<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended MARCH 31, 1999
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) is not registered on any exchanges.
CIP(R) does not have any Securities registered pursuant to Section 12(b) of the
Act.
CIP(R) is unaware of any delinquent filers pursuant to Item 405 of Regulation
S-K.
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 May 10, 1999. 21,656,222 shares
of common stock, $.001 Par Value outstanding at May 10, 1999.
<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,
1998 and March 31, 1999 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 1998 and 1999 3
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1999 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II - Other Information
Item 3A. - Quantitative and Qualitative Disclosures About Market Risk 12
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, March 31,
1998 1999
------------ -----------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land and buildings,
net of accumulated depreciation of
$14,974,151 at December 31, 1998 and
$16,050,866 at March 31, 1999 $ 203,547,846 $ 209,739,845
Net investment in direct financing leases 94,473,412 94,852,457
Equity investments 32,749,198 38,510,055
Assets held for sale 218,250
Cash and cash equivalents 36,787,777 22,893,275
Other assets 4,517,389 4,197,124
------------- -------------
Total assets $ 372,075,622 $ 370,411,006
============= =============
LIABILITIES:
Limited recourse mortgage notes payable $ 160,255,378 $ 158,007,211
Accrued interest 1,088,678 1,033,887
Accounts payable and accrued expenses 769,381 640,673
Accounts payable to affiliates 10,565,418 1,433,760
Dividends payable 4,409,132 4,438,637
Prepaid rental income and security deposits 862,282 837,846
------------- -------------
Total liabilities 177,950,269 166,392,014
------------- -------------
Minority interest 5,233,926 5,439,755
------------- -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
authorized, 40,000,000 shares; issued and
outstanding, 21,046,424 shares at December 31,
1998 and 21,866,590 shares at March 31, 1999 21,046 21,867
Additional paid-in capital 205,320,138 216,136,666
Dividends in excess of accumulated earnings (13,718,867) (14,602,248)
Accumulated other comprehensive income (loss) 121,335 (102,983)
------------- -------------
191,743,652 201,453,302
Less: common stock in treasury at cost, 287,305
shares at December 31, 1998 and 289,505
shares at March 31, 1999 (2,852,225) (2,874,065)
------------- -------------
Total shareholders' equity 188,891,427 198,579,237
------------- -------------
Total liabilities and
shareholders' equity $ 372,075,622 $ 370,411,006
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 1998 has been derived from the
audited consolidated 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
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Revenues:
Rental income $ 5,694,507 $ 6,420,870
Interest income from direct financing leases 2,774,632 2,774,762
Other interest income 253,714 358,005
Other income 9,197
------------ ------------
8,732,050 9,553,637
------------ ------------
Expenses:
Interest 3,460,762 3,366,952
Depreciation and amortization 912,014 1,143,926
General and administrative 494,754 685,613
Property expenses 1,462,918 1,659,471
Writedown to fair value 335,839
------------ ------------
6,330,448 7,191,801
------------ ------------
Income before minority interest and
income from equity investments 2,401,602 2,361,836
Minority interest in income (201,523) (205,829)
------------ ------------
Income before income from equity
investments 2,200,079 2,156,007
Income from equity investments 993,616 1,235,780
------------ ------------
Net income $ 3,193,695 $ 3,391,787
============ ============
Basic earnings per common share $ .19 $ .16
============ ============
Diluted earnings per common share $ .18 $ .16
============ ============
Weighted average of shares outstanding-basic 17,246,314 21,442,372
============ ============
Weighted average of shares outstanding-diluted 17,512,069 21,773,002
============ ============
