<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 JUNE 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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
19,985,450 shares of common stock; $.001 Par Value
outstanding at August 10, 1998.
<PAGE> 2
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 1997
and June 30, 1998 2
Condensed Consolidated Statements of Income for the three and
six months ended June 30, 1997 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 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 10-11
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 12
Item 6. - Exhibits and Reports on Form 8-K 12
Signatures 13
</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, June 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
$13,124,843 at June 30, 1998 $ 180,075,131 $ 192,381,234
Net investment in direct financing leases 94,235,594 94,373,771
Equity investments 22,835,403 23,255,337
Cash and cash equivalents 17,331,710 38,821,534
Other assets 6,007,626 5,275,067
------------- -------------
Total assets $ 320,485,464 $ 354,106,943
============= =============
LIABILITIES:
Limited recourse mortgage notes payable $ 154,348,585 $ 152,440,777
Accrued interest payable 1,248,886 1,444,704
Accounts payable and accrued expenses 523,821 441,822
Accounts payable to affiliates 8,483,741 9,594,107
Dividends payable 3,466,189 2,276,028
Prepaid rental income and security deposits 1,053,186 715,986
------------- -------------
Total liabilities 169,124,408 166,913,424
------------- -------------
Minority interest 4,988,932 5,108,887
------------- -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized, 40,000,000 shares; issued and
outstanding, 17,440,556 shares at December 31,
1997 and 20,267,507 shares at June 30, 1998 17,440 20,263
Additional paid-in capital 159,636,566 195,434,010
Dividends in excess of accumulated earnings (11,549,928) (11,579,935)
Unrealized appreciation, marketable securities 638,539 1,000,457
------------- -------------
148,742,617 184,874,795
Less, common stock in treasury, at cost, 241,404
shares at December 31, 1997 and
282,057 shares at June 30, 1998 (2,370,493) (2,790,163)
------------- -------------
Total shareholders' equity 146,372,124 182,084,632
------------- -------------
Total liabilities and
shareholders' equity $ 320,485,464 $ 354,106,943
============= =============
</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 Six Months Ended
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 5,387,975 $ 5,440,199 $ 10,995,445 $ 11,134,706
Interest Income from direct
financing leases 2,762,363 2,793,292 5,691,630 5,567,924
Other interest income 165,316 143,721 359,821 397,435
Other income 112,314 799 507,298 9,996
------------ ------------ ------------ ------------
8,427,968 8,378,011 17,554,194 17,110,061
------------ ------------ ------------ ------------
Expenses:
Interest 3,517,132 3,452,463 7,182,619 6,913,225
Depreciation 868,068 864,630 1,704,858 1,728,241
General and administrative 577,125 666,292 1,252,377 1,161,046
Property expenses 1,170,110 1,274,201 2,520,633 2,737,119
Amortization 77,251 42,572 160,853 90,975
------------ ------------ ------------ ------------
6,209,686 6,300,158 12,821,340 12,630,606
------------ ------------ ------------ ------------
Income before minority
interest, income from
equity investments and
extraordinary item 2,218,282 2,077,853 4,732,854 4,479,455
Minority interest in income (195,241) (199,866) (375,297) (401,389)
------------ ------------ ------------ ------------
Income before income
from equity investments
and extraordinary item 2,023,041 1,877,987 4,357,557 4,078,066
Income from equity investments 714,851 731,116 1,630,288 1,724,732
------------ ------------ ------------ ------------
Income before
extraordinary item 2,737,892 2,609,103 5,987,845 5,802,798
Extraordinary gain on
extinguishment of debt 427,448 427,448
------------ ------------ ------------ ------------
Net income $ 3,165,340 $ 2,609,103 $ 6,415,293 $ 5,802,798
============ ============ ============ ============
Basic earnings per share:
Income before extraordinary
item $ .16 $ .15 $ .36 $ .33
Extraordinary item .03 .03
------------ ------------ ------------ ------------
$ .19 $ .15 $ .39 $ .33
============ ============ ============ ============
Diluted earnings per share
Income before extraordinary
