<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended JUNE 30, 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 August 9, 1999. 21,673,019
shares of common stock, $.001 par value outstanding at August 9, 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 June 30, 1999 2
Condensed Consolidated Statements of Income for the three and
six months ended June 30, 1998 and 1999 3
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II - Other Information
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. - Submission of Matters to a Vote of Security Holders 14
Item 6. - Exhibits and Reports on Form 8-K 14
Signatures 15
</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,
1998 1999
---- ----
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land and buildings,
net of accumulated depreciation of
$14,974,151 at December 31, 1998 and
$17,191,136 at June 30, 1999 $ 203,547,846 $ 223,532,361
Net investment in direct financing leases 94,473,412 94,450,418
Equity investments 32,749,198 38,714,183
Assets held for sale 751,750
Cash and cash equivalents 36,787,777 17,191,979
Other assets 4,517,389 3,812,532
------------- -------------
Total assets $ 372,075,622 $ 378,453,223
============= =============
LIABILITIES:
Limited recourse mortgage notes payable $ 160,255,378 $ 165,988,720
Accrued interest payable 1,088,678 1,016,356
Accounts payable and accrued expenses 769,381 764,571
Accounts payable to affiliates 10,565,418 1,547,831
Dividends payable 4,409,132 4,490,650
Prepaid rental income and security deposits 862,282 1,026,454
------------- -------------
Total liabilities 177,950,269 174,834,582
------------- -------------
Minority interest 5,233,926 5,364,649
------------- -------------
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 21,992,808 shares at June 30, 1999 21,046 21,993
Additional paid-in capital 205,320,138 217,811,312
Dividends in excess of accumulated earnings (13,718,867) (16,077,658)
Accumulated other comprehensive income 121,335 (308,630)
------------- -------------
191,743,652 201,447,017
Less, common stock in treasury, at cost, 287,305
shares at December 31, 1998 and
319,789 shares at June 30, 1999 (2,852,225) (3,193,025)
------------- -------------
Total shareholders' equity 188,891,427 198,253,992
------------- -------------
Total liabilities and
shareholders' equity $ 372,075,622 $ 378,453,223
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 1998 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, 1998 June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 5,440,199 $ 6,453,594 $ 11,134,706 $ 12,874,464
Interest income from direct
financing leases 2,793,292 2,774,101 5,567,924 5,548,863
Other interest and
miscellaneous income 144,520 176,363 407,431 534,368
------------ ------------ ------------ ------------
8,378,011 9,404,058 17,110,061 18,957,695
------------ ------------ ------------ ------------
Expenses:
Interest 3,452,463 3,399,631 6,913,225 6,766,583
Depreciation and amortization 907,202 1,214,826 1,819,216 2,358,752
General and administrative 666,292 829,462 1,161,046 1,515,075
Property expenses 1,274,201 1,695,235 2,737,119 3,354,706
Writedown to fair value 130,836 466,675
------------ ------------ ------------ ------------
6,300,158 7,269,990 12,630,606 14,461,791
------------ ------------ ------------ ------------
Income before minority
interest, and income from
equity investments 2,077,853 2,134,068 4,479,455 4,495,904
Minority interest in income (199,866) (206,712) (401,389) (412,541)
------------ ------------ ------------ ------------
Income before income
from equity investments 1,877,987 1,927,356 4,078,066 4,083,363
Income from equity investments 731,116 1,087,887 1,724,732 2,323,667
------------ ------------ ------------ ------------
Net income $ 2,609,103 $ 3,015,243 $ 5,802,798 $ 6,407,030
============ ============ ============ ============
Basic earnings per share $ .15 $ .14 $ .33 $ .30
============ ============ ============ ============
Diluted earnings per share $ .15 $ .14 $ .33 $ .29
============ ============ ============ ============
Weighted average common
shares outstanding-basic 17,789,576 21,665,604 17,523,970 21,554,583
============ ============ ============ ============
Weighted average common
shares outstanding-diluted 18,055,331 22,052,972 17,789,725 21,901,146
============ ============ ============ ============
</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, 1998 June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 2,609,103 $ 3,015,243 $ 5,802,798 $ 6,407,030
Other comprehensive income:
Change in unrealized gains
and losses on marketable
securities during the period (373,384) (205,647) 361,918 (429,965)
----------- ----------- ----------- -----------
Comprehensive income $ 2,235,719 $ 2,809,596 $ 6,164,716 $ 5,977,065
=========== =========== =========== ===========
