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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 0-20016
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3602400
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|.
Registrant has no active market for its common stock as of March 20, 2003.
Non-affiliates held 25,931,478 shares as of March 25, 2003.
As of March 25, 2003, there are 27,881,085 shares of common stock of
Registrant outstanding.
CIP(R) incorporates by reference its definitive Proxy Statement with
respect to its 2003 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
PART I
Item 1. Business.
Carey Institutional Properties Incorporated ("CIP(R)") is a real estate
investment trust ("REIT") that acquires and owns commercial properties leased to
companies nationwide, primarily on a triple net basis. As of December 31, 2002,
CIP(R)'s portfolio consisted of 107 properties leased to 45 tenants and totaling
more than 10,444,000 square feet.
CIP(R)'s core investment strategy is to own and manage its portfolio of
properties leased to a variety of companies on a single tenant net lease basis,
to maximize shareholder returns. Additional properties may be bought and net
leased if appropriate opportunities arise. These leases generally place the
economic burden of ownership on the tenant by requiring them to pay the costs of
maintenance, insurance, taxes, structural repairs and other operating expenses.
CIP(R) also generally includes in its leases:
- clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index or
other indices or, when appropriate, increases tied to the
volume of sales at the property;
- covenants restricting the activity of the tenant to reduce the
risk of a change in credit quality;
- indemnification of CIP(R)for environmental and other
liabilities; and
- guarantees from parent companies or other entities.
On December 14, 2001, Corporate Property Associates 10 Incorporated
("CPA(R):10"), another real estate investment trust managed by W. P. Carey & Co.
LLC, entered into a merger agreement with CIP(R). The transaction was approved
by the holders of over two-thirds of the outstanding shares of CPA(R):10 and
CIP(R). CPA(R):10 merged with and into CIP(R) on May 1, 2002.
CIP(R) was formed as a Maryland corporation on February 15, 1991. Between August
1991 and August 1993, CIP(R) sold 14,167,581 shares of common stock for a total
of $141,675,810 in gross offering proceeds. In 1995, CIP(R)'s board of directors
authorized a private placement of common stock. CIP(R) also issued 6,250,262
shares for a total of $74,440,000 in connection with the private placement.
Through December 31, 2002, CIP(R) has also issued 1,346,431 shares through its
dividend reinvestment plan. These proceeds have been combined with limited
recourse mortgage debt to purchase CIP(R)'s property portfolio. As a REIT,
CIP(R) is not subject to federal income taxation as long as it satisfies certain
requirements relating to the nature of its income, the level of its
distributions and other factors.
Carey Asset Management Corp. provides both strategic and day-to-day management
for CIP(R), including acquisition services, research, investment analysis, asset
management, capital funding services, disposition of assets, investor relations
and administrative services. Carey Asset Management Corp. also provides office
space and other facilities for CIP(R). Carey Asset Management Corp. has
dedicated senior executives in each area of its organization so that CIP(R)
functions as a fully integrated operating company. CIP(R) pays asset management
fees to Carey Asset Management Corp. and pays certain transactional fees. CIP(R)
also reimburses Carey Asset Management Corp. for certain expenses. Carey Asset
Management Corp. also serves in this capacity for Corporate Property Associates
12 Incorporated, Corporate Property Associates 14 Incorporated and Corporate
Property Associates 15 Incorporated. Carey Asset Management Corp. is a
wholly-owned subsidiary of W. P. Carey & Co., a publicly-traded company on the
New York Stock Exchange and Pacific Exchange under the symbol "WPC."
CIP(R)'s principal executive offices are located at 50 Rockefeller Plaza, New
York, NY 10020 and its telephone number is (212) 492-1100. As of December 31,
2002, CIP(R) had no employees. An affiliate of Carey Asset Management Corp.
employs 27 individuals who perform services for CIP(R). CIP(R)'s website address
is http://www.CPA10.com.
