Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended SEPTEMBER 30, 2002
of
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CIP(R)
A MARYLAND Corporation
IRS Employer Identification No. 13-3602400
SEC File Number 0-20016
50 ROCKEFELLER PLAZA,
NEW YORK, NEW YORK 10020
(212) 492-1100
CIP(R) has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CIP(R) HAS NO SECURITIES registered on any exchanges.
CIP(R) does not have any Securities registered pursuant to Section 12(b) of the
Act.
CIP(R) (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.
CIP(R) has no active market for common stock at November 11, 2002.
CIP(R) has 27,889,940 shares of common stock, $.001 par value outstanding at
November 11, 2002.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 2001
and September 30, 2002 2
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 2001 and 2002 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2001 and 2002 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2002 5-6
Notes to Condensed Consolidated Financial Statements 7-14
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-19
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. - Controls and Procedures 20
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 21
Item 6. - Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 22-23
* 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
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 September 30, 2002
----------------- ------------------
(Note) (Unaudited)
------ -----------
ASSETS:
Land and buildings, net of accumulated depreciation of $26,240,326 at
December 31, 2001 and $29,000,180 at September 30, 2002 $195,962,495 $302,079,051
Net investment in direct financing leases 101,498,035 135,483,001
Real estate under construction 7,969,435 5,268,851
Assets held for sale 6,910,554 9,410,554
Equity investments 43,776,928 57,627,677
Cash and cash equivalents 7,388,480 34,996,244
Marketable securities - 12,576,513
Other assets 5,800,715 13,923,659
----------- -----------
Total assets $369,306,642 $571,365,550
=========== ===========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable, net of discount
of $365,519 at September 30, 2002 $146,456,175 $253,793,612
Mortgage note payable on property held for sale 6,075,832 5,953,887
Notes payable, net of discount of $323,778 - 11,249,795
Accrued interest 874,728 1,483,894
Accounts payable and accrued expenses 1,454,040 1,318,894
Accounts payable to affiliates 1,898,009 2,225,223
Dividends payable 4,714,132 5,936,464
Prepaid rental income and security deposits 2,349,622 2,272,780
Other liabilities - 3,953,178
----------- -----------
Total liabilities 163,822,538 288,187,727
----------- -----------
Minority interest 7,031,014 13,848,912
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, shares issued and outstanding, $.001 par value; authorized,
40,000,000 shares; 22,994,375 and 28,745,088 shares issued and
outstanding at December 31, 2001 and September 30, 2002 22,994 28,745
Additional paid-in capital 230,880,420 307,481,823
Dividends in excess of accumulated earnings (22,897,031) (28,050,963)
Accumulated other comprehensive (loss) income (411,420) 243,910
----------- -----------
207,594,963 279,703,515
Less, common stock in treasury at cost, 810,237 and 907,772 shares at
December 31, 2001 and September 30, 2002 (9,141,873) (10,374,604)
----------- -----------
Total shareholders' equity 198,453,090 269,328,911
----------- -----------
Total liabilities and shareholders' equity $369,306,642 $571,365,550
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the audited
consolidated financial statements at that date.
2
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues:
Rental income $ 7,194,574 $ 9,422,344 $21,447,997 $24,520,726
Interest income from direct financing leases 3,083,293 3,951,742 9,258,451 10,551,791
Interest and other income 72,851 190,108 424,938 251,973
---------- ---------- ---------- ----------
10,350,718 13,564,194 31,131,386 35,324,490
---------- ---------- ---------- ----------
Expenses:
Interest 3,434,647 4,819,588 10,743,752 11,530,071
Depreciation 1,224,517 1,663,355 3,674,029 4,014,867
General and administrative 764,932 1,064,438 2,319,702 2,954,036
Property expenses 1,938,933 2,505,877 5,470,677 6,336,553
Impairment loss on real estate - - 2,300,000 -
---------- ---------- ---------- ----------
7,363,029 10,053,258 24,508,160 24,835,527
---------- ---------- ---------- ----------
Income from continuing operations before
minority interest, equity investments and
gains and losses 2,987,689 3,510,936 6,623,226 10,488,963
Minority interest in income (221,898) (654,063) (654,684) (1,357,133)
Income from equity investments 1,228,816 2,388,924 4,010,075 6,357,368
---------- ---------- ---------- ----------
Income from continuing operations before gains
and losses 3,994,607 5,245,797 9,978,617 15,489,198
Unrealized gain on warrants 1,378,930 - 2,178,000 -
Unrealized loss on interest rate cap derivative
instrument - (4,645) - (33,439)
Reversal of unrealized gain on warrants in
connection with disposition - - - (2,128,000)
Gain on sale of warrants, net - - - 1,992,678
Gain on sale of real estate 1,082,400 - 1,043,980 -
---------- ---------- ---------- ----------
Income from continuing operations 6,455,937 5,241,152 13,200,597 15,320,437
---------- ---------- ---------- ----------
Discontinued operations:
Loss from operations of discontinued properties (120,526) (54,818) (364,515) (325,246)
Gain on sale of real estate - - - 8,774
Impairment loss on assets held for sale - (1,090,347) - (1,090,347)
---------- ---------- ---------- ----------
Income from discontinued operations (120,526) (1,145,165) (364,515) (1,406,819)
---------- ---------- ---------- ----------
Income before extraordinary charge 6,335,411 4,095,987 12,836,082 13,913,618
Extraordinary charge on early extinguishment of
debt, net of minority interest of $1,011,353 - (1,531,227) - (2,845,648)
---------- ---------- ---------- ----------
Net income $ 6,335,411 $ 2,564,760 $12,836,082 $11,067,970
========== ========== ========== ==========
--continued--
3
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(continued)
Three Months Ended Nine Months Ended
------------------- -----------------
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Basic earnings per share:
Income from continuing operations $ .29 $ .19 $ .60 $ .60
Discontinued operations - (.04) (.02) (.06)
Extraordinary charge - (.06) - (.11)
---------- ---------- ---------- ----------
Net income $ .29 $ .09 $ .58 $ .43
========== ========== ========== ==========
Diluted earnings per share:
Income from continuing operations $ .28 $ .18 $ .59 $ .59
Discontinued operations - (.04) (.02) (.05)
Extraordinary charge - (.05) - (.11)
---------- ---------- ---------- ----------
Net income $ .28 $ .09 $ .57 $ .43
