-----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, WCEkexFgFLPlmQspKB3nc0jRZt2lC4sTwFe0EAMX1ltkZfrygH0vkFFrZ51ZpDdt Mm5HBlDjjJSKj7LmgeFmIw== 0000950123-99-010076.txt : 19991115 0000950123-99-010076.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950123-99-010076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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-Q SEC ACT: SEC FILE NUMBER: 001-13779 FILM NUMBER: 99747471 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-Q 1 CAREY DIVERIFIED LLC 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q For the quarterly period ended SEPTEMBER 30, 1999 of CAREY DIVERSIFIED LLC ("CDC") A DELAWARE Limited Liability Company IRS Employer Identification No. 13-3912578 SEC File Number 001-13779 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (212) 492-1100 CDC has LISTED SHARES registered pursuant to Section 12(g) of the Act. CDC is registered on the NEW YORK STOCK EXCHANGE. CDC does not have any Securities registered pursuant to Section 12(b) of the Act. CDC is unaware of any delinquent filers pursuant to Item 405 of Regulation S-K. CDC (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. There are 25,682,017 Listed Shares, no par value outstanding at November 10, 1999. 2 CAREY DIVERSIFIED LLC AND SUBSIDIARIES INDEX
Page No. -------- PART I - ------ Item 1. - Financial Information* Condensed Consolidated Balance Sheets, as of September 30, 1999 and December 31, 1998 2 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 1999 and 1998 3 Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 5-6 Notes to Condensed Consolidated Financial Statements 7-12 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 13-15 Item 3. - Quantitative and Qualitative Disclosures About Market Risk 16 PART II - Other Information - ------- Item 4. - Submission of Matters to a Vote of Security Holders 17 Item 6. - Exhibits and Reports on Form 8-K 17 Signatures 18
*The summarized financial information contained herein is unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of such financial information have been included. -1- 3 CAREY DIVERSIFIED LLC AND SUBSIDIARIES PART I Item 1. - FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
September 30, December 31, 1999 1998 ---- ---- (Unaudited) (Note) ASSETS: Real estate leased to others under the operating method, net of accumulated depreciation of $13,776 at September 30, 1999 and $7,617 at December 31, 1998 $421,252 $390,312 Net investment in direct financing leases 296,618 295,826 Operating real estate, net of accumulated depreciation of $552 and $300 at September 30, 1999 and December 31, 1998 7,033 7,013 Real estate leased to others under construction 58,279 55,856 Cash and cash equivalents 6,157 5,673 Assets held for sale 12,610 12,842 Equity investments 36,938 29,532 Other assets 24,963 16,210 -------- -------- Total assets $863,850 $813,264 ======== ======== LIABILITIES: Mortgage notes payable $188,783 $138,964 Notes payable 133,000 132,334 Accrued interest 1,241 2,128 Accounts payable to affiliates 6,367 7,013 Dividends payable 10,709 10,447 Other liabilities 10,186 11,771 -------- -------- Total liabilities 350,286 302,657 -------- -------- Minority interest (3,055) (3,626) -------- -------- Commitments and contingencies MEMBERS' EQUITY: Listed Shares, no par value; 25,684,061, and 25,343,402 shares issued and outstanding at September 30, 1999 and December 31, 1998 523,282 517,755 Distributions in excess of accumulated earnings (5,964) (2,803) Accumulated other comprehensive income (loss) (699) (719) -------- -------- Total members' equity 516,619 514,233 -------- -------- Total liabilities and members' equity $863,850 $813,264 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. Note: The condensed consolidated balance sheet at December 31, 1998 has been derived from the audited consolidated financial statements at that date -2- 4 CAREY DIVERSIFIED LLC CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share and share amounts)