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Net income $3,193,695 $ 3,391,787
---------- -----------
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities
during the period 735,302 (224,318)
---------- -----------
Other comprehensive income (loss) 735,302 (224,318)
---------- -----------
Comprehensive income $3,928,997 $ 3,167,469
========== ===========
</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 CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,193,695 $ 3,391,787
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 912,014 1,143,926
Income from equity investments in excess of dividends
and distributions received (208,386) (126,683)
Minority interest in income 201,523 205,829
Straight-line rent adjustments and other noncash
rent adjustments (430,460) (378,829)
Writedown to fair value 335,839
Provision for uncollected rents 63,519 233,795
Net change in operating assets and liabilities 1,339,681 506,282
------------ ------------
Net cash provided by operating activities 5,071,586 5,311,946
------------ ------------
Cash flows from investing activities:
Acquisitions of real estate and equity investments and
additional capitalized costs (12,525,127) (13,478,498)
------------ ------------
Net cash used in investing activities (12,525,127) (13,478,498)
------------ ------------
Cash flows from financing activities:
Proceeds from stock issuance, net of costs 667,611 984,220
Proceeds from mortgages 4,200,000
Prepayment of mortgages (5,413,727)
Payments of mortgage principal (955,564) (1,034,440)
Deferred financing costs (196,500)
Dividends paid (3,466,189) (4,245,663)
Purchase of treasury stock (21,840)
------------ ------------
Net cash used in financing activities (3,754,142) (5,727,950)
------------ ------------
Net decrease in cash and cash equivalents (11,207,683) (13,894,502)
Cash and cash equivalents, beginning of period 17,331,710 36,787,777
------------ ------------
Cash and cash equivalents, end of period $ 6,124,027 $ 22,893,275
============ ============
Supplemental disclosure of cash flows information:
Interest paid $ 3,428,031 $ 3,421,743
============ ============
Noncash operating and financing activities:
Issuance of common stock to Advisor in satisfaction
of fees payable $ 9,833,129
============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- 4 -
<PAGE> 6
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, 1998.
Assets held for sale are accounted for at the lower of cost or fair value, less
costs to dispose.
Note 2. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
periods ended March 31, 1998 and 1999 were calculated as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net income $ 3,193,695 $ 3,391,787
=========== ===========
Weighted average shares - basic 17,246,314 21,442,372
Effect of dilutive securities:
Stock warrants 265,755 330,630
----------- -----------
Weighted average shares - diluted 17,512,069 21,773,002
=========== ===========
Basic earnings per share $ .19 $ .16
=========== ===========
Diluted earnings per share $ .18 $ .16
=========== ===========
</TABLE>
Note 3. Transactions with Related Parties:
For the three-month periods ended March 31, 1998 and 1999, the Company incurred
asset management fees of $533,750 and $630,169, respectively, with performance
fees in like amount, and general and administrative expense reimbursements were
$167,389, and $230,340, respectively, payable to an affiliate.
In January 1999, the Company issued 744,934 restricted shares of common stock to
the Advisor in satisfaction of $9,833,129 of performance fees as a result of the
Company achieving its cumulative dividend return criterion of 8% (based on an
initial issuance of Company common stock at $10 per share) to which payment of
the performance fee is subordinated. The shares issued to pay the performance
fee were priced at $13.20 per share with the price determined based on the most
recent independent valuation of the Company's portfolio as of December 31, 1998.
The shares will vest ratably over five years, with the Advisor having the right
to receive dividends and vote its shares currently.
