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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended JUNE 30, 2002
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) HAS NO SECURITIES registered on any exchanges.
CIP(R) does not have any Securities registered pursuant to Section 12(b) of the
Act.
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 13, 2002.
CIP(R) has 27,811,631 shares of common stock, $.001 par value outstanding at
August 13, 2002.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 2001
and June 30, 2002 2
Condensed Consolidated Statements of Income for the three and six
months ended June 30, 2001 and 2002 3-4
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2001 and 2002 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2002 5-6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 18
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 19
Item 6. - Exhibits and Reports on Form 8-K 19
Signatures 20
* 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
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 June 30, 2002
----------------- -------------
(Note) (Unaudited)
------------ ------------
ASSETS:
Land and buildings, net of accumulated depreciation of $26,240,326 at
December 31, 2001 and $28,897,784 at June 30, 2002 $195,962,495 $306,159,991
Net investment in direct financing leases 101,498,035 124,023,886
Real estate under construction 7,969,435 5,244,556
------------ ------------
Real estate leased to others 305,429,965 435,428,433
Assets held for sale 6,910,554 6,910,554
Equity investments 43,776,928 56,794,058
cash and cash equivalents 7,388,480 4,866,960
Other assets 5,800,715 10,816,974
------------ ------------
Total assets $369,306,642 $514,816,979
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable, net of discount
of $291,742 at June 30, 2002 $146,456,175 $200,785,250
Mortgage note payable on property held for sale 6,075,832 5,995,463
Notes payable, net of discount of $383,737 - 10,956,688
Accrued interest 874,728 1,234,472
Accounts payable and accrued expenses 1,454,040 947,400
Accounts payable to affiliates 1,898,009 2,169,691
Dividends payable 4,714,132 5,557,264
Prepaid rental income and security deposits 2,349,622 2,448,944
Other liabilities - 4,065,579
------------ ------------
Total liabilities 163,822,538 234,160,751
------------ ------------
Minority interest 7,031,014 8,719,074
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, shares issued and outstanding, $.001 par value; authorized,
40,000,000 shares; 22,994,375 and 28,673,840 shares issued and
outstanding at December 31, 2001 and June 30, 2002 22,994 28,674
Additional paid-in capital 230,880,420 306,444,320
Dividends in excess of accumulated earnings (22,897,031) (24,676,802)
Accumulated other comprehensive (loss) gain (411,420) 115,000
------------ ------------
207,594,963 281,911,192
Less, common stock in treasury at cost, 810,237 and 874,601 shares at
December 31, 2001 and June 30, 2002 (9,141,873) (9,974,038)
------------ ------------
Total shareholders' equity 198,453,090 271,937,154
------------ ------------
Total liabilities and shareholders' equity $369,306,642 $514,816,979
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the
audited consolidated financial statements at that date.
2
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenues:
Rental income $ 7,071,073 $ 8,458,535 $ 14,253,423 $ 15,100,691
Interest income from direct financing
leases 3,138,688 3,556,683 6,175,158 6,600,049
Interest and other income 245,020 25,352 352,087 61,865
------------ ------------ ------------ ------------
10,454,781 12,040,570 20,780,668 21,762,605
------------ ------------ ------------ ------------
Expenses:
Interest 3,744,068 3,671,220 7,309,105 6,710,483
Depreciation 1,351,728 1,377,167 2,656,671 2,609,247
General and administrative 819,612 1,079,751 1,554,770 1,889,598
Property expenses 1,861,850 2,354,067 3,574,814 3,853,673
Impairment loss on real estate 2,300,000 -- 2,300,000 --
------------ ------------ ------------ ------------
10,077,258 8,482,205 17,395,360 15,063,001
------------ ------------ ------------ ------------
Income from continuing operations
before minority interest, equity
investments and gains and losses 377,523 3,558,365 3,385,308 6,699,604
Minority interest in income (216,670) (456,530) (432,786) (703,070)
Income from equity investments 1,243,660 2,069,856 2,781,259 3,968,444
------------ ------------ ------------ ------------
Income from continuing operations
before gains and losses 1,404,513 5,171,691 5,733,781 9,964,978
Unrealized gain on warrants 799,070 -- 799,070 --
Unrealized loss on interest rate cap
derivative instrument -- (28,794) -- (28,794)
Reversal of unrealized gain on warrants in
connection with disposition -- -- -- (2,128,000)
Gain on sale of warrants, net -- -- -- 1,992,678
Loss on sale of real estate (38,420) -- (38,420) --
------------ ------------ ------------ ------------
Income from continuing operations 2,165,163 5,142,897 6,494,431 9,800,862
Discontinued operations:
Income from operations of discontinued
properties 3,120 5,905 6,240 7,995
Gain on sale of real estate -- 8,774 -- 8,774
------------ ------------ ------------ ------------
Income before extraordinary charge 2,168,283 5,157,576 6,500,671 9,817,631
Extraordinary charge on early extinguishment
of debt, net of
minority interest of $771,962 -- -- -- (1,314,421)
------------ ------------ ------------ ------------
Net income $ 2,168,283 $ 5,157,576 $ 6,500,671 $ 8,503,210
============ ============ ============ ============
-- continued --
3
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(continued)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
2001 2002 2001 2002
-------------- -------------- -------------- --------------
Basic earnings per share:
Income from continuing operations $ .10 $ .20 $ .29 $ .40
Discontinued operations -- -- -- --
Extraordinary charge -- -- -- (.05)
-------------- -------------- -------------- --------------
Net income $ .10 $ .20 $ .29 $ .35
============== ============== ============== ==============
Diluted earnings per share:
Income from continuing operations $ .10 $ .19 $ .29 $ .40
Discontinued operations -- -- -- --
Extraordinary charge -- -- -- (.05)
-------------- -------------- -------------- --------------
Net income $ .10 $ .19 $ .29 $ .35
============== ============== ============== ==============
Weighted average common shares
outstanding-basic 22,075,527 26,057,433 22,051,006 24,162,174