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 22,129,924 27,871,349 22,077,601 25,420,864
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 22,484,819 28,435,030 22,432,496 25,984,545
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
------------------- -----------------
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
Net income $6,335,411 $2,564,760 $12,836,082 $11,067,970
--------- --------- ---------- ----------
Other comprehensive income (loss):
Change in unrealized loss on marketable
securities - (4,616) - (4,616)
Change in foreign currency translation
adjustment 213,521 133,526 (63,195) 659,946
--------- --------- ---------- ----------
Other comprehensive income (loss) 213,521 128,910 (63,195) 655,330
--------- --------- ---------- ----------
Comprehensive income $6,548,932 $2,693,670 $12,772,887 $11,723,300
========= ========= ========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2001 2002
---- ----
Cash flows from operating activities:
Net income $ 12,836,082 $ 11,067,970
Adjustments to reconcile net income to net cash provided by continuing operations:
Loss from discontinued operations, including gain on sale of real estate and
impairment loss 364,515 1,406,819
Depreciation and amortization 3,835,034 4,239,359
Income from equity investments in excess of distributions received (1,155,568) (2,078,315)
Extraordinary charge on extinguishment of debt, net of minority interest - 2,845,648
Minority interest in income 654,684 1,357,133
Straight-line rent adjustments (500,145) (647,142)
Provision for uncollected rent 600,000 -
Unrealized gain on warrants (2,178,000) -
Reversal of unrealized gain on warrants in connection with disposition - 2,128,000
Gain on sale of warrants - (1,992,678)
Gain on sale of real estate (1,043,980) -
Impairment loss on real estate 2,300,000 -
Issuance of shares in satisfaction of performance fees 2,075,850 2,219,269
Net change in operating assets and liabilities, net of assets and liabilities
acquired (771,143) (1,729,114)
----------- -----------
Net cash provided by continuing operations 17,017,329 18,816,949
Net cash used in discontinued operations (48,857) (33,258)
Prepayment premiums paid on extinguishment of debt - (3,439,377)
----------- -----------
Net cash provided by operating activities 16,968,472 15,344,314
----------- -----------
Cash flows from investing activities:
Equity distributions received in excess of equity income 302,267 505,679
Payment of leasing costs - (244,237)
Acquisition of real estate and additional capitalized costs (4,224,621) (2,625,746)
Redemption of dissenter interests with acquisition of business operations - (1,774,385)
Costs incurred in connection with acquisition of business operations - (615,766)
Cash acquired on acquisition of business operations - 765,493
Proceeds from sale of securities, warrants and real estate 8,050,738 4,484,315
Purchase of securities - (14,777,285)
----------- -----------
Net cash provided by (used in) investing activities 4,128,384 (14,281,932)
----------- -----------
Cash flows from financing activities:
Dividends paid (13,856,534) (14,999,570)
Prepayment of mortgage payable (6,194,448) (66,948,469)
Mortgage principal payments (3,475,922) (3,641,487)
Proceeds from mortgages 3,061,528 120,110,222
Proceeds from stock issuance 1,775,598 1,067,092
Distributions to minority partners (274,064) (1,179,278)
Capital distributions to minority partners - (2,745,674)
Contributions from minority partners 452,501 257,982
Payment of financing costs (50,000) (4,157,122)
Purchase of treasury stock (1,745,508) (1,232,731)
----------- -----------
Net cash (used in) provided by financing activities (20,306,849) 26,530,965
----------- -----------
Effect of exchange rate changes on cash - 14,417
----------- -----------
Net increase in cash and cash equivalents 790,007 27,607,764
Cash and cash equivalents, beginning of period 7,181,199 7,388,480
----------- -----------
Cash and cash equivalents, end of period $ 7,971,206 $ 34,996,244
=========== ===========
--continued--
5
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
Noncash investing activities:
A. The purchase of Corporate Property Associates 10 Incorporated consisted
of the acquisition of certain assets and liabilities at fair value in
exchange for the issuance of shares, notes payable and a cash payment
to dissenters as follows:
Real estate assets $127,721,807
Equity investment in Marcourt Investments, Inc., a real estate
investment trust 11,993,899
Cash 765,493
Other assets 5,204,479
Mortgage notes payable, net of discount of $294,273 (52,077,045)
Other liabilities (5,231,182)
Minority interest (2,092,437)
-----------
Net assets acquired $ 86,285,014
===========
Shares issued $ 73,320,793
Notes payable issued, net of discount of $383,737 11,189,836
Cash paid for redemption of dissenter interests 1,774,385
-----------
Consideration paid $ 86,285,014
===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
6
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in the United
States of America for complete financial statements. All significant
intercompany 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, 2001.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Business Combination with Corporate Property Associates 10
Incorporated:
On May 1, 2002, the Company and Corporate Property Associates 10 Incorporated
("CPA(R):10"), another real estate investment trust managed by W. P. Carey & Co.
LLC, completed a merger of CPA(R):10 with and into the Company pursuant to a
Merger Agreement dated December 14, 2001. Under the terms of the merger, the
Company is the surviving company. The total purchase price was $87,232,302,
including transaction costs of $947,288. Pursuant to the merger, CPA(R):10
stockholders had the option of receiving either 0.8445 of a share of newly
issued Company common stock for each CPA(R):10 common share that he or she
owned, or, upon election by the shareholders who owned shares on December 13,
2001, a promissory note bearing interest at the annual rate of 4% payable on or
before December 31, 2004 for $11.23 per share of CPA(R):10 common stock. The
exchange ratio for issuing shares of the Company to CPA(R):10 shareholders was
determined based on independent valuations of each company. The merger was
approved by more than the requisite two-thirds majority of the outstanding
shares of each company. Shareholders holding 6,529,012 shares of CPA(R):10
common stock received 5,513,751 shares of Company common stock ($73,320,793
according to the independent appraisal performed in connection with the
transaction) and shareholders representing 1,030,594 shares of CPA(R):10 common
stock elected to receive promissory notes with a total principal amount of
$11,573,573. Shareholders holding 158,004 shares of CPA(R):10 common stock
elected not to participate and their shares were redeemed for $1,774,385.
