<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number 0-20016
CAREY INSTITUTIONAL PROPERTIES INCORPORATED, A MARYLAND CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 13-3602400
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
</TABLE>
(212) 492-1100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such 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. X Yes No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
20,556,676 shares of common stock; $.001 Par Value outstanding at
November 9, 1998.
<PAGE> 2
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I
<S> <C>
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 1997
and September 30, 1998 2
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 1997 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 13
Item 6. - Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
* The summarized financial information contained herein is unaudited; however,
in the opinion of management, all adjustments necessary for a fair presentation
of such financial information have been included.
- 1 -
<PAGE> 3
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land and buildings ,
net of accumulated depreciation of
$11,396,602 at December 31, 1997 and
$13,989,152 at September 30, 1998 $ 180,075,131 $ 195,616,575
Net investment in direct financing leases 94,235,594 94,794,344
Equity investments 22,835,403 23,523,362
Cash and cash equivalents 17,331,710 34,028,131
Other assets 6,007,626 4,245,435
------------- -------------
Total assets $ 320,485,464 $ 352,207,847
============= =============
LIABILITIES:
Limited recourse mortgage notes payable $ 154,348,585 $ 145,741,777
Accrued interest payable 1,248,886 1,334,831
Accounts payable and accrued expenses 523,821 604,515
Accounts payable to affiliates 8,483,741 10,226,957
Dividends payable 3,466,189 4,161,284
Prepaid rental income and security deposits 1,053,186 719,235
------------- -------------
Total liabilities 169,124,408 162,788,599
------------- -------------
Minority interest 4,988,932 5,312,858
------------- -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized, 40,000,000 shares; issued and
outstanding, 17,440,556 and 20,738,810 shares
at December 31, 1997 and September 30, 1998 17,440 20,738
Additional paid-in capital 159,636,566 201,382,997
Dividends in excess of accumulated earnings (11,549,928) (14,457,453)
Unrealized appreciation (depreciation),
marketable securities 638,539 (34,450)
------------- -------------
148,742,617 186,911,832
Less, common stock in treasury, at cost, 241,404
and 283,497 shares at December 31,
1997 and September 30, 1998 (2,370,493) (2,805,442)
------------- -------------
Total shareholders' equity 146,372,124 184,106,390
------------- -------------
Total liabilities and
shareholders' equity $ 320,485,464 $ 352,207,847
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 1997 has
been derived from the audited financial statements at that date.
- 2 -
<PAGE> 4
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 5,413,361 $ 5,478,533 $ 16,408,806 $ 16,613,239
Interest from direct
financing leases 2,770,775 2,760,900 8,462,405 8,328,824
Other interest income 90,135 463,105 449,956 860,540
Other income 5,000 512,298 9,996
------------ ------------ ------------ ------------
8,279,271 8,702,538 25,833,465 25,812,599
------------ ------------ ------------ ------------
Expenses:
Interest 3,521,131 3,343,336 10,703,750 10,256,561
Depreciation 867,163 864,309 2,572,021 2,592,550
General and administrative 668,702 765,281 1,921,079 1,926,327
Property expenses 1,136,218 1,461,914 3,656,851 4,199,033
Amortization 81,185 41,850 242,038 132,825
------------ ------------ ------------ ------------
6,274,399 6,476,690 19,095,739 19,107,296
------------ ------------ ------------ ------------
Income before minority
interest, income from
equity investments,
net gain on sales and
extraordinary item 2,004,872 2,225,848 6,737,726 6,705,303
Minority interest in income (199,293) (203,972) (574,590) (605,361)
------------ ------------ ------------ ------------
Income before income
from equity investments,
net gain on sales and
extraordinary item 1,805,579 2,021,876 6,163,136 6,099,942
Income from equity
investments 751,593 759,007 2,381,881 2,483,739
------------ ------------ ------------ ------------
Income before net gain
on sales and
extraordinary item 2,557,172 2,780,883 8,545,017 8,583,681
Gain on sale of real estate and
sales of securities, net 141,131 141,131
------------ ------------ ------------ ------------
Income before
extraordinary item 2,698,303 2,780,883 8,686,148 8,583,681
Extraordinary gain on
extinguishment of debt 427,448
Net income $ 2,698,303 $ 2,780,883 $ 9,113,596 $ 8,583,681
============ ============ ============ ============
Basic earnings per share:
Income before extraordinary item $ .16 $ .14 $ .52 $ .47
Extraordinary item .03
------------ ------------ ------------ ------------
$ .16 $ .14 $ .55 .47
============ ============ ============ ============
Diluted earnings per share:
Income before extraordinary item $ .16 $ .14 $ .52 .46
Extraordinary item .02
------------ ------------ ------------ ------------
$ .16 $ .14 $ .54 .46
============ ============ ============ ============