</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, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,802,798 $ 6,407,030
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,819,216 2,358,752
Income from equity investments in excess of dividends
and distributions received (419,934) (330,811)
Minority interest in income 401,389 412,541
Straight-line rent adjustments and other
noncash rent adjustments (100,502) 23,564
Provision for uncollected rent 226,843 388,175
Writedown to fair value 466,675
Net change in operating assets and liabilities 1,461,899 1,759,922
------------ ------------
Net cash provided by operating activities 9,191,709 11,485,848
------------ ------------
Cash flows from investing activities:
Acquisition of real estate and equity investments and
additional capitalized costs (13,870,274) (29,104,790)
------------ ------------
Net cash used in investing activities (13,870,274) (29,104,790)
------------ ------------
Cash flows from financing activities:
Purchase of treasury stock (419,670) (340,800)
Prepayment of mortgage payable (5,413,727)
Proceeds from mortgages 13,200,000
Proceeds from stock issuance, net of costs 35,800,267 2,028,824
Payments of mortgage principal (1,907,808) (2,052,931)
Distributions paid to minority interests (281,434) (281,818)
Deferred financing costs (432,101)
Dividends paid (7,022,966) (8,684,303)
------------ ------------
Net cash provided by (used in) financing activities 26,168,389 (1,976,856)
------------ ------------
Net increase (decrease) in cash and cash equivalents 21,489,824 (19,595,798)
Cash and cash equivalents, beginning of period 17,331,710 36,787,777
------------ ------------
Cash and cash equivalents, end of period $ 38,821,534 $ 17,191,979
============ ============
Supplemental disclosure of cash flows information:
Interest paid $ 6,717,407 $ 6,838,905
============ ============
Noncash operating and financing activities:
Issuance of common stock to Advisor in
satisfaction of performance fees $ 10,463,297
============
</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, 1998.
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, 1998 and 1999 were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Net income $ 2,609,103 $ 3,015,243
=========== ===========
Weighted average shares - basic 17,789,576 21,665,604
Effect of dilutive securities:
Stock warrants 265,755 387,368
----------- -----------
Weighted average shares - diluted 18,055,331 22,052,972
=========== ===========
Basic earnings per share $ .15 $ .14
=========== ===========
Diluted earnings per share $ .15 $ .14
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Net income $ 5,802,798 $ 6,407,030
=========== ===========
Weighted average shares - basic 17,523,970 21,554,583
Effect of dilutive securities:
Stock warrants 265,755 346,563
----------- -----------
Weighted average shares - diluted 17,789,725 21,901,146
=========== ===========
Basic earnings per share $ .33 $ .30
=========== ===========
Diluted earnings per share $ .33 $ .29
=========== ===========
</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 Company incurred asset management fees of $533,750 and $652,293,
respectively for the three month periods ended June 30, 1998 and 1999 and
$1,067,500 and $1,282,462 for the six month periods ended June 30, 1998 and
1999, respectively, with performance fees in like amounts. General and
administrative expense reimbursements were $304,805 and $253,368 for the three
months ended June 30, 1998, and 1999, respectively, and $472,198 and $483,708
for the six months ended June 30, 1998 and 1999, respectively.
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 April 1998, the Company granted warrants for 1,872,353 shares of common stock
representing a fee relating to $42,440,000 of capital raised in 1998 from
institutional investors. The warrants are exercisable at $12.80 per share, the
price at which the stock was sold, for a ten-year period. The current value of
the newly issued warrants were determined pursuant to a valuation performed by
an independent compensation consultant retained for such purpose. Since the fees
are directly related to raising capital, the related compensation cost has been
charged to additional paid-in capital.
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) in January 1999.
Because the payment of the performance fee is subordinated to the cumulative
dividend return criterion, the Advisor was not entitled to the fee until January
1999, even though the Company had recognized such fees since its inception. The
Company has also issued an additional 47,740 shares of common stock to the
Advisor in satisfaction of the performance fee of $630,168 for the three-month
period ended March 31, 1999. 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. The Advisor is a participant in the
Company's dividend reinvestment plan. Currently, it has opted to take all its
dividends in stock of the Company.