============== ============== ============== ==============
Weighted average common shares
outstanding-diluted 22,430,422 26,621,114 22,405,901 24,725,855
============== ============== ============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Net income $ 2,168,283 $ 5,157,576 $ 6,500,671 $ 8,503,210
----------- ----------- ----------- -----------
Other comprehensive (loss) income:
Change in foreign currency translation
adjustment (3,448) 671,910 (276,716) 526,420
----------- ----------- ----------- -----------
Other comprehensive (loss) income (3,448) 671,910 (276,716) 526,420
----------- ----------- ----------- -----------
Comprehensive income $ 2,164,835 $ 5,829,486 $ 6,223,955 $ 9,029,630
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
---------------------------------
2001 2002
------------ ------------
Cash flows from operating activities:
Net income $ 6,500,671 $ 8,503,210
Adjustments to reconcile net income to net cash provided by
continuing operations:
Income from discontinued operations, including gain on sale of real estate (6,240) (16,769)
Depreciation and amortization 2,767,660 2,707,442
Income from equity investments in excess of distributions received (801,190) (1,104,591)
Extraordinary charge on extinguishment of debt, net -- 1,314,421
Minority interest in income 432,786 703,070
Straight-line rent adjustments 16,713 (92,753)
Provision for uncollected rent 250,000 310,000
Unrealized gain on warrants (799,070) --
Unrealized gain on interest rate cap derivative instrument -- 28,794
Reversal of unrealized gain on warrants in connection with disposition -- 2,128,000
Gain on sale of warrants -- (1,992,678)
Loss on sale of real estate 38,420 --
Impairment loss on real estate 2,300,000 --
Issuance of shares in satisfaction of performance fees 1,397,732 1,382,063
Net change in operating assets and liabilities, net of assets and
liabilities acquired (34,294) (1,782,100)
------------ ------------
Net cash provided by continuing operations 12,063,188 12,088,109
Net cash provided by discontinued operations 6,870 9,255
------------ ------------
Net cash provided by operating activities 12,070,058 12,097,364
------------ ------------
Cash flows from investing activities:
Proceeds from sale of warrants -- 1,992,678
Proceeds from sale of real estate 605,161 301,317
Equity distributions received in excess of equity income 197,279 365,574
Payment of leasing costs -- (244,237)
Acquisition of real estate and additional capitalized costs (2,556,331) (2,553,166)
Redemption of dissenter interests with acquisition of business operations -- (1,774,385)
Costs incurred in connection with acquisition of business operations -- (615,766)
Cash acquired on acquisition of business operations -- 765,493
------------ ------------
Net cash used in investing activities (1,753,891) (1,762,492)
------------ ------------
Cash flows from financing activities:
Purchase of treasury stock (1,168,309) (1,236,704)
Repayment of mortgage payable (209,567) (33,404,478)
Payments of mortgage principal (2,296,784) (2,323,047)
Proceeds from mortgages 1,444,467 36,472,511
Proceeds from stock issuance 1,170,749 1,038,115
Distributions to minority partners (384,060) (724,689)
Contributions from minority partners 485,011 250,375
Prepayment premium on extinguishment of debt -- (2,086,383)
Payment of financing costs (66,632) (1,409,945)
Dividends paid (9,175,472) (9,439,849)
------------ ------------
Net cash used in financing activities (10,200,597) (12,864,094)
------------ ------------
Effect of exchange rate changes on cash -- 7,702
------------ ------------
Net increase (decrease) in cash and cash equivalents 115,570 (2,521,520)
Cash and cash equivalents, beginning of period 7,181,199 7,388,480
------------ ------------
Cash and cash equivalents, end of period $ 7,296,769 $ 4,866,960
============ ============
-- continued --
5
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
Noncash investing activities:
A. The purchase of Corporate Property Associates 10 Incorporated consisted
of the acquisition of certain assets and liabilities at fair value in
exchange for the issuance of shares, notes payable and a cash payment
to dissenters as follows:
Real estate assets $ 127,721,807
Equity investment in Marcourt Investments, Inc., a real estate
investment trust 11,993,899
Cash 765,493
Other assets 5,204,479
Mortgage notes payable, net of discount of $294,273 (52,077,045)
Other liabilities (5,231,182)
Minority interest (2,092,437)
-------------
Net assets acquired $ 86,285,014
=============
Shares issued $ 73,553,941
Notes payable issued, net of discount of $383,737 10,956,688
Cash paid for redemption of dissenter interests 1,774,385
-------------
Consideration paid $ 86,285,014
=============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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 accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in the United
States of America 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, 2001.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Business Combination with Corporate Property Associates 10 Incorporated:
On May 1, 2002, the Company and Corporate Property Associates 10 Incorporated
("CPA(R):10"), another real estate investment trust managed by W. P. Carey & Co.
LLC, completed a merger of CPA(R):10 with and into the Company pursuant to a
Merger Agreement dated December 14, 2001 between the companies. Under the terms
of the merger, the Company is the surviving company. The total purchase price is
$87,232,302, including transaction costs of $947,288. Pursuant to the merger,
CPA(R):10 stockholders had the option of receiving either 0.8445 of a share of
newly issued Company common stock for each CPA(R):10 common share that he or she
owned, or, upon election by the shareholders who owned shares on December 13,
2001, a promissory note bearing interest at the annual rate of 4% payable on or
before December 31, 2004 for $11.23 per share of CPA(R):10 common stock. The
exchange ratio for issuing shares of the Company to CPA(R):10 shareholders was
determined based on independent valuations of each company. Shareholders who
became shareholders of record after December 13, 2001 or those who did not vote
in favor of the merger did not have the option to receive a promissory note and
received Company common stock in the merger. At meetings of the shareholders of
both companies held on April 16, 2002, the merger was approved by more than the
requisite two-thirds majority of the outstanding shares of each company.
