct an additional office building at the CheckFree property on a build-to-suit basis at a cost not to exceed $11,061,000. Upon completion of construction, which is scheduled for June, 2000, CheckFree's annual rent will increase by approximately $1,550,000. Carey Diversified and CPA(R):14 have obtained limited recourse mortgage financing of $7,500,000 that will be used to fund the construction. The loan bears interest at an annual variable rate equal to the sum of LIBOR and 2.5% with principal payment installments, effective August 1, 2000, based on a twenty-five year amortization schedule. This loan will also mature on August 1, 2006 at which time a balloon payment will be due. On July 15, 1999 Carey Diversified and AWHQ LLC obtained $25,000,000 of limited recourse financing collateralized by a deed of trust and a lease assignment on a property in Tempe, Arizona that is subject to a net lease with America West Holdings Corporation ("America West"). Carey Diversified owns the property as a tenant-in-common with AWHQ LLC, an affiliate of America West. As a result of the distribution of the entire mortgage proceeds to Carey Diversified, Carey Diversified's undivided ownership interest in the property as a tenant-in-common was adjusted to 74.583%, representing its share of its net contribution, after distribution of the mortgage proceeds, in the property. The loan provides for monthly payments of interest and principal of approximately $180,000 (of which Carey Diversified's share is approximately $134,000) at an annual interest rate of 7.23% based on a 25-year amortization schedule. The loan is scheduled to mature in August 2009 at which time a balloon payment will be due. -2- 4 On December 22, 1999 Carey Diversified purchased a property in Lafayette, Louisiana and assumed an existing net lease with Bell South Telecommunications, Inc. The transaction is described in Note 14 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. OTHER SIGNIFICANT RECENT EVENTS On December 20, 1999, Carey Diversified LLC and the Manager entered into an Agreement and Plan of Merger, whereby the Manager will contribute certain assets relating to its real estate investment advisory business to Carey Diversified by way of a merger with and into a wholly-owned subsidiary of Carey Diversified (the "Merger"). The Merger is subject to the approval of the shareholders of the Company. A consent solicitation with respect to such shareholder approval will be distributed to the shareholders of Carey Diversified, and the Merger will be consummated as soon as practicable following receipt of consents from a majority of the shareholders of Carey Diversified. Following the Merger, Carey Diversified will be renamed W. P. Carey & Co. LLC and will be listed on the New York Stock Exchange and the Pacific Exchange under the symbol "WPC". At the effective time of the merger, Carey Diversified will issue 8,000,000 Listed Shares (subject to adjustment) to the shareholders of the Manager, and will issue up to an additional 2,000,000 Listed Shares over the next four years if funds from operations and total share value return targets are met. The 8,000,000 shares will be subject to a three-year lock-up agreement (with one-third of the shares released from the lock-up each year). The owners of these shares will have the benefit of registration rights once free from the lock-up. In the fourth quarter of 1999, Carey Diversified announced that it would purchase up to 1,000,000 Listed Shares on the open market. Purchases are made on the open market on a discretionary basis based upon favorable market conditions in compliance with Securities and Exchange Commission rules and regulations. As of December 31, 1999, Carey Diversified has repurchased 62,300 Listed Shares for a weighted-average purchase price of $17.01 per Listed Share. 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: - - combine the stability and security of long-term lease payments, including rent increases, with the appreciation potential inherent in the ownership of real estate; - - enhance current returns by utilizing varied lease structures; - - reduce credit risk by diversifying investments by tenant, type of facility, geographic location and tenant industry; and - - increase potential returns by obtaining equity enhancements from the tenant when possible, such as warrants to purchase tenant common stock. FINANCING STRATEGIES -3- 5 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, 1999, Carey Diversified also had approximately $188,248,000 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 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 certain 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 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 -4- 6 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 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 20 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. 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 -5- 7 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 real estate investment trusts. Carey Diversified also faces competition from institutions that provide or arrange for other types of commercial financing through private or 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 other parties, may be required to investigate and clean up hazardous or toxic chemicals, substances or waste or petroleum product or waste, releases on, under, in or from a property. These parties may be held liable to governmental entities or to third parties for specified damages and for investigation and cleanup costs incurred by these parties in connection with the release or threatened release of hazardous materials. These 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 these laws has been interpreted to be joint and several under some 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 environmental assessments are performed by independent environmental consulting and engineering firms for all properties acquired by Carey Diversified. Where warranted, Phase II environmental 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 indemnify it fully 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 compliance with the environmental provisions of the lease or environmental remediation relating to the tenant's operations and to provide that non-compliance with environmental laws is a lease default. In some cases, 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 the entity 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 the 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 -6- 8 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, 1999, no lessee represented 10% or more of the total operating revenue of Carey Diversified. FACTORS AFFECTING FUTURE OPERATING RESULTS 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 INCREASE OUR EXPOSURE IN THE EVENT OF A 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. WE DEPEND 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. WE CAN BORROW A SIGNIFICANT AMOUNT OF FUNDS. 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. WE MAY NOT BE ABLE TO REFINANCE BALLOON PAYMENTS ON OUR MORTGAGE DEBTS. A significant number of our properties are subject to mortgages with balloon payments. Scheduled balloon payments for the next five years are as follows: 2000 - $3 million; 2001 - $13 million; 2002 - $3 million; 2003 - $3 million; 2004 - $20 million
-7- 9 Our credit facility matures in 2001. As of December 31, 1999, the Company had $129,000,000 drawn from the line of credit. An additional $25,000,000 was drawn from the line of credit through March 31, 2000. Our ability to make such balloon payments will depend upon our ability either to refinance the obligation when due, 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. WE MAY BE UNABLE TO RENEW LEASES OR RE-LET VACATED SPACES. 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: 2000 - 1% 2001 - 3% 2002 - 1% 2003 - 3% 2004 - 3%
WE ARE SUBJECT TO POSSIBLE LIABILITIES 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: - - 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; - - 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 - - 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 LOSSES. There are certain types of losses (such as due to wars or some natural disasters) that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of the limits of our insurance 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. 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. -8- 10 The real estate industry is highly competitive. Our principal competitors include national real estate investment trusts, 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: - - Adverse changes in general or local economic conditions, - - Changes in supply of or demand for similar or competing properties, - - Changes in interest rates and operating expenses, - - Competition for tenants, - - Changes in market rental rates, - - Inability to lease properties upon termination of existing leases, - - Renewal of leases at lower rental rates, - - Inability to collect rents from tenants due to financial hardship, including bankruptcy, - - Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate, - - Uninsured property liability, property damage or casualty losses, - - Unexpected expenditures for capital improvements or to bring properties into compliance with applicable federal, state and local laws, and - - Acts of God and other factors beyond the control of our management. WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS. We depend on the efforts of the executive officers and key employees of the Manager. 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. YEAR 2000 ISSUES. In 1999, Carey Diversified and its affiliates formed a task force to identify year 2000 problems. The task force developed and implemented a plan that included inventory, assessment, remediation, testing and contingency planning. Carey Diversified experienced no significant disruptions as a result of the year end date change. The task force intends to monitor other critical dates in the future, such as quarter-end dates. The impact of the year 2000 issues on the company will continue to depend on the way the issues have been addressed by third parties that provide services to Carey Diversified. To date Carey Diversified has not been adversely impacted to any significant extent by the failure of third parties to address year 2000 issues. The task force has developed contingency plans to address risks associated with year 2000 issues that may arise. There can be no assurance that these plans will fully mitigate any problems, if any arise. The foregoing year 2000 discussions constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Readiness and Disclosure and Disclosure Act of 1998. -9- 11 Item 2. PROPERTIES Set forth below is certain information relating to the Company's properties owned as of December 31, 1999:
PROPERTY SQUARE CURRENT INCREASE LEASE MAXIMUM LESSEE/GUARANTOR LOCATION FOOTAGE ANNUAL RENT FACTOR EXPIRATION TERM - ----------------------------------------------------------------------------------------------------------------------- DR PEPPER BOTTLING COMPANY OF TEXAS Irving, TX 459,497 $2,124,018 Houston, TX 262,450 2,124,019 -------------------------- 721,947 4,248,037 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 144,300 496,163 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 3,626,912 CPI Dec-13 Dec-38 GIBSON GREETINGS, INC. Cincinnati, OH 593,340 1,860,000 Berea, KY 601,500 1,240,000 -------------------------- 1,194,840 3,100,000 Stated Nov-13 Nov-23 LIVHO, INC. Livonia, MI 158,000 3,014,545 Stated Jan-08 Jan-28 AMERICA WEST HOLDINGS CORPORATION Tempe, AZ 218,000 2,538,815(10) CPI Nov-19 Nov-29 QUEBECOR PRINTING INC. Doraville, GA 432,559 1,428,094 CPI Dec-09 Dec-34 Olive Branch, MS 270,500 973,255 CPI Jun-08 Jun-33 -------------------------- 703,059 2,401,349 FURON COMPANY New Haven, CT 110,389 532,705 Mickleton, NJ 86,175 395,786 Aurora, OH 147,848 543,330 Mantua, OH 150,544 482,960 Bristol, RI 105,642 283,498 Aurora, OH 26,692 176,521 -------------------------- 627,290 2,414,800 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)
10 12
PROPERTY SQUARE CURRENT INCREASE LEASE MAXIMUM LESSEE/GUARANTOR LOCATION FOOTAGE ANNUAL RENT FACTOR EXPIRATION TERM - ----------------------------------------------------------------------------------------------------------------------- THERMADYNE HOLDINGS CORP. Industry, CA 325,800 $2,525,163 CPI Feb-10 Feb-35 THE GAP, INC. Erlanger, KY 391,000 1,252,636 CPI Feb-03 Feb-43 362,750 952,749 CPI Feb-03 Feb-43 -------------------------- 753,750 2,205,385 ORBITAL SCIENCES CORPORATION Chandler, AZ 280,000 2,655,320 CPI Sep-09 Sep-29 UNITED STATES POSTAL SERVICE Bloomingdale, IL 116,000 1,089,982 Stated Apr-06 Apr-06 COMARK INC. 36,967 272,120 Stated May-00 May-00 -------------------------- 152,967 1,362,102 LOCKHEED MARTIN CORPORATION King of Prussia, 88,578 974,358 Market Jul-03 Jul-08 PA Glen Burnie, MD 45,804 345,000 Stated Apr-01 Apr-21 -------------------------- 134,382 1,319,358 AP PARTS INTERNATIONAL, INC. Toledo, OH 1,160,000 1,614,338 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 1,519,253 CPI Jun-08 Jun-28 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 1,457,788(7) 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 70,712 649,087 Sterling, MA 70,000 679,555 -------------------------- 140,712 1,328,642 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-18 EAGLE HARDWARE & GARDEN, INC. Bellevue, WA 127,360 1,120,606(6) CPI & Sep-17 Sep-17 %sales BELL SOUTH TELECOMMUNICATION Lafayette Parish, 80,450 1,096,170 Stated Dec-09 Dec-39 LA
11 13
PROPERTY SQUARE CURRENT INCREASE LEASE MAXIMUM LESSEE/GUARANTOR LOCATION FOOTAGE ANNUAL RENT FACTOR EXPIRATION TERM - ----------------------------------------------------------------------------------------------------------------------- CHECKFREE HOLDINGS, INC. Norcross, GA 178,584 1,243,872 Stated/ Dec-15 DEC-15 CPI LOCKHEED MARTIN SERVICES GROUP Houston, TX 60,364 $561,264 Stated Jul-04 Jul-04 JOHNSON ENGINEERING CORPORATION Houston, TX 48,214 476,964 Stated Jun-03 Jun-03 -------------------------- 108,578 1,038,228 CENDANT OPERATION, INC. Moorestown, NJ 65,567 1,016,289 Stated June-04 June-04 DEVLIEG-BULLARD, INC. McMinnville, TN 276,991 605,172 Frankenmuth, MI 132,400 348,631 -------------------------- 409,391 953,803 CPI Apr-06 Apr-26 ANTHONY'S MANUFACTURING COMPANY, San Fernando, CA 95,420 493,392 INC. San Fernando, CA 7,220 37,333 San Fernando, CA 40,285 206,416 San Fernando, CA 39,920 208,303 -------------------------- 182,845 945,444 CPI May-07 May-12 UNITED STATIONERS SUPPLY COMPANY New Orleans, LA 59,000 324,389 Memphis, TN 75,000 280,886 San Antonio, TX 63,321 310,559 -------------------------- 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 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 97,567 765,101 Stated Dec-04 Dec-09 VERIFICATIONS NATIONALES ET INTERNATIONALES DES IMPORTS(2) NATIONAL POUR L'EMPLOI(2) DIRECTION DEPARTMENTALE DU TRAVAIL ET DE L'EQUIPMENT(2) HOECHST ROUSSEL VET(2) Pantin, France -------------------------- 51,714 777,618 INSEE(5) 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 34,887 128,470 % Sales Jun-07 Jun-37 Brewton, AL 30,625 134,500 % Sales Oct-10 Oct-30 -------------------------- 158,512 769,616(6) AT&T CORPORATION Bridgeton, MO 55,810 757,846 Stated Nov-01 Nov-11
12 14
PROPERTY SQUARE CURRENT INCREASE LEASE MAXIMUM LESSEE/GUARANTOR LOCATION FOOTAGE ANNUAL RENT FACTOR EXPIRATION TERM - ------------------------------------------------------------------------------------------------------------------------- NV RYAN, INC. Thurmont, MD 150,468 125,131 Farmington, NY 29,273 648,239 -------------------------- 179,741 $773,370 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(6) BELL SOUTH ENTERTAINMENT, INC. Ft. Lauderdale, FL 80,540 300,000 CPI Jul-06 Jul-09 VACANT Salisbury, NC 311,182 MOTOROLA, INC. Urbana, IL 46,350 600,000 Stated (9) VARIOUS Broomfield, CO 60,660 184,633 CPI May-02 May-02 Broomfield, CO 40,440 149,530 CPI Dec-01 Dec-01 -------------------------- 101,100 334,163 WESTERN UNION FINANCIAL SERVICES, Bridgeton, MO 78,080 573,221 Stated Nov-01 Nov-11 INC. EXIDE ELECTRONICS CORPORATION Raleigh, NC 27,770 572,130 CPI Jul-06 Jul-06 LOCKHEED MARTIN CORPORATION 142,796 475,200 Stated Aug-00 Aug-02 MERCHANTS HOME DELIVERY, INC. Oxnard, CA 22,716 250,788 Stated Jan-04 Jan-14 -------------------------- 165,512 725,988 UNITED SPACE ALLIANCE LLC 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 53,158 532,800 Stated Dec-06 Dec-20 DS GROUP LIMITED Goshen, IN 54,270 500,212 CPI Feb-10 Feb-35 WOZNIAK INDUSTRIES, INC. Schiller Park, IL 84,197 497,400 Stated Aug-05 Dec-23 TITAN CORPORATION San Diego, CA 166,403 485,084(8) 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
13 15
PROPERTY SQUARE CURRENT INCREASE LEASE MAXIMUM LESSEE/GUARANTOR LOCATION FOOTAGE ANNUAL RENT FACTOR EXPIRATION TERM - ----------------------------------------------------------------------------------------------------------------------- TELLIT ASSURANCES(2) Rouen, France 27,593 $464,041 INSEE(5) Aug-04 Aug-09 CHILDTIME CHILDCARE, INC. 12 Locations: 83,694 439,008(9) CPI Jan-16 Jan-41 AZ, CA, MI,TX PETROCON ENGINEERING, INC. Beaumont, TX 48,700 327,516 Stated Jan-99 Jan-00 OLMSTEAD KIRK PAPER COMPANY 5,760 36,000 Stated Jan 03 Jan 03 -------------------------- 54,460 363,516 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 160,000 222,102 Stated Dec-01 Dec-03 HONEYWELL, INC. Houston, TX 32,320 335,484 Stated Sep-02 Sep-02 ADAPTIVE CONTROLS, INC. 18,058 107,880 Stated Nov-00 Nov-00 ADPLEX, INC. 13,698 92,280 Stated May-01 May-01 WORK READY, INC 7,306 59,640 Stated Aug-01 Aug-01 THE TERMINEX INTERNATIONAL COMPANY, Houston, TX 3,330 25,980 Stated Sep-00 Sep-00 INC. -------------------------- 42,392 285,780 KOBACKER STORES, INC. Fontana, CA 4,500 46,158 Rialto, CA 4,500 20,580 Reynoldsburg, OH 3,840 21,525 Tallmadge, OH 4,000 21,157 Anderson, IN 4,500 19,362 Cuyahoga Falls, OH 3,792 18,900 Marion, OH 3,900 18,663 Fremont, OH 4,000 16,800 Merced, CA 4,500 20,370 Sacramento, CA 4,400 25,725 Stockton, CA 4,500 21,525 Sacramento, CA 4,400 16,548 -------------------------- 50,832 267,313 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. 6,216 59,160 Stated Aug-05 Aug-05 -------------------------- 27,285 259,532 DIRECTION REGIONAL DES AFFAIRES SANITAIRES ET SOCIALES(3) Rouen, France 25,228 232,828 INSEE(5) Oct-04 Oct-04 BELL ATLANTIC CORPORATION Milton, VT 30,624 231,000 Stated Feb-03 Feb-13
14 16