-7-
<PAGE> 9
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 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>
1998 1999
------------ ------------
<S> <C> <C>
Per Statements of Income:
Rental income from operating leases $ 11,134,706 $ 12,874,464
Interest from direct financing leases 5,567,924 5,548,863
Adjustments:
Share of leasing revenue applicable
to minority interest (894,687) (890,795)
Share of leasing revenue from equity
investments 3,654,952 5,536,590
------------ ------------
$ 19,462,895 $ 23,069,122
============ ============
</TABLE>
For the six-month periods ended June 30, 1998 and 1999, the Company earned its
proportionate net lease revenues from its investments as follows:
<TABLE>
<CAPTION>
1998 % 1999 %
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Marriott International, Inc. (a) $ 2,340,514 12% $ 2,368,022 10%
Omnicom Group, Inc. 908,750 5 2,132,689 9
Advanced Micro Devices, Inc. (a) 1,524,250 7
Best Buy Co., Inc. (b) 1,523,387 8 1,516,760 7
Neodata Corporation 1,175,456 6 1,179,464 5
Lucent Technologies, Inc. 926,414 5 926,414 4
Big V Holding Corp. 870,147 5 878,869 4
Garden Ridge, Inc. 713,064 4 718,905 3
Barnes & Noble, Inc. 687,956 4 697,574 3
Wal-Mart Stores, Inc. 633,946 3 690,789 3
Michigan Mutual Insurance Company 681,383 4 681,409 3
The Upper Deck Company (a) 659,938 3 659,938 3
Sicor, Inc. (formerly Gensia, Inc.) (a) 654,500 3 654,500 3
Merit Medical Systems, Inc. 651,646 3 651,646 3
Q Clubs, Inc. 644,438 3 647,534 3
Del Monte Corporation 643,125 3 643,125 3
Lincoln Technical Institute of Arizona, Inc. 603,476 3 603,476 3
Plexus Corp. 592,205 3 592,205 2
Waban, Inc./BJ's Warehouse Club 559,178 3 559,178 2
Bell Sports Corp. 532,164 3 544,033 2
Custom Food Products, Inc. 434,398 2 433,409 2
Detroit Diesel Corporation 422,500 2 422,500 2
Nicholson Warehouse, L.P. 421,721 2 402,595 2
Compucom Systems, Inc. (a) 329,880 1
Other 2,182,589 11 2,609,958 11
----------- ----------- ----------- -----------
$19,462,895 100% $23,069,122 100%
=========== =========== =========== ===========
</TABLE>
(a) Represents the Company's proportionate share of lease revenues from its
equity investments.
(b) Net of amounts applicable to minority interests owned by Corporate
Property Associates 12 Incorporated ("CPA(R):12").
-8-
<PAGE> 10
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 June 30, 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 Sicor, Inc.
(formerly Gensia, Inc.) and the Upper Deck Company and (iii) 33.33% interests in
entities that net lease property to Advanced Micro Devices, Inc. and Compucom
Systems, Inc. ("Compucom"). The interest on the Compucom property was purchased
on March 31, 1999. Summarized combined financial information of the Company's
equity investees is as follows:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C>
Assets (primarily real estate) $287,777 $325,278
Liabilities (primarily mortgage notes payable) 193,443 214,205
Shareholders' and members' equity 94,334 111,073
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Revenues (primarily rental income and interest from
direct financing leases) $ 12,521 $ 18,198
Expenses (primarily interest on mortgage and depreciation) (6,610) (10,279)
-------- --------
Net income $ 5,911 $ 7,919
======== ========
</TABLE>
Note 6. Acquisitions:
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 $533,490 with rent increases scheduled in 2000,
2003, and 2007. Each rent increase will be based on a formula indexed to
increases in the Consumer Price Index ("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. On June 17, 1999 the Company obtained $3,500,000 of limited
recourse mortgage financing collateralized by a deed of trust on the Bolder
property and lease assignments. The mortgage loan provides for monthly payments
of principal and interest of $24,833 at an annual interest rate of 7.65% based
on a 30-year amortization schedule. The loan matures on July 1, 2009 at which
time a balloon payment of approximately $3,053,000 will be due. The loan is
prepayable at any time, subject to a prepayment premium.
On May 12, 1999, the Company purchased a property in Eugene, Oregon for
$8,717,278 and entered into a net lease with PSC Scanning, Inc. ("PSC"). The PSC
lease has a 15-year term through May 31, 2014 with an initial annual rent of
$820,013. The lease provides for annual rent increases with such increases based
on a formula indexed to increases in the CPI, capped at 3.75%. On June 9, 1999,
the Company obtained $5,500,000 of limited recourse mortgage financing
collateralized by a deed of trust on the PSC property and a lease assignment.