Three Months Ended September 30, Nine Months Ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Rental income $12,413 $10,765 $34,990 $31,776 Interest income from direct financing leases 8,589 8,559 25,519 25,954 Other interest income 306 183 741 607 Other income 590 45 977 306 Revenue of hotel operations 1,833 1,754 4,495 5,000 ------- ------- ------- ------- 23,731 21,306 66,722 63,643 ------- ------- ------- ------- Expenses: Interest 5,382 4,947 14,217 13,776 Depreciation and amortization 3,174 2,211 7,986 6,102 General and administrative 2,269 1,297 5,985 4,806 Property expenses 1,812 1,030 4,851 3,513 Writedown to fair value 158 Operating expenses of hotel operations 1,235 1,161 3,446 3,832 ------- ------- ------ ------- 13,872 10,646 36,643 32,029 ------- ------- ------ ------- Income before minority interest, income from equity investments, gain (loss) and extraordinary items 9,859 10,660 30,079 31,614 Minority interest in income (828) (933) (2,389) (2,771) ------- ------ ------- ------- Income before income from equity investments, gain (loss) and extraordinary items 9,031 9,727 27,690 28,843 Income from equity investments 302 431 1,129 1,547 ------- ------- ------- ------- Income before gain (loss) and extraordinary items 9,333 10,158 28,819 30,390 Gain (loss) on sales 137 (20) 137 70 ------- ------- ------- ------- Income before extraordinary items 9,470 10,138 28,956 30,460 Extraordinary loss on extinguishment of debt, net of minority interest (39) (621) ------- ------- ------- ------- Net income $ 9,470 $10,138 $28,917 $29,839 ======= ======= ======= ======= Basic and diluted earnings per share: Income before extraordinary item $.37 $.40 $1.13 $ 1.23 Extraordinary item (0.02) ---- ---- ----- ------ $.37 $.40 $1.13 $ 1.21 ==== ==== ===== ====== Weighted average shares outstanding: Basic 25,656,473 25,242,808 25,550,686 24,716,281 ========== ========== ========== ========== Diluted 25,656,473 25,242,808 25,550,686 24,721,141 ========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- 5 CAREY DIVERSIFIED LLC CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands)
Three Months Ended September 30, Nine Months Ended September 30, 1999 1998 1999 1998 Net income $ 9,470 $10,138 $28,917 $29,839 Other comprehensive income (loss): Change in unrealized appreciation of marketable securities (120) (361) (89) (158) Foreign currency translation adjustment (1,255) 199 109 243 ------- ------- ------- ------- Other comprehensive income (1,375) (162) 20 85 ------- ------- ------- ------- Comprehensive income $8,095 $ 9,976 $28,937 $29,924 ====== ======= ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements. -4- 6 CAREY DIVERSIFIED LLC CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) (in thousands)
Nine Months Ended September 30, 1999 1998 Cash flows from operating activities: Net income $ 28,917 $ 29,839 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,986 6,102 Amortization of deferred income (1,016) (719) Gain on sale of real estate (137) (70) Extraordinary loss, net of minority income 39 621 Securities received in lieu of cash (265) Minority interest in income 2,389 2,771 Straight-line rent adjustments (1,223) (2,088) Compensation costs paid by issuance of shares 1,271 651 Payment of deferred leasing fees (1,509) Provision for uncollected rents 200 439 Writedowns to fair value 158 Net change in operating assets and liabilities (3,255) 15 -------- -------- Net cash provided by operating activities 35,064 36,052 -------- -------- Cash flows from investing activities: Purchases of real estate and equity investments (60,000) (66,558) Additional capital expenditures (2,216) (3,628) Proceeds from sale of property 74 10,066 Distributions from equity investments in excess of equity income 808 416 Payment of disposition fees (1,007) Purchases of mortgage receivable and marketable securities (3,676) (65) -------- -------- Net cash used in investing activities (66,017) (59,769) -------- -------- Cash flows from financing activities: Proceeds from issuance of shares 652 7,243 Dividends paid (31,814) (20,391) Distributions to former general partners (5,018) Distributions to and redemption of former limited partners (9,520) Distributions to minority interest (1,895) Payments of mortgage principal (3,519) (5,265) Proceeds from notes payable 37,000 111,577 Proceeds from mortgages payable 75,171 13,374 Prepayments of mortgages and notes payable (42,488) (77,129) Deferred refinancing costs (1,631) (1,475) Prepayment charges paid on extinguishment of debt (39) (700) Other (585) -------- -------- Net cash provided by financing activities 31,437 12,111 -------- -------- Net increase (decrease) in cash and cash equivalents 484 (11,606) Cash and cash equivalents, beginning of period 5,673 18,586 -------- -------- Cash and cash equivalents, end of period $ 6,157 $ 6,980 ======== ========
(Continued) The accompanying notes are an integral part of the condensed consolidated financial statements. -5- 7 CAREY DIVERSIFIED LLC CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED) - CONTINUED (in thousands)
Nine Months Ended September 30, 1999 1998 Supplemental disclosure of cash flows information: Interest paid $15,104 $13,625 ======= =======