BUSINESS OBJECTIVES AND STRATEGY
CIP(R)'s objectives are to:
- pay quarterly dividends at an increasing rate that for taxable
shareholders are partially free from current taxation;
- provide inflation protected income;
- purchase and own a diversified portfolio of net-leased real estate
that will increase in value; and
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- increase the value of its shares by increasing the equity in its
real estate by making regular mortgage principal payments.
CIP(R) seeks to achieve these objectives by purchasing and holding industrial
and commercial properties each net leased to a single corporate tenant. CIP(R)
intends its portfolio to be diversified by geography, property type and by
tenant.
DEVELOPMENTS DURING 2002
On May 1, 2002, CIP(R) and CPA(R):10 completed a merger pursuant to a Merger
Agreement dated December 14, 2001. Under the terms of the merger, CIP(R) is the
surviving company. The total purchase price was $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 CIP(R) to CPA(R):10 shareholders was determined based on
independent valuations of each company. Shareholders holding 6,513,217 shares of
CPA(R):10 common stock received 5,500,412 shares of Company common stock
($73,155,478 according to the independent appraisal performed in connection with
the transaction) and shareholders representing 1,045,315 shares of CPA(R):10
common stock elected to receive promissory notes with a total principal amount
of $11,738,888. On December 27, 2002, CIP(R) paid off the promissory notes for
$11,738,888. Shareholders holding 158,004 shares of CPA(R):10 common stock
elected not to participate and their shares were redeemed for $1,774,385.
In June 1993, the Company was granted warrants to purchase 194,356 shares of
common stock of Merit Medical Systems, Inc. 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, CIP(R) sold its warrant position in Merit
Medical for approximately $1,993,000.
In February 2002, the partnership that owns the Best Buy Co., Inc. properties
paid off an existing limited recourse mortgage loan of $25,743,178 and paid a
prepayment premium of $2,086,384 in connection with retiring the loan. 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. Corporate Property Associates 12 Incorporated ("CPA(R):12") owns a
37% interest in the partnership.
In January 2002, CIP(R) paid off an existing limited recourse mortgage loan on
its property net leased to Plexus Corp. and paid a prepayment premium of $60,050
in connection with retiring the loan. CIP(R) obtained a new limited recourse
mortgage loan of $5,500,000 which is collateralized by the property and provides
for monthly payments of principal and interest totaling $40,437 based on an
annual interest rate of 7.34%. The loan matures in February 2009, at which time
a balloon payment is scheduled.
In connection with extending a mortgage loan in June 2002, CIP(R) 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. CIP(R)
paid $36,000 to enter into the agreement.
On August 28, 2002, CIP(R) and three affiliates, W. P. Carey & Co. LLC,
Corporate Property Associates 12 Incorporated and Corporate Property Associates
14 Incorporated obtained an aggregate of approximately $172,335,000 of limited
recourse mortgage financing on 62 leased properties. The lender pooled the loans
into a trust, Carey Commercial Mortgage Trust, a non-affiliate, whose assets
consist solely of the loans and sold the loans, as collateralized mortgage
obligations in a private placement to institutional investors. CIP(R) and the
three affiliates agreed to acquire a separate class of subordinated interests in
the trust (the "CPA(R) Interests"). The amount of CPA(R) Interests acquired by
CIP(R) was proportional to the mortgage amounts obtained. CIP(R) obtained new
mortgage financing proceeds in this transaction of $83,666,787. The CPA(R)
Interests were purchased for $24,128,739 of which CIP(R)'s share was
$10,616,645, or 44%.
-2-
The principal amount of loans obtained were as follows:
Lease Obligor Loan Amount Annual Debt Service Maturity Date
- ------------- ----------- ------------------- -------------
ShopRite Supermarkets, Inc. $15,570,000 $1,380,734 July 2010 and September 2011
Garden Ridge Corporation 13,136,946 1,164,976 October 2009 and May 2010
Childtime Childcare, Inc. 11,567,709 1,025,815 January 2011 and June 2010
Merit Medical Systems, Inc. 9,180,000 814,073 October 2011
Barnes & Noble, Inc. 8,735,682 774,673 November 2009 and September 2012
Q Clubs, Inc. 7,895,224 700,142 September 2009 and December 2010
Hibbett Sporting Goods, Inc. 5,139,462 455,762 April 2010
Superior Telecommunications, Inc. 4,547,071 403,229 September 2009
UTI Holdings, Inc. 3,268,862 289,879 July 2012
Petsmart, Inc. 3,031,808 268,858 December 2009
US West Communications, Inc. 1,594,023 141,356 June 2012
----------- ----------
$83,666,787 $7,419,497
=========== ==========
All of the loans provide for payments of principal and interest at an annual
interest rate of 7.5% based on a 25-year amortization schedule. Balloon payments
are due on the maturity dates.