Weighted average common
shares outstanding-basic 16,841,048 20,304,615 16,733,273 18,462,871
============ ============ ============ ============
Weighted average common
shares outstanding-diluted 17,004,633 20,570,370 16,800,385 18,728,626
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 3 -
<PAGE> 5
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income $ 2,698,303 $ 2,780,883 $ 9,113,596 $ 8,583,681
Other comprehensive income:
Change in unrealized
appreciation(depreciation),
marketable securities
during the period 211,867 (1,034,907) 602,869 (672,989)
----------- ----------- ----------- -----------
Comprehensive income $ 2,910,170 $ 1,745,976 $ 9,716,465 $ 7,910,692
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 4 -
<PAGE> 6
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,113,596 $ 8,583,681
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,814,059 2,725,375
Income from equity investments in excess of dividends
and distributions received (619,671) (687,959)
Minority interest in income in excess of distributions
paid to minority interest 311,838 323,926
Straight-line rent adjustments and other
noncash rent adjustments (575,863) (505,018)
Provision for uncollected rent 341,572
Net gain on sales of securities and real estate (141,131)
Extraordinary gain on extinguishment of debt (427,448)
Net change in operating assets and liabilities 711,873 1,972,903
------------ ------------
Net cash provided by operating activities 11,187,253 12,754,480
------------ ------------
Cash flows from investing activities:
Purchase of real estate and additional capitalized costs (17,969,920)
Proceeds from sale of real estate 1,194,273
Purchase of marketable securities (429,750)
------------ ------------
Net cash provided by (used in) investing activities 764,523 (17,969,920)
------------ ------------
Cash flows from financing activities:
Purchases of treasury stock (1,410,466) (434,949)
Prepayment of mortgage payable (3,850,000) (5,690,312)
Proceeds from stock issuance, net of costs 1,861,591 41,749,729
Payments of mortgage principal (2,711,924) (2,916,496)
Dividends paid (10,243,571) (10,796,111)
------------ ------------
Net cash (used in) provided by financing activities (16,354,370) 21,911,861
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,402,594) 16,696,421
Cash and cash equivalents, beginning of period 15,740,583 17,331,710
------------ ------------
Cash and cash equivalents, end of period $ 11,337,989 $ 34,028,131
============ ============
Supplemental disclosure of cash flows information:
Interest paid $ 10,691,303 $ 10,170,616
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 5 -
<PAGE> 7
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
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 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
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, 1997.
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, 1997 and 1998 were calculated as
follows:
<TABLE>
<CAPTION>
Income Available Weighted Average Per-Share
to Common Shareholders Shares Outstanding Amount
---------------------- ------------------ ------
<S> <C> <C> <C>
Three-months ended September 30, 1997:
Basic earnings per common share $2,698,303 16,841,048 $.16
========== ====
Effect of dilutive securities-stock warrants 163,585
----------
Diluted earnings per common share $2,698,303 17,004,633 $.16
========== ========== ====
Nine-months ended September 30, 1997:
Basic earnings per common share $9,113,596 16,733,273 $.55
========== ====
Effect of dilutive securities-stock warrants 67,112
----------
Diluted earnings per common share $9,113,596 16,800,385 $.54
========== ========== ====
Three-months ended September 30, 1998:
Basic earnings per common share $2,780,883 20,304,615 $.14
========== ====
Effect of dilutive securities-stock warrants 265,755
----------
Diluted earnings per common share $2,780,883 20,570,370 $.14
========== ========== ====
Nine-months ended September 30, 1998:
Basic earnings per common share $8,583,681 18,462,871 $.47
========== ====
Effect of dilutive securities-stock warrants 265,755
----------
Diluted earnings per common share $8,583,681 18,728,626 $.46
========== ========== ====
</TABLE>
- 6 -
<PAGE> 8
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 3. Transactions with Related Parties:
The Advisor performs multiple services including providing the management and
administration of the Company for which it is entitled to receive asset
management and performance fees and certain general and administrative expense
reimbursements. For the three-month and nine-month periods ended September 30,
1997, the Company incurred asset management fees of $518,750 and $1,556,250,
respectively. For the three-month and nine-month periods ended September 30,
1998, the Company incurred asset management fees of $533,750 and $1,601,250,
respectively. Subordinated performance fees were in like amounts. General and
administrative expense reimbursements were $265,599 and $835,685 for the
three-month and nine-month periods ended September 30, 1997, respectively, and
$382,071 and $854,265 for the three-month and nine-month periods ended September
30, 1998, respectively.