item $ .16 $ .15 $ .36 $ .33
Extraordinary item .03 .02
------------ ------------ ------------ ------------
$ .19 $ .15 $ .38 $ .33
============ ============ ============ ============
Weighted average common
shares outstanding-basic 16,673,866 17,789,576 16,659,513 17,523,970
============ ============ ============ ============
Weighted average common
shares outstanding-diluted 16,837,450 18,055,331 16,823,097 17,789,725
============ ============ ============ ============
</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 Six Months Ended
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $3,165,340 $ 2,609,103 $6,415,293 $5,802,798
Other comprehensive income:
Change in unrealized gains
on marketable securities
during the period 382,407 (373,384) 391,002 361,918
---------- ----------- ---------- ----------
Comprehensive income $3,547,747 $ 2,235,719 $6,806,295 $6,164,716
========== =========== ========== ==========
</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>
Six Months Ended
June 30,
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,415,293 $ 5,802,798
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,865,711 1,819,216
Income from equity investments in excess of dividends
and distributions received (388,138) (419,934)
Minority interest in income in excess of distributions
paid to minority interest 112,446 119,955
Straight-line rent adjustments and other
noncash rent adjustments (114,825) (100,502)
Provision for uncollected rent 226,843
Extraordinary gain on extinguishment of debt (427,448)
Net change in operating assets and liabilities 325,046 1,461,899
------------ ------------
Net cash provided by operating activities 7,788,085 8,910,275
------------ ------------
Cash flows from investing activities:
Purchase of real estate and additional capitalized costs (450,000) (13,870,274)
------------ ------------
Net cash used in investing activities (450,000) (13,870,274)
------------ ------------
Cash flows from financing activities:
Purchase of treasury stock (563,295) (419,670)
Prepayment of mortgage payable (3,850,000)
Proceeds from stock issuance, net of costs 1,252,909 35,800,267
Payments of mortgage principal (1,780,906) (1,907,808)
Dividends paid (6,835,170) (7,022,966)
------------ ------------
Net cash (used in) provided by financing activities (11,776,462) 26,449,823
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,438,377) 21,489,824
Cash and cash equivalents, beginning of period 15,740,583 17,331,710
------------ ------------
Cash and cash equivalents, end of period $ 11,302,206 $ 38,821,534
============ ============
Supplemental disclosure of cash flows information:
Interest paid $ 7,121,149 $ 6,717,407
============ ============
</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 six-month periods ended June 30, 1997 and 1998 were calculated as follows:
<TABLE>
<CAPTION>
Income Available Weighted Average
to Common Shares Per-Share
Shareholders Outstanding Amount
------------ ----------- ------
<S> <C> <C> <C>
Three-months ended June 30, 1997:
Basic earnings per common share $3,165,340 16,673,866 $.19
========== ====
Effect of dilutive securities-stock warrants 163,584
---------
Diluted earnings per common share $3,165,340 16,837,450 $.19
========== ========== ====
Six-months ended June 30, 1997:
Basic earnings per common share $6,415,293 16,659,513 $.39
========== ====
Effect of dilutive securities-stock warrants 163,584
---------
Diluted earnings per common share $6,415,293 16,823,097 $.38
========== ========== ====
Three-months ended June 30, 1998:
Basic earnings per common share $2,609,103 17,789,576 $.15
========== ====
Effect of dilutive securities-stock warrants 265,755
---------
Diluted earnings per common share $2,609,103 18,055,331 $.15
========== ========== ====
Six-months ended June 30, 1998:
Basic earnings per common share $5,802,798 17,523,970 $.33
========== ====
Effect of dilutive securities-stock warrants 265,755
---------
Diluted earnings per common share $5,802,798 17,789,725 $.33
========== ========== ====
</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 six-month periods ended June 30, 1997,
the Company incurred asset management fees of $518,750 and $1,037,500,
respectively. For the three-month and six-month periods ended June 30, 1998, the
Company incurred asset management fees of $533,750 and $1,067,500, respectively.