- 5 -
<PAGE> 7
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 4. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
lease revenues are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Per Statements of Income:
Rental income from operating leases $ 5,694,507 $ 6,420,870
Interest from direct financing leases 2,774,632 2,774,762
Adjustments:
Share of leasing revenue applicable
to minority interest (448,187) (446,267)
Share of leasing revenue from equity
investments 1,942,101 2,733,114
------------ ------------
$ 9,963,053 $ 11,482,479
============ ============
</TABLE>
For the three-month periods ended March 31, 1998 and 1999, the Company earned
its proportionate net lease revenues from its investments as follows:
<TABLE>
<CAPTION>
Lease Obligor: 1998 % 1999 %
- -------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
Marriott International, Inc. (a) $1,284,882 13% 1,310,054 11%
Omnicom Group, Inc. 454,375 5 1,063,945 9
Advanced Micro Devices, Inc. (a) 762,125 7
Best Buy Co., Inc. (b) 763,129 8 759,859 6
Neodata Corporation 587,728 6 589,732 5
Wal-Mart Stores, Inc. 444,224 5 501,067 4
Lucent Technologies 463,207 5 463,207 4
Big V Holding Corp. 434,113 4 440,281 4
Garden Ridge, Inc. 356,532 4 356,532 3
Barnes & Noble, Inc. 343,359 3 348,330 3
Michigan Mutual Insurance Company 340,690 3 340,703 3
The Upper Deck Company (a) 329,969 3 329,969 3
Gensia, Inc. (a) 327,250 3 327,250 3
Merit Medical Systems, Inc. 325,823 3 325,823 3
Q Clubs, Inc. 322,219 3 322,219 3
Del Monte Corporation 321,563 3 321,563 3
Lincoln Technical Institute of Arizona, Inc. 301,738 3 301,738 3
Plexus Corp. 296,102 3 296,102 3
Waban, Inc./BJ's Warehouse Club 279,589 3 279,589 2
Bell Sports Corp. 266,082 3 272,016 2
Custom Food Products, Inc. 217,297 2 216,820 2
Detroit Diesel Corporation 211,250 2 211,250 2
Nicholson Warehouse, L.P. 201,286 2 201,296 2
Other 1,090,646 11 1,141,009 10
---------- --- ----------- ---
$9,963,053 100% $11,482,479 100%
========== === =========== ===
</TABLE>
(a) Represents the Company's proportionate share of lease revenues from its
equity investments.
(b) Net of amounts applicable to Corporate Property Associates 12
Incorporated's ("CPA(R):12") minority interest.
- 6 -
<PAGE> 8
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Equity Investments:
The Company holds interests in five investments in which its ownership interest
is 50% or less. All of the underlying investments are entities that were formed
solely for the purpose of entering into a long-term net lease with a single
tenant. As of March 31, 1999, the Company owns (i) an approximate 23.68%
interest in a real estate investment trust that net leases 13 Courtyard by
Marriott hotels to a wholly-owned subsidiary of Marriott International, Inc.,
(ii) 50% interests in general partnerships that net lease properties to Gensia,
Inc. and the Upper Deck Company and (iii) 33.33% interests in two entities that
net lease properties to Advanced Micro Devices, Inc. and Compucom Systems, Inc.
("Compucom"). The interest in the Compucom property was purchased on March 31,
1999 (see Note 6). Summarized combined financial information of the Company's
equity investees is as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Assets (primarily real estate) $287,777 $325,421
Liabilities (primarily mortgage
notes payable) 193,443 215,396
Shareholders' and members' equity 94,334 110,025
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Revenues (primarily rental income
and interest from direct financing loan) $ 6,745 $ 6,952
Expenses (primarily interest on
mortgages and depreciation) 3,235 3,361
Net income 3,510 3,591
</TABLE>
Note 6. Acquisitions:
On February 5, 1999, the Company purchased land and buildings in Texarkana,
Texas and Orem, Utah for $7,748,691 and entered into a net lease agreement with
Humco Holding Group, Inc. ("Humco"). The Humco lease provides for a seventeen
year lease term at an annual rent of $825,100, with rent increases every two
years based on a formula indexed to increases in the Consumer Price Index
("CPI"). Each increase is capped at a maximum of 3% for the first five years,
4%, for the next five years, and 5% thereafter. The lease provides for a
purchase option, exercisable on the seventh, twelfth and seventeenth anniversary
dates of the lease, and is also exercisable in the event 80% or more of Humco's
voting stock is acquired by a third party. The purchase option is exercisable at
the greater of the fair value of the properties, as defined, or the Company's
acquisition cost for the properties plus any prepayment premium on any mortgage
loan on the Humco properties.