The Company has accounted for the merger under the purchase method of accounting
(see also the Statements of Cash Flows). The purchase price has been allocated
to the assets and liabilities acquired based upon their fair market values. The
assets acquired consist primarily of commercial real estate properties net
leased to single corporate tenants and an interest in a real estate investment
trust, Marcourt Investments, Inc. ("Marcourt"), that owns property net leased to
a single tenant. The Company owned an approximate 23% interest in Marcourt prior
to the acquisition of CPA(R):10. The liabilities acquired consist primarily of
limited recourse mortgage obligations. Additionally, the Company issued notes
payable to former CPA(R):10 shareholders who elected not to receive shares of
the Company. Differences between the fair value of mortgages and notes payable
and the stated amounts of such obligations are being amortized as an adjustment
to interest expense over the remaining term of each obligation. The fair value
of real estate and equity investment was based on independent appraisals. The
fair value of mortgages and notes payable was determined by discounting the
future cash flows using market rates as of the date of the merger.
In connection with evaluating the fair value of its real estate assets, the
Company assigned a portion of the value to leases to the extent that the rents
on the acquired properties differed from the Company's estimate of fair market
rentals. The fair value attributed to leases rather than land and buildings is
being amortized over the remaining lease terms as an adjustment of rental income
or interest income from direct financing leases.
7
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 3. Mortgage Financing Through Loan Securitization:
On August 28, 2002, The Company and three affiliates, W.P. Carey & Co. LLC ("W.
P. Carey"), Corporate Property Associates 12 Incorporated ("CPA(R):12") and
Corporate Property Associates 14 Incorporated ("CPA(R):14") obtained an
aggregate of approximately $172,335,000 of limited recourse mortgage financing
on 62 leased properties. The lender pooled the loans into a trust, Carey
Commercial Mortgage Trust, a non-affiliate, whose assets consist solely of the
loans and sold the loans, as collateralized mortgage obligations in a private
placement to institutional investors (the "Offered Interests"). The Company and
the three affiliates agreed to acquire a separate class of interests in the
trust (the "CPA(R) Interests"). The amount of CPA(R) Interests acquired by the
Company was proportional to the mortgage amounts obtained.
All of the mortgage loans provide for payments of principal and interest at a
stated annual rate of 7.5% and are based on a 25-year amortization schedule.
Each loan is collateralized by mortgages on the properties and lease
assignments. Under the lease assignments, the lessees direct their rent payment
to the mortgage servicing company which in turn distributes amounts in excess of
debt service requirements to the applicable lessors. Under certain limited
conditions, a property may be released from its mortgage by the substitution of
another property. Such substitution is subject to the approval of the trustee of
the trust.
The Offered Interests consist of $148,206,000 of mortgage loan balances with
different tranches of principal entitled to distributions at annual interest
rates as follows: $119,772,000 - 5.97%, $9,478,000 - 6.58%, $9,478,000 - 7.18%
and $9,478,000 - 8.43%. The assumed final distribution dates for the four
classes of Offered Interests range from December 2011 through March 2012.
The CPA(R) Interests were purchased for $24,128,739 of which the Company's share
was $10,616,645, or 44% and are comprised of two components, a component that
will receive payments of principal and interest and a component that will
receive payments of interest only. The CPA(R) Interests are subordinated to the
Offered Interests and will be payable only when and if all distributions to the
Offered Interests are current. The assumed final distribution date for the
CPA(R) Interests is June 30, 2012. The distributions to the CPA(R) Interests do
not have a stated rate of interest and will be affected by any shortfall in
rents received from lessees or defaults at the mortgaged properties. As of the
purchase date, the Company's cost basis attributable to the principal and
interest and interest only components was $6,357,765 and $4,258,880,
respectively. Over the term of its ownership interest in the CPA(R) Interests,
the value of the interest only component will fully amortize to $0 and the
principal and interest component will amortize to its anticipated face value of
its share in the underlying mortgages (which currently is $10,616,645). For
financial reporting purposes, the effect of such amortization will be reflected
in interest income. Interest income, including all related amortization, will be
recognized using an effective interest method. As of September 30, 2002, the
Company owned $1,970,320 of Offered Interests which the Company intends to sell.
The Company is accounting for its interest in the CPA(R) Interests as an
available-for-sale security and will be measured at fair value with all gains
and losses from changes in fair value reported as a component of other
comprehensive income as part of shareholders' equity. As of September 30, 2002,
the fair value of the Company's CPA(R) Interests was $10,606,193, reflecting an
unrealized loss of $4,616. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. The Offered Interests held by
the Company are being accounted for as trading securities, with any unrealized
gains and losses included in the determination of net income.
The Company obtained new mortgage financing of $83,666,787 of which
approximately $33,486,400 was used to payoff existing loans. In connection with
paying off the loans, the Company incurred prepayment charges of $1,352,994.
After paying off the loans, incurring costs in connection with obtaining the new
mortgages, distributing $2,745,674 to two equity interests and purchasing its
CPA(R) Interest in the trust, the Company retained cash of approximately
$30,690,000. The loans which were paid off bore interest at annual rates ranging
from 8.125% to 11%.
8
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The principal amount of loans obtained, which are collateralized by real estate
with a carrying value of $105,136,990, were as follows:
Lease Obligor Loan Amount Annual Debt Service Maturity Date
- ------------- ----------- ------------------- -------------
ShopRite Supermarkets, Inc. $15,570,000 $1,380,734 July 2010 and September 2011
Garden Ridge Corporation 13,136,946 1,164,976 October 2009 and May 2010
Childtime Childcare, Inc. 11,567,709 1,025,815 January 2011 and June 2010
Merit Medical Systems, Inc. 9,180,000 814,073 October 2011
Barnes & Noble, Inc. 8,735,682 774,673 November 2009 and September 2012
Q Clubs, Inc. 7,895,224 700,142 September 2009 and December 2010
Hibbett Sporting Goods, Inc. 5,139,462 455,762 April 2010
Superior Telecommunications, Inc. 4,547,071 403,229 September 2009
UTI Holdings, Inc. 3,268,862 289,879 July 2012
Petsmart, Inc. 3,031,808 268,858 December 2009
US West Communications, Inc. 1,594,023 141,356 June 2012
----------- ----------
$83,666,787 $7,419,497
=========== ==========
The loans paid off were as follows:
Lease Obligor Loan Amount Annual Debt Service
- ------------- ----------- -------------------
Garden Ridge Corporation $ 6,775,746 $ 817,992
ShopRite Supermarkets, Inc. 6,721,104 755,280
Childtime Childcare, Inc. 5,516,637 707,172
Merit Medical Systems, Inc. 5,328,730 742,356
Barnes & Noble, Inc. 4,788,074 642,447
Hibbett Sporting Goods, Inc. 2,459,952 293,796
Petsmart, Inc. 1,896,210 273,417
----------- ----------
$33,486,453 $4,232,460
=========== ==========
The Company jointly-owns properties leased to Childtime Childcare Inc. and
ShopRite Supermarkets, Inc. (formerly Big V Holding Corp.) with W.P. Carey and
CPA(R):12, respectively. In connection with structuring the transaction, the
jointly-owned properties were contributed to limited partnerships with the
Company owning majority interests as general partner. The accounts of the
limited partnerships are consolidated in the accounts of the Company, with the
interests of W.P. Carey and CPA(R):12 reflected as minority interests.