Noncash operating, investing and financing activities: A. During the nine-month periods ended September 30, 1999 and 1998, the Company issued restricted shares of $2,979 and $3,206, respectively, to certain directors, officers and affiliates in consideration of services rendered. B. In March 1999, the Company purchased the entire 26% minority interest in a subsidiary that net leases property to Sprint Spectrum, L.P. for $2,510 in exchange for the issuance of 139,859 shares. C. In connection with the acquisition of properties in 1998, the Company assumed mortgage obligations of $13,593 and issued shares of $16,377. D. 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 as follows; Land, buildings and personal property, net of accumulated depreciation $(7,654) Mortgage note payable 8,107 Other assets and liabilities, net (316) ------- Gain on sale $ 137 =======
The accompanying notes are an integral part of the condensed consolidated financial statements. -6- 8 CAREY DIVERSIFIED LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands, except per share amounts) Note 1. Basis of Presentation: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant inter-entity balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Note 2. Earnings Per Share: Basic and diluted earnings per common share for the Company for the three-month and nine-month periods ended September 30, 1999 and 1998 were calculated as follows:
Three Months Ended September 30, 1999 1998 ---- ---- Net income $ 28,917 $ 29,839 ========== ========== Weighted average shares - diluted 25,656,473 25,242,808 ========== ========== Basic and diluted earnings per share $ .37 $ .40 ========== ==========
Nine Months Ended September 30, 1999 1998 Income before extraordinary item $ 28,956 $ 30,460 Extraordinary item (39) (621) ---------- ---------- Net income $ 28,917 $ 29,839 ========== ========== Weighted average shares - basic 25,550,686 24,716,281 Effect of dilutive securities - options for shares 4,860 ---------- ---------- Weighted average shares - basic and diluted 25,550,686 24,721,141 ========== ========== Basic and diluted earnings per share before extraordinary item $ 1.13 $1.23 Extraordinary item (.02) ----- ----- Basic and diluted earnings per share $1.13 $1.21 ====== =====
-7- 9 CAREY DIVERSIFIED LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) Note 3. Transactions with Related Parties: ---------------------------------- Pursuant to its management agreement, Carey Management LLC ("Carey Management"), an affiliate, performs certain advisory and administrative services for the Company. Management and performance fees are payable to Carey Management, each at an annual rate of 1/2 of 1% of the total average market capitalization of the Company. The management fee is reduced on a dollar-for-dollar basis for distributions paid to the special limited partners of the Company's nine subsidiary partnerships. The performance fee is payable in the form of restricted shares issued by the Company and vests over a five-year period. The performance fees were $389 and $194 for the three-month periods ended September 30, 1999 and 1998, respectively and $1,140 and $563 for the nine-month periods ended September 30, 1999 and 1998, respectively. Carey Management participates in the Company's dividend reinvestment plan. It is reinvesting its dividends in stock of the Company through the dividend reinvestment plan. Management fees, net of distributions paid to special limited partners, were $399 for the three-month period ended September 30, 1999, and $1,082 for the nine-month period ended September 30, 1999. For the nine-month period ended September 30, 1998, the Company's management fee was offset in its entirety by distributions paid to special limited partners and property management fees paid by the Partnerships to Carey Management. General and administrative expense reimbursements were $293 and $313 for the three-month periods ended September 30, 1999 and 1998, respectively, and $1,022 and $1,040 for the nine months ended September 30, 1999 and 1998, respectively. -8- 10 CAREY DIVERSIFIED LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) Note 4. Lease Revenues: --------------- For the nine months ended September 30, 1999 and 1998, the Company earned its net leasing revenues (i.e., rental income and interest income from direct financing leases) from more than 80 lessees. A summary of net leasing revenues is as follows:
1999 % 1998 % -------- ---- ---- ---- Dr Pepper Bottling Company of Texas $ 3,040 5% $ 2,999 5% Gibson Greetings, Inc. 2,957 5 2,896 5 Detroit Diesel Corporation 2,744 5 2,744 5 Sybron International Corporation 2,720 4 2,483 4 Livho, Inc. 2,420 4 2,151 4 Quebecor Printing, Inc. 1,850 3 1,898 3 AutoZone, Inc. 1,827 3 1,780 3 Furon Company 1,811 3 1,812 3 Orbital Sciences Corporation 1,713 3 1,615 3 Thermadyne Holdings Corporation 1,676 3 1,676 3 The Gap, Inc. 1,654 3 1,645 3 Copeland Beverage Group, Inc. 1,350 2 750 1 Unisource Worldwide, Inc. 1,293 2 1,284 2 Lockheed Martin Corporation 1,248 2 1,210 2 AP Parts International, Inc. 1,213 2 1,377 3 America West Holdings Corp. 1,204 2 CSS Industries, Inc. 1,190 2 1,184 2 Brodart, Co. 1,139 2 1,052 2 Peerless Chain Company 1,098 2 1,098 2 Red Bank Distribution, Inc. 1,050 2 1,050 2 Eagle Hardware & Garden, Inc. 1,017 2 High Voltage Engineering Corporation 996 2 881 2 Duff-Norton Company, Inc. 873 1 873 2 Sprint Spectrum, L.P. 866 1 United States Postal Service 817 1 817 2 DeVlieg Bullard Inc. 715 1 715 1 Anthony's Manufacturing company, Inc. 709 1 680 1 Wal-Mart Stores, Inc. 668 1 668 1 Hotel Corporation of America 636 1 636 1 Material Sciences Corporation 621 1 1,561 1 Winn-Dixie Stores, Inc. 584 1 577 1 Continental Casualty Company 579 1 579 1 AT&T Corporation 570 1 570 1 Family Dollar Stores, Inc. 484 1 516 1 Exide Electronics Corporation 429 1 429 1 Excel Communications, Inc. 400 1 400 1 Other 14,348 23% 15,124 26% ------- ---- ------- ---- $60,509 100% $57,730 100% ======= ===== ======= ====
-9- 11 CAREY DIVERSIFIED LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5. Equity Investments: The Company owns 780,269 units of the operating partnership of Meristar Hospitality Corporation ("Meristar"), a publicly traded real estate investment trust. The Company has the right to convert its units in the operating partnership to shares of common stock in Meristar at any time on a one-for-one basis. The exchange of units for common stock would be a taxable transaction in the year of exchange. The Company's interest in the Meristar operating partnership is being accounted for under the equity method. The most recently filed financial statements of Meristar reported total assets of $3,096,627 and shareholders' equity of $1,130,162 as of June 30, 1999 and revenues of $138,148 and net income of $7,446 for the six months then ended. As of October 29, 1999, Meristar's quoted share price was $16.06 resulting in an aggregate value of the Company's units of approximately $12,531 if converted. The carrying value of the equity interest in Meristar operating partnership as of September 30, 1999 was $23,426. The Company owns equity interests as a limited partner in two limited partnerships that each own real estate net leased to a single tenant. Corporate Property Associates 10 Incorporated, an affiliate, owns the remaining controlling interests as a general partner in each partnership. The Company also owns a 50% interest in a limited liability company with the remaining 50% interest owned by Corporate Property Associates 14 Incorporated, an affiliate. Combined financial information of the two limited partnerships and the limited liability company is summarized as follows:
September 30, 1999 December 31, 1998 ------------------ ----------------- Assets (primarily real estate) $77,936 $46,391 Liabilities (primarily mortgage notes payable) 48,827 32,399 Partners' capital 29,109 13,992
Nine Months Ended ----------------- September 30, ------------- 1999 1998 ------- ------- Revenues (primarily rental income) $6,076 $5,243 Expenses (primarily interest on mortgages and depreciation) (3,988) (3,406) ------ ------- Net income $2,088 $1,837 ======= ======
Note 6. Acquisitions of Properties in France: In July 1999, the Company purchased two newly-constructed buildings in France in Lille and Indre et Loire, through an 80% majority owned subsidiary, at a total cost of 29,150,000 French Francs ("FF") (approximately $4,736) of which FF 24,300,000 (approximately $3,948) was financed with limited recourse mortgage debt. The Lille and Indre et Loire properties are leased to Gist-Brocades France S. A. ("Gist-Brocades") and a subsidiary of the French postal service, respectively, at an annual rent of FF 1,400,000 (approximately $227) and FF 1,600,000 (approximately $260), respectively. Each lease has an initial term of six years followed by a renewal term of three years at the option of the lessee. Rent will increase annually based on increases in the INSEE index, a French index of construction costs. The limited recourse mortgage loans have a term of fifteen years at which time balloon payments will be due. The loans bear interest at an annual rate of 4.56% for the first five loan years. -10- 12 CAREY DIVERSIFIED LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 7. Mortgage Financings: -------------------- A. On July 15, 1999 the Company obtained $25,000 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"). The Company 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 the Company, the Company's undivided ownership interest in the property 