<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 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 November 9, 1999.
21,830,496 shares of common stock, $.001 par value outstanding at
November 9, 1999.
<PAGE> 2
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
Page No.
--------
PART I
<S> <C>
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 1998
and September 30, 1999 2
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 1998 and 1999 3
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 14
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 15
Item 6. - Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
* The summarized financial information contained herein is unaudited; however,
in the opinion of management, all adjustments necessary for a fair presentation
of such financial information have been included.
-1-
<PAGE> 3
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
(Note) (Unaudited)
ASSETS:
<S> <C> <C>
Land and buildings,
net of accumulated depreciation of
$14,974,151 at December 31, 1998 and
$18,350,154 at September 30, 1999 $203,547,846 $221,573,115
Net investment in direct financing leases 94,473,412 94,902,729
Equity investments 32,749,198 38,671,922
Assets held for sale 909,375
Cash and cash equivalents 36,787,777 19,318,274
Other assets 4,517,389 3,763,029
------------ ------------
Total assets $372,075,622 $379,138,444
============ ============
LIABILITIES:
Limited recourse mortgage notes payable $160,255,378 $164,922,033
Accrued interest payable 1,088,678 1,056,274
Accounts payable and accrued expenses 769,381 788,624
Accounts payable to affiliates 10,565,418 1,726,704
Dividends payable 4,409,132 4,515,232
Prepaid rental income and security deposits 862,282 1,000,487
------------ ------------
Total liabilities 177,950,269 174,009,354
------------ ------------
Minority interest 5,233,926 5,574,096
------------ ------------
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 22,103,025 shares at September 30, 1999 21,046 22,103
Additional paid-in capital 205,320,138 219,266,058
Dividends in excess of accumulated earnings (13,718,867) (16,336,640)
Accumulated other comprehensive income (loss) 121,335 (59,375)
------------ ------------
191,743,652 202,892,146
Less, common stock in treasury, at cost, 287,305
shares at December 31, 1998 and
337,167 shares at September 30, 1999 (2,852,225) (3,337,152)
------------ ------------
Total shareholders' equity 188,891,427 199,554,994
------------ ------------
Total liabilities and
shareholders' equity $372,075,622 $379,138,444
============ ============
</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 Nine Months Ended
September 30, 1998 September 30, 1999 September 30, 1998 September 30, 1999
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 5,478,533 $ 6,581,614 $16,613,239 $19,456,078
Interest from direct
financing leases 2,760,900 2,790,685 8,328,824 8,339,548
Interest and other income 463,105 249,849 870,536 784,217
Lease termination income 1,250,000 1,250,000
----------- ----------- ----------- -----------
8,702,538 10,872,148 25,812,599 29,829,843
----------- ----------- ----------- -----------
Expenses:
Interest 3,343,336 3,524,072 10,256,561 10,290,655
Depreciation and amortization 906,159 1,248,028 2,725,375 3,606,780
General and administrative 765,281 544,719 1,926,327 2,059,794
Property expenses 1,461,914 1,756,473 4,199,033 5,111,179
Writedown to fair value 386,954 853,629
----------- ----------- ----------- -----------
6,476,690 7,460,246 19,107,296 21,922,037
----------- ---------- ----------- -----------
Income before minority
interest and income from
equity investments 2,225,848 3,411,902 6,705,303 7,907,806
Minority interest in income (203,972) (221,561) (605,361) (634,102)
----------- ----------- ----------- -----------
Income before income
from equity investments 2,021,876 3,190,341 6,099,942 7,273,704
Income from equity
investments 759,007 1,065,905 2,483,739 3,389,572
----------- ----------- ---------- ----------
Net income $ 2,780,883 $ 4,256,246 $ 8,583,681 $10,663,276
=========== =========== =========== ===========
Basic earnings per share: $.14 $.20 $.47 $.49
======= ====== ====== =====
Diluted earnings per share: $.14 $.19 $.46 $.49
======= ====== ====== =====
Weighted average common
shares outstanding-basic 20,304,615 21,745,143 18,462,871 21,618,801