In connection with the purchase of the Humco property, the Company obtained
$4,200,000 of limited recourse financing. The loan is collateralized by the
Humco properties and an assignment of the Humco lease, and bears interest at an
annual rate of 7.75% with monthly interest and principal payments of $31,724,
based on a 25-year amortization schedule. The interest rate will reset on the
fifth anniversary of the loan to 3.25% plus the average yield on U.S. Treasury
instruments adjusted to a maturity of five years. The loan matures in March 2009
when a balloon payment will be due. The loan may be prepaid at any time, in
whole or in part, without a prepayment penalty.
- 7 -
<PAGE> 9
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
On March 31, 1999, the Company and two affiliates, Corporate Property Associates
12 Incorporated and Corporate Property Associates 14 Incorporated, through a
newly-formed entity, in which the Company and the two affiliates each own 1/3
interests, purchased land and building in Dallas, Texas for $39,790,500 and
entered into a net lease with Compucom Systems, Inc. ("Compucom")
The Compucom lease has an initial term of 20 years with two five-year renewal
terms at Compucom's option. The lease initially provides for annual rent of
$3,914,000 with rent increases every three years based on a formula indexed to
increases in the CPI, with each increase capped at 13.3%.
In connection with the purchase, the jointly-owned entity obtained a limited
recourse mortgage loan of $23,000,000. The loan is collateralized by the
Compucom property and an assignment of the Compucom lease and bears interest at
an annual interest rate of 7.215% with monthly payments of interest and
principal of $165,727 based on a 25-year amortization schedule. The loan matures
in April 2009 when a balloon payment will be due. A prepayment premium will
apply if the loan is prepaid prior to six months before maturity.
Note 7. Writedown to Fair Value:
On April 15, 1999, the Company and Corporate Property Associates 10
Incorporated, an affiliate, the owners, as tenants in common, of a property in
Ruston, Louisiana, entered into an agreement to sell a property for $450,000.
The property has been vacant since the termination of the Harvest Foods, Inc.
("Harvest Foods") lease in March 1997. Based on the proposed sales price less
estimated transaction costs, the carrying value of the Company's 50% interest in
the property has been written down to $218,250. As a result of this writedown,
the Company has recognized an impairment loss of $335,839. Because it satisfied
the subordinated mortgage loan on the former Harvest Foods properties in
December 1998, the Company will retain the entire amount of its share of net
proceeds from the proposed sale of the Ruston property.
Note 8. Subsequent Event:
On April 16, 1999, the Company purchased a property in Golden, Colorado for
$6,620,942 and assumed existing leases with Bolder Technology, Inc. ("Bolder")
and Northstar Computer Forms, Inc. ("Northstar"). The Bolder lease currently
provides for annual rent of $593,490 with rent increases scheduled in 2000,
2003, and 2007. Each rent increase will be based on a formula indexed to
increases in the CPI subject to maximum 4% annual increases. The Northstar lease
provides for annual rent of $110,141. The Bolder and Northstar leases have
remaining terms through April 2008 and September 2005, respectively.
- 8 -
<PAGE> 10
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 March 31,
1999 included in this quarterly report and the Company's Annual Report on Form
10-K for the year ended December 31, 1998. This quarterly report contains
forward looking statements. Such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievement of the Company to be materially different from the results of
operations or 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 March 31, 1999 increased by
$198,000 as compared with the three-month period ended March 31, 1998. Net
income for the current three-month period includes the effect of a property
writedown of $336,000. Excluding the noncash charge for the writedown, income
would have reflected an increase of $534,000.