Subordinated performance fees, which are not payable currently, were in like
amounts. Until Shareholders have received a cumulative dividend return of 8%,
which threshold has not yet been met, the Advisor will not be entitled to
receive the performance fee. The Company currently projects that the threshold
will be met in the near future. The performance fee has been accrued and
included in accounts payable to affiliates in the accompanying condensed
consolidated financial statements. General and administrative expense
reimbursements were $254,714 and $570,086 for the three-month and six-month
periods ended June 30, 1997, respectively, and $304,805 and $472,194 for the
three-month and six-month periods ended June 30, 1998, respectively.
On June 10, 1998, the Company's shareholders approved a proposal to allow the
Company to pay fees to the Advisor in Company stock rather than 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 is met. The value per share for shares issued will be based on a per
share value determined pursuant to the most recent appraisal of the Company's
real estate assets. Based on the most recent appraisal as of December 31, 1997,
the value for any shares issued in 1998 will be $12.80.
In connection with the Company's private placement of common stock to
institutional investors, W. P. Carey & Company, 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 compensation consultant retained by
the Board of Directors for such purpose. Since the fees are directly related to
raising capital, the related compensation cost has been charged to additional
paid-in capital. Pursuant to Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, the charge for stock-based
compensation has been offset by a credit to additional paid-in capital.
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 six-month periods ended June 30,
1997 and 1998 were $103,058 and $154,849 respectively.
Note 4. Dividends:
Dividends paid to shareholders during the six months ended June 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
</TABLE>
A dividend of $ 0.131551 per share was declared on May 28, 1998 payable to
shareholders of record as of May 28, 1998. In addition, a dividend of $.07485
per share was declared on July 7, 1998 to shareholders of record as of July 7,
1998. Both of the declared dividends were paid on July 15, 1998. The dividend
declared on May 28, 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 $ 10,995,445 $ 11,134,706
Interest from direct financing leases 5,691,630 5,567,924
Adjustments:
Share of leasing revenue applicable
to minority interest (897,172) (894,687)
Share of leasing revenue from equity
investments 3,608,298 3,654,952
------------ ------------
$ 19,398,201 $ 19,462,895
============ ============
</TABLE>
For the six-month periods ended June 30, 1997 and 1998, the Company earned its
proportionate net lease revenues from its investments from the following lease
obligors:
<TABLE>
<CAPTION>
1997 % 1998 %
----------- --- ----------- ---
<S> <C> <C> <C> <C>
Marriott International, Inc. (a) $ 2,293,860 12% $ 2,340,514 12%
Best Buy Co., Inc. (b) 1,527,617 8 1,523,387 8
Neodata Corporation 1,175,456 6 1,175,456 6
Lucent Technologies, Inc. 926,414 5 926,414 5
Omnicom Group, Inc. 933,750 5 908,750 5
Big V Holding Corp. 855,669 5 870,147 5
Garden Ridge, Inc. 680,502 4 713,064 4
Barnes & Noble, Inc. 675,798 4 687,956 4
Michigan Mutual Insurance Company 680,355 4 681,383 4
The Upper Deck Company (a) 659,938 3 659,938 3
Gensia, Inc. (a) 654,500 3 654,500 3
Merit Medical Systems, Inc. 651,646 3 651,646 3
Q Clubs, Inc. 644,438 3 644,438 3
Del Monte Corporation 643,125 3 643,125 3
Wal-Mart Stores, Inc. 591,505 3 633,946 3
Lincoln Technical Institute of Arizona, Inc. 551,579 3 603,476 3
Plexus Corp. 545,750 3 592,205 3
Waban, Inc./BJ's Warehouse Club 559,178 3 559,178 3
Bell Sports Corp. 519,272 3 532,164 3
Custom Food Products, Inc. 434,674 2 434,398 2
Detroit Diesel Corporation 422,500 2 422,500 2
Nicholson Warehouse, L.P. 402,279 2 421,721 2
GATX Logistics, Inc. 397,446 2 397,446 2
Superior Telecommunications, Inc. 332,042 2 328,639 2
Childtime Childcare, Inc. 280,000 1 304,428 2
Petsmart, Inc. 239,900 1 246,276 1
Hibbett Sporting Goods, Inc. 237,892 1 237,892 1
Oshman Sporting Goods, Inc. 223,966 1 227,601 1
CalComp Technology, Inc. 220,839 1 222,694 1
Other 149,345 217,613 1
Harvest Foods, Inc. 286,966 2
----------- --- ----------- ---
$19,398,201 100% $19,462,895 100%
=========== === =========== ===
</TABLE>
(a) Represents the Company's proportionate share of lease revenues from its
equity investments.