PROPERTY SQUARE CURRENT INCREASE LEASE MAXIMUM LESSEE/GUARANTOR LOCATION FOOTAGE ANNUAL RENT FACTOR EXPIRATION TERM - ----------------------------------------------------------------------------------------------------------------------- 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 THE ROOF CENTERS, INC. Manassas, VA 60,446 256,896 Stated Mar-02 Jul-09 ROCHESTER BUTTON COMPANY South Boston, VA 43,387 95,957 Kenbridge, VA 38,000 84,043 -------------------------- 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 65,000 Market May-99 May-09 College Station, TX 12,080 189,986 Market Feb-02 Feb-09 Colliersville, TN 390,380 6,624,000 CPI Dec-19 Dec-29 -------------------------- 432,672 6,878,986 CONTINENTAL AIRLINES, INC. Houston, TX 25,125 142,560 Stated Jul-03 Jul-03 PEPSI-COLA METROPOLITAN BOTTLING COMPANY, INC. Houston, TX 17,725 111,558 Stated Oct-04 Oct-04 POPULAR STORES, INC. Scottsdale, AZ 11,800 96,766(6) %Sales Jul-00 Jul-10 STAIR PANS OF AMERICA, INC. Fredericksburg, VA 45,821 94,300 Stated Jul-07 Jul-07 LOCKHEED MARTIN SERVICES. Webster, TX 10,960 82,200 Stated Jul-00 Jul-00 PENN VIRGINIA COAL COMPANY Duffield, VA 12,804 74,000 CPI Nov-04 Nov-04 CENTS STORES, INC. Mesa, AZ 11,039 55,620 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 47,968 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(6) %Sales Aug-00 Aug-10 RECLAMATION FOODS, INC. Apache Junction, AZ 9,945 24,028 CPI Jun-01 Jun-06 WEXLER & WEXLER New Orleans, LA 1,641 19,692(6) %Sales Oct-05 Oct-15 SCALLON'S CARPET CASTLE, INC. Casa Grande, AZ 3,134 18,480 Stated Dec-03 Dec-03
15 17
PROPERTY SQUARE CURRENT INCREASE LEASE MAXIMUM LESSEE/GUARANTOR LOCATION FOOTAGE ANNUAL RENT FACTOR EXPIRATION TERM - ----------------------------------------------------------------------------------------------------------------------- ARTHUR L. JONES Greensboro, NC 1,700 $ 6,600 CPI Apr-99 Apr-01 ALPENA HOLIDAY INN Alpena, MI 96,333 759,365(1) PETOSKEY HOLIDAY INN Petoskey, MI 83,462 353,459(1) GIST-BROCADES FRANCE S. A. Indre et Loire, 37,337 214,447 INSEE(5) Jun-05 Jun-08 France SOCIETE DE TRAITEMENS Indre et Loire, 69,470 245,083 INSEE(5) Jun-05 Jun-08 France
(1) The Company operates a hotel business at this property. Dollar amounts are net operating income for 1999 for the hotel business. (2) CD owns 75% of this property and rents are collected in French Francs, conversion rate at December 31, 1999 used. (3) CD owns 99% of this property and rents are collected in French Francs, conversion rate at December 31, 1999 used. (4) CD owns 80% of this property and rents are collected in French Francs, conversion rate at December 31, 1999 used. (5) INSEE construction index, an index published quarterly by the French Government. (6) Current annual rent amount before any percentage of sales rent. (7) Current annual rent represents the 33.33% ownership interest in this property. (8) Current annual rent represents the 18.54% ownership interest in this property. (9) Current annual rent represents the 33.93% ownership interest in this property. (10) Current annual rent represents 74.583% ownership interest in this property. 16 18 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, 1999 to a vote of security holders, through the solicitation of proxies or otherwise. 17 19 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, 1999 there were approximately 20,800 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 paid since inception are as follows: Cash dividends declared per share:
Quarter 1999 1998 - ------- ---- ---- 1 $ .4175 $ .4125 2 .4175 .4125 3 .4175 .4125 4 .4175 .4125 ------- ------- Total $1.6700 $1.6500
Listed Shares The high, low and closing prices on the New York Stock Exchange for a Listed Share for each fiscal quarter of 1999 and 1998 were as follows (in dollars):
1999 High Low Close - ---- ---- --- ----- First Quarter $17.88 $17.44 $17.69 Second Quarter 17.38 17.06 17.25 Third Quarter 20.00 17.38 20.00 Fourth Quarter 17.19 16.63 16.88
1998 High Low Close - ---- ---- --- ----- First Quarter $22.38 $20.13 $20.13 Second Quarter 22.25 19.75 19.75 Third Quarter 20.94 18.50 19.75 Fourth Quarter 21.31 18.19 19.69
18 20 Item 6. Selected Financial Data. (in thousands, except per share data)
The Company The Predecessor Consolidated Combined Operating Data 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues $ 88,506 $ 85,330 $ 96,271 $101,576 $107,946 Income before extraordinary items 34,078 39,085 40,561 45,547 49,363 Basic and diluted earnings per Listed Share 1.33 1.55 Cash distributions (1) 42,525 30,820 43,620 34,173 57,216 Cash provided by operating activities 48,241 51,944 51,641 53,317 63,276 Cash (used in) provided by investing activities (55,189) (71,525) (273) 19,545 24,327 Cash provided by (used in) financing activities 3,353 6,668 (61,335) (72,020) (105,578) Cash dividends declared per share 1.67 1.65 Balance Sheet Data: Real estate, net (2) $501,350 $453,181 $240,498 $271,660 $301,505 Net investment in direct financing leases 295,556 295,826 216,761 215,310 218,922 Total assets 856,259 813,264 523,420 544,728 582,324 Long-term obligations (3) 310,562 254,827 150,907 187,414 233,300
(1) 1997, 1996 and 1995 amounts represent cash distributions to Limited Partners of the predecessor partnership. (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. 19 21 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, 1999. 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. The risk factors are fully described in Item I of this Annual Report on Form 10-K. 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 property acquisitions in France. Additional properties were purchased in France in 1999. Public business enterprises are required to report financial and descriptive information about their 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. Results of Operations: Year-Ended December 31, 1999 Compared to Year-Ended December 31, 1998 Income before the effects of non-recurring items consisting of the noncash writedown of investments, gains from sales and extraordinary items increased by $437 or 1% in 1999 as compared to 1998. This increase is primarily due to the growth of lease revenues, which was partially offset by increases in depreciation, interest and general and administrative expenses. Net income for the twelve months ended December 31, 1999 decreased by $4,425 as compared to 1998 primarily due to a noncash writedown to net realizable value of $4,830 of CDC's investment in Meristar Hospitality Corporation, a publicly traded real estate investment trust specializing in hotels. The noncash writedown was recognized because of continued weakness in the public market's valuation of equity securities of real estate investment companies, including Meristar. CDC owns approximately 780,000 units of the operating partnership of Meristar, which was acquired in 1996 by the predecessor CPA partnerships in exchange for the transfer of a hotel property. Upon commencement of CDC's operations in January 1998, pursuant to a consolidation of the nine CPA predecessor partnerships, the equity investment in Meristar was recorded on the books of CDC at $23,600 based on the then quoted market value per share of Meristar common stock. The carrying value of the equity investment in Meristar subsequent to the writedown approximated CDC's pro rata share of Meristar at Meristar's reported net asset value. The quoted market value of a share of common stock at December 31, 1999 was $16.00 resulting in an aggregate value as of that date of approximately $12,484, if converted. Lease revenues, including rental income from operating leases and interest income from financing leases, increased by approximately $3,300 or 4% for the year ended December 31, 1999 as compared to 1998. This increase represents the excess of additional lease revenues of approximately $6,000 from completed construction projects and the effect of property acquisitions, over revenue decreases as compared with 1998 of approximately $2,700 due to sales of properties and lease terminations. During 1999, CDC completed construction of a new $37,000 office building for America West Holdings Corp. in Tempe, Arizona in which CDC owns an approximate 75% interest, a $3,000 -20- 22 renovation for property leased to Cendant Operations, Inc. in Moorestown New Jersey and a $1,800 expansion on a property in Chandler, Arizona leased to Orbital Sciences Corporation. Annual rent on the America West and Cendant properties is $2,539 and $1,000 respectively. Additional annual rent from the Orbital Science expansion is $234. Approximately $2,500 of the increase in lease revenues was realized as a result of recognizing a full year's rent in 1999 on properties acquired in 1998, including a property leased to Eagle Hardware and Garden Inc., a portfolio of seven properties acquired from J.A. Billipp Development Corporation and three properties located in France. Decreases in lease revenues in 1999 of approximately $2,700 resulted from the scheduled expiration of a lease with Hughes Markets in April 1998 and the sale of properties. Approximately $1,300 of the decrease in lease revenues was due to the termination of the lease with Hughes Markets for a dairy processing plant in Los Angeles, California. On April 30, 1998, CDC's two-year extension term with Hughes Markets at above-market rental rates ended, and a new lease for the property with Copeland Beverage Group, Inc. became effective. Annual rent of $1,800 from the lease with Copeland approximated the rent in effect before commencement of Hughes' two-year extension term. In April 1998, CDC received a final rent payment of $3,500 from Hughes. Loss of revenues from the sale of properties in 1999 and 1998 account for approximately $1,400 of the decrease in lease revenues. These properties were sold as a result of exercise of purchase options by the lessees of the properties. Copeland Beverage Group, Inc. defaulted on its loans and a receiver was appointed to oversee the liquidation of the company in August 1999. Copeland was required to provide CDC with an $1,800 letter of credit, and since December 31, 1999, CDC has drawn on the full amount of the letter. DeVlieg Bullard, Inc., the lessee of two properties in McMinnville, Tennessee and Frankenmuth, Michigan, filed a petition for bankruptcy and is in the process of submitting a plan of reorganization to the bankruptcy court. DeVlieg has not indicated whether it will seek to affirm or terminate its lease with CDC. Annual rent from the DeVlieg lease is $954. CDC has drawn on the full amount of a letter of credit for $831 provided by DeVlieg. Proceeds from the Copeland and DeVlieg letters of credit will be applied to fund unpaid rent and property carrying costs for 1999 and, to the extent there are sufficient proceeds, for 2000. CDC has completed funding construction of four office buildings in Collierville, Tennessee for the Federal Express Corporation at a cost of $77,000 as of February 2000. CDC has entered into a lease with Federal Express with an initial term of 20 years and two ten-year renewal options, that provides for annual rental income of approximately $6,600. The lease also provides for yearly rent increases indexed to increases in the Consumer Price Index. The lease term commenced in February 2000. CDC is also funding construction of an office facility in Tours, France leased to Bouygues Telecom for an estimated cost of $12,600. The lease with Bouygues Telecom provides for annual rent of $1,146. Construction is expected to be completed in the year 2000 at which time recognition of rental income on the lease will commence. Hotel operating income (hotel revenues less hotel expenses) decreased from $1,333 in 1998 to $1,113 in 1999 primarily due to a transfer of hotel operations in 1998. Income from hotels in 1998 included one month of operating income from a hotel in Livonia, Michigan, whose operations were transferred to an affiliated entity on February 1, 1998. The affiliated entity entered into a lease with CDC for the hotel property, allowing CDC to retain certain tax benefits while retaining substantially all of the economic benefits of owning the hotel properties. Operating income from the hotels located in Alpena and Petosky, Michigan was substantially unchanged. Other income increased by $250 or 26%, primarily due to the receipt of payments in connection with the settlement of a dispute with the former tenant of a property in Broomfield, Colorado. Pursuant to the settlement, CDC received $700 of unpaid rents, interest and penalties due from the former tenant. CDC also received proceeds of $265 from the settlement of a bankruptcy by a former tenant that is included in other income. Income from equity investments increased by 3% in 1999 as compared to 1998. Minority interest in income decreased by approximately $2,000 in 1999 as compared to 1998 due to the redemption of certain minority interests in July 1998. Net gains from the sale of assets in 1999 were $471 and consist of the sale of two properties, Hotel Corporation of America and KSG, Inc. Both sales were made pursuant to the exercise of purchase options by the lessees. Interest expense increased by approximately $535, or 3% in 1999 as compared to 1998 primarily due to an increase in debt balances for the acquisition of additional properties. Total debt, consisting of limited recourse mortgage debt and advances on the revolving line of credit, increased from approximately $271,000 in 1998 to $317,000 -21- 23 in 1999. The increase in interest expense from additional borrowings was substantially offset by the decrease in expense from lower principal balances on amortizing mortgage loans. CDC used draws on its $185,000 revolving line of credit to fund construction costs, acquisitions and refinance high rate debt on a transitional basis. Advances made on the revolving line of credit during 1999 were repaid from the proceeds of limited recourse mortgage loans and property sales. CDC continues to evaluate opportunities for re-leveraging certain of its properties with limited recourse mortgage debt. Depreciation and amortization expense increased by $2,786 in 1999 as compared to 1998 primarily due to the acquisition of properties in 1998 and the completion of construction on properties leased to America West Holding Corp. and Cendant Operations, Inc. in 1999. General and administrative expenses increased by approximately $1,400 in 1999 as compared to 1998 primarily due to increases in professional fees and state and local income taxes. Professional fees increased due to the implementation of a new integrated accounting and asset management system and costs related to the evaluation and remediation of Year 2000 issues. A portion of the increase in professional fees is due to efforts to improve CDC's tax reporting capabilities to shareholders. CDC revised its systems and procedures to provide accelerated reporting of tax information to shareholders and engaged an external processing agent to provide shareholders with internet access to their tax information. State and local income taxes have increased due to the growth of CDC's portfolio of properties. Property expenses increased by approximately $375 due to an increase in management and performance fees. Management and performance fees are based on the total market capitalization of CDC. These fees will tend to increase with the growth of CDC's portfolio. 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. 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 reflect the combined results of nine static and liquidating predecessor partnerships. The results for 1997 reflect several nonrecurring items including 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. The ASA lease represented 3% of 1997 lease revenues, 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. 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 property expenditures were required in 1999 or 1998. -22- 24 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 decreased to 7% of overall revenues. 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. Interest expense decreased as a result of paying off several mortgage loans in 1998, amortization of mortgage debt and the refinancing of a $12,700 limited recourse mortgage loan in June 1997, collateralized by properties leased to Furon Company at a lower rate of interest. CDC used draws from its $185,000 revolving 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 $621in 1998. In addition, CDC obtained $11,000 of mortgage financing on the Eagle property in December 1998. The increase in general and administrative expense was due, in part, to CDC's transition from a combined group 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. 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. CPA(R) Partnership management fees were based on operating cash flow and/or rent collections. 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 Meristar. The decreased earnings for Meristar for 1998 included an extraordinary charge and one-time restructuring charges. 