========== ========== ========== ==========
Weighted average common
shares outstanding-diluted 20,570,370 22,132,511 18,728,626 21,970,674
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE> 5
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1999 September 30, 1998 September 30, 1999
<S> <C> <C> <C> <C>
Net income $ 2,780,883 $ 4,256,246 $ 8,583,681 $10,663,276
Other comprehensive
income (loss):
Change in unrealized
appreciation (depreciation),
marketable securities
during the period (1,034,907) 249,255 (672,989) (180,710)
----------- ----------- ----------- ----------
Comprehensive income $ 1,745,976 $ 4,505,501 $ 7,910,692 $10,482,566
=========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE> 6
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,583,681 $ 10,663,276
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,725,375 3,606,780
Income from equity investments in excess of dividends
and distributions received (687,959) (288,550)
Minority interest in income 605,361 634,102
Straight-line rent adjustments and other
noncash rent adjustments (505,018) (550,404)
Provision for uncollected rent 341,572 623,294
Issuance of stock in satisfaction of current year's
performance fees 1,282,459
Writedown to fair value 853,629
Net change in operating assets and liabilities 1,972,903 1,480,316
--------- ---------
Net cash provided by operating activities 13,035,915 18,304,902
---------- ----------
Cash flows from investing activities:
Purchase of real estate and additional capitalized costs (17,969,920) (29,104,790)
Proceeds from sale of real estate 218,250
----------- ----------
Net cash used in investing activities (17,969,920) (28,886,540)
----------- -----------
Cash flows from financing activities:
Purchases of treasury stock (434,949) (484,927)
Prepayment of mortgage payable (5,690,312) (5,413,727)
Proceeds from mortgages 13,200,000
Proceeds from stock issuance, net of costs 41,749,729 2,831,389
Payments of mortgage principal (2,916,496) (3,119,618)
Deferred financing costs (432,101)
Distributions to minority partners (281,435) (293,932)
Dividends paid (10,796,111) (13,174,949)
----------- -------------
Net cash provided by (used in) financing activities 21,630,426 (6,887,865)
---------- -------------
Net increase (decrease) in cash and cash equivalents 16,696,421 (17,469,503)
Cash and cash equivalents, beginning of period 17,331,710 36,787,777
---------- -------------
Cash and cash equivalents, end of period $ 34,028,131 $ 19,318,274
============ ==============
Supplemental disclosure of cash flows information:
Interest paid $ 10,170,616 $ 10,323,059
============ =============
Noncash operating and financing activities:
Issuance of common stock to Advisor in satisfaction
of performance fee expense (including $1,282,459
incurred in 1999) $ 11,115,588
=============
</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 nine-month periods ended September 30, 1998 and 1999 were
calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998 September 30, 1999
<S> <C> <C>
Net income $ 2,780,883 $ 4,256,246
=========== ===========
Weighted average shares - basic 20,304,615 21,745,143
Effect of dilutive securities:
Stock warrants 265,755 387,368
---------- ----------
Weighted average shares - diluted 20,570,370 22,132,511
========== ==========
Basic earnings per share $ .14 $ .20
===== =====
Diluted earnings per share $ .14 $ .19
===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1999
<S> <C> <C>
Net income $ 8,583,681 $10,663,276
=========== ===========
Weighted average shares - basic 18,462,871 21,618,801
Effect of dilutive securities:
Stock warrants 265,755 351,873
---------- ----------
Weighted average shares - diluted 18,728,626 21,970,674
========== ==========
Basic earnings per share $ .47 $ .49
===== =====
Diluted earnings per share $ .46 $ .49
===== =====
</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 $533,755 and $668,350,
respectively, for the three month periods ended September 30, 1998 and 1999
and $1,601,250 and $1,950,817 for the nine month periods ended September 30,
1998 and 1999, respectively, with performance fees in like amounts. General
and administrative expense reimbursements were $382,701 and $161,542 for the
three months ended September 30, 1998, and 1999, respectively, and $854,265
and $645,250 for the nine months ended September 30, 1998 and 1999,
respectively.