Note 4. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
and nine-month periods ended September 30, 2001 and 2002 were calculated as
follows:
Three Months Ended September 30,
--------------------------------
2001 2002
---- ----
Income from continuing operations $ 6,455,937 $ 5,241,152
Discontinued operations (120,526) (1,145,165)
Extraordinary charge - (1,531,227)
----------- -----------
Net income $ 6,335,411 $ 2,564,760
=========== ===========
Weighted average shares - basic 22,129,924 27,871,349
Effect of dilutive securities: Stock warrants 354,895 563,681
----------- -----------
Weighted average shares - diluted 22,484,819 28,435,030
=========== ===========
Basic earnings per share from continuing operations $ .29 $ .19
Discontinued operations - (.04)
Extraordinary charge - (.06)
----------- -----------
Basic earnings per share $ .29 $ .09
=========== ===========
9
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Three Months Ended September 30,
--------------------------------
2001 2002
---- ----
Diluted earnings per share from continuing operations $ .28 $ .18
Discontinued operations - (.04)
Extraordinary charge - (.05)
----------- -----------
Diluted earnings per share $ .28 $ .09
=========== ===========
Nine Months Ended September 30,
-------------------------------
2001 2002
---- ----
Income from continuing operations $13,200,597 $15,320,437
Discontinued operations (364,515) (1,406,819)
Extraordinary charge - (2,845,648)
----------- -----------
Net income $12,836,082 $11,067,970
=========== ===========
Weighted average shares - basic 22,077,601 25,420,864
Effect of dilutive securities: Stock warrants 354,895 563,681
---------- ----------
Weighted average shares - diluted 22,432,496 25,984,545
========== ==========
Basic earnings per share from continuing operations $ .60 $ .60
Discontinued operations (.02) (.06)
Extraordinary charge - (.11)
---------- ----------
Basic earnings per share $ .58 $ .43
========== ==========
Diluted earnings per share from continuing operations $ .59 $ .59
Discontinued operations (.02) (.05)
Extraordinary charge - (.11)
---------- ----------
Diluted earnings per share $ .57 $ .43
========== ==========
Note 5. Transactions with Related Parties:
The Company's asset management and performance fees payable to its Advisor,
Carey Asset Management Corp., a wholly-owned subsidiary of W. P. Carey, each of
which is in the per annum amount of 1/2 of 1% of Average Invested Assets, as
defined in the Company's Advisory Agreement. The Company incurred asset
management fees of $691,601 and $903,670 for the three-month periods ended
September 30, 2001 and 2002, respectively, and $2,075,446 and $2,444,627 for the
nine-month periods ended September 30, 2001 and 2002, respectively, with
performance fees in like amounts. General and administrative expense
reimbursements were $270,165 and $409,140 for the three-month periods ended
September 30, 2001 and 2002, respectively, and $859,258 and $1,107,947 for the
nine-month periods ended September 30, 2001 and 2002, respectively. Fees are
payable to the Advisor in connection with services performed relating to the
identification, evaluation, negotiation, financing and purchase of properties.
For transactions that were completed during the nine months ended September 30,
2002, fees were $654,632.
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceed the greater of 2% of Average Invested
Assets or 25% of Net Income as defined in the Advisory Agreement for any
twelve-month period. If in any year the operating expenses of the Company exceed
these amounts, the Advisor will have an obligation to reimburse the Company for
such excess, subject to certain conditions. If the Independent Directors find
that such expenses were justified based on any unusual and nonrecurring factors,
the Advisor may be reimbursed in future years for the full amount or any portion
of such excess expenses, but only the extent that such reimbursement would not
cause the Company's operating expenses to exceed this limit in any such year.
10
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 6. Lease Revenues:
The Company's operations consist of the direct and indirect investment in and
the leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the nine-month periods ended September 30,
2001 and 2002 are as follows:
2001 2002
---- ----
Per Statements of Income:
Rental income from operating leases $21,447,997 $24,520,726
Interest from direct financing leases 9,258,451 10,551,791
Adjustments:
Share of leasing revenue applicable to
minority interest (1,322,134) (1,567,855)
Share of leasing revenue from equity
investments 8,886,911 11,833,535
---------- ----------
$38,271,225 $45,338,197
========== ==========
For the nine-month periods ended September 30, 2001 and 2002, the Company earned
its net lease revenues from its investments as follows:
2001 % 2002 %
---- - ---- -
Marriott International, Inc. (a) $ 3,461,405 9% $ 5,152,873 11%
Omnicom Group, Inc. 3,199,034 8 3,199,034 7
Advanced Micro Devices, Inc. (a) 2,286,375 6 2,444,203 5
Best Buy Co., Inc. (b) 2,251,202 6 2,237,362 5
Information Resources, Inc. (b) - - 2,136,282 5
Electronic Data Systems Corporation 1,830,815 5 2,121,247 5
ShopRite Supermarkets, Inc.