The loans paid off were as follows:
Lease Obligor Loan Amount Annual Debt Service Interest Rate
- ------------- ----------- ------------------- -------------
Garden Ridge Corporation $ 6,775,746 $ 817,992 8.250%
ShopRite Supermarkets, Inc. 6,721,104 755,280 9.000%
Childtime Childcare, Inc. 5,516,637 707,172 9.550%
Merit Medical Systems, Inc. 5,328,730 742,356 9.630%
Barnes & Noble, Inc. 4,788,074 642,447 8.125% and 9.625%
Hibbett Sporting Goods, Inc. 2,459,952 293,796 8.125%
Petsmart, Inc. 1,896,210 273,417 9.250%
----------- ----------
$33,486,453 $4,232,460
=========== ==========
In December 2002, CIP(R) sold a vacant property in Farmingdale, New York for
$6,743,251. The property had been leased by Waban, Inc. which vacated at the end
of its lease in the first quarter of 2001.
On October 21, 2000, CIP(R) and a joint venture partner with 65% and 35%
ownership interests, respectively, purchased property in Toulouse, France and
commenced construction of a Holiday Inn hotel and entered into a net lease with
Societe Hoteliere Tourisme Grand Noble. The first phase of construction was
completed in February 2002 and an expansion of the property was completed in
February 2003. The final funding of the second expansion was funded by the joint
venture partner. Total annual rental income from the hotel will be approximately
$1,137,000.
ACQUISITION STRATEGIES
Carey Asset Management Corp. has a well-developed process with established
procedures and systems for acquiring net leased property on behalf of CIP(R). As
a result of its reputation and experience in the industry and the contacts
maintained by its professionals, Carey Asset Management Corp. has a presence in
the net lease market that has provided it with the opportunity to invest in a
significant number of transactions on an ongoing basis. CIP(R) takes advantage
of Carey Asset Management Corp.'s presence in the net lease market to build its
portfolio. In evaluating opportunities for CIP(R), Carey Asset Management Corp.
carefully examines the credit, management and other attributes of the tenant and
the importance of the property under consideration to the tenant's operations.
Careful credit analysis is a crucial aspect of every transaction. CIP(R)
believes that Carey Asset Management Corp. has one of the most extensive
underwriting processes in the industry and has an experienced staff of
professionals involved with underwriting transactions. Carey Asset Management
Corp. seeks to identify those prospective tenants whose creditworthiness is
likely to improve over time. CIP(R) believes that the experience of Carey Asset
Management Corp.'s management in structuring sale-leaseback transactions to meet
the needs of a prospective tenant enables Carey Asset Management Corp. to obtain
a higher return for a given level of risk than would typically be available by
purchasing a property subject to an existing lease.
Carey Asset Management Corp.'s strategy in structuring its net lease investments
for CIP(R) is to:
-3-
- combine the stability and security of long-term lease
payments, including rent increases, with the appreciation
potential inherent in the ownership of real estate;
- enhance current returns by utilizing varied lease structures;
- reduce credit risk by diversifying investments by tenant, type
of facility, geographic location and tenant industry; and
- increase potential returns by obtaining equity enhancements
from the tenant when possible, such as warrants to purchase
tenant common stock. As of December 31, 2002, CIP(R) has
disposed of all warrants that it received and held no warrant
positions.