On June 10, 1998, the Company's shareholders approved a proposal to allow the
Company, subject to the consent of the Advisor, to pay fees to the Advisor in
Company stock instead of cash. Stock issued to the Advisor in lieu of cash will
be subject to certain restrictions and will vest ratably over five years. The
Company currently intends to pay all accrued performance fees in Company stock
at such time as the preferred return criterion of a cumulative dividend return
to shareholders of 8% is met, or shortly thereafter. The Company expects to meet
the preferred return criterion in 1999. The value per share for shares issued
will be based on a per share value determined pursuant to the an independent
appraisal of the Company's real estate assets as of December 31, 1998. As of
September 30, 1998, accrued asset management and performance fees were
approximately $9,240,000.
In connection with the Company's private placement of common stock to
institutional investors, W. P. Carey & Co., Inc., an affiliate, receives a 3%
fee in the form of warrants to purchase Company common stock in lieu of cash. In
January 1998, the Board of Directors of the Company approved a fee of $270,000
relating to $9,000,000 of capital raised in 1997 from institutional investors.
The warrants are exercisable at $11.90 per share, the price at which the stock
was sold, for a ten-year period. The number of warrants corresponding to the fee
approved by the Board of Directors has not yet been determined. Such
determination will be made by an independent consultant retained by the Board of
Directors for such purpose. Since the fees are directly related to raising
capital, the related cost has been charged to additional paid-in capital. The
Company has raised an additional $39,800,000 of equity pursuant to the private
placement in 1998.
The Company, in conjunction with certain affiliates, is a participant in a cost
sharing agreement for the purpose of renting and occupying office space. Under
the agreement, the Company pays its proportionate share of rent and other costs
of occupancy. Net expenses incurred for the nine-month periods ended September
30, 1997 and 1998 were $170,855 and $157,858 respectively.
Note 4. Dividends:
Dividends paid to shareholders during the nine months ended September 30, 1998
are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Paid Per Share
------------- ---- ---------
<S> <C> <C>
December 31, 1997 $3,466,189 $.20600
March 31, 1998 $3,556,777 $.20620
June 30, 1998 $3,773,145 $.20622
</TABLE>
On September 24, 1998, the Board of Directors declared a dividend at the rate of
$.002246 per share per day for each day of the period from and including July 1,
1998 through September 30, 1998. Dividends totalling $4,161,284 were paid on
October 15, 1998. The dividend declared in September, 1998 has been recorded in
the accompanying condensed consolidated financial statements as a dividend
payable.