-8-
<PAGE> 10
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
(CONTINUED)
(b) Net of amounts applicable to Corporate Property Associates 12
Incorporated's ("CPA(R):12") minority interest.
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"), which net leases two
office buildings to The Upper Deck Company. Summarized financial information of
Marcourt, GENA and Cards LLC is as follows:
<TABLE>
<CAPTION>
(in thousands)
Marcourt GENA Cards LLC
--------------------------------- -------------------------------- --------------------------------
December 31, 1997 June 30, 1998 December 31, 1997 June 30, 1998 December 31, 1997 June 30, 1998
----------------- ------------- ----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets $149,413 $149,242 $21,710 $21,135 $26,729 $26,596
Liabilities 102,826 101,111 11,671 10,914 15,511 15,399
Owners' equity 46,587 48,131 10,039 10,221 11,218 11,197
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------------------------------------------------------------
June 30, 1997 June 30, 1998
---------------------------------------------- -----------------------------------------------
Marcourt GENA Cards LLC Marcourt GENA Cards LLC
-------- ---- --------- -------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 9,696 $ 1,309 $ 1,320 $ 9,892 $ 1,309 $ 1,320
Interest (5,391) (464) (624) (5,244) (440) (615)
Depreciation (230) (230)
Other expenses (64) (1) (76) (2) (3)
------- ------- ------- ------- ------- -------
Net income $ 4,241 $ 614 $ 696 $ 4,572 $ 637 $ 702
======= ======= ======= ======= ======= =======
</TABLE>
-9-
<PAGE> 11
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 June 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 and six-month periods ended June 30, 1998
decreased by $556,000 and $612,000 as compared with the similar periods ended
June 30, 1997. Excluding the effects of an extraordinary gain on the
extinguishment of debt that was recognized in June 1997 in connection with the
satisfaction of a limited recourse mortgage loan at a discount and nonrecurring
other income of $112,000 and $507,000 for the three-month and six-month periods,
ended June 30, 1997, respectively, income would have been unchanged for the
comparable three-month periods and reflected an increase of approximately
$300,000 for the comparable six-month periods.
The increase in income, as adjusted for nonrecurring items, for the six-month
periods was due to an increase in income from equity investments and a decrease
in interest expense. The increase in equity income was due to an increase in
percentage rents in 1998 from the Company's participation in a lease for 13
Courtyard by Marriott hotels and lower interest expense on the related mortgage
loan. The decrease in interest expense was due primarily to the effects of the
continuing principal amortization of the Company's nonrecourse mortgage loans,
and, to a lesser extent, the benefit of prepaying the first mortgage loan on the
former Harvest Foods, Inc. properties in June 1997. For the comparable
three-month periods, an increase in revenues and a decrease in interest expense
offset moderate increases in general and administrative and property expenses.
The increase in property expenses was primarily due to higher asset management
and performance fees. The increase in these fees resulted from the increase in
the appraised value of the Company's real estate assets from the prior year.
Lease revenues (rental income and interest income) were stable for the
comparable periods. Rent increases in 1997 and 1998 on leases with Bell Sports,
Inc., Garden Ridge Corporation, Plexus Corporation and Childtime Childcare, Inc.
as well as leases executed in 1997 and 1998 with The Kroger Co. and Affiliated
Foods Southwest, Inc. for five properties formerly leased to Harvest Foods, Inc.
offset the reduction that resulted from the termination of the Harvest master
lease in March 1997. The Company continues to remarket six vacant former Harvest
properties. As these properties are leased, lease revenues will increase and
some or all of the carrying costs for the properties will be absorbed by the
lessees.
FINANCIAL CONDITION:
There has not been any material change in the Company's financial condition
since December 31, 1997. Cash flow from operations of $8,910,000, which
increased by 14% from 1997, was sufficient to fund dividends of $7,023,000 and
substantially all of the Company's scheduled mortgage principal payments of
$1,908,000.