The mortgage loan provides for monthly payments of interest and principal of
$39,755 at an annual interest rate of 7.25% based on a 25-year amortization
schedule. The loan matures on July 1, 2009 at which time a balloon payment of
approximately $4,368,000 will be due. The loan may not be prepaid during the
first five loan years except for certain limited circumstances. The loan is
prepayable thereafter, in part or whole, subject to a prepayment premium.
-9-
<PAGE> 11
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 7. Writedowns to Fair Value:
The Company and Corporate Property Associates 10 Incorporated (CPA(R):10) an
affiliate, are owners as tenants in common of properties in Ruston, Louisiana
and Jonesboro, Arkansas. In April 1999, the Company and CPA(R):10 entered into
an agreement to sell the Ruston property for $450,000. The sale of the Ruston
property was completed on July 27, 1999. In addition, the Company and CPA(R):10
have reached an agreement-in-principle to sell the Jonesboro property for
$1,100,000. The properties had been vacant since the termination of the Harvest
Foods, Inc. lease in March 1997. Based on the proposed sales prices less
estimated transaction costs, the Company's 50% interest in the property has been
written down to $751,750, and impairment loss of $466,675 has been recognized.
The Jonesboro property is subject to a ground lease and the ground rental
obligation, currently $113,447 per year, will be assumed by the purchaser if the
sale is completed.
-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 June 30,
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 and six-month periods ended June 30,
1999 increased $406,000 and $604,000, respectively, as compared with the
three-month and six-month periods ended June 30, 1998. Excluding the effects of
noncash asset writedowns on two properties that the Company expects to sell,
income for the three-month and six-month periods would have increased $537,000
and $1,071,000, respectively.
The increase in income was primarily due to increases in lease revenues
(rental income and interest from direct financing leases) and an increase in
income from equity investments. The effects of these increases were partially
offset by increases in depreciation and amortization and general and
administrative and property expenses. The increase in lease revenues was due to
the new leases with Omnicom Group, Inc., effective October 1, 1998, and the
purchase of properties leased to Humco Holdings, Inc., Bolder Technology, Inc.
and Northstar Computer Forms, Inc. and PSC Scanning, Inc. in 1999. Annual
revenues from the Humco, Bolder Technology, Northstar and PSC leases are
$2,289,000. The increase in income from equity income was primarily due to the
Company's investment with two affiliates in properties leased to Advanced Micro
Devices, Inc. and Compucom Systems, Inc. that were purchased in December 1998
and March 1999, respectively. The Company's share of annual cash flow (rent less
mortgage debt service) from these two equity investments is approximately
$1,700,000. The increase in depreciation and amortization is directly
attributable to the acquisition of the aforementioned new properties. The
increase in general and administrative costs was due, in part, to the costs
related to the installation of new integrated accounting and asset management
software that is expected to be operational during the fourth quarter. The
increase in property expenses was due to increases in asset management and
performance fees and an increase in the provision for uncollected rents. Asset
management and performance fees are calculated based on an appraised value per
share determined annually pursuant to an independent valuation.
FINANCIAL CONDITION:
There has been no material change in the Company's financial condition
since December 31, 1998. As a result of the Company's Advisor electing to
receive its accrued performance fees and its performance fees for the first
fiscal quarter in shares of Company common stock rather than cash, obligations
of $10,463,000 were converted into shareholders' equity thereby strengthening
the Company's balance sheet and enhancing the Company's liquidity. The
performance fee became payable in January 1999 when the cumulative dividend
return criterion of 8%, determined based on the public offering issuance price
of $10 per share, was achieved. As of June 30, 1999, the Company's Advisor holds
approximately 3.5% of the outstanding shares of the Company. For the six month
period ended June 30, 1999, cash flow from operations of $11,486,000 was
sufficient to pay quarterly dividends of $8,684,000 and pay scheduled mortgage
principal installments of $2,053,000.
During 1999, the Company has used $29,105,000 for the acquisition of
real estate and an interest in an equity investment. The properties acquired are
net leased to Humco, PSC Scanning, Bolder Technology and Northstar and Compucom.
The Compucom transaction was structured through an ownership interest in a
limited liability company that is owned jointly with two affiliates and
accounted for under the equity method.
-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 is evaluating potential real estate investment and has
sufficient cash reserves and borrowing capacity from several unleveraged
properties to complete additional purchases. The Company is also negotiating a
credit agreement which would provide a line of credit that could be used to
purchase properties on a transitional basis so that any desired mortgage
financing could be obtained subsequent to purchase of property. There is no
assurance that the line of credit will be obtained. A substantial portion of the
Company's current cash balances are available for funding additional real estate
investments.