Shareholders holding 6,549,773 shares of CPA(R):10 common stock received
5,531,269 ($73,553,941) shares of Company common stock and shareholders
representing 1,009,833 shares of CPA(R):10 common stock elected to receive
promissory notes with a total principal amount of $11,340,425. Shareholders
holding 158,004 shares of CPA(R):10 common stock elected not to participate and
their shares were redeemed for $1,774,385.
The Company has accounted for the merger under the purchase method of accounting
(see also the Statements of Cash Flows). The purchase price has been allocated
to the assets and liabilities acquired based upon their fair market values. The
assets acquired consist primarily of commercial real estate properties net
leased to single corporate tenants and an interest in a real estate investment
trust, Marcourt Investments, Inc. ("Marcourt"), that owns property net leased to
a single tenant. The Company owned an approximate 23% interest in Marcourt prior
to the acquisition of CPA(R):10. The liabilities acquired consist primarily of
limited recourse mortgage obligations. Additionally, the Company issued notes
payable to former CPA(R):10 shareholders who elected not to receive shares of
the Company. Differences between the fair value of mortgages and notes payable
and the stated amounts of such obligations are being amortized as an adjustment
to interest expense over the remaining term of each obligation. The fair value
of real estate and equity investment was based on independent appraisals. The
fair value of mortgages and notes payable was determined by discounting the
future cash flows using market rates as of the date of the merger.
In connection with evaluating the fair value of its real estate assets, the
Company assigned a portion of the value to leases to the extent that the rents
on the acquired properties differed from the Company's estimate of fair market
rentals. The fair value attributed to leases rather than land and buildings is
being amortized over the remaining lease terms as an adjustment of rental income
or interest income from direct financing leases.
7
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 3. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
and six-month periods ended June 30, 2001 and 2002 were calculated as follows:
Three Months Ended June 30,
------------------------------------
2001 2002
-------------- --------------
Net income $ 2,168,283 $ 5,157,576
============== ==============
Weighted average shares - basic 22,075,527 26,057,433
Effect of dilutive securities: Stock warrants 354,895 563,681
-------------- --------------
Weighted average shares - diluted 22,430,422 26,621,114
============== ==============
Basic earnings per share from continuing operations $ .10 $ .20
Discontinued operations -- --
-------------- --------------
Basic earnings per share $ .10 $ .20
============== ==============
Diluted earnings per share from continuing operations $ .10 $ .19
Discontinued operations -- --
-------------- --------------
Diluted earnings per share $ .10 $ .19
============== ==============
Six Months Ended June 30,
---------------------------------
2001 2002
----------- --------------
Income before extraordinary charge $ 6,500,671 $ 9,817,631
Extraordinary charge -- (1,314,421)
----------- --------------
Net income $ 6,500,671 $ 8,503,210
=========== ==============
Weighted average shares - basic 22,051,006 24,162,174
Effect of dilutive securities: Stock warrants 354,895 563,681
----------- --------------
Weighted average shares - diluted 22,405,901 24,725,855
=========== ==============
Basic earnings per share from continuing operations $ .29 $ .40
Discontinued operations -- --
Extraordinary charge -- (.05)
----------- --------------
Basic earnings per share $ .29 $ .35
=========== ==============
Diluted earnings per share from continuing operations $ .29 $ .40
Discontinued operations -- --
Extraordinary charge -- (.05)
----------- --------------
Diluted earnings per share $ .29 $ .35
=========== ==============
Note 4. Transactions with Related Parties:
The Company's asset management and performance fees payable to its Advisor,
Carey Asset Management Corp., a wholly-owned subsidiary of W. P. Carey & Co.
LLC, are each 1/2 of 1% per annum of Average Invested Assets, as defined in the
Company's advisory agreement. The Company incurred asset management fees,
payable to its Advisor, Carey Asset Management Corp., of $678,118 and $837,207
for the three-month periods ended June 30, 2001 and 2002, respectively, and
$1,383,845 and $1,540,957 for the six-month periods ended June 30, 2001 and
2002, respectively, with performance fees in like amounts. General and
administrative expense reimbursements were $288,479 and $411,293 for the
three-month periods ended June 30, 2001 and 2002, respectively, and $589,093 and
$698,807 for the six-month periods ended June 30, 2001 and 2002, respectively.
8
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 5. 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 for the six-month periods ended June 30, 2001 and
2002 are as follows: 2001 2002
2001 2002
------------ ------------
Per Statements of Income:
Rental income from operating leases $ 14,253,423 $ 15,100,691
Interest from direct financing leases 6,175,158 6,600,049
Adjustments:
Share of leasing revenue applicable to
minority interest (881,659) (1,245,221)
Share of leasing revenue from equity
investments 6,023,676 7,481,043
------------ ------------
$ 25,570,598 $ 27,936,562
============ ============
For the six-month periods ended June 30, 2001 and 2002, the Company earned its
net lease revenues from its investments as follows:
2001 % 2002 %
----------- --- ----------- ---
Marriott International, Inc. (a) $ 2,417,920 9% $ 3,067,793 11%
Omnicom Group, Inc. 2,132,689 8 2,132,689 7
Advanced Micro Devices, Inc. (a) 1,524,097 6 1,629,469 5
Best Buy Co., Inc. (b) 1,501,203 6 1,492,100 5
Electronic Data Systems Corporation 1,194,869 5 1,369,514 5
Big V Holding Corp. 1,032,071 4 1,040,761 4
Lucent Technologies, Inc. 926,414 4 972,033 3
UTI Holdings, Inc. 642,305 2 893,077 3
Garden Ridge, Inc. 773,140 3 778,217 3
Sicor, Inc. (a) 736,368 3 736,368 3
Merit Medical Systems, Inc. 732,701 3 732,701 3
The Upper Deck Company (a) 693,023 3 726,110 3
Barnes & Noble, Inc. 713,279 3 722,688 3
Q Clubs, Inc. 697,293 3 710,098 3
Michigan Mutual Insurance Company 681,471 3 681,506 2
Compucom Systems, Inc. (a) 652,268 3 678,178 2
Del Monte Corporation (c) 643,125 2 643,125 2
Plexus Corp. 634,346 2 634,346 2
Bell Sports Corp. 573,111 2 587,536 2
Information Resources, Inc. (b) -- -- 569,704 2
Detroit Diesel Corporation 448,967 2 454,019 2
Childtime Childcare, Inc. 324,446 1 446,664 2
Other 5,895,492 23 6,237,866 23
----------- --- ----------- ---
$25,570,598 100% $27,936,562 100%
=========== === =========== ===
(a) Represents the Company's proportionate share of lease revenues
from its equity investments.