- 7 -
<PAGE> 9
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Industry Segment Information:
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 are as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Per Statements of Income:
Rental income from operating leases $ 16,408,806 $ 16,613,239
Interest from direct financing leases 8,462,405 8,328,824
Adjustments:
Share of leasing revenue applicable
to minority interest (1,345,934) (1,341,940)
Share of leasing revenue from equity
investments 5,313,094 5,361,055
------------ ------------
$ 28,838,371 $ 28,961,178
============ ============
</TABLE>
For the nine-month periods ended September 30, 1997 and 1998, the Company earned
its lease revenues on its investments from the following lease obligors:
<TABLE>
<CAPTION>
1997 % 1998 %
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Marriott International, Inc. (a) $ 3,341,438 12% $ 3,389,399 12%
Best Buy Co., Inc. (b) 2,291,725 8 2,284,924 8
Neodata Corporation 1,763,183 6 1,764,520 6
Lucent Technologies, Inc. 1,389,621 5 1,389,621 5
Omnicom Group, Inc. 1,400,625 5 1,363,125 5
Big V Holding Corp. 1,286,109 5 1,308,159 5
Garden Ridge, Inc. 1,020,753 4 1,069,596 4
Barnes & Noble, Inc. 1,015,984 4 1,033,778 4
Michigan Mutual Insurance Company 1,020,798 4 1,022,079 4
The Upper Deck Company (a) 989,906 3 989,906 3
Gensia, Inc. (a) 981,750 3 981,750 3
Merit Medical Systems, Inc. 977,468 3 977,468 3
Q Clubs, Inc. 966,656 3 966,656 3
Del Monte Corporation 964,688 3 964,688 3
Lincoln Technical Institute of Arizona, Inc. 853,318 3 905,215 3
Plexus Corp. 826,367 3 888,307 3
Waban, Inc./BJ's Warehouse Club 838,767 3 838,767 3
Wal-Mart Stores, Inc. 781,227 3 823,668 3
Bell Sports Corp. 778,909 3 798,246 3
Custom Food Products, Inc. 651,216 2 651,288 2
Detroit Diesel Corporation 633,750 2 633,750 2
Nicholson Warehouse, L.P. 603,415 2 603,866 2
GATX Logistics, Inc. 596,170 2 596,170 2
Superior Telecommunications, Inc. 499,458 2 494,106 2
Childtime Childcare, Inc. 432,214 2 456,642 2
Petsmart, Inc. 361,975 1 369,414 1
Other 253,802 363,024 1
Hibbett Sporting Goods, Inc. 356,838 1 356,838 1
Oshman Sporting Goods, Inc. 336,706 1 341,678 1
CalComp Technology, Inc. 331,775 1 334,530 1
Harvest Foods, Inc. 291,760 1
----------- ----------- ----------- -----------
$28,838,371 100% $28,961,178 100%
=========== =========== =========== ===========
</TABLE>
- 8 -
<PAGE> 10
(a) Represents the Company's proportionate share of lease revenues attributable
to its equity investment.
- 9 -
<PAGE> 11
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(b) Net of amounts applicable to the minority interest of Corporate Property
Associates 12 Incorporated.
Note 6. Equity Investments:
The Company owns an approximate 23.68% interest in Marcourt Investments
Incorporated ("Marcourt"), a real estate investment trust that net leases 13
Courtyard by Marriott hotels to a wholly-owned subsidiary of Marriott
International, Inc., a 50% interest in Gena Property Company ("GENA"), a general
partnership that net leases two office buildings to Gensia, Inc., and a 50%
interest in Cards Limited Liability Company ("Cards LLC"), a limited liability
company that net leases two office buildings to The Upper Deck Company.
Summarized financial information of Marcourt, GENA and Cards LLC is as follows:
(in thousands)
<TABLE>
<CAPTION>
Marcourt Gena Cards LLC
------------------------------------- ------------------------------------- -------------------------------------
December 31, 1997 September 30, 1998 December 31, 1997 September 30, 1998 December 31, 1997 September 30, 1998
----------------- ------------------ ----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Assets $149,413 $149,216 $ 21,710 $ 21,020 $ 26,729 $ 26,596
Liabilities 102,826 100,218 11,671 10,752 15,511 15,293
Owners' equity 46,587 48,998 10,039 10,268 11,218 11,303
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------------------------------------------------------------
September 30, 1997 September 30, 1998
------------------------------------------ -------------------------------------------
Marcourt GENA Cards LLC Marcourt GENA Cards LLC
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 14,223 $ 1,964 $ 1,980 $ 14,321 $ 1,964 $ 1,980
Interest (8,046) (695) (934) (7,825) (659) (921)
Depreciation (346) (346)
Other expenses (88) (2) (2) (87) (2) (2)
-------- -------- -------- -------- -------- --------
Net income $ 6,089 $ 921 $ 1,044 $ 6,409 $ 957 $ 1,057
======== ======== ======== ======== ======== ========
</TABLE>
- 10 -
<PAGE> 12
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
condensed consolidated financial statements and notes thereto as of September
30, 1998 included in this quarterly report and the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. 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 plan 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 period ended September 30, 1998 increased by
$83,000 as compared with net income for the three-month period ended September
30, 1997. Excluding a gain from the sale of properties in the prior year
three-month period, the current year would have reflected an increase of
$224,000. The decrease in net income of $530,000 for the nine-month period ended
September 30, 1998 as compared with the nine-month period ended September 30,
1997 was due to several items that benefited net income in 1997. In addition to
the gain on sale of properties mentioned above, the Company recognized an
extraordinary gain of $427,000 in connection with the satisfaction of a limited
recourse mortgage loan at a discount and nonrecurring other income items
totaling $512,000. Excluding these items, the results of operations would have
reflected an increase of $541,000.