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's primary sources of capital to meet its short-term and long-term needs are cash generated from operations, limited recourse mortgage loans, unsecured indebtedness and the issuance of additional equity securities. The issuance of equity was not a significant source of capital in 1999 because the cost of obtaining debt financing during 1999 was attractive as compared to the cost of raising capital through an offering of equity securities. This is primarily due to the general weakness in valuation of equity securities of real estate companies by the public markets and a favorable interest rate climate for debt financing. Cash flows from operations and distributions from equity investments for the year ended December 31, 1999 of $49,016 were sufficient to fund the payment of dividends to shareholders of $42,525 and distributions to minority interests of $2,344. Cash and cash equivalents decreased by $3,376 in 1999 as compared to 1998 resulting from to management's decision to reduce excess cash balances and improve the effectiveness of working capital. Dividends paid to shareholders in 1999 of $42,525 exceeded dividends paid in 1998 of $30,820 primarily because 1998 was the first full year of operations for the CDC and three of the four dividends declared in 1998 -23- 25 were paid during the year. In March, 2000, quarterly dividends were increased to $0.4225 per listed share from $0.4175 per listed share. CDC expects to meet its short-term liquidity needs for the payment of operating expenses, dividends to shareholders and regularly scheduled debt service from cash flows generated from operations and existing cash balances. Cash flows from operations derived from existing properties for 2000 are expected to remain stable as compared to 1999. Cash flows for the year 2000 will be favorably affected by recognition of a full year's operation of properties acquired or constructed in 1999, including the properties leased to America West and Cendant Operations. Annual cash flows from these investments will approximate $2,300. Increases in annual cash flows of $6,840 are expected from the completion of construction of properties leased to Federal Express and Bouygues Telecom in 2000. The expected increases in cash flows will be partially offset by the possible loss of rents from properties leased to Copeland Beverage and DeVlieg Bullard and from properties sold in 1999. A portion of the funds received from the Copeland and DeVlieg letters of credit will be applied to fund property carrying costs and unpaid rents during 2000 but such proceeds will not cover the loss of revenues from both leases for the entire year. A property formerly leased to KSG Inc. was sold in November 1999 for $11,000 resulting in a reduction in annual cash flows of $900. The Company's ability to maintain its current level of cash flows after 2000 may depend in part on its ability to re-lease the Copeland and DeVlieg properties. CDC is exploring various options for the property leased to Copeland including re-leasing the property for its current use or a possible redevelopment of the property. The property consists of an 18 acre parcel in the City of Los Angeles, California. A redevelopment could result in no revenues being generated from the property for an extended period due to the time required for planning, construction of new facilities and obtaining tenants for the property. CDC is in the initial stages of evaluating its options with respect to the Copeland property and no final decision has been made with respect to the re-marketing of the property. CDC is currently pursuing new tenants for the DeVlieg properties. CDC's investing activities for 1999 primarily consist of funding construction costs for build to suit transactions and the acquisition of new properties for $64,588. Construction costs funded in 1999 approximated $38,600 and primarily relate to properties leased to America West, Cendant Operations and Federal Express and the funding of an expansion for Orbital Sciences. Construction of these properties, except for the property leased to Federal Express, was completed in 1999. The Federal Express property was completed in February 2000. Construction costs for the properties located in France approximate $5,117 and work on these properties except for the office facility in Tours was completed in July 1999. In June 1999, CDC acquired a 50% interest in a joint venture that purchased property located in Norcross, Georgia leased to CheckFree Corporation. The total purchase price of the property was $31,306 of which $15,800 was supplied by a limited recourse mortgage loan. The leases with CheckFree provide for annual rents of $2,564 per year of which CDC's share is $1,282 with scheduled rent increases based on a formula indexed to the Consumer Price Index. Financing activities during 1999 consisted primarily of the payment of dividends to shareholders of $42,525, distributions to minority interests of $2,344 and obtaining additional borrowings of $74,251 to fund investment activities. The additional borrowings were derived primarily from the placement of additional mortgage debt during the year. CDC uses limited recourse mortgage notes for a substantial portion of its long-term financing strategy because the cost of this financing is attractive and the exposure of its assets is limited to the collateral designated for each loan. Limited recourse mortgage loans placed in 1999 collateralized by properties leased to America West, AutoZone, Inc. and The Gap, Inc. is equal to $55,850. Annual interest rates on the loans ranged from 6.85% to 7.91% with maturities of five to twelve years. The mortgage loans provide for monthly installment payments including interest and principal amortization pursuant to specified amortization periods for each loan. CDC maintains a revolving line of credit that provides for borrowings of up to $185,000. Advances from the line of credit bear interest at an annual rate indexed to the LIBOR Rate. 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 is in compliance with these covenants. Advances of $150,000 were drawn on the revolving line of credit as of March 2000. The revolving line of credit matures in March, 2001. CDC believes that based on its current financial condition an extension or renewal of the revolving line of credit is probable. -24- 26 CDC uses its revolving line of credit to provide additional flexibility in meeting its long and short-term capital needs. During 1999 advances from the revolving line of credit were used to acquire new properties, fund construction costs on build-to-suit transactions and capital improvements to existing properties in the portfolio. Funds from the revolving line of credit were also used to pay off high rate mortgage debt, satisfy balloon payments on maturing mortgage debt and to temporarily fund working capital needs. Advances made on the revolving line of credit during 1999 were repaid from the proceeds of new limited recourse mortgage debt and from excess cash derived from the sales of properties during the year. CDC expects to meet its capital requirements to fund future property acquisitions, construction costs on build-to-suit transactions, capital expenditures on existing properties and scheduled debt maturities through long-term secured and unsecured indebtedness and the issuance of additional equity securities. CDC's remaining commitments on build-to-suit transactions for properties leased to Federal Express and Bouygues Telecom approximate $7,200. Commitments for capital expenditures on the Livonia, Alpena and Petoskey, Michigan hotels are currently estimated to be approximately $600. 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 revolving 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. Scheduled balloon payments on limited recourse mortgage notes approximate $2,800 in 2000 and $12,500 in 2001. 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. In 1999, CDC and its affiliates formed a task force to identify year 2000 problems. The task force developed and implemented a plan that included inventory, assessment, remediation, testing and contingency planning. CDC experienced no significant disruptions as a result of the year end date change. The task force intends to monitor other critical dates in the future, such as quarter-end dates. In connection with these procedures, CDC incurred expenses of $139. The impact of the year 2000 issues on the CDC will continue to depend on the way the issues have been addressed by third parties that provide services to the CDC. To date, CDC has not been adversely impacted to any significant extent by the failure of third parties to address year 2000 issues. The task force has developed contingency plans to address risks associated with year 2000 issues that may arise. There can be no assurance that these plans will fully mitigate any problems that may arise. The foregoing year 2000 discussions constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Readiness and Disclosure and Disclosure Act of 1998. -25- 27 On December 20, 1999, CDC and Carey Management LLC, the Manager of CDC's business operations, entered into an Agreement and Plan of Merger, whereby CDC would acquire certain assets relating to the Manager's real estate investment advisory business by way of a merger with the Manager. The Merger is subject to the approval of the shareholders of the CDC. A consent solicitation with respect to such shareholder approval will be distributed to the shareholders of CDC, and the Merger will be consummated as soon as practicable following receipt of consents from a majority of the shareholders of CDC. Following the Merger, CDC will be renamed W. P. Carey & Co. LLC and will be listed on the New York Stock Exchange and the Pacific Exchange under the symbol "WPC." Pursuant to the Agreement and Plan of Merger, CDC will acquire substantially all of the business operations of the Manager and W.P. Carey & Co., Inc. and its subsidiaries and affiliates in exchange for 8,000,000 shares of CDC. Up to an additional 2,000,000 shares will be paid over four years if specified performance criteria are satisfied. The assets and liabilities to be acquired include, but are not limited to, all the stock of the Manager, the Advisory Agreements to four real estate investment trusts that are managed by an affiliate of the Manager, the management agreement with CDC and the employees of W.P. Carey & Co. Management believes that the merger will broaden CDC's access to capital, enhance its growth opportunities and strengthen its credit position by acquiring the businesses of W. P. Carey & Co., Inc. without indebtedness. -26- 28 Item 7A. Quantitative and Qualitative Disclosures about Market Risk: (in thousands) $159,764 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, 1999 ranged from 4.65% to 7.40%. 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.
2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Fixed rate $6,590 $10,464 $9,158 $9,640 $26,838 $97,074 $159,764 $156,160 Average interest rate 7.66% 7.63% 7.63% 7.67% 7.79% 7.82% Variable rate $3,753 $138,990 $ 716 $ 755 $ 768 $12,605 $157,587 $157,587
Item 8. Consolidated/Combined Financial Statements and Supplementary Data: (i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 1999 and 1998. (iii) Consolidated Statements of Income for the years ended December 31, 1999 and 1998 and Combined Statements of Income for the year ended December 31, 1997. (iv) Consolidated Statements of Members' Equity for the years ended December 31, 1999 and 1998 and Combined Statement of Partners' Capital for the year ended December 31, 1997. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 and Combined Statement of Cash Flows for the year ended December 31, 1997. (vi) Notes to Consolidated/Combined Financial Statements. -27- 29 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 52 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 auditing standards generally accepted in the United States 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 New York, New York March 28, 2000 -28- 30 CAREY DIVERSIFIED LLC and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
December 31, December 31, 1999 1998 ASSETS: Real estate leased to others: Accounted for under the operating method, net $425,421 $390,312 Net investment in direct financing leases 295,556 295,826 -------- -------- Real estate leased to others 720,977 686,138 Operating real estate, net of accumulated depreciation of $832 and $300 at December 31, 1999 and 1998 6,753 7,013 Real estate under construction leased to others 69,176 55,856 Assets held for sale 3,091 12,842 Cash and cash equivalents 2,297 5,673 Equity investments 32,167 29,532 Other assets, net of accumulated amortization of $1,125 and $375 at December 31, 1999 and 1998 and reserve for uncollected rent of $1,839 and $1,353 at December 31, 1999 and 1998 21,798 16,210 -------- -------- Total assets $856,259 $813,264 ======== ======== LIABILITIES: Mortgage notes payable $188,248 $138,964 Notes payable 129,103 132,334 Accrued interest payable 874 2,128 Dividends payable 10,718 10,447 Accounts payable to affiliates 7,227 7,013 Other liabilities 10,625 11,771 -------- -------- Total liabilities 346,795 302,657 -------- -------- Minority interest (3,136) (3,626) -------- -------- Commitments and contingencies MEMBERS' EQUITY: Listed Shares, no par value, 25,833,603 and 25,343,402 shares issued and outstanding at December 31, 1999 and 1998 526,130 517,755 Dividends in excess of accumulated earnings (11,560) (2,803) Accumulated other comprehensive income (910) (719) -------- -------- 513,660 514,233 Less, shares in treasury at cost, 62,300 shares at December 31, 1999 (1,060) - -------- -------- Total members' equity 512,600 514,233 -------- -------- Total liabilities and members' equity $856,259 $813,264 ======== ========
The accompanying notes are an integral part of the consolidated/combined financial statements. -29- 31 CAREY DIVERSIFIED LLC and SUBSIDIARIES CONSOLIDATED / COMBINED STATEMENTS of INCOME (In thousands except share and per share amounts)
The Company Consolidated The Predecessor Combined For the Years Ended For the Year Ended December 31, December 31, 1999 1998 1997 Revenues: Rental income $46,719 $42,771 $43,045 Interest income from direct financing leases 33,842 34,529 34,574 Other interest income 962 783 1,270 Other income 1,208 958 2,859 Revenues of hotel operations 5,775 6,289 14,523 ------- ------ ------- 88,506 85,330 96,271 ------- ------ ------- Expenses: Interest 18,801 18,266 19,888 Depreciation and amortization 11,192 8,406 10,628 General and administrative 8,045 6,660 5,275 Property expenses 5,433 5,059 6,430 Writedowns to fair value 5,988 1,585 3,806 Operating expenses of hotel operations 4,662 4,956 10,748 ------- ------- ------- 54,121 44,932 56,775 ------- ------- ------- Income before income from equity investments, gain on sale, minority interest in income and extraordinary items 34,385 40,398 39,496 Income from equity investments 1,886 1,837 2,076 ------- ------- ------- Income before gain on sale, minority interest in income and extraordinary items 36,271 42,235 41,572 Gain on sale of real estate and securities, net 471 1,512 1,565 ------- ------- ------- Income before minority interest in income and extraordinary items 36,742 43,747 43,137 Minority interest in income (2,664) (4,662) (2,576) ------- ------- ------- Income before extraordinary items 34,078 39,085 40,561 Extraordinary losses on early extinguishment of debt, net of minority interest of $79 in 1998 (39) (621) -------- ------- ------- Net income $34,039 $38,464 $40,561 ======= ======= ======= Basic and diluted earnings per share: Earnings before extraordinary item $1.33 $1.57 Extraordinary item - (.02) ----- ----- 1.33 1.55 Weighted average shares outstanding: Basic 25,596,793 24,866,225 ========== ========== Diluted 25,596,793 24,869,570 ========== ==========
The accompanying notes are an integral part of the consolidated/combined financial statements. -30- 32 CAREY DIVERSIFIED LLC and SUBSIDIARIES CONSOLIDATED STATEMENTS of MEMBERS' EQUITY For the years ended December 31, 1998 and 1999 (In thousands except share amounts)
Dividends Accumulated In Excess Of Other Paid-in Comprehensive Accumulated Comprehensive Treasury Shares Capital Income Earnings Income Shares Total Balance at January 1, 1998 23,959,101 $490,820 $490,820 Cash proceeds on issuance of shares, net 384,708 6,191 6,191 Shares issued in connection with services rendered and properties acquired 999,593 20,744 20,744 Dividends declared $(41,267) (41,267) Comprehensive income: Net income $38,464 38,464 38,464 Other comprehensive income: Change in unrealized appreciation (depreciation) of marketable securities (233) Foreign currency translation adjustment (486) --------- (719) $(719) (719) --------- $37,745 ========= Balance at ---------- -------- --------- --------- -------- December 31, 1998 25,343,402 517,755 (2,803) (719) 514,233 Cash proceeds on issuance of shares, net 34,272 652 652 Shares issued in connection with services rendered and properties acquired 455,929 7,723 7,723 Dividends declared (42,796) (42,796) Repurchase of shares (62,300) $(1,060) (1,060) Comprehensive income: Net income $34,039 34,039 34,039 Other comprehensive income: Change in unrealized appreciation (depreciation) of marketable securities 497 Foreign currency translation adjustment (688) --------- (191) $(191) (191) --------- $33,848 ========= Balance at ---------- -------- --------- --------- -------- -------- December 31, 1999 25,771,303 $526,130 $(11,560) $(910) $(1,060) $512,600 ========== ======== ========= ========= ======== ========
The accompanying notes are an integral part of the consolidated/combined financial statements. -31- 33 CAREY DIVERSIFIED LLC and SUBSIDIARIES COMBINED STATEMENT of PARTNERS' CAPITAL For the year ended December 31, 1997 (In thousands)
The Predecessor Company ----------------------- Balance, January 1, 1997 $304,045 Distributions to partners (43,620) Comprehensive income: Net Income 40,561 Change in unrealized appreciation of marketable securities (98) -------- 40,463 -------- Balance, December 31, 1997 $300,888 ========
The accompanying notes are an integral part of the consolidated/combined financial statements. -32- 34 CAREY DIVERSIFIED LLC CONSOLIDATED / COMBINED STATEMENTS of CASH FLOWS
(In thousands) The Company Consolidated The Predecessor Combined For the Years Ended For the Year Ended December 31, December 31, 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income $ 34,039 $ 38,464 $ 40,561 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,192 8,406 10,628 Amortization of deferred income (1,397) (964) (348) Extraordinary loss 39 621 Gain on sales, net (471) (1,512) (1,565) Securities received in lieu of cash (265) (1,690) Minority interest in income 2,664 4,662 2,576 Straight-line rent adjustments and other noncash rent adjustments (1,646) (2,642) (2,310) Writedown to fair value 5,988 1,585 3,806 Provision for uncollected rents 328 682 1,576 Payment of deferred management fees (1,509) Compensation costs paid by issuance of shares 1,647 881 Net changes in operating assets and liabilities and other (3,877) 3,270 (1,593) ------- ------- ---- Net cash provided by operating activities 48,241 51,944 51,641 ------- ------- ---- Cash flows from investing activities: Purchases of real estate (60,804) (89,650) Additional capital expenditures (3,784) (5,156) (1,955) Proceeds from sales of real estate and securities 9,631 21,567 1,242 Accrued disposition fees payable (1,007) 1,007 Purchases of mortgage receivable and marketable securities (3,676) (65) Sale of mortgage receivable 3,676 Distributions received from equity investments in excess of equity income 775 763 245 Other 9 195 ------- ------- ---- Net cash used in investing activities (55,189) (71,525) (273) ------- ------- ----
- continued - -33- 35 CAREY DIVERSIFIED LLC CONSOLIDATED/COMBINED STATEMENTS of CASH FLOWS, Continued