(b) Net of amounts applicable to minority interests.
(c) Represents the Company's proportionate share of lease revenues
from its equity investment in 2002.
Note 6. Equity Investments:
The Company owns a 47.3% interest in Marcourt Investments, Inc. ("Marcourt"), a
real estate investment trust which net leases 13 hotel properties to a
wholly-owned subsidiary of Marriott International, Inc. The Company also owns
interests in properties leased to corporations through equity interests in
various partnerships and limited liability companies subject to joint control.
The ownership interests range from 33.33% to 50%, and the underlying investments
are owned
9
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
with affiliates that have similar investment objectives as the Company. The
lessees are Sicor Inc., The Upper Deck Company, Advanced Micro Devices, Inc.,
Compucom Systems, Inc. and Del Monte Corporation.
Summarized financial information of the Company's equity investees is as
follows:
(in thousands) December 31, 2001 June 30, 2002
----------------- -------------
Assets (primarily real estate) $347,429 $345,510
Liabilities (primarily mortgage notes payable) 220,750 216,769
Shareholders' and members' equity 126,679 128,741
Six Months Ended June 30,
--------------------------
2001 2002
------- -------
Revenues (primarily rental income and interest income from
direct financing leases) $19,623 $21,809
Expenses (primarily interest on mortgage and depreciation) 10,127 10,724
------- -------
Net income $ 9,496 $11,085
======= =======
Note 7. Sale of Securities and Real Estate and Assets Held for Sale:
In June 1993, the Company was granted warrants to purchase 194,356 shares of
common stock of Merit Medical Systems, Inc. ("Merit Medical") at an exercise
price of $4.87 (as adjusted for subsequent stock split) in connection with
structuring a net lease with Merit Medical. In March 2002, the Company sold its
warrant position in Merit Medical and realized a gain on sale of $1,992,678.
Changes in the fair value of the warrants had been recognized for financial
statement purposes in the determination of income. In connection with the sale,
the Company reversed the unrealized appreciation on the Merit Medical warrants
of $2,128,000, representing the cumulative fair value that had been recognized
in the determination of income in prior periods.
In May 2002, the Company sold a property in Little Rock, Arkansas leased to
Affiliated Foods Southwest, Inc. and a portion of excess land at a property in
Tucson, Arizona. The Company received sale proceeds of $301,317 and recognized a
gain on sale of $8,774. The operations of the Little Rock property and the gain
on sale have been included in income from discontinued operations in the
accompanying condensed consolidated financial statements for the three-month and
six-month periods ended June 30, 2001 and 2002.
The Company owns a property in Farmingdale, New York which is held for sale with
a carrying value of $6,910,554 as of December 31, 2001 and June 30, 2002. The
results of operations for the Farmingdale property for the six months ended June
30, 2001 and 2002 reflected net losses of $2,139,507 and $264,569, respectively.
The results for the six months ended June 30, 2001 included an impairment loss
on real estate of $2,300,000. As a result of classifying the property as an
asset held for sale, no depreciation expense was incurred in 2002. If
depreciation expense had been incurred, such amount would have been $17,705. The
Company expects to dispose of the property within the next twelve months.
Note 8. Interest Rate Cap Agreement:
In connection with extending a mortgage loan in June 2002, the Company was
required to enter into a separate interest rate cap agreement, a derivative
financial instrument, with a notional amount of $6,750,000, a strike of 8%,
based on the one-month London Inter-Bank Offered Rate and a maturity of April 1,
2005.
The Company paid $36,000 to enter into the agreement, and the cost will be
charged to interest expense over the life of the contract. To determine the fair
values of this derivative instrument, the Company uses an options pricing model
and assumptions that are based on market conditions and risks existing at each
balance sheet date. The estimated fair value of the interest rate cap is $7,206
and is included in other assets in the accompanying condensed consolidated
financial statements. The interest rate cap is marked to market but did not meet
the criteria required to qualify for hedge accounting and, therefore, the change
in the fair value of the interest rate cap of $28,794 has been charged to
earnings for the periods ended June 30, 2002.
10
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 9. Pro Forma Financial Information:
The following consolidated pro forma financial information has been presented as
if the merger of Corporate Property Associates 10 Incorporated into the Company
had occurred on January 1, 2001 and 2002 for the three-month and six-month
periods ended June 30, 2001 and 2002, respectively. In Management's opinion, all
adjustments necessary to reflect the merger and the related issuance of common
stock of the Company have been made. The pro forma financial information is not
necessarily indicative of what the actual results would have been, nor does it
purport to represent the results of operations for future periods.