The increases in income, as adjusted for nonrecurring items and gains, were
primarily due to a decrease in interest expense and an increase in other
interest income. The decrease in interest expense was due to the satisfaction of
a limited recourse mortgage loan on the former Harvest Foods, Inc. properties in
June 1998, the payoff of two loans in 1998, as well as lower balances on the
Company's remaining mortgages resulting from payment of scheduled mortgage
principal installments. Solely as a result of the satisfaction of the two loans
in 1998, annual debt service will decrease by approximately $583,000. The
increase in other interest income resulted from the Company's holding higher
average cash balances in 1998.
Lease revenues (rental income and interest income from direct financing
leases) were stable as rent increases have offset a decrease in revenue that
resulted from the March 1997 termination of the Harvest Foods lease. As of
October 1998, a new lease with Omnicom Group, Inc. on a build-to-suit project
for a property in Los Angeles, California and the amendment of an existing lease
with Omnicom will increase annual rent by up to $2,380,000. In September 1998
the Company entered into a new lease for a former Harvest Foods property that
had been vacant since March 1997. The new lease has a term of five years and
will initially provide annual rent of $66,000. The lessee will also assume the
obligation of all utility costs and maintenance and repairs. If any of the five
currently vacant properties formerly leased to Harvest Foods that are currently
vacant are leased, lease revenues will increase and some or all of the carrying
costs for those properties may be absorbed by the lessees.
FINANCIAL CONDITION:
There has been no material change in the Company's financial condition since
December 31, 1997. Cash flow from operations of $12,754,000 was sufficient to
pay dividends of $10,796,000. A portion of scheduled mortgage principal payment
installments of $2,916,000 was paid from cash reserves.
- 11 -
<PAGE> 13
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
Continued
The Company's cash balances have increased by $16,696,000 since December 31,
1997. The Company has raised approximately $41,750,000 of equity in 1998,
including $39,800,000 from the sale of 3,108,875 shares of common stock issued
to institutional investors pursuant to the Company's private placement offering.
The per share offering price of $12.80 is based on an independent appraisal of
the Company's real estate assets at December 31, 1997. The Company will use the
funds raised to purchase additional property, to complete the Omnicom build
- -to-suit project and possibly to pay off mortgage debt with relatively high
interest rates. The Company has funded $17,929,000 of the Omnicom improvements
since December 31, 1997. Approximately $9,296,000 will be used to complete the
funding of the Omnicom project. The Company has used $5,690,000 to satisfy
balloon payment obligations on mortgage loans that matured during the year. The
Company may seek to refinance the properties that had collateralized the
maturing loans. A balloon payment of $6,910,000 is scheduled in January, 1999 on
a limited recourse mortgage loan collateralized by six properties leased to
Wal-Mart Stores, Inc. If the Company does not refinance the loan, it has the
ability to pay the balloon payment from its cash reserves.
In June 1998, the shareholders of the Company approved a proposal to amend
the Company's Advisory Agreement to allow the Company, with the Advisor's
consent, to pay its asset management and performance fees in common stock rather
than cash. As a result of this amendment to the Advisory Agreement, the Company
intends to fulfill the obligation related to such fees by issuing common stock.
The Company expects to meet the cumulative preferred return criterion in 1999,
and unpaid asset management fees which currently aggregate $9,240,000 will be
satisfied at that time. Paying fees through the issuance of common stock rather
than in cash will enhance the Company's liquidity and strengthen the Company's
balance sheet. The Company believes that the resulting increase in the Advisor's
ownership in the Company will more closely align the interests of the Advisor
and Company shareholders. The stock issued to the Advisor will be valued at a
per share amount determined pursuant to an independent appraisal of the
Company's real estate assets as of December 31, 1998.