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 $180 (of which the Company's share is approximately $134) 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. B. On July 26, 1999, the Company obtained $17,100 of limited recourse financing collateralized by 48 retail properties leased to AutoZone, Inc. ("AutoZone") pursuant to four master leases with AutoZone. The loans consist of four tranches which mature and fully amortize between January 2011 and August 2013 and bear interest at an annual rate of 6.85%. Monthly debt service payments of principal and interest are currently $172 plus certain administrative fees. C. On August 31, 1999, the Company obtained $13,750 of limited recourse financing collateralized by its two adjacent properties leased to the Gap, Inc. ("The Gap") in Erlanger, Kentucky. The loans bear interest at an annual rate of 7.91% and provide for monthly payments of interest and principal of $105, with $9,682 of the amount payable based on a 66-year amortization schedule, and the remaining $4,068 payable based on a 161-month (13 years and five-months) amortization schedule. The loan matures in September 2004 and will be extended for an additional five years if the Gap exercises its options to renew its leases on or before May 1, 2004. If the loan is extended, the interest rate will be reset to the lender's then prevailing rate for loans with a term of five years. In connection with the financing, the Company paid off an existing mortgage loan of $5,534. Note 8. Property in Topeka, Kansas: --------------------------- 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 Hotel Corp. lease was structured so that it had the right to exercise its purchase option at any time during the lease term. The exercise price was determined pursuant to a formula based on Hotel Corp.'s operating cash flow of the hotel for the most recent twelve month period with a minimum exercise price in an amount equal to the outstanding mortgage loan balance on the property. Based on this formula, the exercise price was determined to be $8,107, the outstanding mortgage loan balance. Hotel Corp. assumed the mortgage loan obligation to complete the sale. In connection with the sale, the Company realized a $137 gain. The Company's annual cash flow (rent less mortgage debt service) from the Topeka property was $70. Note 9. Subsequent Event: ----------------- In December 1996, KSG, Inc. ("KSG") notified the Company that it was exercising its option to purchase the property it leases in Hazelwood, Missouri. The Company and KSG were not able to reach an agreement on the exercise price. 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. A dispute about the Company's calculation of a rent increase in April 1997 prevented an agreement or valuation. 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. On March 25, 1999, the Circuit Court of the County of St. Louis, State of Missouri ruled in favor of the Company with regard to the interpretation of the terms of the rent increase calculation. On November 1, 1999, the Company sold the property to KSG for $11,000 plus an allowance of $100 for legal costs. Annual rent from the KSG property was $921. -11- 13 CAREY DIVERSIFIED LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 10. Segment Reporting: The Company operates in two business segments - real estate and hotel operations. The two segments are summarized as follows:
Nine months ended September 30, Real Estate Hotel Total Company ------------------------------- ----------- ----- ------------- Revenues: 1999 $ 62,227 $4,495 $ 66,722 1998 58,643 5,000 63,643 Operating and interest expenses: (excluding depreciation and amortization) 1999 $ 25,211 $ 3,446 $ 28,657 1998 22,095 3,832 25,927 Income from equity investments: 1999 $ 1,129 $ 1,129 1998 1,547 1,547 Net operating income (1): 1999 $ 27,907 $ 1,049 $ 28,956 1998 29,292 1,168 30,460 Total assets: September 30, 1999 $854,889 $8,961 $863,850 December 31, 1998 804,755 8,509 813,264
(1) Represents income before extraordinary items. -12- 14 CAREY DIVERSIFIED LLC AND SUBSIDIARIES Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands) The following information should be read in conjunction with the Company's condensed consolidated financial statements and notes thereto as of September 30, 1999 included in this quarterly report and the Company's Annual Report on Form 10-K for the year ended December 31, 1998. This quarterly report contains forward looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievement of the Company to be materially different from the results of operations or plans expressed or implied by such forward looking statements. Accordingly, such information should not be