The increase in income was primarily due to increases in lease revenues
(rental income and interest income from direct financing leases) and income from
equity investments, and, to a lesser extent, an increase in other interest
income and a decrease in interest expense. The increase in lease revenues
resulted from (i) the new lease with Omnicom Group, Inc. that went into effect
in October 1998, (ii) increased percentage rents from the Company's six leases
with Wal-Mart Stores, Inc. and (iii) the acquisition of the Humco Holding Group,
Inc. properties in February 1999. The increase in income from equity investments
was due to the first full quarter of earnings from the investment, purchased in
December 1998, in the Advanced Micro Devices, Inc. property as well as the
continuing trend of increasing income from the Marriott International, Inc.
lease. The increase in other interest income was due to higher average cash
balances resulting from capital raised in 1998 pursuant to the Company's private
placement offering to institutional investors that will be used to fund
additional investments in real estate. The decrease in interest expense reflects
the benefit from paying off several mortgage loans in 1998 and paying a
scheduled balloon payment of $5,414,000 in January 1999 to satisfy the mortgage
loan on the Lincoln Technical Institute of Arizona, Inc. property. The reduction
in interest expense from mortgage prepayments was offset, in part, by the
mortgage loan of $18,400,000 on the new Omnicom property that was obtained in
the fourth quarter of 1998. The increase in general and administrative expenses
resulted from several items including costs of Year 2000 remediation and the
Company's share of consulting costs relating to the upgrade and installation of
integrated asset management and accounting systems software. The increase in
property expenses was due to the Company's strengthening of its reserve for
uncollected rents.
Solely as a result of purchasing the Humco properties in February 1999,
annual cash flow (rent less mortgage debt service) will increase by
approximately $444,000. In addition, the purchase of an equity investment on
March 31, 1999 of an interest in a property leased to Compucom Systems, Inc. is
expected to provide annual cash flow of approximately $644,000. The leases with
Bolder Technology, Inc. and Northstar Computer Forms, Inc. for a property in
Golden, Colorado, purchased in April 1999, will provide annual cash flow of
$644,000. The proposed sale of a vacant property in Ruston, Louisiana will not
significantly effect operating cash flow as no revenue has been earned on the
Ruston property for two years. In January 1999, CalComp Technology, Inc., a
tenant of a property in Austin, Texas announced its intention to liquidate and
stopped paying its rent. The Company has filed a complaint against CalComp, and
is seeking a judgment for all unpaid and future rents plus associated costs. The
Company has also entered into negotiations with CalComp in an attempt to reach a
settlement. Because of the expectation that the Company will no longer receive
CalComp rents, no rental income from this lease was recorded during the current
three-month period.
- 9 -
<PAGE> 11
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
FINANCIAL CONDITION:
Cash flow from operations of $5,312,000 was sufficient to pay quarterly
dividends of $4,246,000 and scheduled mortgage principal installments of
$1,034,000. Future cash flow from operations is expected to increase from new
real estate investments acquired since December 31, 1998. As of May 10, 1999,
the Company has $9,476,000 of cash available for investments for which several
potential real estate investments are being evaluated.
The Company's investing activities consisted of using $13,478,000 to
purchase the Humco properties and an interest in the Compucom property. Since
March 31, 1999, the Company has made an additional real estate investment in a
property leased to Bolder Technology and Northland Computer Forms of $6,621,000.
The Company expects to make additional investments during the year, however, the
Company has not committed to enter into any specific transactions. The Company
will consider funding improvements at five properties formerly leased to Harvest
Foods, Inc. if management believes that in doing so it will provide a
satisfactory long-term economic return.
In addition to paying scheduled mortgage debt service and dividends to
shareholders, the Company's financing activities included obtaining $4,200,000
of limited recourse mortgage financing in connection with the purchase of Humco
properties, payment of $5,414,000 to satisfy a balloon payment obligation on the
Lincoln Technical property and satisfying an obligation to the Advisor for asset
management and performance fees of $9,833,000 by issuing to the Advisor 744,934
restricted shares of common stock in lieu of cash. The stock was issued at
$13.20 per share with the price determined pursuant to the most recent appraisal
of the Company's portfolio as of December 31, 1998. Under the Company's Advisory
Agreement, the Advisor was not entitled to receive its performance fee until a
cumulative dividend return of 8%, determined using an issuance price of $10 per
share, was achieved. The dividend return criterion was achieved in January 1999.