(in thousands, except share and per share amounts)
Three Months Ended June 30,
-----------------------------------
2001 2002
---------- ----------
Pro forma total revenues $ 14,519 $ 13,188
Pro forma net income $ 4,108 $ 5,560
Pro forma earnings per share:
Basic $ .15 $ .20
Diluted $ .15 $ .20
Six Months Ended June 30,
-----------------------------
2001 2002
------- -------
Pro forma total revenues $28,774 $26,481
Pro forma income before extraordinary charge $10,601 12,305
Pro forma net income $10,601 10,991
Pro forma earnings per share:
Basic $ .38 $ .40
Diluted $ .38 $ .39
The pro forma net income and earnings per share figures for both the three-month
and six-month periods ended June 30, 2001 presented above include a
non-recurring, non-cash impairment loss on real estate of $2,300,000, an
unrealized gain on warrants of $779,070 and a loss on sale of real estate of
$38,420. The pro forma net income and earnings per share for the six-month
period ended June 30, 2002 include a reversal of unrealized gain on warrants of
$2,128,000, a realized gain on sale of warrants of $1,992,678 and an
extraordinary charge on early extinguishment of debt of $1,314,421, net of
minority interest.
Note 10. Extraordinary Charge on Early Extinguishment of Debt:
The Company and Corporate Property Associates 12 Incorporated ("CPA(R):12"), an
affiliate, own 63% and 37% ownership interests, respectively, in a general
partnership that net leases 12 properties to Best Buy Co., Inc. ("Best Buy")
under a master lease.
In February 2002, the Best Buy general partnership paid off an existing limited
recourse mortgage loan of $25,743,178 and paid a prepayment premium of
$2,086,383 in connection with retiring the loan. As a result of paying the
premium, the Company incurred an extraordinary charge on the early
extinguishment of debt of $1,314,421, which is net of CPA(R):12's minority
interest of $771,962. The retired loan provided for monthly payments of interest
and principal of $291,290 at an annual interest rate of 9.01%. The general
partnership obtained a new limited recourse mortgage loan of $28,500,000 which
provides for monthly payments of interest and principal of $210,427 at an annual
interest rate of 7.49%. The loan matures in May 2012 at which time a balloon
payment is scheduled.
Note 11. Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
11
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
the Company's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and are
amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on the Company's financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on the Company's
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the Company's commitment to a plan of disposition after
the date of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, the Company will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented. The Company has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The Company does not expect SFAS No. 146 to have a material effect on the
Company's financial statements.
12
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Carey Institutional
Properties Incorporated's ("CIP(R)") condensed consolidated financial statements
and notes thereto as of June 30, 2002 included in this quarterly report and
CIP(R)'s Annual Report on Form 10-K for the year ended December 31, 2001. 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 CIP(R) to be materially different
from the results of operations or plans expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by CIP(R) that the results or conditions described in such
statements or the objectives and plans of CIP(R) will be achieved. Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2001 provides a
description of CIP(R)'s business objectives, acquisition and financing
strategies and risk factors which could affect future operating results.
Certain accounting policies are critical to the understanding of CIP(R)'s
financial condition and results of operations. Management believes that an
understanding of financial condition and results of operations requires an
understanding of accounting policies relating to the use of estimates.
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, CIP(R) must assess its ability to collect rent and
other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because CIP(R)'s real estate operations have a limited
number of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods.
CIP(R) also uses estimates and judgments when evaluating whether long-lived
assets are impaired. When events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, Management performs
projections of undiscounted cash flows, and if such cash flows are insufficient,
the assets are adjusted (i.e., written down) to their estimated fair value. An
analysis of whether a real estate asset has been impaired requires Management to
make its best estimate of market rents and residual values. In its evaluations,
CIP(R) obtains market information from outside sources; however, such
information requires Management to determine whether the information received is
appropriate to the circumstances. Depending on the assumptions made and
estimates used, the future cash flow projected in the evaluation of long-lived
assets can vary within a range of outcomes. CIP(R) will consider the likelihood
of possible outcomes in determining the best possible estimate of future cash
flows. Because CIP(R)'s properties are leased to single tenants, CIP(R) is more
likely to incur significant writedowns when circumstances affecting a tenant
deteriorate because of the possibility that a property will be vacated in its
entirety. Therefore, this risk is different than the risks related to leasing
and managing multi-tenant properties. Events or changes in circumstances can
result in further writedowns and impact the gain or loss ultimately realized
upon sale of the asset.
CIP(R) recognizes rental income from sales overrides when reported by lessees,
that is, after the level of sales requiring a rental payment to CIP(R) is
reached.
CIP(R) and affiliated REITs are investors in certain real estate ventures.
Certain of the investments are held through incorporated or unincorporated
jointly-held entities and certain investments are held directly as tenants in
common. Substantially all of these investments represent jointly purchased
properties which were net leased to a single tenant and were structured to
provide diversification and reduce concentration of a risk from a single lessee
for CIP(R) and the affiliated REIT. The placement of an investment in a
jointly-held entity or tenancy in common requires the approval of CIP(R)'s
Independent Directors. All of the jointly held investments are structured so
that CIP(R) and the affiliated REIT contribute equity, receive distributions and
are allocated profit or loss in amounts that are proportional to their ownership
interests. The presentation of these jointly-held investments and their related
results in the accompanying condensed consolidated financial statements is
determined based on factors such as controlling interest, significant influence
and whether either party has the ability to make independent decisions. All of
the jointly-held investments are subject to contractual agreements.