The Company has raised new equity of approximately $35,800,000 in 1998,
including $34,800,000 (2,718,750 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. As a result of raising capital, the
Company's cash balance had increased to $38,822,000 at June 30, 1998. The
Company will use such funds to purchase additional properties and to complete a
build-to-suit facility leased to Omnicom Group, Inc. under construction in Los
-10-
<PAGE> 12
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
Continued
Angeles, California and fund tenant improvements at a second property leased to
Omnicom. Upon completion of the new facility and funding of the tenant
allowance, annual rent from Omnicom will increase by approximately $2,380,000,
if all committed funds are used.
Mortgage loans of $5,690,000 on properties leased to Big V Holding Corp.
and Q Clubs, Inc. matured in July 1998 and have been paid. The Company intends
to place new limited recourse mortgages on the properties at a later date. The
Company will seek such refinancing at such time as current cash balances are
invested in new properties.
In June 1998, the shareholders of the Company approved a proposal to amend
the Company's Advisory Agreement to allow the Company 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 performance fee is
expected to be paid in the near future. Paying fees through the issuance of
common stock rather than in cash will enhance the Company's liquidity and
increase the Company's net worth by replacing liabilities with equity. The
Company believes that the resulting increase in the Advisor's ownership in the
Company will cause the interests of the Advisor and the Company's shareholders
to become more closely aligned. 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 the end of the most recent fiscal year. As of
June 30, 1998, unpaid asset management and performance fees were $8,713,000.
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.
The Company's Advisor has responsibility for maintaining the Company's
books and records. An affiliate of the Advisor services the computer systems
used for maintaining such books and records. In its preliminary assessment of
Year 2000 issues, the affiliate believes that such issues will not have a
material effect on the Company's operations, however, such assessment has not
been completed. The Company relies on its bank and transfer agent for certain
computer-related services and has initiated discussions to determine whether
they are addressing Year 2000 issues that may affect the Company.
-11-
<PAGE> 13
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders meeting was held on June 10, 1998, at which
time a vote was taken to elect the Company's directors through the
solicitation of proxies. The following directors were elected for a
one-year term:
<TABLE>
<CAPTION>
Total Shares Shares Shares
Name Of Director Shares Voting Voting Yes Voting No Abstaining
---------------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
William P. Carey 9,939,236 9,764,024 68,590 106,622
Charles C. Townsend, Jr. 9,939,236 9,816,162 16,452 106,622
Ralph G. Coburn 9,939,236 9,787,738 44,876 106,622
George E. Stoddard 9,939,236 9,782,208 50,406 106,622
Warren G. Wintrub 9,939,236 9,827,914 4,700 106,622
Thomas E. Zacharias 9,939,236 9,825,714 6,900 106,622
</TABLE>
An amendment to the Company's Advisory Agreement was approved which
allows the Company, with the consent of the Advisor, to pay fees to
its Advisor through issuance of common stock.
<TABLE>
<CAPTION>
Total Shares Shares Shares
Shares Voting Voting Yes Voting No Abstaining
------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
9,939,236 8,667,314 766,258 505,664
</TABLE>
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the quarter ended June 30, 1998, the Company was not
required to file any reports on Form 8-K.
12
<PAGE> 14
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
08/10/98 By: /s/ Steven M. Berzin
-------- -----------------------------------
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
08/10/98 By: /s/ Claude Fernandez
-------- -----------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE SIX MONTHS ENDED JUNE 30,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 38,821,534
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,821,534
<PP&E> 299,879,848
<DEPRECIATION> 13,124,843
<TOTAL-ASSETS> 354,106,943
<CURRENT-LIABILITIES> 14,472,647
<BONDS> 152,440,777
0
0
<COMMON> 20,263
<OTHER-SE> 182,084,632
<TOTAL-LIABILITY-AND-EQUITY> 354,106,943
<SALES> 0
<TOTAL-REVENUES> 17,110,061
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,898,165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,913,225
<INCOME-PRETAX> 5,802,798
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,802,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,802,798
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