With the issuance of stock to the Advisor, the Company has strengthened its
balance sheet by converting a liability to equity, retaining cash and more
closely aligning the interests of the Advisor and the Company's shareholders. As
of March 31, 1999, the Advisor holds 3.5% of the outstanding shares of the
Company.
A mortgage loan on the Wal-Mart properties that had been scheduled to
mature in January 1999 has been extended through May 1999. The lender has
proposed to extend the maturity of the loan for several years. The Company is
evaluating the lender's proposal and it is likely that the lender's proposal
will be accepted. A balloon payment of $1,574,000 is scheduled for August 1999
on the CalComp property. The loan is in default and subject to acceleration as
the result of nonpayment of rent by CalComp. The lender has not exercised its
remedies, and the Company has continued to pay monthly debt service based on
management's conclusion that the value of the property is in excess of the loan
balance.
The Company and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. The Year 2000 issue refers to the series of
problems that have resulted or may result from the inability of certain computer
software and embedded processes to process dates properly. The Company and its
affiliates are completing a program of replacing or upgrading equipment that has
been identified as not being Year 2000 compliant. The Company and its affiliates
have also completed remediating certain software applications. Contingency plans
are in the process of being developed and should be completed during the second
quarter.
The Company believes it is addressing its internal Year 2000 issues in a
timely manner. There is, however, a risk that the inability of third-party
suppliers and tenants to meet Year 2000 readiness issues could have an adverse
effect on the Company. The Company and its affiliates have identified their
critical suppliers and are requiring that suppliers communicate their plans and
progress in identifying Year 2000 readiness.
- 10 -
<PAGE> 12
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
The Company has contacted its tenants regarding Year 2000 readiness and
emphasized the need to address Year 2000 issues. Generally, tenants are
contractually required to maintain their leased properties in good working order
and to make necessary alterations, foreseen or unforeseen, to meet their
contractual obligations. Because of those obligations, the Company believes that
the risks and costs of upgrading systems related to operations of the buildings
and that contain technology affected by Year 2000 issues will generally be
absorbed by tenants rather than the Company. The major risk is that Year 2000
issues have such an adverse effect on the financial condition of a tenant that
its ability to meet its lease obligations, including the timely payment of rent,
is impaired. In such an event, the Company may ultimately incur the costs for
Year 2000 readiness at the affected properties. The potential materiality of any
impact is not known at this time.
- 11 -
<PAGE> 13
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
PART II
Item 3A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Approximately $130,746,000 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 interest rate on the variable rate debt as of March 31, 1999
ranged from LIBOR and 1.625% to LIBOR and 4%. There has been no material change
since December 31, 1998.
<TABLE>
<CAPTION>
(in thousands)
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $9,022 $3,090 $3,376 $ 5,603 $11,120 $98,535 $130,746 $133,956
Weighted
average
interest
rate 9.70% 8.83% 8.84% 8.97% 8.93% 8.54%
Variable rate $2,441 $8,825 $4,958 $11,037 -- -- $ 27,261 $ 27,261
</TABLE>
As of March 31, 1999, the Company had no other material exposure to
market risk.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1999, no matters
were submitted to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the quarter ended March 31, 1999, 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
5/10/99 By: /s/ Steven M. Berzin
------- ----------------------------------
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
5/10/99 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 10-Q
FOR THE THREE-MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 22,893,275
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 218,250
<CURRENT-ASSETS> 23,111,525
<PP&E> 320,643,168
<DEPRECIATION> 16,050,866
<TOTAL-ASSETS> 370,411,006
<CURRENT-LIABILITIES> 8,384,803
<BONDS> 158,007,211
0
0
<COMMON> 21,867
<OTHER-SE> 198,557,370
<TOTAL-LIABILITY-AND-EQUITY> 370,411,006
<SALES> 0
<TOTAL-REVENUES> 9,553,637
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,255,215
<LOSS-PROVISION> 569,634
<INTEREST-EXPENSE> 3,366,952
<INCOME-PRETAX> 3,391,787
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,391,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,391,787
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
