<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(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)
MARYLAND 13-3602400
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
(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.
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
INDEX
Page No.
PART I
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
PART II - Other Information
Signatures 14
* 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.
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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.. If any of the six
currently vacant properties formerly leased to Harvest Foods 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.
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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.
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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.
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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
11/17/98 By: /s/ Steven M. Berzin
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Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/17/98 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
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