13
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CIP(R) classifies its directly-owned leased assets for financial reporting
purposes as either real estate leased under the operating method or net
investment in direct financing leases based on several criteria, including, but
not limited to, estimates of the remaining economic life of the leased assets
and the calculation of the present value of future minimum rents. In determining
the classification of a lease, CIP(R) uses estimates of remaining economic life
provided by independent appraisals of the leased assets. The calculation of the
present value of future minimum rents includes determining a lease's implicit
interest rate which requires an estimate of the residual value of leased assets
as of the end of the noncancellable lease term. Different estimates of residual
value result in different implicit interest rates and could possibly affect the
financial reporting classification of leased assets.
RESULTS OF OPERATIONS:
Effective May 1, 2002, CIP(R) acquired the business operations of an affiliated
real estate investment trust, Corporate Property Associates 10 Incorporated
("CPA(R):10"), through a merger approved by the shareholders of both companies
in April 2002. CPA(R):10's operations consisted of one business segment
comprised of the investment in and the leasing of industrial and commercial real
estate. As a result of the merger, CIP(R) has increased its asset base and
expanded its real estate portfolio by acquiring interests in 45 properties with
a fair value of $139,716,000 and has assumed 17 leases with 14 tenants. Such
real estate was encumbered by limited recourse mortgage debt with a fair value
of $52,077,000 as of the date of acquisition. As a result of the merger with
CPA(R):10, CIP(R)'s net income for the three-month and six-month periods ended
June 30, 2002 is not directly comparable to the three-month and six-month
periods ended June 30, 2001.
Net income for the three-month and six-month periods ended June 30, 2002
increased by $2,989,000 and $2,003,000, respectively, as compared with the
three-month and six-month periods ended June 30, 2001. Income from continuing
operations before gains and excluding the effect of a $2,300,000 noncash
impairment loss in 2001 increased $1,467,000 and $1,931,000 for the three-month
and six-month periods, respectively. The increases are primarily due to
increases in lease revenues and income from equity investments and a decrease in
interest expense which was partially offset by increases in general and
administrative and property expenses. The results of a property disposed during
the six-month period ended June 30, 2002 have been classified as a discontinued
operation. The effect of this disposal did not have a material impact on
earnings.
Of the increase in lease revenues (rental income and interest income from direct
financing leases) for both the three-month and six-month periods of $1,805,000
and $1,272,000, respectively, approximately $2,516,000 was due to the
acquisition of CPA(R):10's real estate portfolio of interests in 45 properties.
Lease revenues also benefited from the completion of build-to-suit properties
leased to UTI Holdings, Inc. placed into service in April 2001 and a hotel in
Toulouse, France in February 2002. The increase in these lease revenues was
offset by the reduction in revenues following the September 2001 sale of six
retail stores leased to Wal-Mart Stores, Inc. and the vacating of two properties
formerly leased to Waban, Inc. and Bolder Technologies Corporation, which will
result in an annual reduction of lease revenues of $2,799,000.
The increase in income from equity investments for both the three-month and
six-month periods was due to the increase in CIP(R)'s ownership interest in
Marcourt Investments, Inc. As a result of the merger, CIP(R)'s investment in
Marcourt increased to 47.33% from 23.67%. Income from equity investments also
increased due to the reclassification of CIP(R)'s investment in the Del Monte
Corporation properties in October 2001 when ownership of the properties were
transferred to a partnership and a jointly-controlled tenancy-in-common that
CIP(R) owns with an affiliate. The Del Monte reclassification has no effect on
net income; however, CIP(R) now reports its share of net income from the equity
investment in its financial statements rather than reporting the proportionate
share of underlying revenues and expenses. The Del Monte reclassification
increased income from equity investments for the current three-month and
six-month periods by $139,000 and $276,000.
Interest expense decreased for both the three-month and six-month periods
primarily as a result of the payoff of mortgage loans on the Wal-Mart Stores,
Inc. in September 2001 in connection with the sale of the Wal-Mart properties
and the satisfaction of loans on the Superior Telecommunications, Inc. and Bell
Sports Corp. properties since September 2001. In addition, the continuing
amortization of principal on CIP(R)'s existing mortgage obligations and lower
interest on its variable rate loans contributed to a reduction of interest
expense. Such decreases were offset by approximately $680,000 of interest
expense from existing mortgages on the properties acquired from CPA(R):10.
14
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
General and administrative expense for both the three-month and six-month
periods ended June 30, 2002 increased primarily as a result of the merger.
Certain expenses, such as transfer agent and printing expenses, increased as a
portion of such costs are based on the number of shareholders, and other
expenses increased as a result of the increase in CIP(R)'s asset base, such as
state level income and franchise taxes. The merger also resulted in an increase
in property expenses caused by an increase in asset management fees and
performance fees. The fees are based on the appraised value of CIP(R)'s real
estate assets (including equity investments). As a result of the acquisition of
CPA(R):10's real estate assets, the appraised value of CIP(R)'s real estate
assets increased by approximately 29%. For the current three-month and six-month
periods, the increase in the asset-based fees from the newly-acquired assets was
approximately $267,000.
CIP(R)'s extraordinary charge on the extinguishment of debt was due to a
prepayment premium incurred in connection with paying off the existing mortgage
loan on the Best Buy Co., Inc. ("Best Buy") properties. In connection with the
refinancing of the Best Buy properties, annual debt service will decrease by
$970,000. CIP(R)'s share of the increase in annual cash flows from the Best Buy
properties is $611,000.
FINANCIAL CONDITION
Cash flows from operations of $12,097,000 and equity investments of $366,000
were sufficient to fund dividends to shareholders of $9,440,000, pay scheduled
mortgage principal payment installments of $2,323,000 and fund distributions to
minority partners of $725,000. CIP(R) projects that it will have sufficient cash
flow to meet its cash flow objectives.