(formerly Big V Holding Corp.) (b) 1,549,224 4 1,562,459 3
Lucent Technologies, Inc. 1,389,621 4 1,480,859 3
UTI Holdings, Inc. 1,195,945 3 1,330,472 3
Garden Ridge, Inc. 1,159,711 3 1,180,019 3
Titan Corporation (b) - - 1,138,940 3
Sicor, Inc. (a) 1,104,552 3 1,104,552 2
Merit Medical Systems, Inc. 1,099,053 3 1,099,053 2
The Upper Deck Company (a) 1,056,079 3 1,089,165 2
Barnes & Noble, Inc. 1,071,610 3 1,085,946 2
Q Clubs, Inc. 1,052,343 3 1,077,374 2
Compucom Systems, Inc. (a) 978,500 3 1,030,188 2
Michigan Mutual Insurance Company 1,022,212 3 1,022,266 2
Del Monte Corporation (a) 1,007,388 3 1,012,553 2
Plexus Corp. 951,520 2 951,520 2
Bell Sports Corp. 859,666 2 881,303 2
Childtime Childcare, Inc. 486,669 1 792,214 2
EnviroWorks, Inc. - - 725,796 2
New Wai, L.P./Warehouse Associates - - 716,693 2
Detroit Diesel Corporation 673,450 2 681,028 2
Other 8,584,851 21 8,084,796 19
---------- --- ---------- ---
$38,271,225 100% $45,338,197 100%
========== === ========== ===
(a) Represents the Company's proportionate share of lease revenues from its
equity investments.
(b) Net of amounts applicable to minority interests.
11
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 7. Equity Investments:
The Company owns a 47.3% interest in Marcourt Investments, Inc. ("Marcourt"), a
real estate investment trust which net leases 13 hotel properties to a
wholly-owned subsidiary of Marriott International, Inc. The Company also owns
interests in properties leased to corporations through equity interests in
various partnerships and limited liability companies subject to joint control.
The ownership interests range from 33.33% to 50%, and the underlying investments
are owned with affiliates that have similar investment objectives as the
Company. The lessees are Sicor Inc., The Upper Deck Company, Advanced Micro
Devices, Inc., Compucom Systems, Inc. and Del Monte Corporation.
Summarized financial information of the Company's equity investees is as
follows:
(in thousands) December 31, 2001 September 30, 2002
----------------- ------------------
Assets (primarily real estate) $347,429 $344,689
Liabilities (primarily mortgage notes payable) 220,750 214,767
Shareholders' and members' equity 126,679 129,922
Nine Months Ended September 30,
--------------------------------
2001 2002
---- ----
Revenues (primarily rental income and interest income from
direct financing leases) $ 28,769 $ 31,918
Expenses (primarily interest on mortgage and depreciation) (15,464) (15,979)
------- -------
Net income $ 13,305 $ 15,939
======= =======
Note 8. Assets Held for Sale:
The Company owns a property in Farmingdale, New York which is held for sale with
a carrying value of $6,910,554 as of December 31, 2001 and September 30, 2002.
The results of operations for the Farmingdale property reflected a net gain of
$137,333 and a net loss of $2,001,851 for the three-month and nine-month periods
ended September 30, 2001, respectively and $172,844 and $437,312 for the
three-month and nine-month periods ended September 30, 2002, respectively. The
results for the nine months ended September 30, 2001 include an impairment loss
on real estate of $2,300,000. The Company expects to sell the property within
the next twelve months. The Company owns a property in Austin, Texas which is
held for sale with a carrying value of $2,500,000 as of September 30, 2002 and
which it expects to sell within the next twelve months. In connection with an
evaluation of the fair value of the property the Company has recognized an
impairment loss of $1,090,347. The results of operations for the Austin
property, inclusive of the impairment loss in 2002, reflected net losses of
$123,645 and $373,874 for the three-month and nine-month periods ended September
30, 2001, respectively, and $1,145,165 and $1,423,530 for the three-month and
nine-month periods ended September 30, 2002, respectively. As a result of
classifying the properties as held for sale, no depreciation has been incurred
from the date of reclassification. The effect of suspending depreciation expense
was $32,992 and $433,969 for the three-month and nine-month periods ended
September 30, 2002 and had no effect for the three-month and nine-month periods
ended September 30, 2001.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the net income
(or loss) and gain or loss on sale of real estate for properties sold or held
for sale are to be reflected in the consolidated statements of income as
"Discontinued Operations" for all periods presented. The provisions of SFAS No.
144 are effective for disposal activities initiated by the Company's commitment
to a plan of disposition after the date it is initially applied (January 1,
2002) (see also Note 11).
12
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 9. Pro Forma Financial Information:
The following consolidated pro forma financial information has been presented as
if the merger of Corporate Property Associates 10 Incorporated into the Company
had occurred on January 1, 2001 and 2002 for the three-month and nine-month
periods ended September 30, 2001 and 2002, respectively. In Management's
opinion, all adjustments necessary to reflect the merger and the related
issuance of common stock of the Company have been made. The pro forma financial
information is not necessarily indicative of what the actual results would have
been, nor does it purport to represent the results of operations for future
periods.
(in thousands, except share and per share amounts) Three Months Ended September 30,
--------------------------------
2001 2002
---- ----
Pro forma total revenues $14,098 $13,562
Pro forma income before extraordinary charge $ 8,843 $ 4,072
Pro forma net income $ 8,843 $ 2,541
Pro forma earnings per share:
Basic $ .32 $ .09
Diluted $ .32 $ .09
Nine Months Ended September 30,
--------------------------------
2001 2002
---- ----
Pro forma total revenues $42,873 $40,043
Pro forma income before extraordinary charge $19,276 $16,221
Pro forma net income $19,276 $13,376
Pro forma earnings per share:
Basic $ .70 $ .48
Diluted $ .69 $ .47
The pro forma net income and earnings per share figures for both the three-month
and nine-month periods ended September 30, 2001 presented above include a
nonrecurring, noncash impairment loss on real estate of $2,300,000, an
unrealized gain on warrants of $1,378,930 and $2,178,000, respectively, and a
gain on sale of real estate of $1,082,400 and $1,043,980, respectively. The pro
forma net income and earnings per share for both the three-month and nine-month
periods ended September 30, 2002 include an impairment loss on assets held for
sale of $1,090,347 and an extraordinary charge on early extinguishment of debt,
net of minority interest, of $1,531,227 and $2,845,648, respectively. The pro
forma net income and earnings per share for the nine-month period ended
September 30, 2002 include a reversal of unrealized gain on warrants of
$2,128,000 and a realized gain on sale of warrants of $1,992,678.
Note 10. Extraordinary Charges on Early Extinguishment of Debt:
The Company and CPA(R):12 own 63% and 37% ownership interests, respectively, in
a general partnership that net leases properties to Best Buy Co., Inc. ("Best
Buy") under a master lease. In February 2002, the Best Buy general partnership
paid off an existing limited recourse mortgage loan of $25,743,178 and paid a
prepayment premium of $2,086,383 in connection with retiring the loan. As a
result, the Company incurred an extraordinary charge on the early extinguishment
of debt of $1,314,421, which is net of CPA(R):12's minority interest of
$771,962.