(In thousands) The Company Consolidated The Predecessor Combined For the Years Ended For the Year Ended December 31, December 31, 1999 1998 1997 Cash flows from financing activities: Dividends distributions paid (42,525) (30,820) (43,620) Payment of accrued preferred distributions (4,422) Distributions paid to special limited partners (2,344) (2,499) (2,327) Distributions to and redemptions of subsidiary partnership unitholders (8,789) Payments of mortgage principal (6,393) (6,627) (27,565) Proceeds from mortgages and notes payable 74,251 157,823 12,700 Prepayments of mortgages and notes payable (17,803) (101,555) Prepayment charges paid (39) (700) Deferred financing costs (1,744) (1,963) (66) Proceeds from issuance of shares 652 7,304 Purchase of treasury stock (627) Other (75) (1,084) (457) ------- --------- --------- Net cash provided by (used in) financing activities 3,353 6,668 (61,335) ------- --------- --------- Effect of exchange rate changes on cash 219 - ------- --------- Net decrease in cash and cash equivalents (3,376) (12,913) (9,967) Cash and cash equivalents, beginning of year 5,673 18,586 28,553 Cash and cash equivalents, ------- --------- --------- end of year $ 2,297 $ 5,673 $ 18,586 ======= ========= ========
Noncash operating, investing and financing activities: A. The Company issued 203,166 and 215,424 restricted shares valued at $3,311 and $4,367 in 1999 and 1998, respectively, 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 $6,098 and $13,593 and issued 252,763 and 784,169 shares valued at $4,412 and $16,377 in 1999 and 1998, respectively. C. In connection with the disposition of a property in Topeka, Kansas in 1999, the property was transferred to the purchaser in exchange for assumption of the mortgage obligation on the property and certain other assets and liabilities. The gain on sale was as follows: Land, buildings and personal property, net of accumulated depreciation $(7,654) Mortgage note payable 8,107 Other (373) ------- Gain on sale $ 80 =======
D. Deferred acquisition fees payable to an affiliate at December 31, 1999 and 1998 are $ 3,945 and $3,137, respectively. E. In connection with foreclosure of a property in 1997, 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: Mortgage loan payable released $ 4,755 Other liabilities and assets, net 91 Carrying value of property transferred (3,889) ------- Gain on foreclosure $ 957 =======
The accompanying notes are an integral part of the consolidated/combined financial statements. -34- 36 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: The combined financial statements for year ended December 31, 1997 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. The consolidated financial statements for the years ended December 31, 1999 and 1998 are those of Carey Diversified and its wholly-owned and majority-owned subsidiaries including the nine CPA(R) 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"). Effective January 1, 1998, the exchange of CPA(R) Partnership limited partner interests for interests in Carey Diversified was 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 the predecessor CPA(R) Partnerships for 1997. Limited partners who did not elect to receive shares retained a direct ownership interest in the applicable Partnership as subsidiary partnership unitholders. 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 amounts 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. 2. Summary of Significant Accounting Policies: Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. -35- 37 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 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, for certain retail properties, sales overrides. Certain of the Company's leases provide for additional rental revenue by way of percentage rents to be paid based upon the level of sales to be achieved by the lessee. These percentage rents are recorded once the required sales level is achieved and are included in the accompanying consolidated statements of income in rental revenue and interest income from direct financing leases. 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. In connection with the lease of the property in Livonia, Michigan, $16,563 of operating real estate was reclassified to real estate accounted for under the operating method at its historical cost in 1998. Real Estate Under Construction, Leased to Others: For properties under construction, interest charges, if any, 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. Assets Held for Sale: Assets held for sale are accounted for at the lower of carrying value 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 the 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 sale 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). -36- 38 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 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 reported as a component of 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, 1999 and 1998 were held in the custody of four financial institutions and which, at times, 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 and accounts payable and accrued expenses. 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. 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 until realized. Such marketable securities had a cost basis of $2,065 and $1,800 and reflected a fair value of $2,329 and $1,513 at December 31, 1999 and 1998, respectively. Equity Investments: The Company's limited partner interests in two real estate limited partnerships and a limited liability company in which the Company's ownership is 50% or less 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 three ownership interests are jointly owned with affiliates and represent interests in properties net leased to single tenants. An interest in the operating partnership of a publicly-traded real estate investment trust is also accounted for under the equity method. Accounts Payable to Affiliates: Included in payables 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. -37- 39 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 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 Federal income taxes is recognized for financial statement purposes. The Company is subject to certain state and local taxes. Earnings Per Share: 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. Basic and diluted earnings per share were calculated as follows:
Income Basic and Diluted Per Available Weighted Shares Share to Members Outstanding Amount Year Ended December 31, 1999 Basic and diluted earnings before extraordinary item $34,078 25,596,793 $1.33 Extraordinary item (39) - ------- ----- Basic and diluted earnings $34,039 25,596,793 $1.33 ======= ===== Year Ended December 31, 1998 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 ======= ========== =====
As of December 31, 19999, the Company had issued 3,199,280 share options that were not reflected in the 1999 calculation because based on the exercise price of the options, such options were anti-dilutive. 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 1999 and 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 16). 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. -38- 40 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) Reclassification: Certain 1998 and 1997 amounts have been reclassified to conform to the 1999 financial statement presentation. 3. Transactions with Related Parties: Through December 31, 1997, the Partnership agreements of each of the CPA(R) 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 and distributable cash from operations. 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, an affiliate, and William Polk Carey, are allocated between 1% and 10% of the profits and losses and distributable cash from operations. 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 in the accompanying consolidated financial statements. 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. 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. Management and performance fees were $3,025, $2,201 and $1,139 for 1999, 1998 and 1997, respectively. The management fee for 1999 and 1998 reflects a dollar-for-dollar reduction for quarterly distributions paid to special limited partners. General and administrative reimbursements consist primarily of the actual cost of personnel needed in providing administrative services to the Company and were $1,457, $1,540 and $1,788 in 1999, 1998 and 1997, respectively. 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. Disposition fees were $695 and $1,007 in 1999 and 1998, respectively. In connection with performing services related to the Company's real estate purchases in 1999 and 1998, W. P. Carey received structuring and development fees of $441 and $2,502, respectively. The affiliate is entitled to receive deferred acquisition fees of $3,945 in equal annual installments over a period of no less than eight years. An installment of $392 was paid in January 2000. Unpaid deferred acquisition fees bear interest at an annual rate of 6%. -39- 41 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 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 gross revenues. Expenses incurred were $545, $558 and $590, in 1999, 1998 and 1997, respectively. An independent director of the Company has an ownership interest in companies that own the minority interest in the Company's French majority-owned subsidiaries. The director's ownership interest is subject to the same terms as all other ownership interests in the subsidiary companies. The Chairman of the Board of the Company is the sole shareholder of Livho, Inc., a lessee of the Company. 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:
December 31, 1999 1998 Land $ 91,447 $ 88,731 Buildings 350,429 309,198 ------- ------- 441,876 397,929 Less: Accumulated depreciation 16,455 7,617 ------- ------- $425,421 $390,312 ======== ========
The scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to $51,030 in 2000, $50,199 in 2001, $48,644 in 2002, $44,752 in 2003, $41,490 in 2004, and aggregate $506,858 through 2019. Contingent rentals were $563, $614 and $2,022 in 1999, 1998 and 1997, respectively. 5. Net Investment in Direct Financing Leases: Net investment in direct financing leases is summarized as follows:
December 31, 1999 1998 Minimum lease payments receivable $365,558 $398,520 Unguaranteed residual value 293,550 294,891 -------- -------- 659,108 693,411 Less: Unearned income 363,552 397,585 ------- ------- $295,556 $295,826 ======== ========
The scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to $30,994 in 2000, $31,480 in 2001, $30,260 in 2002, $30,458 in 2003, $30,204 in 2004, and aggregate $365,558 through 2016. Contingent rentals were approximately $995, $320 and $4,533 in 1999, 1998 and 1997, respectively. -40- 42 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 6. 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 $334,813. As of December 31, 1999, mortgage notes and notes payable have interest rates varying from 4.65% to 10% per annum and mature from 2000 to 2015. Scheduled principal payments for the mortgage notes during each of the next five years following December 31, 1999 and thereafter are as follows: Year Ending December 31, 2000 $ 10,343 2001 20,351 2002 9,874 2003 10,395 2004 27,606 Thereafter 109,679 ------- $188,248 ========
The Company has a line of credit of $185,000 pursuant to a revolving credit agreement with The Chase Manhattan Bank in which eight lenders participate. The revolving credit agreement has a term of three years and expires in March 2001 with all advances prepayable at any time. As of December 31,1999, the Company had $129,000 drawn from the line of credit. Additional advances of $25,000 have been drawn from the line of credit since December 31, 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. Interest paid by the Company on mortgages and notes payable aggregated approximately $20,055, $17,936 and $19,534 in 1999, 1998 and 1997 respectively. In addition, capitalized interest paid by the Company was $3,808 and $910 for 1999 and 1998, respectively. In connection with providing services in connection with the placement of debt, fees of $696 and $1,001 were paid to an affiliate of the Company in 1999 and 1998, respectively. 7. Dividends Payable: The Company declared a quarterly dividend of $.4175 per share on November 30, 1999 payable to shareholders of record as of December 15, 1999. The dividend was paid in January 2000. In March 2000, the quarterly dividend rate was increased to $.4225. -41- 43 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 8. Lease Revenues: For the years ended December 31, 1999, 1998 and 1997, 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:
Years Ended December 31, 1999 % 1998 % 1997 % Dr Pepper Bottling Company of Texas $ 4,123 5% $ 3,998 5% $ 3,998 5% Gibson Greetings, Inc. 3,954 5 3,870 5 3,466 5 Detroit Diesel Corporation 3,658 5 3,658 5 3,645 5 Sybron International Corporation 3,627 4 3,311 4 3,311 4 Livho, Inc. 3,226 4 2,958 4 Lockheed Martin Corporation 2,740 3 1,621 2 1,131 1 Quebecor Printing, Inc. 2,552 3 2,523 3 2,618 4 Furon Company 2,415 3 2,415 3 2,416 3 AutoZone, Inc. 2,331 3 2,469 3 2,512 3 Orbital Sciences Corporation 2,311 3 2,154 3 2,154 3 Thermadyne Holdings Corp 2,243 3 2,234 3 2,234 3 The Gap, Inc. 2,205 3 2,199 3 2,154 3 America West Holdings Corp 1,839 2 Copeland Beverage Group, Inc. 1,800 2 1,200 2 Unisource Worldwide, Inc. 1,726 2 1,714 2 1,654 2 AP Parts International, Inc. 1,617 2 1,783 2 1,837 2 CSS Industries, Inc. 1,588 2 1,580 2 1,844 2 Brodart, Co. 1,519 2 1,432 2 1,308 2 Peerless Chain Company 1,463 2 1,463 2 1,709 2 Red Bank Distribution, Inc. 1,401 2 1,401 2 1,401 2 United States Postal Service 1,396 2 1,090 1 894 1 Eagle Hardware & Garden, Inc. 1,387 2 High Voltage Engineering Corp. 1,329 2 1,187 2 1,174 2 Duff-Norton Company, Inc. 1,164 1 1,164 2 1,021 1 Sprint Spectrum, Inc. 1,154 1 Hughes Markets, Inc. 1,928 3 5,784 7 Other 25,793 32 27,948 35 29,354 38 ------- --- ------- --- ------- --- $80,561 100% $77,300 100% $77,619 100% ======= ==== ======= ==== ======= ====
-42- 44 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 9. Gains and Losses on Disposition of Properties: Significant sales of properties are summarized as follows: 1999 On September 30 ,1999, the Company sold its property in Topeka, Kansas, leased to Hotel Corporation of America ("Hotel Corp.") pursuant to Hotel Corp.'s exercise of its purchase option. The exercise price was determined using the greater of (a) a formula based on the operating cash flow of the hotel's operations and (b) an amount equal to the outstanding mortgage loan balance on the property. The exercise price of $8,107, was equal to outstanding mortgage loan balance. In connection with the sale, the Company realized a $80 gain. The Company's annual cash flow (rent less mortgage debt service) from the Topeka property was $70. 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 exercise price was to be determined based on the fair market value of the property as encumbered by the lease, determined in part by discounting all future rents over the remaining terms, including renewal terms, of the lease. The Company and KSG were not able to reach an agreement on the exercise price because of a dispute about the calculation of a rent increase. In January 1999, the Company and KSG entered into an agreement to establish a minimum and maximum exercise price of $9,000 and $11,500 and to defer the exercise price determination until a dispute regarding an interpretation of the rent provisions of the lease was resolved. In March 1999, the court ruled in favor of the Company. On November 1, 1999, the Company sold the property to KSG for $11,000 plus an allowance of $100 for legal costs. In connection with the sale, the Company realized a $391 gain. Annual cash flow from the KSG property was $921. 1998 In April 1998 Simplicity Manufacturing, Inc. purchased its leased property in Port Washington, Wisconsin for $9,684 pursuant to the exercise of its purchase option. A loss of $291 was recognized on the sale. 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. 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. In July 1997, the Company's lease with Arley Merchandise Corporation ("Arley") for properties in Sumter and Columbia, South Carolina was terminated by the Bankruptcy Court in connection with Arley's voluntary petition of bankruptcy. In May 1997, the lender on 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. In connection with the sale of two properties in 1999 and three properties in 1998, the Company incurred disposition fees of $695 and $1,007, respectively, paid to an affiliate. Disposition fees are included in the determination of gain or loss on sale. 10. Extraordinary Gains and Losses on Extinguishment of Debt: 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 in 1998. -43- 45 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 11. Writedowns to Fair Value: Significant writedowns of properties to fair value are summarized as follows: 1999 The Company owns a property in Carthage, New York leased to Sunds Defibrator, Inc. ("Sunds"). During 1999, the Company accepted offers to sell the property for $300 and to receive a lease termination payment of $500, payable at the time of sale. Based on the current market conditions and prospects for releasing the property, upon the termination of the lease in 2005, the Company believes it is prudent to sell the property. In connection with the proposed sale, the Company recognized a noncash charge of $1,000 on the writedown of the property to the anticipated sales price. Current annual rent for the property is $144. The initial term of the Sunds lease was scheduled to expire in 2005. As described in Note 12, the Company recognized a noncash charge of $4,830 on the writedown of the Company's equity interest in Meristar Hospitality Corporation. 1998 The Company owns a property in Urbana, Illinois 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 recognized a writedown of $1,575 to an amount representing the fair value of the property, less costs to sell. An additional writedown of $158 was recognized in 1999. 1997 As described in Note 9, in connection with the exercise by Simplicity Manufacturing, Inc. of its option to purchase its leased property, the Company concluded that the likely agreed-upon exercise price would be $9,684. Accordingly, the Company recognized a noncash charge of $2,316 on the writedown of the property to the anticipated exercise price. As more fully described in Note 9, 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 on the writedown of the property. 12. Equity Investments: The Company owns 780,269 units of the operating partnership of Meristar Hospitality Corporation ("Meristar") which is accounted for under the equity method. Meristar is a lessor of hotel properties 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 carrying value of the equity interest in the Meristar operating partnership was $18,725 and $24,070 as of December 31, 1999 and 1998, respectively. Because of a continued weakness in the public market's valuation of equity securities of real estate investment companies including Meristar, Management concluded that the underlying value of its investment in operating partnership units has been impaired. Accordingly, the Company has written down its equity investment by $4,830 in 1999. The carrying value of the investment in Meristar subsequent to the writedown approximated the Company's pro rata ownership of Meristar at Meristar's reported net asset value. As of December 31, 1999, Meristar's quoted per share market value was $16.00 resulting in an aggregate value of approximately $12,484, if converted. The audited consolidated financial statements of Meristar filed with the United States Securities and Exchange Commission reported total assets of $3,094,201 and $2,998,460 and shareholders' equity of $1,170,602 and $1,150,992 as of December 31, 1999 and 1998, respectively, and revenues of $374,904, $525,297 and $316,393 and net income of $98,964, $43,707 and $20,060 for the years ended December 31, 1999, 1998 and 1997. -44- 46 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) The Company owns 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 and a 50% equity interest in a limited liability company that owns real estate with Corporate Property Associates 14 Incorporated ("CPA(R):14), an affiliate which owns the remaining 50% interest. The investment with CPA(R):14 was jointly purchased in 1999. Summarized combined financial information of the two limited partnerships and limited liability company is as follows:
December 31, 1999 1998 Assets (primarily real estate) $81,054 $46,391 Liabilities (primarily mortgage notes payable) 51,211 32,399 ------ ------ Capital $29,843 $13,992 ======= =======
Year Ended December 31, 1999 1998 1997 Revenue (primarily rental revenue) $8,465 $6,990 $6,909 Expenses (primarily depreciation and interest on mortgages) 5,603 4,536 4,593 ----- ----- ----- Net income $2,862 $2,454 $2,316 ====== ====== ======
13. 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 was $313,747 and $272,075 at December 31, 1999 and 1998, respectively. 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. 14. Purchase of Real Estate: On December 22, 1999 the Company purchased a property in Lafayette, Louisiana for $8,377 subject to an existing net lease with Bell South Telecommunications, Inc. ("Bell South"). The purchase was funded through the assumption of an existing mortgage loan of $6,098 and the issuance of 112,904 shares of the Company with a value of $1,902. The Bell South lease has a remaining term of ten years through December 2009 and provides for six five-year renewals at the lessee's option. Annual rent is $1,096 with an increase to $1,351 in January 2005. Bell South has the option to purchase the property at the end of the initial and any extended term at fair market value. In connection with the purchase of the Bell South property, the Company paid off the mortgage loan that had been scheduled to mature on January 1, 2000 and obtained new mortgage financing for $5,995. The new limited recourse mortgage loan provides for monthly payments of principal and interest of $60 at an annual interest rate of 8.11% through July 1, 2005 at which time the monthly payments will increase to $70. The loan will mature on January 1, 2010 at which time a balloon payment will be due. The loan may not be prepaid; however, the Company may defease the loan. In connection with performing services relating to the Company's real estate purchases in 1999 and 1998, an affiliate of the Company received acquisition fees of $480 and $1,001, respectively. -45- 47 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 15. Selected Quarterly Financial Data (unaudited):
Three Months Three Months Three Months Three Months ended ended ended ended March 31, June 30, September 30, December 31, 1999 1999 1999 1999 Revenues $21,114 $21,877 $23,731 $21,784 Expenses 11,084 11,687 13,872 17,478 Income before extraordinary items 9,866 9,620 9,470 5,122 Net income 9,827 9,620 9,470 5,122 Net income per share - basic and diluted .39 .38 .37 .20 Dividends declared per share .4175 .4175 .4175 .4175
16. Stock Options and Warrants: In January 1998, W. P. Carey was granted warrants to purchase 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 on the CPA(R) Partnerships. The warrants are exercisable until January 2009. 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. In 1999, 38,500 share options were granted at an exercise price of $19.69 per share. In 1998, share options for 113,500 shares were granted at an exercise price of $20 per share. 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 and under certain other conditions. The Directors' Plan provides for the same terms as the Incentive Plan. In 1999, 12,704 share options were granted at exercise prices ranging from $17.25 to $19.69 per share. In 1998, 23,846 share options were granted at an exercise price of $20 per share. -46- 48 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) Share option and warrant activity is as follows:
Weighted Average Number of Exercise Price Shares Per Share Balance at January 1, 1998 - Granted 3,148,076 $21.42 Exercised Forfeited --------- ------ Balance at December 31, 1998 3,148,076 $21.42 Granted 51,204 $19.31 Exercised Forfeited --------- ------ Balance at December 31, 1999 3,199,280 $21.38 ========= ======
At December 31, 1998 and 1999, the range of exercise prices and weighted-average remaining contractual life of outstanding share options and warrants was $20 to $23 and ten years and $17.25 to $23.00 and 9.01 years, respectively. The per share weighted average fair value of share options issued during 1999 was estimated to be $1.48, 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 5.54% a volatility factor of 18.35%, a dividend yield of 7.64% and an expected life of ten years. 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%, 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 1999 and 1998 would have been $33,964 and $38,299 and pro forma basic and diluted earnings per share would have been unchanged for 1999 and $1.54 for 1998. -47- 49 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 17. Segment Reporting: The Company has determined that it operates in two business segments - real estate operations with domestic and international investments and hotel operations. The two segments are summarized as follows:
Real Estate Hotel Total Company Revenues: 1999 $82,731 $ 5,775 $ 88,506 1998 79,041 6,289 85,330 1997 81,748 14,523 96,271 Operating and interest expenses: (excluding depreciation and amortization) 1999 $38,267 $ 4,662 $42,929 1998 31,570 4,956 36,526 1997 35,399 10,748 46,147 Income from equity investments: 1999 $ 1,886 $ 1,886 1998 1,837 1,837 1997 2,076 2,076 Net operating income (1): 1999 $ 32,561 $1,046 $33,607 1998 36,320 1,253 37,573 1997 35,447 3,549 38,996 Total assets: 1999 $848,526 $ 7,733 $856,259 1998 804,755 8,509 813,264 1997 497,722 25,698 523,420 Total long-lived assets: 1999 $825,411 $ 6,753 $832,164 1998 784,368 7,013 791,381 1997 461,723 23,333 485,056
The Company acquired its first international real estate investment in 1998. For 1999, geographic information is as follows:
Domestic International Total Company -------- ------------- ------------- Revenues $ 86,458 $ 2,048 $ 88,506 Operating and interest expense 41,850 1,079 42,929 Net operating income 32,752 855 33,607 Total assets 834,045 22,214 856,259 Total long-lived assets 810,402 21,762 832,164
For 1998, geographic information is as follows:
Domestic International Total Company -------- ------------- ------------- 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
(1) Net operating income represents income before gains and extraordinary items. -48- 50 CAREY DIVERSIFIED LLC NOTES to CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (Continued) 18. Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective January 1, 2000, which establishes accounting and reporting standards for derivative instruments. The Company believes that upon adoption SFAS will not have a material impact on the consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") which provides guidance on several revenue recognition issues including recognition of rents based upon lessees' sales. Certain of the Company's leases provide for additional rents to be paid based upon the level of sales achieved by the lessee. These percentage rents are recorded once the required sales level is achieved and included in the consolidated statements of income in rental revenue and interest income from direct financing leases. The adoption of SAB 101 did not have a significant impact on the consolidated financial statements. 19. Proposed Acquisition: On December 20, 1999, the Company, Carey Management and W. P. Carey entered into an Agreement and Plan of Merger whereby the Company would acquire certain assets relating to Carey Management's and W. P. Carey's real estate investment advisory business. The Merger is subject to the approval of the shareholders of the Company. Pursuant to the Agreement and Plan of Merger, the Company will acquire all of the business operations of Carey Management and W. P. Carey and its subsidiaries and affiliates in exchange for 8,000,000 shares of the Company. Up to an additional 2,000,000 shares will be paid over four years if specified performance criteria are satisfied. The assets and liabilities to be acquired include, but are not limited to, all the stock of Carey Management and W. P. Carey, the Advisory Agreements to four real estate investment trusts that are managed by an affiliate of Carey Management, the management agreement with the Company and the employees of W. P. Carey. The exchange of interests for shares of the Company will be accounted for as a purchase and recorded at the fair value of the initial 8,000,000 shares issued by the Company. The purchase price will be allocated to the assets and liabilities acquired based on their estimated fair market values. The portion of the purchase price attributable to the existing management contract between the Company and Carey Management will be accounted for as a contract termination and the purchase price allocated to such contract will be expensed immediately at the date of acquisition. -49- 51 Item 9. Disagreements on Accounting and Financial Disclosure. NONE -50- 52 \ PART III Item 10. Directors and Executive Officers of the Registrant. WILLIAM P. CAREY AGE: 69 Mr. Carey, Chairman, Chief Executive Officer of W.P. Carey & Co. since 1973, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding Carey Management, in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), and head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School, Mr. Carey also received a Sc.D. honoris causa from Arizona State University and is a Trustee of The John Hopkins University and of other educational and philanthropic institutions. He has served for many years on the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that University. In the fall of 1999, Mr. Carey was the Executive-in-Residence at Harvard Business School. He also serves as Chairman of the Board and Chief Executive Officer of CPA(R):10, CIP(R), CPA(R):12 and CPA(R):14. Mr. Carey is the brother of Francis J. Carey. DR. LAWRENCE R. KLEIN AGE: 79 Dr. Klein was elected to the board of directors of Carey Diversified in 1998 and is Benjamin Franklin Professor Emeritus of Economics and Finance at the University of Pennsylvania and its Wharton School, having joined the faculty of the University in 1958. He is a holder of earned degrees from the University of California at Berkeley, the Massachusetts Institute of Technology and Oxford University and has been awarded the Alfred Nobel Memorial Prize in Economic Sciences, as well as a number of honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to various corporations, governments and government agencies, including the Federal Reserve Board and the President's Council of Economic Advisers. Dr. Klein joined W.P. Carey & Co. in 1984 as Chairman of the Economic Policy Committee and as a director. CHARLES C. TOWNSEND, JR. AGE: 72 Mr. Townsend was elected to the board of directors of Carey Diversified in 1998 and currently is an Advisory Director of Morgan Stanley & Co., having held such position since 1979. Mr. Townsend was a Partner and a Managing Director and head of the Corporate Finance Department of Morgan Stanley & Co. from 1963 to 1978 and served as Chairman of Morgan Stanley Realty Corporation from 1977 to 1982. Mr. Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from Harvard University. Mr. Townsend also serves as director of CIP(R) and CPA(R):14; he will resign from those positions upon the consummation of the merger. DONALD E. NICKELSON AGE: 67 Mr. Nickelson was elected to the board of directors of Carey Diversified in 1998 and is currently Vice-Chairman and director of Harbour Group Industries Inc., a leverage buy-out firm. Mr. Nickelson served as Chairman of the Special Commuter of the board of directors of Carey Diversified which evaluated and approved the merger on behalf of the shareholders of Carey Diversified. From 1988 to 1990, he served as President of Paine, Webber, Jackson & Curtis, PaineWebber, Inc. and PaineWebber Group, investment banking and brokerage firms. He also serves as a Trustee of the Mainstay Mutual Funds Group, and is on the Advisory Board at Stanford Institute for the Quantitative Study of Society. Previously, Mr. Nickelson was Chairman of the Board of Omniquip International, Inc., Greenfield Industries and Flair Corporation. He served as director for Selectide Corporation and Sugen, Inc., biotech companies. In addition, he served as Chairman of the Pacific Stock Exchange and director of the Chicago Board of Options Exchange. -51- 53 GORDON F. DUGAN AGE: 33 Mr. DuGan, President and Chief Acquisitions Officer of Carey Diversified, was elected President of W.P. Carey & Co. in 1999, Executive Vice President and a Managing Director of W.P. Carey & Co. in June 1997. Mr. DuGan rejoined W.P. Carey & Co. as Deputy Head of Acquisitions in February 1997. Mr. DuGan was until September 1995 a Senior Vice President in the Acquisitions Department of W.P. Carey & Co. From October 1995 until February 1997, Mr. DuGan was Chief Financial Officer of Superconducting Core Technologies, Inc., a Colorado-based wireless communications equipment manufacturer. Mr. DuGan joined W.P. Carey & Co. as Assistant to the Chairman in May 1988, after graduating from the Wharton School at the University of Pennsylvania where he concentrated in Finance. REGINALD WINSSINGER AGE: 57 Mr. Winssinger was elected to the board of directors of Carey Diversified in 1998 and is currently Chairman of the Board and Director of Horizon Real Estate Group, Inc. and National Portfolio, Inc. Mr. Winssinger has managed portfolios of diversified real estate assets exceeding $500 million throughout the United States for more than 20 years. Mr. Winssinger is active in the planning and development of major land parcels and has developed 20 commercial properties. He is a native of Belgium with more than 25 years of real estate practice, including 10 years based in Brussels, overseeing appraisals, construction and management. Mr. Winssinger holds a B.S. in Geography from the University of California at Berkeley and received a degree in Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary Belgium Consul to the State of Arizona, a position he has held since 1991. FRANCIS J. CAREY AGE: 74 Mr. Carey was elected in 1997 as Chairman, Chief Executive Officer and a director of Carey Diversified. From 1987 to 1997, Mr. Carey held various positions with affiliates of the W.P. Carey & Co. Inc., including President of W.P. Carey & Co., and President and director of CPA(R):10, CIP(R) and CPA(R):12. Mr. Carey also served as director of Carey Management from its founding in 1973 through 1997. Prior to 1987, he was senior partner in Philadelphia, head of the real estate department nationally and a member of the executive committee of Reed Smith Shaw & McClay LLP, counsel for W.P. Carey & Co. and Carey Diversified. He served as a member of the executive committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982, and is a former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences at the University of Pennsylvania from 1983 to 1990. He has also served as a member of the Board of Trustees and executive committee of the Investment Program Association since 1990, and as its Chairman from 1998 to 2000 and on the Business Advisory Council of the Business Council for the United Nations since 1994. He holds A.B. and J.D. degrees from the University of Pennsylvania and completed executive programs in corporate finance and accounting at Stanford University Graduate School of Business and the Wharton School of the University of Pennsylvania. Mr. Carey is the brother of William P. Carey. EBERHARD FABER, IV AGE: 63 Mr. Faber was elected to the board of directors of Carey Diversified in 1998 and is currently Chairman of the Board and director of the newspaper Citizens Voice, Chairman of the Board of Kings College and a director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and Chief Executive Officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber also served as the director of the Philadelphia Federal Reserve Bank, including service as the Chairman of its Budget and Operations Committee from 1980 to 1986. Mr. Faber has served on the boards of several other companies, including First Eastern Bank from 1980 to 1994, where he was Chairman. He is also a Borough Councilman and Chief Financial Officer of Bear Creek Village Borough. Carey Diversified's executive officers are elected annually by Carey Diversified's board of directors. Detailed information regarding Carey Diversified's executive officers who are not directors is set forth below. -52- 54 CLAUDE FERNANDEZ AGE: 47 Mr. Fernandez, Executive Vice President -- Financial Operations, is a Managing Director, Executive Vice President and Chief Administrative Officer of W.P. Carey & Co. Mr. Fernandez joined W.P. Carey & Co. as Assistant Controller in March 1983, was elected Controller in July 1983, a Vice President in April 1986, a First Vice President in April 1987, a Senior Vice President in April 1989 and Executive Vice