The so-called "Year 2000 issue" is the name that has been given to the
series of problems that have resulted or may result from computer programs
having been written using two digits rather than four to define a year. For
example, any program that has time-software may recognize a date using "00" as
the year 1900 rather than 2000. This shortcoming could result in the failure of
major systems or miscalculations causing major disruptions to business
operations. The Company has no computer systems of its own, but is dependent
upon the systems maintained by an affiliate of its Advisor and certain other
third parties including its bank and transfer agent.
The Company and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. In 1998, the Company, its Advisor, and
affiliates commenced an assessment of their local area network of personal
computers and related equipment and are in the process of replacing or upgrading
the equipment that has been identified as not being Year 2000 compliant. The
program is expected to be completed in the first or second quarter of 1999. The
Company and its affiliates have also engaged outside consultants experienced in
detecting and addressing Year 2000 issues, and they will continue to research
and test the affiliate's applications and systems.
- 12 -
<PAGE> 14
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
Continued
At the same time, the Company, its Advisor, and affiliates are evaluating
all of their applications software, all of which are commercial "off the shelf"
programs that have not been customized. During 1998, the Company commenced a
project to select a comprehensive integrated real estate accounting and asset
management software package to replace its existing applications. A commercial
Windows-based integrated accounting and asset management based application is
being tested and is scheduled to be installed during the second or third quarter
of 1999. This software has been designed to use four digits to define a year.
Because the Company's primary operations consist of investing in and receiving
rents on long-term net leases of real estate, while the failure of the Advisor
and its affiliates to correct fully Year 2000 issues could disrupt its
administrative operations, the resulting disruptions would not likely have a
material impact on the Company's results of operations, financial condition or
liquidity. Contingency plans to address potential disruptions are in the process
of being developed. The Company's share of costs associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. The Company's share of the estimated total
cost of the Year 2000 project is expected to be approximately $146,000.
Although the Company believes that it will address its internal Year 2000
issues in a timely manner, there is a risk that the inability of third-party
suppliers and lessees to meet Year 2000 readiness issues could have an adverse
impact on the Company. The Company and its affiliates have identified their
critical suppliers and are requiring that these suppliers communicate their
plans and progress in addressing Year 2000 readiness. The most critical
processes provided by third-party suppliers are the Company's bank and transfer
agent. The Company's operations may be significantly affected if such providers
are ineffective or untimely in addressing Year 2000 issues.
The Company contacted each of its lessees regarding Year 2000 readiness and
has emphasized the need to address Year 2000 issues. Generally, lessees are
contractually required to maintain their leased properties in good working order
and to make necessary alterations, foreseen or unforeseen, to meet their
contractual obligations. Because of those obligations, the Company believes that
the risks and costs of upgrading systems related to operations of the buildings
and that contain technology affected by Year 2000 issues will generally be
absorbed by lessees rather than the Company. The major risk to the Company is
that Year 2000 issues have such an adverse effect on the financial condition of
a lessee that its ability to meet its lease obligations, including the timely
payment of rent, is impaired. In such an event, the Company may ultimately incur
the costs for Year 2000 readiness at the affected properties. The potential
materiality of any impact is not known at this time.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
accounting standards for the way that public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products, geographic area and major customers. The statement is effective
for financial periods beginning after December 15, 1997, however, SFAS No. 131
does not need to be applied to interim financial statements in 1998. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for all quarters of fiscal years beginning after June 15, 1999. The Company is
currently evaluating the impact, if any, of SFAS No. 131 and SFAS No. 133.
- 13 -
<PAGE> 15
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 1998, 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, 1998, the Company was
not required to file any report on Form 8-K.
- 14 -
<PAGE> 16
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
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
AND SUBSIDIARIES
11/9/98 By: /s/ Steven M. Berzin
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/9/98 By: /s/ Claude Fernandez
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
- 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 34,028,131
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,028,131
<PP&E> 304,400,071
<DEPRECIATION> 13,989,152
<TOTAL-ASSETS> 352,207,847
<CURRENT-LIABILITIES> 17,046,822
<BONDS> 145,741,777
0
0
<COMMON> 20,738
<OTHER-SE> 184,085,652
<TOTAL-LIABILITY-AND-EQUITY> 352,207,847
<SALES> 0
<TOTAL-REVENUES> 25,812,599
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,850,735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,256,561
<INCOME-PRETAX> 8,583,681
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,583,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,583,681
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.46
</TABLE>