The Company paid prepayment charges of $1,352,994 and wrote off deferred
financing costs of $417,624 in connection with paying off $33,486,452 of
mortgage loans in August 2002. As a result of paying the premium, the Company
incurred an extraordinary charge on the early extinguishment of debt of
$1,531,227. The extraordinary charge is net of amounts applicable to minority
interests of $239,391.
13
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 11. Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and No. 142 "Goodwill and Other Intangibles," which
establish accounting and reporting standards for business combinations and
certain assets and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
the Company's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and are
amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on the Company's financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on the Company's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the Company's commitment to a plan of disposition after
the date of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, the Company will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented. The Company has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not
expect SFAS No. 146 to have a material effect on the Company's financial
statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. The Company does not
expect SFAS No. 147 to have a material effect on its financial statements.
14
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Carey Institutional
Properties Incorporated's ("CIP(R)") condensed consolidated financial statements
and notes thereto as of September 30, 2002 included in this quarterly report and
CIP(R)'s Annual Report on Form 10-K for the year ended December 31, 2001. 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 CIP(R) 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 CIP(R) that the results or conditions described in such
statements or the objectives and plans of CIP(R) will be achieved. Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2001 provides a
description of CIP(R)'s business objectives, acquisition and financing
strategies and risk factors which could affect future operating results.
Certain accounting policies are critical to the understanding of CIP(R)'s
financial condition and results of operations. Management believes that an
understanding of financial condition and results of operations requires an
understanding of accounting policies relating to the use of estimates.
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, CIP(R) must assess its ability to collect rent and
other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because CIP(R)'s real estate operations have a limited
number of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods.
CIP(R) also uses estimates and judgments when evaluating whether long-lived
assets are impaired. When events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, Management performs
projections of undiscounted cash flows, and if such cash flows are insufficient,
the assets are adjusted (i.e., written down) to their estimated fair value. An
analysis of whether a real estate asset has been impaired requires Management to
make its best estimate of market rents and residual values. In its evaluations,
CIP(R) obtains market information from outside sources; however, such
information requires Management to determine whether the information received is
appropriate to the circumstances. Depending on the assumptions made and
estimates used, the future cash flow projected in the evaluation of long-lived
assets can vary within a range of outcomes. CIP(R) will consider the likelihood
of possible outcomes in determining the best possible estimate of future cash
flows. Because CIP(R)'s properties are leased to single tenants, CIP(R) is more
likely to incur significant writedowns when circumstances affecting a tenant
deteriorate because of the possibility that a property will be vacated in its
entirety. Therefore, this risk is different than the risks related to leasing
and managing multi-tenant properties. Events or changes in circumstances can
result in further writedowns and impact the gain or loss ultimately realized
upon sale of the asset. For its direct financing leases, CIP(R) is required to
perform a review of residual values at least annually.
CIP(R) is accounting for its subordinated interest in a mortgage trust as an
available-for-sale security and it will be measured at fair value with all
changes in fair value reported as a component of other comprehensive income as a
part of shareholders' equity. Fair value is determined using a discounted cash
flow model with assumptions of market rates and the credit quality of the
underlying lessees.
CIP(R) recognizes rental income from sales overrides when reported by lessees,
that is, after the level of sales requiring a rental payment to CIP(R) is
reached.
CIP(R) and affiliated REITs are investors in certain real estate ventures.
Certain of the investments are held through incorporated or unincorporated
jointly-held entities and certain investments are held directly as tenants in
common. Substantially all of these investments represent jointly purchased
properties which were net leased to a single tenant and were structured to
provide diversification and reduce concentration of a risk from a single lessee
for CIP(R) and the affiliated REIT. The placement of an investment in a
jointly-held entity or tenancy in common requires the approval of
15
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CIP(R)'s Independent Directors. All of the jointly held investments are
structured so that CIP(R) and the affiliated REIT contribute equity, receive
distributions and are allocated profit or loss in amounts that are proportional
to their ownership interests. The presentation of these jointly-held investments
and their related results in the accompanying condensed consolidated financial
statements is determined based on factors such as controlling interest,
significant influence and whether either party has the ability to make
independent decisions. All of the jointly-held investments are subject to
contractual agreements.
CIP(R) classifies its directly-owned leased assets for financial reporting
purposes as either real estate leased under the operating method or net
investment in direct financing leases based on several criteria, including, but
not limited to, estimates of the remaining economic life of the leased assets
and the calculation of the present value of future minimum rents. In determining
the classification of a lease, CIP(R) uses estimates of remaining economic life
provided by independent appraisals of the leased assets. The calculation of the
present value of future minimum rents includes determining a lease's implicit
interest rate which requires an estimate of the residual value of leased assets
as of the end of the noncancellable lease term. Different estimates of residual
value result in different implicit interest rates and could possibly affect the
financial reporting classification of leased assets.
RESULTS OF OPERATIONS:
Effective May 1, 2002, CIP(R) acquired the business operations of an affiliated
real estate investment trust, Corporate Property Associates 10 Incorporated ("
CPA(R):10"), through a merger approved by the shareholders of both companies in
April 2002. CPA(R):10's operations consisted of one business segment comprised
of the investment in and the leasing of industrial and commercial real estate.
As a result of the merger, CIP(R) increased its asset base and expanded its real
estate portfolio by acquiring interests in 45 properties with a fair value of
$139,716,000 and has assumed 17 leases with 14 tenants. Such real estate was
encumbered by limited recourse mortgage debt with a fair value of $52,077,000 as
of the date of acquisition. As a result of the merger with CPA(R):10, CIP(R)'s
net income for the three-month and nine-month periods ended September 30, 2002
is not directly comparable to the three-month and nine-month periods ended
September 30, 2001.
Net income for the three-month and nine-month periods ended September 30, 2002
decreased by $3,771,000 and $1,768,000, respectively, as compared with the
three-month and nine-month periods ended September 30, 2001. Excluding gains and
losses, discontinued operations, extraordinary charges and a noncash impairment
charge in 2001, income would have reflected an increase of $1,251,000 and
$3,211,000 for the three-month and nine-month periods, respectively. The
increases were primarily due to increases in income from equity investments and
lease revenues (rental income and interest income from direct financing leases)
and were partially offset by increases in interest, general and administrative
and property expenses.