President in April 1991. Prior to joining W.P. Carey & Co., Mr. Fernandez was associated with Coldwell Banker, Inc. in New York for two years and with Arthur Andersen & Co. in New York for over three years. Mr. Fernandez, a Certified Public Accountant, received a B.S. in Accounting from New York University in 1975 and an M.B.A. in Finance from Columbia University Graduate School of Business in 1981. JOHN J. PARK AGE: 35 Mr. Park, Executive Vice President, Chief Financial Officer and Treasurer, is an Executive Vice President, Chief Financial Officer and a Managing Director of W.P. Carey & Co. Mr. Park became a First Vice President of W.P. Carey & Co. in April 1993 and a Senior Vice President in October 1995. Mr. Park joined W.P. Carey & Co. as an Investment Analyst in December 1987 and became a Vice President in July 1991. Mr. Park received a B.S. in Chemistry from Massachusetts Institute of Technology in 1986 and an M.B.A. in Finance from the Stern School of New York University in 1991. H. AUGUSTUS CAREY AGE: 42 Mr. Carey, Senior Vice President and Secretary, is Senior Vice President and a Managing Director of W.P. Carey & Co. He returned to W.P. Carey & Co. as a Vice President in August 1988 and was elected a First Vice President in April 1992. He also serves as President of CPA(R):10, CPA(R):12, CPA(R):14 and CIP(R). Mr. Carey previously worked for W.P. Carey & Co. from 1979 to 1981 as Assistant to the President. From 1984 to 1987, Mr. Carey served as a loan officer in the North American Department of Kleinwort Benson Limited in London, England. He received his A.B. in Asian Studies from Amherst College in 1979 and a M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is Chairman of the Corporate Advisory Council for the International Association for Investment Planners and a Trustee for the Oxford Management Center Advisory Council. He is the son of Francis J. Carey and a nephew of William P. Carey. -53- 55 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE In 1999, Francis J. Carey filed two late reports and Charles C. Townsend, Jr., H. Augustus Carey and Reginald Winssinger each filed one late report required by Section 16(a). Based on a review of its records and written representations, Carey Diversified believes that during 1999, all other Section 16 filings of its officers and directors complied with the requirements of the Securities Exchange Act. Item 11. Executive Compensation. Carey Diversified was organized as a Delaware limited liability company in October 1996. On January 1, 1998, Carey Diversified completed its merger with nine CPA(R) Partnerships. During 1996 and 1997 Carey Diversified had no employees and paid no compensation to any executive officer. Carey Diversified currently has one employee. The following table sets forth the base compensation earned by Francis J. Carey, Carey Diversified's Chief Executive Officer, during 1999. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION --------------- --------------------------- RESTRICTED STOCK SECURITIES UNDERLYING YEAR SALARY BONUS AWARDS($)(1) OPTIONS(#) ---- -------- -------- ---------------- --------------------- Francis J. Carey Chairman & Chief Executive 1999 $300,000 $102,738 $379,688 150,000 Officer............................. 1998 $250,000 $150,000 $150,000 113,500
- --------------- (1) On January 3, 2000, Mr. Carey received a grant of 22,500 shares as part of his annual compensation for 1999. On January 3, 2000, the New York Stock Exchange was closed. The closing price of Carey Diversified's shares on the immediately preceding trading date was $16.875 per share. Mr. Carey holds 30,000 restricted shares valued at $506,250 as of December 31, 1999. These shares are eligible to receive dividends. OPTIONS GRANTED IN FISCAL YEAR 1999
PERCENT OF POTENTIAL REALIZABLE VALUE TOTAL OPTIONS AT ASSUMED ANNUAL RATE OF GRANTED TO EXERCISE SHARE PRICE APPRECIATION OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------------- GRANTED(1) FISCAL YEAR SHARE DATE 0%(2) 5% 10% ---------- --------------- --------- ---------- ------- ---------- ---------- Francis J. Carey........... 150,000 100% $16.50 1/21/08 $56,250 $1,264,809 $2,950,959
- --------------- (1) The options are exercisable for one-third of the covered shares on each of January 2000, January 2001 and January 2002. (2) Options were granted on January 3, 2000, when the New York Stock Exchange was closed. The closing price of Carey Diversified shares on the immediately preceding trading date was $16.875 per share. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Value of Unexercised Number of Securities Underlying In-the-Money Option Unexercised Options at Fiscal Year-End At Fiscal Year-End -------------------------------------- ------------------------- Exercisable Unexercisable Exercisable Unexercisable --------------- ----------------- ----------- ------------- Francis J. Carey ..... 50,000 213,500 None None
Compensation Committee Report on Executive Compensation Carey Diversified established a Compensation Committee which monitors and implements the compensation program for Carey Diversified. The committee's activity is currently limited to evaluating the compensation of Carey Diversified's sole employee, Francis J. Carey, Carey Diversified's Chief Executive Officer. For 1999, Mr. Carey's base salary was established by the board of directors. The Compensation Committee meet during 1999 to determine the bonus to be paid to Francis J. Carey, Carey Diversified's Chief Executive Officer, for 1999 and his 2000 compensation. The committee concluded that Carey Diversified was on target to satisfy its funds from operations target for 1999 and the Mr. Carey was entitled to a bonus of $102,738 in cash, 22,500 shares of restricted stock valued at $379,688 and options to purchase 150,000 shares. This bonus was within the target bonus range established Carey Diversified's compensation consultant. Submitted by the Compensation Committee: Charles C. Townsend, Jr., Chairman Eberhard Faber, IV Donald E. Nickelson -54- 56 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information regarding the beneficial ownership of shares as of March 31, 2000 by each of the directors including the Chief Executive Officer of the Carey Diversified. The business address of the individuals listed is 50 Rockefeller Plaza, New York, NY 10020. Wm. Polk Carey beneficially owns 15.2% of the shares of Carey Diversified. No other director or officer beneficially owns more than 1% of the shares of Carey Diversified. The directors and executive officers as a group own approximately 16.1% of the shares.
AMOUNT OF SHARES NAME BENEFICIALLY OWNED(1) - ---- --------------------- Francis J. Carey(2)......................................... 152,711 Gordon F. DuGan(3).......................................... 6,005 Wm. Polk Carey(4)........................................... 4,428,579 Eberhard Faber, IV(5)(6).................................... 15,958 Dr. Lawrence R. Klein(6).................................... 7,283 Donald E. Nickelson(7)...................................... 24,507 Charles C. Townsend, Jr.(6)................................. 10,398 Reginald Winssinger(6)...................................... 12,283 All Directors and Executive Officers and a Group (11 individuals).............................................. 4,689,497
- --------------- (1) Beneficial ownership has been determined in accordance with the rules of the Securities and Exchange Commission. Except as noted, and except for any community property interest owned by spouses, the listed individuals have sole investment power and sole voting power as to all shares which they are identified as being the beneficial owners. (2) The amounts shown include 88,500 shares which Mr. Carey has the right to acquire through the exercise of stock options within 60 days after March 31, 2000 under Carey Diversified's 1997 Listed Share Incentive Plan. Additionally, 37,500 of these shares are held pursuant to a compensation arrangement with Carey Management LLC (the "Manager") and are subject to the restrictions connected therewith. (3) 5,000 of these shares are held pursuant to a compensation arrangement with the Manager and are subject to the restrictions connected therewith. (4) Includes 1,367,718 shares held by the Manager, Carey Management LLC, which Mr. Carey is deemed to own beneficially as a result of his ownership of the shareholders of Carey Management LLC, W.P. Carey & Co., Inc., Carey Corporate Property, Inc., Seventh Carey Corporate Property, Inc., Eighth Carey Corporate Property, Inc. and Ninth Carey Corporate Property, Inc. This amount also includes 3,010,730 shares which W.P. Carey & Co. has the right to acquire through the exercise of stock options. See "Certain Transactions." (5) Includes 4,675 shares held by trusts of which Mr. Faber is a trustee and a beneficiary. Does not include 1,090 shares held by the Faber Foundation. (6) The amount shown includes 2,666 shares which each of these directors has the right to acquire pursuant to stock options exercisable within 60 days of March 31, 2000 under Carey Diversified's Non-Employee Director Plan. (7) Includes 2,912 shares held by Mr. Nickelson's wife. Also includes 11,497 shares which Mr. Nickelson has the right to acquire pursuant to stock options exerciseable within 60 days of March 31, 2000 under Carey Diversified's Non-Employee Director Plan. Item 13. Certain Relationships and Related Transactions. MANAGEMENT CONTRACT WITH CAREY MANAGEMENT LLC Carey Management LLC, the manager of Carey Diversified, provides both strategic and day-to-day management services for Carey Diversified including acquisition services, research, investment analysis, asset management, capital funding services, disposition of assets and administrative services for which it receives a fee from Carey Diversified. W.P. Carey & Co., Inc., a company which is owned solely by Wm. Polk Carey, a director of Carey Diversified and affiliates, owns directly and indirectly 100% of Carey Management LLC. Carey Diversified has agreed to acquire the management business of Carey Management LLC, pending stockholder approval. -55- 57 AMOUNTS PAYABLE TO CAREY MANAGEMENT The following is a description of the fees payable by Carey Diversified to Carey Management in connection with the services provided by Carey Management: Management Fee. Carey Management is paid a monthly management fee at an annual rate of 0.5 percent of the total capitalization of Carey Diversified. Total capitalization is based on the average of total principal amount of the debt owed by Carey Diversified and the average market capitalization of Carey Diversified. The management fee is reduced by one-half of the amount received by Carey Management from the partnerships controlled by Carey Diversified for property management or leasing fees and distributions of cash from operations. Performance Fee. Carey Management is paid a monthly performance fee at an annual rate of 0.5 percent of the total capitalization of Carey Diversified. The fee amount is divided by the closing price of the shares on the last trading day of the month to determine the fee paid to Carey Management. This fee is paid in the form of cash or restricted shares of Carey Diversified which vest ratably over five years. Until these shares become vested, the restricted shares are not transferable and are subject to forfeiture in the event Carey Management is terminated for cause or resigns. The restricted shares vest immediately in the event of a change of control and certain other circumstances. The merger will not be considered a change of control for purposes of the vesting schedule of these shares. The performance fee is reduced by one-half of the amount received by Carey Management from the partnerships controlled by Carey Diversified for property management or leasing fees and distributions of cash from operations. The sale of the shares is restricted pursuant to Rule 144 of the Securities Act. Termination Fee. If the management agreement is terminated by Carey Diversified, Carey Management is entitled to receive payment of any earned but unpaid compensation and expense reimbursements accrued as of the end of the term of the agreement and an incentive fee based on the appraised value of certain properties owned by Carey Diversified. If the management agreement is terminated in connection with a change of control of Carey Diversified, without cause or by Carey Management with good reason, Carey Management is entitled to receive a termination fee. The termination fee equals the sum of - any fees that would be earned by Carey Management upon the disposition of the assets of Carey Diversified owned by the CPA(R) Partnerships prior to the Consolidation at their appraised value as of the date the management agreement is terminated, and - if the agreement is terminated by Carey Diversified after a change in control, five times the total fees paid to the Carey Management by Carey Diversified and the CPA(R) Partnerships in the 12 months preceding the change in control, or - if the agreement is terminated without cause or for good reason, $40 million if the agreement is terminated before December 31, 2000; $30 million if the agreement is terminated before December 31, 2001; $20 million if the agreement is terminated before December 31, 2002 and $10 million if the agreement is terminated before December 31, 2003. No termination fee will be paid in connection with the merger. Carey Management is also paid fees on a transactional basis for acquisitions. The acquisition fees are generally 2.5% of the purchase price of properties purchased on behalf of Carey Diversified, which is paid at the time of acquisition, plus 2% of the purchase price if certain performance goals are satisfied, which is paid over eight years (with interest). Fees Payable by the Partnerships Controlled by Carey Diversified. Carey Management is entitled to certain distributions from the CPA(R) Partnerships. Distributions paid to Carey Management by these partnerships reduce each of the management fee and performance fee otherwise payable to Carey Management by Carey Diversified by one-half of the amount paid by each partnership. Incentive Fee. Carey Management is paid an incentive fee of 15 percent of the amount of the net proceeds received from the sale of a property previously held by a CPA(R) Partnership in excess of the appraised value of the equity interest in that property used for purposes of the Consolidation, less an adjustment for the share of the net proceeds in excess of the appraised value of the equity interest attributable to Carey Management's interest in the shares of Carey Diversified. Expenses. Carey Diversified reimburses Carey Management for certain costs that it incurs in connection with the services it provides to Carey Diversified, including, but not limited to, personnel costs, rent and the cost of goods and services used on behalf of Carey Diversified. -56- 58 AMOUNTS PAYABLE BY CAREY DIVERSIFIED TO CAREY MANAGEMENT The following table sets forth the amounts paid by Carey Diversified for management services in 1998 and 1999. CAREY MANAGEMENT COMPENSATION FROM CAREY DIVERSIFIED
ACQUISITION MANAGEMENT FINANCING DISPOSITION FEES(1) FEES(2) FEES(1) FEES(1) TOTAL ----------- ---------- ---------- ----------- ----------- 1998.............................. $6,640,000 $6,769,000 $1,001,000 $1,007,000 $15,417,000 1999.............................. 1,474,000 6,801,000 696,000 695,000 9,666,000
- --------------- (1) Revenue classified as structuring and financing fees by Carey Management. (2) Revenue classified as management fees by Carey Management. Includes reimbursement of expenses. If the merger is approved, W.P. Carey & Co. LLC will no longer pay any of the fees listed above, but will be responsible for the salaries and other overhead expenses necessary to provide the services that Carey Management currently provides to Carey Diversified and the CPA(R) REITs. In 1999, Carey Management received 15% of its gross revenue from Carey Diversified. AMOUNTS PAID TO W.P. CAREY & CO. Upon completion of the merger of the nine CPA(R) Partnerships, W.P. Carey & Co. received warrants to purchase 2,284,800 of Carey Diversified's shares at $21 per share and 725,930 shares at $23 per share as compensation for investment banking services provided to Carey Diversified. The warrants are exercisable through December 31, 2008. AMOUNTS PAID/PAYABLE TO THE GENERAL PARTNERS In connection with the merger of the nine CPA(R) Partnerships, W.P. Carey & Co. and affiliates (collectively, the "General Partners") received a subordinated preferred return of $4,422,000, measured based upon the cumulative proceeds arising from the sale of the CPA(R) partnerships assets (with the exception of CPA(R):5). Carey Management is entitled to be paid a preferred return in connection with CPA(R):5 of $1,423,000 if the closing price of the shares exceeds $23.11 for five consecutive days. LIVHO, INC. TRANSACTION In connection with the consolidation, Carey Diversified obtained a hotel in Livonia, Michigan which was not subject to a lease. Carey Diversified would be taxed as a corporation if it received more than a small percentage of its income from the operation of a hotel. In order to avoid taxation as a corporation, Carey Diversified leased the hotel to Livho Inc., a corporation wholly-owned by Francis J. Carey, the chairman and chief executive officer of Carey Diversified pursuant to a 10-year lease. Livho Inc. paid $2,923,044 in rent in 1999 and is scheduled to pay $3,014,544 in rent for 2000. FREDIP, S.A. TRANSACTIONS Carey Diversified has acquired six properties in France through its subsidiary, Polkinvest. In the acquisition of these properties, Polkinvest has co-invested with a FREDIP, S.A., a company in which Reginald Winssinger, a director of Carey Diversified, is a 25% owner. Polkinvest owns between a 75% and a 99% interest in these properties and FREDIP owns the remaining interest. The total cost of acquiring these properties was $18,963,373. FREDIP has invested on the same terms as Carey Diversified. -57- 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 Balance Sheets, December 31, 1999 and 1998. Consolidated/Combined Statements of Income for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Members' Equity for the years ended December 31, 1999 and 1998 Combined Statement of Partners' Capital for the year ended December 31, 1997. Consolidated/Combined Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999. 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- 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.