regarded as representations by the Company that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. RESULTS OF OPERATIONS: - ---------------------- Net income for the three-month and nine-month periods ended September 30, 1999 decreased by $668 and $922, respectively, as compared with the three-month and nine-month periods ended September 30, 1998. Excluding extraordinary charges of $621 and $39 on the early extinguishment of debt in 1999 and 1998, respectively, income for the comparable nine-month periods would have reflected a decrease of $1,504. The decreases were primarily attributable to a decrease in equity income, an increase in depreciation and amortization and increases in general and administrative and property expenses. The current nine-month period also included a $158 noncash charge on a writedown to fair value on the Company's property leased to Motorola, Inc. which is held for sale. These effects were partially offset by increases in lease revenues (rental income and interest from direct financing leases) and other income. The decrease in equity income was due to a substantial decrease in income from the Company's investment in the operating partnership of Meristar Hospitality Corporation. The decrease in Meristar's earnings was due to a change by Meristar in its method of accounting for contingent (i.e., percentage) rents in interim financial periods. Meristar had previously accounted for contingent rents ratably throughout the year based on its best estimates and historical trends. In accordance with a new accounting pronouncement, Meristar is deferring recognition of contingent rental income until specified targets on each identified lease are met. The overall affect of this accounting pronouncement affects the recognition of income in interim financial periods and should not effect income for an annual reporting cycle. The increase in depreciation and amortization was due primarily to the purchases of properties in 1998, the completion of the America West Holdings Corp. build-to-suit project in the second quarter, and the completion of renovation of the Moorestown, New Jersey property in connection with a lease with Cendant Operations, Inc. that went into effect in May 1999. The increase in general and administrative costs was due, in part, to expenses related to the implementation of integrated accounting and asset management information system and an increase in professional fees. The increase in property expenses was due to higher management and performance fee expenses. The increase in interest expense was due to the limited recourse mortgage financing placed on 48 retail properties leased to AutoZone, Inc. and the properties leased to the Gap, Inc. during the current quarter as well as a loan on the property leased to Eagle Hardware & Garden, Inc. that was leveraged in the fourth quarter of 1998. As described in Note 7 in the accompanying condensed consolidated financial statements, the Company obtained $25,000 of limited recourse financing on the America West property in September 1999. As the Company releverages existing, unencumbered properties and obtains mortgage financing on newly acquired properties and newly completed projects, interest on mortgages will increase. The proceeds can be used to reduce the amounts outstanding on the Company's line of credit. The increase in other income was due to amounts received in connection with the settlement agreement with the former lessee of the Company's property in Broomfield, Colorado and a bankruptcy distribution relating to a claim against a former tenant of four of the Company's predecessor partnerships. Under the Broomfield settlement, the former lessee agreed to forfeit its claim relating to the exercise of a purchase option and agreed to pay the Company a settlement of $700,000, for unpaid rents, interest and penalties assessed by the Company for late payment and other expenses that had been incurred by the Company. Hotel operating earnings were stable. Lease revenues have increased as a result of 1998 acquisitions and the commencement of new leases in May 1999 with America West and Cendant Operations, Inc. Solely as a result of these two leases, annual cash flow (rent less mortgage debt service) will increase by $1,705. In addition, the Company's share of annual cash flow from its equity investment, purchased in June 1999, in a property net leased to CheckFree Corporation will initially be approximately $550. As a result of the sale of the Hotel Corporation of America and KSG, Inc. properties in September 1999 and November 1999, respectively, annual cash flow will decrease by $991. -13- 15 CAREY DIVERSIFIED LLC AND