The Company's financing activities included paying off a scheduled
balloon payment on a mortgage loan of $5,413,000 in January 1999 and obtaining
$13,200,000 of limited recourse mortgage financing on newly purchased
properties. A mortgage loan on the Company's portfolio of six Wal-Mart Stores,
Inc. retail properties that had been scheduled to mature on January 1, 1999 has
been extended through October 1, 1999. The Company is in discussions with the
lender to extend or refinance the Wal-Mart loan, and management believes that it
is probable that such an extension of refinancing can be completed. As of June
30, 1999, the Wal-Mart loan had an outstanding balance of $6,844,000.
YEAR 2000 ISSUES:
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 properly process dates. This shortcoming could result in
the failure of major systems or miscalculations causing major disruptions to
business operations. The Company has no information technology systems of its
own, but is dependent upon systems maintained by an affiliate of its Advisor,
and certain other third parties including banks and its transfer agent.
The Company and its affiliates have been evaluating their readiness
relating to Year 2000 issues since 1998. The affiliates' core information
technology systems used in administering the Company's business operations have
been upgraded or replaced, as needed, to become Year 2000 compliant. These
systems include desktop computers, network servers, operating systems and
applications software. A new, compliant, integrated accounting and asset
management system is currently being installed and is expected to be functional
in the fourth quarter of this year. Compliance of these systems with Year 2000
requirements has been determined through a combination of internal testing,
where feasible, and vendor representations. Non-core information technology
systems are currently being reviewed for compliance with Year 2000 requirements.
Such systems, although not critical to the Company's business operations, are
expected to be substantially upgraded or replaced before the end of 1999.
The Company has contacted and is evaluating documentation from its
critical third party vendors and suppliers including banks, transfer agents and
telecommunications service providers regarding their Year 2000 compliance. The
responses received have generally been positive although the Company cannot be
assured that such providers have adequately considered the impact of Year 2000
issues on their systems.
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.
-12-
<PAGE> 14
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
Continued
The Company will continue to monitor critical third party vendors and
suppliers to determine its vulnerability to potential disruptions caused by year
2000 issues. Limited scope contingency plans are currently being developed to
address potential disruptions of a temporary nature that may affect the Company.
Because it is not possible to anticipate all of the possible disruptions that
may be caused by Year 2000 events, there can be no assurance that the Company
will not be adversely affected if such disruptions occur.
-13-
<PAGE> 15
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
PART II
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Approximately $139,015,000 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 June 30,
1999 ranged from LIBOR plus 1.625% to LIBOR plus 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 $8,336 $3,205 $3,501 $ 5,737 $11,265 $106,971 $139,015 $142,345
Weighted average
interest rate 9.26% 8.50% 8.50% 8.74% 8.81% 7.84%
Variable rate $2,154 $8,825 $4,958 $11,037 -- -- $ 26,974
</TABLE>
As of June 30, 1999, the Company had no other material
exposure to market risk.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders meeting was held on June 7, 1999, 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
Name Of Director Shares Voting Voting Yes Voting No
---------------- ------------- ---------- ---------
<S> <C> <C> <C>
William P. Carey 13,341,887 13,246,685 95,202
Ralph G. Coburn 13,341,887 13,182,793 159,094
George E. Stoddard 13,341,887 13,212,868 129,019
Charles C. Townsend, Jr. 13,341,887 13,243,725 98,162
Warren G. Wintrub 13,341,887 13,250,225 91,662
Thomas E. Zacharias 13,341,887 13,250,225 91,662
</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.
-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
8/9/99 By: /s/ John J. Park
------ ----------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
8/9/99 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 six months ended June 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,191,979
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 751,750
<CURRENT-ASSETS> 3,812,532
<PP&E> 335,173,915
<DEPRECIATION> 17,191,136
<TOTAL-ASSETS> 378,453,223
<CURRENT-LIABILITIES> 8,845,862
<BONDS> 165,988,720
0
0
<COMMON> 21,993
<OTHER-SE> 198,231,999
<TOTAL-LIABILITY-AND-EQUITY> 378,453,223
<SALES> 0
<TOTAL-REVENUES> 18,957,695
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,840,358
<LOSS-PROVISION> 854,850
<INTEREST-EXPENSE> 6,766,583
<INCOME-PRETAX> 6,407,030
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,407,030
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,407,030
<EPS-BASIC> .30
<EPS-DILUTED> .29
</TABLE>