Exhibit Method of No. Description Filing - ------- ----------- --------- 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 Exhibit 21.1 to Form 10-K dated April 11, 2000 23.1 Consent of PricewaterhouseCoopers LLP Exhibit 23.1 to Form 10-K dated April 11, 2000 24.1 Power of Attorney 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)
-59- 61
Exhibit Method of No. Description Filing - ------- ----------- --------- 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 99.24 Press release from Carey Diversified LLC Exhibit 99.1 to Form 8-K (November 30, 1999) dated December 2, 1999 99.25 Presentation to Analysts Exhibit 99.2 to Form 8-K dated December 2, 1999
(b) Report on Form 8-K: During the quarter ended December 31, 1999, the Company filed a report on Form 8-K dated December 2, 1999 under Item 5 - Other Events. -60- 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 5/01/00 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 5/01/00 BY: Francis J. Carey* - -------- ----------------------------------------- Date Francis J. Carey Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) 5/01/00 BY: William P. Carey* - -------- ----------------------------------------- Date William P. Carey Chairman of the Executive Committee and Director 5/01/00 BY: Gordon F. DuGan* - -------- ----------------------------------------- Date Gordon F. DuGan President, Chief Acquisitions Officer and Director 5/01/00 BY: Donald E. Nickelson* - -------- ----------------------------------------- Date Donald E. Nickelson Chairman of the Audit Committee and Director 5/01/00 BY: Eberhard Faber IV* - -------- ----------------------------------------- Date Eberhard Faber IV Director 5/01/00 BY: Dr. Lawrence R. Klein* - -------- ----------------------------------------- Date Dr. Lawrence R. Klein Director 5/01/00 BY: Charles C. Townsend, Jr.* - -------- ----------------------------------------- Date Charles C. Townsend, Jr. Director 5/01/00 BY: Reginald Winssinger* - -------- ----------------------------------------- Date Reginald Winssinger Director 5/01/00 BY: /s/ John J. Park - -------- ----------------------------------------- Date John J. Park Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) 5/01/00 BY: /s/ Claude Fernandez - -------- ----------------------------------------- Date Claude Fernandez Executive Vice President, Chief Administrative Officer (Principal Accounting Officer) *By Claude Fernandez and John J. Park as Attorney-in-fact -61- 63 CAREY DIVERSIFIED LLC and SUBSIDIARIES SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company Cost ----------------------------------- Capitalized Increase Personal Subsequent to (decrease) in Description Encumbrances Land Buildings Property Acquisition(a) Net Investment (b) ----------- ------------ ---- --------- -------- ---------------------------------- Operating Method: Office, warehouse and manufacturing buildings leased to various tenants in Broomfield, Colorado $ 1,990,288 $ 247,993 $ 2,538,263 1,200,000 Office and manufacturing building leased to IMO Industries Inc. 1,245,486 814,267 4,761,042 Distribution facilities and warehouses leased to The Gap, Inc. 13,690,953 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
Gross Amount at which Carried at Close of Period (c) ---------------------------------------------------- Personal Description Land Buildings Property Total ----------- ---- --------- -------- ----- Operating Method: Office, warehouse and manufacturing buildings leased to various tenants in Broomfield, Colorado $ 247,993 $ 3,738,263 $ 3,986,256 Office and manufacturing building leased to IMO Industries Inc. 814,267 4,761,042 5,575,309 Distribution facilities and warehouses leased to The Gap, Inc. 1,525,593 21,427,148 22,952,741 Supermarkets leased to Winn-Dixie Stores, Inc. 855,196 6,762,374 7,617,570 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 Retail store leased to A. Jones 16,452 80,937 97,389 Retail store leased to Wexler & Wexler 73,267 116,019 189,286 Retail stores leased to Kinko's of Ohio, Inc. 14,844 185,541 200,385 Warehouse and distribution center leased to, B&G Contract Packaging, Inc. 201,721 2,870,928 3,072,649
Life on which Depreciation In Latest Accumulated Statement of Income Description Depreciation Date Acquired is Computed ----------- ------------ ------------- -------------------- Operating Method: Office, warehouse and manufacturing buildings leased to various tenants in Broomfield, Colorado $ 138,164 January 1, 1998 40 yrs. Office and manufacturing building leased to IMO Industries Inc. 238,052 January 1, 1998 40 yrs. Distribution facilities and warehouses leased to The Gap, Inc. 1,071,357 January 1, 1998 40 yrs. Supermarkets leased to Winn-Dixie Stores, Inc. 338,118 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 420,442 January 1, 1998 40 yrs. Retail store leased to A. Jones 4,046 January 1, 1998 40 yrs. Retail store leased to Wexler & Wexler 5,800 January 1, 1998 40 yrs. Retail stores leased to Kinko's of Ohio, Inc. 9,277 January 1, 1998 40 yrs. Warehouse and distribution center leased to, B&G Contract Packaging, Inc. 143,546 January 1, 1998 40 yrs.
-62- 64 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company Cost ----------------------------------- Capitalized Increase Personal Subsequent to (decrease) in Description Encumbrances Land Buildings Property Acquisition(a) Net Investment (b) ----------- ------------ ---- --------- -------- ---------------------------------- Operating Method (continued): Land leased to Unisource Worldwide, Inc. 1,931,903 4,573,360 Centralized telephone bureau leased to Excel Communications, Inc. 925,162 4,023,627 Dairy processing facility in Los Angeles, California 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 246,949 5,034,911 1,301,707 Manufacturing and office buildings leased to Penn Virginia Corporation 652,668 4,080,613 Land leased to Exide Electronics Corporation 1,638,012 Motion picture theaters leased to Harcourt General Corporation 1,568,453 1,527,425 5,709,495
Gross Amount at which Carried at Close of Period (c) ------------------------------------------------------ Personal Description Land Buildings Property Total ----------- ---- --------- -------- ----- 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 Dairy processing facility in Los Angeles, California 2,656,973 10,911,060 13,568,033 Office building in Beaumont, Texas leased to Petrocon Engineering, Inc. and Olmstead Kirk Paper Company 164,113 2,343,849 2,507,962 Office, manufacturing and warehouse buildings leased to Continental Casualty Company 1,389,951 5,337,002 6,726,953 Warehouse and distribution center in Salisbury, North Carolina 246,949 6,336,618 6,583,567 Manufacturing and office buildings leased to Penn Virginia Corporation 652,668 4,080,613 4,733,281 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
Life on which Depreciation In Latest Accumulated Statement of Income Description Depreciation Date Acquired is Computed ----------- ------------ ------------- --------------------- Operating Method (continued): Land leased to Unisource Worldwide, Inc. January 1, 1998 N/A Centralized telephone bureau leased to Excel Communications, Inc. 201,180 January 1, 1998 40 yrs. Dairy processing facility in Los Angeles, California 1,520,729 January 1, 1998 5 yrs. Office building in Beaumont, Texas leased to Petrocon Engineering, Inc. and Olmstead Kirk Paper Company 117,190 January 1, 1998 40 yrs. Office, manufacturing and warehouse buildings leased to Continental Casualty Company 266,850 January 1, 1998 40 yrs. Warehouse and distribution center in Salisbury, North Carolina 290,296 January 1, 1998 40 yrs. Manufacturing and office buildings leased to Penn Virginia Corporation 203,760 January 1, 1998 40 yrs. Land leased to Exide Electronics Corporation January 1, 1998 N/A Motion picture theaters leased to Harcourt General Corporation 285,474 January 1, 1998 40 yrs.
-63- 65 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company Cost ----------------------------------- Capitalized Increase Personal Subsequent to (decrease) in Description Encumbrances Land Buildings Property Acquisition(a) Net Investment (b) ----------- ------------ ---- --------- -------- ---------------------------------- Operating Method (continued): Warehouse/ office research and manufacturing facilities leased to Lockheed Martin Corporation 2,617,330 14,752,353 539,706 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. 4,121,009 447,170 12,337,106 Manufacturing facilities leased To Northern Tube, Inc. 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. 16,798,764 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
Gross Amount at which Carried at Close of Period (c) ---------------------------------------------------- Personal Description Land Buildings Property Total ----------- ---- --------- -------- ----- Operating Method (continued): Warehouse/ office research and manufacturing facilities leased to Lockheed Martin Corporation 2,617,330 15,292,059 17,909,389 Warehouse and office facility leased to Kinney Shoe Corporation/ Armel, Inc. 1,173,108 3,368,141 4,541,249 Manufacturing and office facility leased to Yale Security, Inc. 345,323 3,913,657 4,258,980 Manufacturing facilities leased to AP Parts International, Inc. 447,170 12,337,106 12,784,276 Manufacturing facilities leased To Northern Tube, Inc. 31,725 1,691,580 1,723,305 Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. 2,051,769 5,321,776 7,373,545 Manufacturing facilities leased to Swiss M-Tex, L.P. 263,618 4,046,406 4,310,024 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 Retail stores leased tp General Textiles, Inc. 129,173 313,107 442,280
Life on which Depreciation In Latest Accumulated Statement of Income Description Depreciation Date Acquired is Computed ----------- ------------ ------------- --------------------- Operating Method (continued): Warehouse/ office research and manufacturing facilities leased to Lockheed Martin Corporation 760,501 January 1, 1998 40 yrs. Warehouse and office facility leased to Kinney Shoe Corporation/ Armel, Inc. 168,407 January 1, 1998 40 yrs. Manufacturing and office facility leased to Yale Security, Inc. 195,683 January 1, 1998 40 yrs. Manufacturing facilities leased to AP Parts International, Inc. 616,856 January 1, 1998 40 yrs. Manufacturing facilities leased To Northern Tube, Inc. 84,579 January 1, 1998 40 yrs. Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. 266,089 January 1, 1998 40 yrs. Manufacturing facilities leased to Swiss M-Tex, L.P. 202,320 January 1, 1998 40 yrs. Land leased to AutoZone, Inc. January 1, 1998 N/A Retail stores leased to Northern Auto, Inc. 135,600 January 1, 1998 40 yrs. Retail stores leased tp General Textiles, Inc. 15,655 January 1, 1998 40 yrs.
-64- 66 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company Cost ----------------------------------- Capitalized Increase Personal Subsequent to (decrease) in Description Encumbrances Land Buildings Property Acquisition(a) Net Investment (b) ----------- ------------ ---- --------- -------- ---------------------------------- 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 United States Postal Service, Office facility leased to General Services Administration and Comark, Inc. 1,074,640 11,452,967 73,905 Manufacturing and office facility leased to Allied Plywood Corp. 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. 9,535,543 4,458,047 18,695,004 Land leased to High Voltage Engineering Corp. 1,954,882 Manufacturing facility leased to Wozniak Industries, Inc. 864,638 2,677,512 1,745 Distribution and office facilities leased to Federal Express Corporation 335,189 1,839,331
Gross Amount at which Carried at Close of Period (c) ---------------------------------------------------- Personal Description Land Buildings Property Total ----------- ---- --------- -------- ----- Operating Method (continued): Retail stores leased to Fact 2U, Inc. 77,099 236,231 313,330 Office facility leased to Bell Atlantic Corporation 219,548 1,578,592 1,798,140 Land leased to Sybron International Corporation 1,135,003 1,135,003 United States Postal Service, Office facility leased to General Services Administration and Comark, Inc. 1,074,640 11,526,872 12,601,512 Manufacturing and office facility leased to Allied Plywood Corp. 459,593 1,351,737 1,811,330 Manufacturing and office facility leased to StairPans of America, Inc. 139,004 1,758,648 1,897,652 Manufacturing facilities leased to Quebecor Printing Inc. 4,458,047 18,695,004 23,153,051 Land leased to High Voltage Engineering Corp. 1,954,882 1,954,882 Manufacturing facility leased to Wozniak Industries, Inc. 864,638 2,679,257 3,543,895 Distribution and office facilities leased to Federal Express Corporation 335,189 1,839,331 2,174,520
Life on which Depreciation In Latest Accumulated Statement of Income Description Depreciation Date Acquired is Computed ----------- ------------ ------------- --------------------- Operating Method (continued): Retail stores leased to Fact 2U, Inc. 11,811 January 1, 1998 40 yrs. Office facility leased to Bell Atlantic Corporation 78,929 January 1, 1998 40 yrs. Land leased to Sybron International Corporation January 1, 1998 N/A United States Postal Service, Office facility leased to General Services Administration and Comark, Inc. 573,588 January 1, 1998 40 yrs. Manufacturing and office facility leased to Allied Plywood Corp. 67,587 January 1, 1998 40 yrs. Manufacturing and office facility leased to StairPans of America, Inc. 87,933 January 1, 1998 40 yrs. Manufacturing facilities leased to Quebecor Printing Inc. 934,750 January 1, 1998 40 yrs. Land leased to High Voltage Engineering Corp. January 1, 1998 N/A Manufacturing facility leased to Wozniak Industries, Inc. 133,961 January 1, 1998 40 yrs. Distribution and office facilities leased to Federal Express Corporation 91,966 January 1, 1998 40 yrs.