SUBSIDIARIES Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Copeland Beverage Group, Inc. has defaulted on its loans and as a result a receiver has been appointed to oversee the liquidation of the company. The Copeland lease for a dairy processing plant in Los Angeles, California provided annual cash flow of $1,800. The Company holds a $1,800 letter of credit from Copeland and intends to draw on the letter for all outstanding rents. The Company is exploring various options including re-leasing the facility to another dairy/food service operator or redeveloping the property for alternative use. DeVlieg Bullard, Inc. has filed a petition of bankruptcy and is in the process of submitting a plan of reorganization to the bankruptcy court and has not indicated whether it will seek to affirm or terminate its lease. Annual rent from the DeVlieg Bullard lease is $954. The Company holds a letter of credit for $831 from DeVlieg Bullard that expires in December 1999. The Company intends to draw on the letter of credit for all outstanding rents before the expiration date. FINANCIAL CONDITION: - -------------------- There has been no material change in the Company's financial condition since December, 31, 1998. Cash flow from operations and distributions from equity investments of $35,872 was sufficient to fund dividends and distributions to minority interests of $31,814 and $1,895 respectively. The Company's investing activities included using $60,000 to complete construction of the America West project, to complete renovations and expansions of properties leased to Cendant and Orbital Sciences Corporation, to purchase a 50% equity interest in a property leased to CheckFree, to complete construction of a warehouse located in Indre et Loire, France, leased to an affiliate of the French postal service, and to advance additional funds for the on-going build-to-suit project with Federal Express Corporation. The Company used $2,216 for additional capital costs at existing properties. The Company also used $3,676 to purchase a mortgage receivable in which it has a participating interest. The mortgagor paid off the loan in November 1999. Current capital commitments include $1,250 for capital improvements at the hotel property leased to Livho, Inc. and the two hotel properties operated by the Company, and $28,500 toward the completion of the build-to-suit project leased to Federal Express Corporation, and $1,781 toward the completion of a build-to-suit project at the CheckFree property. The completion of the Federal Express build-to-suit is not expected to occur before the end of the first quarter of 2000. The Company also paid disposition fees of $1,007 to an affiliate in connection with sales of properties in 1998. In addition to paying dividends to shareholders and distributions to minority interests, the Company's financing activities included paying scheduled mortgage principal installments of $3,519, prepaying $9,488 of mortgage debt, obtaining new fixed rate limited recourse mortgage financing of $75,248 including mortgages on properties leased to the Orbital Sciences Corporation in Chandler, Arizona, the America West property in Tempe, Arizona, the Gap, Inc. properties in Erlanger, Kentucky and a portfolio of 48 properties leased to AutoZone. A portion of the proceeds were used to reduce the amount outstanding on the line of credit by $33,000 credit between June 30, 1999 and September 30, 1999. A substantial portion of the amount outstanding on the credit line has been used to fund construction of the Federal Express property, and the Company anticipates that it will be able to obtain limited recourse mortgage financing on that property after the completion of construction. Such mortgage proceeds would be available for reducing the outstanding balance on loans from the line of credit. The Company also expects that it will use the $11,000 of sales proceeds from the November 1999 sale of the KSG property to pay down the line of credit. As of September 30, 1999, the Company has $52,000 of unused capacity under the line of credit and was in compliance with the financial covenants relating to the credit agreement on the line of credit. -14- 16 CAREY DIVERSIFIED LLC AND SUBSIDIARIES Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) YEAR 2000 ISSUES: - ----------------- The "Year 2000 issue" refers to the series of problems that have resulted or may result from the inability of certain computer software and embedded processes to properly process dates. This shortcoming could result in the failure of major systems or miscalculations causing major disruptions to business operations. The Company has no information technology systems of its own, but is dependent upon systems maintained