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 97,156 shares
of common stock to the Advisor in satisfaction of the performance fee of
$1,282,459 for the six-month period ended June 30, 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. Since September 30, 1999, the Company has
issued an additional 50,633 shares in consideration of the performance fee
for the three-month period ended September 30, 1999. All shares issued in
consideration for performance fees vest ratably over five years. The Advisor
is a participant in the Company's dividend reinvestment plan. Currently, it
has opted to reinvest its dividends on its restricted shares in shares 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 $16,613,239 $19,456,078
Interest from direct financing leases 8,328,824 8,339,548
Adjustments:
Share of leasing revenue applicable
to minority interest (1,341,940) (1,336,023)
Share of leasing revenue from equity
investments 5,361,055 8,357,180
--------- ---------
$28,961,178 $34,816,783
=========== ===========
</TABLE>
For the nine-month periods ended September 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) $ 3,389,399 12% $ 3,415,813 10%
Omnicom Group, Inc. 1,363,125 5 3,198,721 9
Advanced Micro Devices, Inc. (a) 2,286,375 6
Best Buy Co., Inc. (b) 2,284,924 8 2,274,850 6
Neodata Corporation 1,764,520 6 1,769,196 5
Lucent Technologies, Inc. 1,389,621 5 1,389,621 4
Big V Holding Corp. 1,308,159 5 1,319,515 3
Garden Ridge, Inc. 1,069,596 4 1,092,959 3
Barnes & Noble, Inc. 1,033,778 4 1,047,708 3
Michigan Mutual Insurance Company 1,022,079 4 1,022,119 3
Sicor, Inc. (a) 981,750 3 1,009,039 3
The Upper Deck Company (a) 989,906 3 989,906 3
Q Clubs, Inc. 966,656 3 983,751 3
Merit Medical Systems, Inc. 977,468 3 977,468 3
Del Monte Corporation 964,688 3 964,688 3
Lincoln Technical Institute of Arizona, Inc. 905,215 3 905,215 3
Plexus Corp. 888,307 3 888,307 3
Wal-Mart Stores, Inc. 823,668 3 880,510 3
Waban, Inc./BJ's Warehouse Club 838,767 3 838,767 2
Bell Sports Corp. 798,246 3 816,050 2
Compucom Systems, Inc. (a) 656,047 2
Custom Food Products, Inc. 651,288 2 649,753 2
Detroit Diesel Corporation 633,750 2 633,750 2
Nicholson Warehouse, L.P. 603,866 2 603,896 2
GATX Logistics, Inc. 596,170 2 596,170 2
Humco Holding Group 540,244 2
Superior Telecommunications, Inc. 494,106 2 477,319 1
Childtime Childcare, Inc. 456,642 2 456,642 1
Petsmart, Inc. 369,414 1 373,839 1
Hibbett Sporting Goods, Inc. 356,838 1 368,707 1
Oshman Sporting Goods, Inc. 341,678 1 344,264 1
CalComp Technology, Inc. 334,530 1
Other 363,024 1 1,045,574 3
----------- --- ----------- ----
$28,961,178 100% $34,816,783 100%
=========== ==== =========== ===
</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 in 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 September 30, 1999
<S> <C> <C>
Assets (primarily real estate) $287,777 $324,010
Liabilities (primarily mortgage notes payable) 193,443 212,811
Shareholders' and members' equity 94,334 111,199
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1999
<S> <C> <C>
Revenues (primarily rental income and interest from
direct financing leases) $ 18,265 $ 27,250
Expenses (primarily interest on mortgage and depreciation) (9,842) (15,678)
-------- ---------
Net income $ 8,423 $ 11,572
======== =========
</TABLE>
Note 6. Assets Held for Sale
The Company and Corporate Properties Associates 10 Incorporated
("CPA(R):10"), an affiliate, are owners as tenants-in-common of properties in
Little Rock and Jonesboro, Arkansas. The Company and CPA(R):10 have entered
into agreements to sell the Little Rock and Jonesboro properties for $775,000
and $1,100,000, respectively. The properties have been vacant since the
termination of the Harvest Foods, Inc. ("Harvest") lease in March 1997.