In addition to issuing approximately 5,531,000 shares of common stock to acquire
the business operations of CPA(R):10, CIP(R)'s investing activities for the six
months ended June 30, 2002 included using $2,553,000 to fund construction of an
expansion at its hotel property in Toulouse, France which is scheduled to be
completed in September 2002, and other additional capitalized real estate costs
at existing properties. A final funding for completion of an expansion of the
Holiday Inn, Toulouse property is estimated to amount to approximately $304,000.
As the result of selling its warrant position in Merit Medical Systems, Inc,
CIP(R) received $1,993,000 in cash. CIP(R) used $616,000 to pay costs related to
the merger with CPA(R):10 and the related acquisition of CPA(R):10's assets and
liabilities. As a result of the merger with CPA(R):10, CIP(R) acquired $765,000
of cash and used $1,774,000 to satisfy the interests of certain CPA(R):10
shareholders who were dissenters of CIP(R)'s acquisition of CPA(R):10. Costs to
complete the retrofit of the vacant Austin, Texas facility are being evaluated
and are estimated to be in excess of $750,000.
In addition to the payment of dividends and scheduled principal mortgage
payments, CIP(R)'s financing activities for the six months ended June 30, 2002
include obtaining mortgage proceeds of $36,473,000 from refinancing the mortgage
loans on properties leased to Best Buy and Plexus Corp. and advances on a
construction loan for the completion of the Toulouse hotel expansion. A portion
of the mortgage proceeds obtained was used to pay off $29,762,000 of existing
loans on the Best Buy and Plexus properties in connection with the refinancing
of these loans. CIP(R) also used $3,642,000 to pay a scheduled balloon payment
on a loan for a property leased to Bell Sports Corp. In connection with the Best
Buy mortgage loan prepayment, CIP(R) incurred a $2,086,000 prepayment penalty.
As a result of refinancing the loan on the Best Buy properties annual cash flow
will increase by $611,000 (net of the amount distributable to the minority owner
interest) and the annual interest rate decreased to 7.49% from 9.01%. The new
$28,500,000 loan on the Best Buy properties will mature in 2012. CIP(R)
successfully negotiated a two-year extension through March 2004 on a $7,700,000
loan on a property leased to Lucent Technologies, Inc. and which was initially
scheduled to mature in April 2002. A balloon payment of $1,880,000 on a loan for
a property leased to Petsmart, Inc. is scheduled for payment in November 2002.
CIP(R) expects to refinance the loan but has sufficient cash resources to pay it
off.
In connection with the merger with CPA(R):10, each shareholder of CPA(R):10 that
elected to receive shares received 0.8445 of newly issued CIP(R) common stock
for every share of CPA(R):10 that he or she owned. Approximately 5,531,000
(totaling approximately $73,554,000) new shares of CIP(R) were issued which
represent approximately 25% of the ownership of CIP(R) as of the effective date
of the merger, May 1, 2002. Approximately 13% of CPA(R):10's shareholders did
not elect to receive shares of CIP(R) and were issued promissory notes with a
face value of $11.23 for each share of CPA(R):10 that he or she owned. As a
result, CIP(R) has issued promissory notes of with a total principal amount of
$11,340,000. The notes bear interest at an annual rate of 4% and will be payable
by no later than December 31, 2004. As a result, CIP(R) will incur annual
interest charges of approximately $455,000 until the notes are paid off. CIP(R)
expects to be able to meet its interest payment obligation but does not have
sufficient cash reserves to pay off the notes when they mature. If CIP(R) is
unable to pay off the notes from cash generated from its operations, it will
need to assess whether it
15
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
can obtain the necessary funds. The alternatives for raising the necessary cash
include, but are not limited to, placing mortgage debt on unencumbered
properties, refinancing existing limited recourse mortgage loans, obtaining
unsecured debt or selling properties.
CIP(R) and certain affiliates are currently negotiating with a single lender to
obtain limited recourse mortgage financing on currently unencumbered properties
or refinance existing mortgage loans on several leased properties. In the event
the negotiations are successful, the lender will pool the loans and place them
in a trust that will sell the interests as collateralized mortgage obligations
("CMO") in a private placement to institutional investors. The sole assets of
the trust would consist of the loans from CIP(R) and its affiliates. CIP(R) and
its affiliates believe that the ability to securitize its mortgage obligations
in a CMO pool facilitates placement of mortgage financing on a wider range of
properties including, but not limited to, supermarkets, movie theaters and
health clubs and at more favorable interest rates. None of the loans will be
cross-collateralized nor include cross-default provisions.
As a condition of pooling the loans, CIP(R) and its affiliates would acquire a
separate class of interests in the trust (the "CPA(R) Interests"). Distributions
to the CPA(R) Interests would be subordinate to all ownership interests in the
trust and payable only when all other distributions are current. The ability to
pay distributions to the CPA(R) Interests may be affected by defaults on any of
the loans resulting from the nonpayment of rent by lessees. If there are no or
few defaults, ownership of the subordinated CPA(R) Interests may provide
additional income to CIP(R). The sale of the loans and related formation of the
trust is currently scheduled for the third quarter; however, there is no
assurance that the contemplated transaction will be completed.
In connection with extending a mortgage loan with a variable interest rate,
CIP(R) was required to enter into a separate interest rate cap agreement with a
notional amount of $6,750,000 and a strike of 8%. An interest rate cap agreement
is a derivative financial instrument designed to hedge interest risk on variable
interest debt. Approximately 7% of CIP(R)'s outstanding debt is variable rate
and the use of derivative financial instruments to hedge interest rate risk is
not currently significant to CIP(R)'s risk management.