by an affiliate of its Advisor, and certain other third parties including banks and its transfer agent. The Company and its affiliates have been evaluating their readiness relating to Year 2000 issues since 1998. The affiliates' core information technology systems used in administering the Company's business operations have been upgraded or replaced, as needed, to become Year 2000 compliant. These systems include desktop computers, network servers, operating systems and applications software. A new, compliant, integrated accounting and asset management system is currently being installed and the accounting component is currently functional. Compliance of these systems with Year 2000 requirements has been determined through a combination of internal testing, where feasible, and vendor representations. Non-core information technology systems have been reviewed for compliance with Year 2000 requirements. Such systems, although not critical to the Company's business operations, are expected to be substantially upgraded or replaced before the end of 1999. Management believes that substantially all costs related to Year 2000 compliance and remediation have been incurred. The Company has contacted and is evaluating documentation from its critical third party vendors and suppliers including banks, transfer agents and telecommunications service providers regarding their Year 2000 compliance. The responses received have generally been positive although the Company cannot be assured that such providers have adequately considered the impact of Year 2000 issues on their systems. The Company has contacted its tenants regarding Year 2000 readiness and emphasized the need to address Year 2000 issues. Generally, tenants are contractually required to maintain their leased properties in good working order and to make necessary alterations, foreseen or unforeseen, to meet their contractual obligations. Because of those obligations, the Company believes that the risks and costs of upgrading systems related to operations of the buildings and that contain technology affected by Year 2000 issues will generally be absorbed by tenants rather than the Company. The major risk is that Year 2000 issues have such an adverse effect on the financial condition of a tenant that its ability to meet its lease obligations, including the timely payment of rent, is impaired. In such an event, the Company may ultimately incur the costs for Year 2000 readiness at the affected properties. The potential materiality of any impact is not known at this time. The Company will continue to monitor critical third party vendors and suppliers to determine its vulnerability to potential disruptions caused by year 2000 issues. Limited scope contingency plans are currently being developed to address potential disruptions of a temporary nature that may affect the Company. Because it is not possible to anticipate all of the possible disruptions that may be caused by Year 2000 events, there can be no assurance that the Company will not be adversely affected if such disruptions occur. -15- 17 CAREY DIVERSIFIED LLC AND SUBSIDIARIES Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (in thousands) $161,712 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 September 30, 1999 ranged from 4.85 % to 10.00%.
1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Fixed rate $1,725 $6,479 $10,342 $9,063 $9,494 $124,609 $161,712 $162,859 Average interest rate 7.86% 7.78% 7.70% 7.75% 7.76% 7.70% Variable rate $4,610 $739 $142,819 $536 $565 $10,802 $160,071 $160,071
As of September 30, 1999, the Company had no other material exposure to market risk. -16- 18 CAREY DIVERSIFIED LLC PART II ------- Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------- During the quarter ended September 30th, 1999, no matters were submitted to a vote of security holders. Item 6. - EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------ (a) Exhibits: None (b) Reports on Form 8-K: During the quarter ended September 30, 1999 the Company was not required to file any reports on Form 8-K. -17- 19 CAREY DIVERSIFIED LLC SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAREY DIVERSIFIED LLC 11/10/99 By: /s/ John J. Park -------- ---------------- Date John J. Park Executive Vice President and Chief Financial Officer (Principal Financial Officer) 11/10/99 By: /s/ Claude Fernandez -------- -------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) -18- EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 6,157 0 0 0 0 6,157 797,510 14,328 863,850 18,317 321,783 0 0 0 516,619 863,580 0 66,722 0 0 22,068 358 14,217 28,956 0 28,956 0 (39) 0 28,917 1.13 1.13
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