Based on the proposed sales prices less estimated transaction costs, the
Company's 50% interest in the properties has been written down to $909,375,
an amount equal to the Company's share of anticipated net proceeds from sale,
and an impairment loss on the properties of $517,790, including $386,954 in
the current quarter, has been recognized. The Jonesboro property is subject
to a ground lease. The ground rental obligation, currently $113,450 per
year, and will be assumed by the purchaser upon completion of the sale. The
Company and CPA(R):10 also sold a property formerly leased to Harvest in
Ruston, Louisiana on July 27, 1999. In connection with the sale, the Company
received net proceeds of $218,250. Prior to the sale of the Ruston property,
the Company recognized an impairment loss of $335,839 in the first quarter of
1999.
Note 7. Lease Termination Settlement:
In January 1999, CalComp Technology, Inc. ("CalComp"), the lessee of a
property in Austin, Texas in which the Company and CPA(R):10 hold 50%
ownership interests as tenants-in-common, announced its intention to
liquidate and stopped paying its rent. In response to CalComp's action, the
Company and CPA(R):10 initiated litigation against CalComp seeking judgement
for all unpaid and future rents plus associated costs. The Company and
CPA(R):10 also entered into discussions with CalComp in order to negotiate a
settlement in recognition of the fact that it could take an extended period
to obtain a resolution to the litigation.
-9-
<PAGE> 11
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
On August 5, 1999, the Company, CPA(R):10 and CalComp agreed to a
settlement. Under the terms of the agreement, the Company and CPA(R):10
agreed to withdraw its lawsuits with prejudice and to terminate the CalComp
lease in consideration for a lump sum payment from CalComp of $2,500,000 (of
which the Company's share was $1,250,000). The Company's share of annual
cash flow (rent less mortgage debt service) from the CalComp lease was
approximately $225,000.
The limited recourse mortgage loan collateralized by the Austin property
matured in August 1999 at which time a scheduled balloon payment was due. In
October 1999, the Company used the lease termination proceeds to reduce the
outstanding balance of the loan from $1,569,153 to $319,153 and is in the
process of negotiating an agreement to extend the maturity of the loan until
August 2000.
-10-
<PAGE> 12
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following information should be read in conjunction with the Company's
condensed consolidated financial statements and notes thereto as of September
30, 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 nine-month periods ended September 30,
1999 increased by $1,475,000 and $2,080,000, respectively, as compared with the
three-month and nine-month periods ended September 30, 1998. Excluding the
effects of a nonrecurring income item of $1,250,000 relating to a lease
termination settlement and noncash charges on the writedown to fair value of
properties held for sale, the increase in income for the comparable three-month
and nine-month periods was $612,000 and $1,683,000. The increase in income was
due primarily to an increase in lease revenues (rental income and interest from
direct financing leases) and income from equity investments. The effects of
these increases were partially offset by increases in property expenses and
depreciation and amortization.
The increase in lease revenues was due to the purchases of properties in
1999 net leased to PSC Scanning, Inc., Humco Holdings, Inc., and Bolder
Technology, Inc. and the completion of a build-to-suit project in October 1998
with Omnicom Group, Inc. The increase in income from equity investments was due
to the Company's investment with two affiliates in properties net leased to
Advanced Micro Devices, Inc. and Compucom Systems, Inc. in December 1998 and
March 1999, respectively. Income from equity investments currently contributes
in excess of 25% of net income and is diversified among five investments
including net leases with Marriott International, Inc. and the Upper Deck
Company. The increase in depreciation and amortization, noncash charges, is
directly attributable to the new properties purchased in 1999 and the completion
of the Omnicom build to suit project. The increase in property expenses was due
to the increase in asset management and performance fees resulting from the
increase in the appraised value of the Company's real estate portfolio,
including equity investments, and to a lesser extent, an increase in the
provision for uncollected rents.