The increase in income from equity investments for the three-month and
nine-month periods of $1,160,000 and $2,347,000, respectively, was primarily due
to the increase in CIP(R)'s ownership interest in Marcourt Investments, Inc. As
a result of the merger, CIP(R)'s ownership interest in Marcourt increased to 47%
from 24%. Income from equity investments also increased due to the
reclassification in October 2001 of CIP(R)'s 50% interest when the Del Monte
Corporation properties were contributed to a partnership that CIP(R) owns with
an affiliate. The Del Monte reclassification has no effect on net income;
however, CIP(R) now reports its share of net income from the equity investment
in its financial statements rather than reporting the proportionate share of
underlying revenues and expenses. The reclassification increased income from
equity investments for the current three-month and nine-month periods by
$276,000 and $460,000, respectively. Prior to the reclassification, the results
of operations reflect CIP(R)'s pro-rata share of revenues and expenses.
Lease revenues increased by $3,096,000 and $4,366,000 for the three-month and
nine-month periods, respectively. For the current nine-month period,
approximately $4,872,000 was due to the acquisition of CPA(R):10's real estate
portfolio on May 1, 2002. On a comparable basis, lease revenues decreased. The
decrease was due to the September 2001 sale of six retail stores leased to
Wal-Mart Stores, Inc. and the termination of leases with Waban, Inc. and Bolder
Technologies Corporation. Waban and Bolder contributed annual lease revenues of
$2,831,000. For the three-month and nine-month periods ended September 30, 2001,
lease revenues include $335,000 and $1,007,000 of rents, respectively, from the
Del Monte lease which are now recognized in income through income from equity
investments. Lease revenues also benefited from the completion of two
build-to-suit projects, a property leased to UTI Holdings, Inc. which was
completed
16
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
in April 2001 and a Holiday Inn in Toulouse, France which lease went
into effect in February 2002, as well as several rent increases in 2001 and
2002.
Interest expense for the three-month and nine-month periods increased by
$1,385,000 and $786,000, respectively, primarily due to assuming existing
mortgages on the properties acquired from CPA(R):10 and from new loans obtained
in August 2002 in connection with the securitization. Interest expense for the
prior nine-month period included approximately $782,000 of interest on a loan on
the Del Monte properties which is now reflected in equity income.
General and administrative expense for both the three-month and nine-month
periods ended September 30, 2002 increased primarily as a result of the merger.
Certain expenses, such as transfer agent and printing expenses, increased as a
portion of such costs are based on the number of shareholders, and other
expenses increased as a result of the increase in CIP(R)'s asset base, such as
state level income and franchise taxes. The merger also resulted in an increase
in property expenses caused by an increase in asset management fees and
performance fees, which are based on the appraised value of CIP(R)'s real estate
assets (including equity investments). As a result of the acquisition of
CPA(R):10's real estate assets, the appraised value of CIP(R)'s real estate
assets increased by approximately 29%. For the current three-month and
nine-month periods, the increase in the asset-based fees from the newly-acquired
assets was approximately $401,000 and $668,000, respectively.
Loans paid off in connection with the mortgage securitization and the mortgage
on the Best Buy Co., Inc. properties in the first quarter resulted in
extraordinary charges on the extinguishment of debt of $2,846,000, primarily as
a result of incurring prepayment premiums.
As a result of obtaining $83,667,000 of new mortgage debt from the mortgage
securitization, interest expense will increase substantially. Additionally, with
the acquisition of interests in the mortgage trust, CIP(R) interest income will
increase substantially. Prior to this transaction, CIP(R) interest income
represented amounts earned in investing cash in money market instruments.
Management projects that the effective rate of interest on the mortgages
obtained through the securitization, net of the projected cash flow from the
interest in the mortgage trust, will be approximately 6.25%.
FINANCIAL CONDITION
Since December 31, 2001, CIP(R)'(s) cash and cash equivalents have increased by
$27,608,000 primarily as a result of obtaining new mortgage financing in
connection with the mortgage securitization described below. As of September 30,
2002 CIP(R) has $34,996,000 in cash and cash equivalents. CIP(R) intends to use
these funds to acquire new properties to further diversify its portfolio and to
pay off $11,574,000 of notes payable to CPA(R):10 shareholders who did not elect
to receive shares of CIP(R) in connection with the merger. CIP(R) is considering
paying off these notes before December 31, 2002.
Cash flows from operations of $15,344,000 included $3,439,000 of prepayment
premiums incurred in connection with paying off eight mortgage loans. Cash flow
from continuing operations of $18,817,000 and equity investments of $506,000 was
sufficient to fund dividends to shareholders of $15,000,000, and fund
distributions to minority partners of $1,179,000 but were not sufficient to
fully cover debt mortgage principal installments of $3,641,000 resulting in a
shortfall of $498,000. CIP(R) projects that it will have sufficient cash flow
from operations and equity investments to meet its cash flow objectives as it
invests its available cash in new real estate investments or pays off existing
mortgage debt.
CIP(R)'s investing activities include using $12,587,000 to purchase interests in
the mortgage loan pool. In addition to issuing approximately 5,514,000 shares of
common stock to acquire the business operations of CPA(R):10, CIP(R)'s investing
activities for the nine months ended September 30, 2002 included using
$2,626,000 to fund construction of an expansion at its hotel property in
Toulouse, France and other additional capitalized real estate costs at existing
properties. A final funding for completion of an additional expansion of the
Holiday Inn, Toulouse property is estimated to amount to approximately $631,000.
As the result of selling its warrant position in Merit Medical Systems, Inc,
CIP(R) received $1,993,000 in cash. CIP(R) used $616,000 to pay costs related to
the merger with CPA(R):10 and the related acquisition of CPA(R):10's assets and
liabilities. As a result of the merger with CPA(R):10, CIP(R) acquired $765,000
of cash and used $1,774,000 to satisfy the interests of certain CPA(R):10
shareholders who exercised dissenters' rights in connection with CIP(R)'s
acquisition of CPA(R):10.