-65- 67 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company Cost ----------------------------------- Capitalized Increase Personal Subsequent to (decrease) in Description Encumbrances Land Buildings Property Acquisition(a) Net Investment (b) ----------- ------------ ---- --------- -------- ---------------------------------- Operating Method (continued): Land leased to Dr Pepper Bottling Company of Texas 9,795,193 Manufacturing facility leased to Detroit Diesel Corporation 20,238,699 5,967,620 31,730,547 Engineering and Fabrication facility leased to Orbital Sciences Corporation 14,875,614 5,034,749 18,956,971 2,185,077 Distribution facility leased to PepsiCo, Inc. 166,745 884,772 Land leased to Childtime Childcare, Inc. 482,373 1,673,925 324 Hotel leased to Livho, Inc. 2,765,094 11,086,650 2,711,519 4,264,238 Retail store leased to Eagle Hardware and Garden, Inc. 10,846,197 4,125,000 11,811,641 376,088 Office building in Pantin, France leased to four lessees 7,210,132 2,674,914 8,113,120 (531,115) Office facility in Mont Saint Argany, France leased to Tellit Assurances 3,783,469 542,968 5,286,915 (553,046) Portfolio of seven properties In Houston, Texas leased to 15 lessees 10,057,481 3,260,000 22,574,073
Gross Amount at which Carried at Close of Period (c) ---------------------------------------------------- Personal Description Land Buildings Property Total ----------- ---- --------- -------- ----- 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 Engineering and Fabrication facility leased to Orbital Sciences Corporation 5,034,749 21,142,048 26,176,797 Distribution facility leased to PepsiCo, Inc. 166,745 884,772 1,051,517 Land leased to Childtime Childcare, Inc. 1,674,249 1,674,249 Hotel leased to Livho, Inc. 2,765,094 14,852,839 3,209,568 20,827,501 Retail store leased to Eagle Hardware and Garden, Inc. 4,476,416 11,836,313 16,312,729 Office building in Pantin, France leased to four lessees 2,450,830 7,806,089 10,256,919 Office facility in Mont Saint Argany, France leased to Tellit Assurances 488,359 4,788,478 5,276,837 Portfolio of seven properties In Houston, Texas leased to 15 lessees 3,260,000 22,574,073 25,834,073
Life on which Depreciation In Latest Accumulated Statement of Income Description Depreciation Date Acquired is Computed ----------- ------------ ------------- --------------------- Operating Method (continued): Land leased to Dr Pepper Bottling Company of Texas January 1, 1998 N/A Manufacturing facility leased to Detroit Diesel Corporation 1,586,527 January 1, 1998 40 yrs. Engineering and Fabrication facility leased to Orbital Sciences Corporation 981,980 January 1, 1998 40 yrs. Distribution facility leased to PepsiCo, Inc. 44,239 January 1, 1998 40 yrs. Land leased to Childtime Childcare, Inc. January 1, 1998 N/A Hotel leased to Livho, Inc. 1,303,887 January 1, 1998 7-40 yrs. Retail store leased to Eagle Hardware and Garden, Inc. 504,411 April 23, 1998 40 yrs. Office building in Pantin, France leased to four lessees 295,790 May 27, 1998 40 yrs. Office facility in Mont Saint Argany, France leased to Tellit Assurances 151,411 June 10, 1998 40 yrs. Portfolio of seven properties In Houston, Texas leased to 15 lessees 869,910 June 15, 1998 40 yrs.
-66- 68 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company Cost ----------------------------------- Capitalized Increase Personal Subsequent to (decrease) in Description Encumbrances Land Buildings Property Acquisition(a) Net Investment (b) ----------- ------------ ---- --------- -------- -------------- ------------------ Operating Method (continued): Office facility leased to Sprint Spectrum L.P. 1,190,000 9,352,965 Office facility leased to Direction Regional des Affaires Sanitaires et Sociales 1,462,839 303,061 2,109,731 (310,243) Office facility leased to Cendant Operations, Inc. 351,445 5,980,736 Office facility leased to Bellsouth Telecommunications 5,995,498 720,000 7,708,458 Office building in Lille and Indre et Loire, France leased to Gist-Brocades France S.A. 3,642,171 451,168 4,478,891 (238,571) Office facility leased to America West Holdings Corp. 18,533,528 2,274,782 26,701,663 Vacant 747,449 ------------ ----------- ------------ ---------- ----------- ----------- $148,010,401 $91,066,569 $339,414,917 $2,711,519 $10,316,293 $(1,632,975) ============ =========== ============ ========== =========== ===========
Gross Amount at which Carried at Close of Period (c) ---------------------------------------------------- Personal Description Land Buildings Property Total ----------- ---- --------- -------- ----- Operating Method (continued): Office facility leased to Sprint Spectrum L.P. 1,190,000 9,352,965 10,542,965 Office facility leased to Direction Regional des Affaires Sanitaires et Sociales 259,604 1,842,945 2,102,549 Office facility leased to Cendant Operations, Inc. 351,445 5,980,736 6,332,181 Office facility leased to Bellsouth Telecommunications 720,000 7,708,458 8,428,458 Office building in Lille and Indre et Loire, France leased to Gist-Brocades France S.A. 428,307 4,263,181 4,691,488 Office facility leased to America West Holdings Corp. 2,274,782 26,701,663 28,976,445 Vacant 747,449 747,449 ----------- ------------ ----------- ------------ $91,446,801 $347,219,954 $3,209,568 $441,876,323 =========== ============ ========== ============
Life on which Depreciation In Latest Accumulated Statement of Income Description Depreciation Date Acquired is Computed ----------- ------------ ------------- --------------------- Operating Method (continued): Office facility leased to Sprint Spectrum L.P. 253,469 July 1, 1998 40 yrs. Office facility leased to Direction Regional des Affaires Sanitaires et Sociales 46,268 November 16, 1998 40 yrs. Office facility leased to Cendant Operations, Inc. 213,318 February 19, 1999 40 yrs. Office facility leased to Bellsouth Telecommunications 8,061 December 22, 1999 40 yrs. Office building in Lille and Indre et Loire, France leased to Gist-Brocades France S.A. 72,902 May 5, 1999 40 yrs Office facility leased to America West Holdings Corp. 443,120 January 1, 1998 and Vacant July 23, 1998 40 yrs. ----------- $16,455,189 ===========
-67- 69 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company ----------------------- Cost Capitalized Increase Subsequent to (Decrease) in Net Description Encumbrances Land Buildings Acquisition (a) Investment (b) ----------- ------------ ---- --------- --------------- -------------- Direct financing method: Office buildings and warehouses leased to Unisource Worldwide, Inc. $3,880,080 $ 331,910 $12,281,102 $ 229,343 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 (11,199) Computer Center leased to AT&T Corporation 269,700 5,099,964 (5,096) Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 3,495,507 34,016,822 1,624,897 Warehouse and manufacturing buildings leased to CSS Industries, Inc./ Cleo, Inc. 1,051,005 14,036,912 167,813 Direct Financing Method (continued):
Gross Amount at which Carried at Close of Period (c) Description Total Date Acquired ----------- ----- ------------- Direct financing method: Office buildings and warehouses leased to Unisource Worldwide, Inc. $12,842,355 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. 5,593,336 January 1, 1998 Computer Center leased to AT&T Corporation 5,364,568 January 1, 1998 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc. 39,137,226 January 1, 1998 Warehouse and manufacturing buildings leased to CSS Industries, Inc./ Cleo, Inc. 15,255,730 January 1, 1998 Direct Financing Method (continued):
-68- 70 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company ----------------------- Cost Capitalized Increase Subsequent to (Decrease) in Net Description Encumbrances Land Buildings Acquisition (a) Investment (b) ----------- ------------ ---- --------- --------------- -------------- Direct financing method: (continued) Manufacturing, distribution and office buildings leased to Brodart Co. 2,690,525 445,383 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 Manufacturing facility leased to Penberthy Products, Inc. 70,317 1,476,657
Gross Amount at which Carried at Close of Period (c) Description Total Date Acquired ----------- ----- ------------- 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 Manufacturing facility leased to Penberthy Products, Inc. 1,546,974 January 1, 1998
-69- 71 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company ----------------------- Cost Capitalized Increase Subsequent to (Decrease) in Net Description Encumbrances Land Buildings Acquisition (a) Investment (b) ----------- ------------ ---- --------- --------------- ------------- Manufacturing facility and warehouse leased to DS Group Limited 238,532 3,339,449 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., $3,095,268 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 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 1,882,372 5,846,214 26,581
Gross Amount at which Carried at Close of Period (c) Description Total Date Acquired ----------- ----- ------------- Manufacturing facility and warehouse leased to DS Group Limited 3,577,981 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 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
-70- 72 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company ----------------------- Cost Capitalized Increase Subsequent to (Decrease) in Net Description Encumbrances Land Buildings Acquisition (a) Investment (b) ----------- ------------ ---- --------- --------------- ------------- 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 11,838,535 4,221,568 19,676,226 Office/warehouse facility leased to Red Bank Distribution, Inc. 4,499,587 1,629,715 9,396,770 Day care facilities leased to Childtime Childcare, Inc. 733,231 2,412,916 ----------- ----------- ------------ -------- ---------- $26,737,226 $27,077,152 $266,423,960 $ 48,624 $2,005,758 =========== =========== ============ ======== ==========
Gross Amount at which Carried at Close of Period (c) Description Total Date Acquired ----------- ----- ------------- 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. 2,412,916 January 1, 1998 ------------ $295,555,494 ============
-71- 73 CAREY DIVERSIFIED LLC and Subsidiaries SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION as of December 31, 1999
Initial Cost to Company ----------------------- Cost Capitalized Personal Subsequent to Description Encumbrances Land Buildings Property Acquisition (a) ----------- ------------ ---- --------- -------- --------------- Operating real estate: Hotels located in: Alpena, Michigan $ 6,749,992 $114,241 $4,256,356 $618,066 $291,019 Petoskey, Michigan 6,749,992 98,326 1,446,757 290,668 469,195 ----------- -------- ---------- -------- -------- $13,499,984 $212,567 $5,703,113 $908,734 $760,214 =========== ======== ========== ======== ========
Gross Amount at which Carried at Close of Period (c) ----------------------------------------------------- Personal Accumulated Description Land Property Buildings Total Depreciation ----------- ---- -------- --------- ----- ----------- Operating real estate: Hotels located in: Alpena, Michigan $114,241 $ 795,389 $4,370,052 $5,279,682 $553,671 Petoskey, Michigan 98,326 584,244 1,622,373 2,304,943 278,065 -------- ---------- ---------- ---------- -------- $212,567 $1,379,633 $5,992,425 $7,584,625 $831,736 ======== ========== ========== ========== ========
Life on which Depreciation In Latest Statement of Income Description Date Acquired is Computed ----------- -------------- ----------- Operating real estate: Hotels located in: Alpena, Michigan January 1, 1998 7-40 yrs. Petoskey, Michigan January 1, 1998 7-40 yrs.
-72- 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 (iii) writedowns of properties to fair value, and (iv) changes in foreign currency exchange rates. (c) At December 31, 1999, the aggregate cost of real estate owned by the Company and its subsidiaries for Federal income tax purposes is $786,229,000. Reconciliation of Real Estate Accounted for Under the Operating Method
December 31, December 31, 1999 1998 Balance at beginning of year $397,929,165 $315,097,546 Additions 54,283,955 73,900,429 Sales (8,703,822) (3,044,712) Change in foreign currency translation adjustment (1,632,975) Writedowns to fair value (1,575,000) Reclassification from investment in direct financing lease 16,563,263 Reclassification to real estate held for sale (3,012,361) ------------- -------------- Balance at end of year $441,876,323 $397,929,165 ============ ============
-73- 75 CAREY DIVERSIFIED LLC and CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES to Schedule III - Real Estate and ACCUMULATED DEPRECIATION
Reconciliation of Accumulated Depreciation ------------------------------------------ December 31, December 31, 1999 1998 ---- ---- Balance at beginning of year $ 7,617,500 Depreciation expense 9,887,829 $7,725,130 Reclassification to real estate held for sale (104,550) Writeoff resulting from sales of property (1,050,140) (3,080) ----------- ---------- Balance at end of year $16,455,189 $7,617,500 =========== ==========
Reconciliation for Operating Real Estate ---------------------------------------- December 31, December 31, 1999 1998 Balance at beginning of year $7,313,478 $23,387,677 Additions 271,142 489,064 Reclassification to operating method (16,563,263) Balance at close of ---------- ----------- year $7,584,625 $ 7,313,478 ========== ===========
-74- 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 --------------------- December 31, December 31, 1999 1998 Balance at beginning of year $300,218 Depreciation expense $531,518 $ 300,218 -------- --------- Balance at end of year $831,736 $ 300,218 -------- ---------
-75- EX-24.1 2 POWER OF ATTORNEY 1 Exhibit 24.1 We, the undersigned directors and/or officers of Carey Diversified LLC (the "Registrant") hereby severally constitute and appoint Claude Fernandez and John J. Park, and each of them individually, with full powers of substitution and re-substitution, our true and lawful attorneys, with full powers to each of them to sign for us, in our names and in the capacities indicated below, the Registrant's Form 10-K Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for the fiscal year ending December 31, 1999 filed with the Securities and Exchange Commission, and any and all amendments to said Form 10-K, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as full to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney. This Power of Attorney may be executed in counterparts.
Signature Title Date - --------- ----- ---- /s/ Francis J. Carey Chairman & Chief Executive Officer April 10, 2000 - --------------------------- Francis J. Carey /s/ William P. Carey Director April 10, 2000 - --------------------------- William P. Carey /s/ Gordan DuGan Director April 10, 2000 - --------------------------- Gordan DuGan /s/ Donald E. Nickelson Director April 10, 2000 - --------------------------- Donald E. Nickelson /s/ Eberhard Faber, IV Director April 10, 2000 - --------------------------- Eberhard Faber, IV /s/ Dr. Lawrence R. Klein Director April 10, 2000 - --------------------------- Dr. Lawrence R. Klein /s/ Charles C. Townsend,Jr. Director April 10, 2000 - --------------------------- Charles C. Townsend, Jr. /s/ Reginald Winssinger Director April 10, 2000 - --------------------------- Reginald Winssinger
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