With the agreement to terminate the CalComp Technology, Inc. lease for a
property in Austin, Texas in consideration for $1,250,000, the Company will
assume the responsibility for the carrying costs of the property. Annual
carrying costs including insurance and real estate taxes are expected to amount
to approximately $75,000. The Company is actively seeking a new tenant for the
property. Prior to the termination of the CalComp lease, annual cash flow (rent
less mortgage debt service) from the property was approximately $225,000.
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 both its accrued and current year performance fees in shares of Company
common stock rather than cash, obligations of $11,116,000 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. For the
nine-month period ended September 30, 1999, cash flow from operations of
$18,305,000 was sufficient to pay quarterly dividends of $13,175,000 and pay
scheduled mortgage principal installments of $3,120,000.
- 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 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. With cash balances of $19,318,000 as of September 30, 1999, the
Company has cash available for investment and is continuing to evaluate
additional potential property purchases. The Company has agreements to sell two
vacant properties formerly leased to Harvest Foods, Inc. and expects to receive
proceeds from such sales of $909,000. The Company also sold a former Harvest
Foods property in July 1999 and received $218,000. Three former Harvest Foods
properties remain vacant and the Company will continue its efforts to either
sell or redevelop the properties. Since September 30, 1999 the Company has
elected to redeem its warrants in Q Clubs, Inc. for $855,000 in connection with
a change in control at that company. The Company was granted the warrants in
consideration for structuring two lease transactions with Q Clubs.
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 was
extended through October 1, 1999. The Company had been in discussions with the
lender to extend or refinance the Wal-Mart loan, however, no extension agreement
was reached. As of September 30, 1999, the Wal-Mart loan had an outstanding
balance of $6,810,000. The Company has continued to pay monthly debt service
installments on a timely basis, and the lender has not yet made a demand for
payment of the entire outstanding loan balance. The Company is continuing its
efforts to restructure the loan or obtain new financing. Because the loan is a
limited recourse obligation, the lender has recourse only to the Wal-Mart
properties and not to any other Company assets. The Company has sufficient cash
reserves to pay off the loan and may also sell the properties and use sales
proceeds to pay off the loan. The Company has reached an agreement in principle
to extend the maturity of the limited recourse mortgage loan collateralized by
the CalComp property until August 2000, and since September 30, 1999 has used
the lease termination proceeds of $1,250,000 received from CalComp to reduce the
outstanding loan balance to $319,000.
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 the accounting component is
currently functional. 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.
Management believes that substantially all costs related to Year 2000 compliance
and remediation have been incurred.
- 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 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 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.
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.
- 13 -
<PAGE> 15
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
Approximately $138,247,000 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 September 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 $7,568 $3,205 $3,501 $5,737 $11,265 $106,971 $138,247 $141,559
Weighted average
interest rate 9.33% 8.50% 8.50% 8.74% 8.81% 7.84%
Variable rate $1,855 $8,825 $4,958 $11,037 - - $26,675
</TABLE>
As of September 30, 1999, the Company had no other material exposure to market
risk.
- 14 -
<PAGE> 16
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
PART II
-------
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
During the quarter ended September 30, 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 September 30, 1998, the Company
was not required to file any reports on Form 8-K.
- 15 -
<PAGE> 17
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
11/09/99 By: /s/ John J. Park
-------- ---------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/09/99 By: /s/ Claude Fernandez
-------- ---------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,318,274
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 909,375
<CURRENT-ASSETS> 20,227,649
<PP&E> 334,825,998
<DEPRECIATION> 18,350,154
<TOTAL-ASSETS> 379,138,444
<CURRENT-LIABILITIES> 9,087,321
<BONDS> 164,922,033
0
0
<COMMON> 22,103
<OTHER-SE> 199,532,891
<TOTAL-LIABILITY-AND-EQUITY> 379,138,444
<SALES> 0
<TOTAL-REVENUES> 29,829,843
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,840,358
<LOSS-PROVISION> 1,476,923
<INTEREST-EXPENSE> 13,604,756
<INCOME-PRETAX> 10,663,276
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,663,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,663,276
<EPS-BASIC> .49
<EPS-DILUTED> .49
</TABLE>