17
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In addition to the payment of dividends and scheduled principal mortgage
payments, CIP(R)'s financing activities for the nine months ended September 30,
2002 include obtaining proceeds of $120,110,000 from limited recourse mortgage
financing of which $83,667,000 was received in connection with the financing of
the mortgage pool. CIP(R) also refinanced existing mortgage loans on properties
leased to Best Buy and Plexus Corp. and obtained advances on a construction loan
for the completion of the Toulouse hotel expansion. CIP(R) used $66,948,000 to
pay off existing mortgages, including $33,486,000 used to satisfy seven existing
loans in connection with the securitization. As a result of placing loans in the
mortgage pool, CIP(R) was able to obtain favorable terms (7.5% annual interest
on a 25-year amortization schedule) on its supermarkets and day care centers,
properties which traditional mortgage lenders are currently averse to financing.
CIP(R) and its affiliates believe they have found an additional, non-traditional
source of financing mortgage debt and may seek to obtain additional financing
through a securitization of loans. There are no current plans to obtain
additional financing through a securitization of loans. All of the loans are
limited recourse loans and have maturity dates ranging from September 2009 to
September 2012, at which time balloon payments are scheduled. Annual debt
service payments will increase by $3,187,000, of which approximately $1,575,000
is projected to be offset by distributions from the CPA(R) Interests.
In connection with the merger with CPA(R):10, each shareholder of CPA(R):10 who
elected to receive shares received 0.8445 of newly issued CIP(R) common stock
for every share of CPA(R):10 that he or she owned. Approximately 5,514,000
(totaling approximately $73,321,000) new shares of CIP(R) were issued which
represent approximately 25% of the ownership of CIP(R) as of the effective date
of the merger, May 1, 2002. Approximately 13% of CPA(R):10's shareholders did
not elect to receive shares of CIP(R) and were issued promissory notes with a
face value of $11.23 for each share of CPA(R):10 that he or she owned. As a
result, CIP(R) has issued promissory notes of with a total principal amount of
$11,574,000. The notes bear interest at an annual rate of 4% and will be payable
by no later than December 31, 2004. As a result, CIP(R) will incur annual
interest charges of approximately $463,000 until the notes are paid off. CIP(R)
expects to be able to meet its payment obligation and management is
contemplating full payment possibly before year end.
In connection with extending a mortgage loan with a variable interest rate,
CIP(R) was required to enter into a separate interest rate cap agreement with a
notional amount of $6,750,000 and a strike of 8%. An interest rate cap agreement
is a derivative financial instrument designed to hedge interest risk on variable
interest debt. Approximately 7% of CIP(R)'s outstanding debt is variable rate
and the use of derivative financial instruments to hedge interest rate risk is
not currently significant to CIP(R)'s risk management.
A summary of CIP(R)'s contractual obligations and commitments is as follows:
(in thousands) Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable $260,113 $7,782 $20,135 $17,670 $7,677 $5,017 $201,832
Unsecured notes payable 11,574 11,574
Subordinated disposition fees 778 778
Commitments:
Commitments for build-to-suit
construction 264 264
Share of minimum rents payable
under office cost-sharing
agreement 942 17 246 246 246 187 -
------- ----- ------ ------ ----- ----- ------
$273,671 $8,063 $20,381 $29,490 $7,923 $5,204 $202,610
======= ===== ====== ====== ===== ===== =======
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for
18
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
business combinations is no longer permitted. The adoption of SFAS No. 141 did
not have a material effect on CIP(R)'s financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and will
be amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on CIP(R)'s financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on CIP(R)'s
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the company's commitment to a plan of disposition after
the date of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, CIP(R) will no longer classify gains and losses for the extinguishment
of debt as extraordinary items and will adjust comparative periods presented.
CIP(R) has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. CIP(R) does not expect
SFAS No. 146 to have a material effect on its financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB
Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the
acquisitions of certain financial institutions and includes long-term customer
relationships as intangible assets within the scope of SFAS No. 144. CIP(R)does
not expect SFAS No. 147 to have a material effect on its financial statements.
19
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risks to which CIP(R) is exposed are interest rate risk
and foreign currency exchange risk.
The value of CIP(R)'s real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees and may affect CIP(R)'s ability to refinance its
debt when balloon payments are scheduled.
CIP(R) owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuations based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of September
30, 2002 the interests in CCMT had a fair value of $12,576,513, which
approximates cost.
Approximately $252,777,000 of CIP(R)'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 annual interest rates on the fixed rate debt as of September 30, 2002
ranged from 4.00% to 10%. The annual interest rates on the variable rate debt as
of September 30, 2002 ranged from 5.82% to 9.625%.
(in thousands) 2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $1,169 $19,851 $26,203 $7,509 $4,825 $193,220 $252,777 $257,937
Weighted average
interest rate 8.36% 9.08% 6.97% 8.17% 7.78% 7.44%
Variable rate debt $6,613 $ 284 $ 3,041 $ 168 $ 192 $ 8,612 $ 18,910 $ 18,910
CIP(R) has one interest rate cap agreement contract, a derivative financial
instrument, with a notional amount of $6,750,000, and a strike of 8% based on
the one-month London Inter-Bank Offered Rate. The use of derivative financial
instruments is not currently significant to CIP(R)'s risk management.
CIP(R) has foreign operations. Accordingly, CIP(R) is subject to foreign
currency exchange risk from the effects of exchange rate movements of foreign
currencies and this may affect future costs and cash flows; however, exchange
rate movements to date have not had a significant effect on CIP(R)'s financial
position or results of operations. To date we have not entered into any foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
September 30, 2002.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its co-chief executive officers and chief
financial officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's co-chief executive officers and chief
financial officer have concluded that the Company's disclosure controls (as
defined in pursuant to Rule 13a-14(c) promulgated under the Exchange Act) are
sufficiently effective to ensure that the information required to be disclosed
by the Company in the reports it files under the Exchange Act is recorded,
processed, summarized and reported with adequate timeliness.
20
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2002, no matters were submitted
to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended September 30, 2002, the Company was not
required to file any reports on Form 8-K.
21
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
11/11/2002 By: /s/ John J. Park
- ------------ ----------------------------------------
Date John J. Park
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
11/11/2002 By: /s/ Claude Fernandez
- ------------ ----------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
22
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Carey Institutional
Properties Incorporated (the "Registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and we have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002 Date 11/11/2002
/s/ William Polk Carey /s/ Gordon F. Dugan
--------------------------- --------------------------
William Polk Carey Gordon F. DuGan
Chairman Vice Chairman
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
23
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carey Institutional
Properties Incorporated (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 11/11/2002
/s/ John J. Park
---------------------------
John J. Park
Chief Financial Officer
24