A summary of CIP(R)'s contractual obligations and commitments is as follows:
(in thousands) Total 2002 2003 2004 2005 2006 Thereafter
-------- -------- -------- -------- -------- -------- ----------
Obligations:
Limited recourse mortgage notes
payable $207,072 $ 11,113 $ 20,020 $ 17,562 $ 14,076 $ 13,524 $130,777
Unsecured notes payable 11,340 11,340
Subordinated disposition fees 778 778
Commitments:
Commitments for build-to-suit
construction 2,553 2,553
Share of minimum rents payable
under office cost-sharing
agreement 1,008 83 246 246 246 187 --
-------- -------- -------- -------- -------- -------- --------
$222,751 $ 13,749 $ 20,266 $ 29,148 $ 14,322 $ 13,711 $131,555
======== ======== ======== ======== ======== ======== ========
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangibles," which establish
accounting and reporting standards for business combinations and certain assets
and liabilities acquired in business combinations.
SFAS No. 141 requires that all business combinations and asset acquisitions be
accounted for under the purchase method, establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain. Use of the pooling-of-interests method for business combinations is no
longer permitted. The adoption of SFAS No. 141 did not have a material effect on
CIP(R)'s financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and
indefinite-lived intangible assets are no longer amortized but are tested for
16
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
impairment at least annually. Intangible assets acquired and liabilities assumed
in business combinations are only amortized if such assets and liabilities are
capable of being separated or divided and sold, transferred, licensed, rented or
exchanged or arise from contractual or legal rights (including leases), and will
be amortized over their useful lives. The adoption of SFAS No. 142 on January 1,
2002 did not have a material effect on CIP(R)'s financial statements.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets" which addresses the accounting and reporting for the
impairment and disposal of long-lived assets and supercedes SFAS No. 121 while
retaining SFAS No. 121's fundamental provisions for the recognition and
measurement of impairments. SFAS No. 144 removes goodwill from its scope,
provides for a probability-weighted cash flow estimation approach for analyzing
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration and broadens that presentation of
discontinued operations to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not have a material effect on CIP(R)'s
financial statements; however, the revenues and expenses relating to an asset
held for sale or sold will be presented as a discontinued operation for all
periods presented. The provisions of SFAS No. 144 are effective for disposal
activities initiated by the company's commitment to a plan of disposition after
the date of adoption (January 1, 2002).
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. Early adoption is permitted. Upon
adoption, CIP(R) will no longer classify gains and losses for the extinguishment
of debt as extraordinary items and will adjust comparative periods presented.
CIP(R) has not elected early adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS No.
146 also includes (1) costs related to terminating a contract that is not a
capital lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
CIP(R) does not expect SFAS No. 146 to have a material effect on its financial
statements.
17
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risks to which CIP(R) is exposed are interest rate risk
and foreign currency exchange risk.
The value of CIP(R)'s real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees and may affect CIP(R)'s ability to refinance its
debt when balloon payments are scheduled.
Approximately $197,141,000 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 annual interest rates on the fixed rate debt as of June 30, 2002
ranged from 6.95% to 10%. The annual interest rates on the variable rate debt as
of June 30, 2002 ranged from 5.84% to 9.63%.
(in thousands) 2002 2003 2004 2005 2006 Thereafter Total Fair Value
-------- -------- -------- -------- -------- ---------- -------- ----------
Fixed rate debt $ 2,217 $ 19,735 $ 25,859 $ 13,906 $ 13,330 $122,094 $197,141 $197,469
Weighted average
interest rate 8.56% 9.13% 7.03% 8.93% 7.17% 7.47%
Variable rate debt $ 8,896 $ 285 $ 3,043 $ 170 $ 194 $ 8,683 $ 21,271 $ 21,271
CIP(R) has one interest rate cap agreement contract, a derivative financial
instrument, with a notional amount of $6,750,000, and a strike of 8% based on
the one-month London Inter-Bank Offered Rate. The use of derivative financial
instruments is not currently significant to CIP(R)'s risk management.
CIP(R) has foreign operations. Accordingly, CIP(R) is subject to foreign
currency exchange risk from the effects of exchange rate movements of foreign
currencies and this may affect future costs and cash flows; however, exchange
rate movements to date have not had a significant effect on CIP(R)'s financial
position or results of operations. To date we have not entered into any foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
18
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 16, 2002, a special meeting of shareholders of CIP(R) was held for the
sole purpose of approving a merger between CIP(R) and Corporate Property
Associates 10 Incorporated ("CPA(R):10"), another non-traded REIT managed by the
Company's Advisor, whereby CIP(R) would be the surviving company. Holders of
16,075,000 shares (72%) of CIP(R) voted in favor of the merger, holders of
514,700 shares (2%) voted against the merger and holders of 5,607,000 shares
(26%) abstained from voting. Holders of more than two-thirds of the outstanding
shares of CIP(R) were required to approve the merger. At a meeting held on the
same day, the shareholders of CPA(R):10 also approved the merger. The merger was
consummated on May 1, 2002.
An annual Shareholders meeting was held on June 11, 2002, 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:
Name Of Director Total Shares Voting Shares Voting Yes Shares Voting No Shares Abstaining
---------------- ------------------- ----------------- ---------------- -----------------
William P. Carey 11,516,371 11,450,078 7,543 58,750
Francis X. Diebold 11,516,371 11,448,621 9,000 58,750
William Ruder 11,516,371 11,411,263 46,358 58,750
George E. Stoddard 11,516,371 11,397,153 60,468 58,750
Ralph F. Verni 11,516,371 11,457,621 -- 58,750
Warren G. Wintrub 11,516,371 11,455,194 2,427 58,750
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Chief Executive Officer's Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended June 30, 2002, the Company filed Report on
Form 8-K, dated May 15, 2002, to report Acquisition of Assets and which was
amended in Report on Form 8-K/A, Amendment No. 1 to Form 8-K, dated June 26,
2002.
19
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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
8/13/02 By: /s/ John J. Park
- ------- ----------------------------
Date John J. Park
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
8/13/02 By: /s/ Claude Fernandez
- ------- ----------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
20