AFINANCING STRATEGIES
Consistent with its investment policies, CIP(R) uses leverage when available on
favorable terms. As of December 31, 2002, CIP(R) had approximately $251,580,000
in property level debt outstanding. These mortgages mature between the current
year and 2021 and, as of December 31, 2002, have interest rates between 5.438%
and 10%. Carey Asset Management Corp. continually seeks opportunities and
considers alternative financing techniques to finance properties not currently
subject to debt, refinance debt, reduce interest expense or improve its capital
structure.
TRANSACTION ORIGINATION
Currently, CIP(R)'s primary source of funds for property acquisitions is the
sale of owned properties and proceeds received from investors through the
Dividend Reinvestment and Share Purchase Plan. Carey Asset Management continues
to make acquisitions for CIP(R) using these funds. In analyzing potential
acquisitions, Carey Asset Management Corp. reviews and structures many aspects
of a transaction, including the tenant, the real estate and the lease, to
determine whether a potential acquisition can be structured to satisfy CIP(R)'s
acquisition criteria. The aspects of a transaction which are reviewed and
structured by Carey Asset Management Corp. include the following:
Tenant Evaluation. Carey Asset Management Corp. subjects each potential
tenant to an extensive evaluation of its credit, management, position
within its industry, operating history and profitability. Carey Asset
Management Corp. seeks tenants it believes will have stable or improving
credit. By leasing properties to these types of tenants, CIP(R) can
generally charge rent that is higher than the rent charged to tenants with
recognized credit and, thereby, enhance its current return from these
properties as compared with properties leased to companies whose credit
potential has already been recognized by the market. Furthermore, if a
tenant's credit does improve, the value of CIP(R)'s properties leased to
that tenant will likely increase (if all other factors affecting value
remain unchanged). Carey Asset Management Corp. may also seek to enhance
the likelihood of a tenant's lease obligations being satisfied, such as
through a letter of credit or a guaranty of lease obligations from the
tenant's corporate parent. This credit enhancement provides CIP(R) with
additional financial security.
Leases with Increasing Rents. Carey Asset Management Corp. seeks to
include clauses in CIP(R)'s leases that provide for increases in rent over
the term of the leases. These increases are generally tied to increases in
certain indices such as the consumer price index, in the case of retail
stores, participation in gross sales above a stated level, mandated rental
increases on specific dates and through other methods. CIP(R) seeks to
avoid entering into leases that provide for contractual reductions in
rents during their primary term (other than reductions related to
reductions in debt service).
Properties Important to Tenant Operations. Carey Asset Management Corp.,
on behalf of CIP(R), generally seeks to acquire properties with operations
that are essential or important to the ongoing operations of the tenant.
CIP(R) believes that these properties provide better protection in the
event that tenants file for bankruptcy, because leases on properties
essential or important to the operations of a bankrupt tenant are less
likely to be rejected and terminated by a bankrupt tenant. Carey Asset
Management Corp. also seeks to assess the income, cash flow and
profitability of the business conducted at the property, so that, if the
tenant is unable to operate its business, CIP(R) can either continue
operating the business conducted at the property or re-lease the property
to another entity in the industry which can operate the property
profitably.
Lease Provisions that Enhance and Protect Value. When appropriate, Carey
Asset Management Corp. attempts to include provisions in CIP(R)'s leases
that require CIP(R)'s consent to certain tenant activity or require the
tenant to satisfy certain operating tests. These provisions include, for
example, operational and financial covenants of the tenant, prohibitions
on a change in control of the tenant and indemnification from the tenant
against environmental and other contingent liabilities. Including these
provisions in its leases enables CIP(R) to protect its investment from
changes in the operating and financial characteristics of a tenant that
may impact its ability to satisfy its obligations to CIP(R) or could
reduce the value of CIP(R)'s properties.
-4-
Diversification. Carey Asset Management Corp. tries to diversify CIP(R)'s
portfolio of properties to avoid dependence on any one particular tenant,
type of facility, geographic location and tenant industry. By diversifying
its portfolio, CIP(R) reduces the adverse effect on CIP(R) of a single
under-performing investment or a downturn in any particular industry or
geographic location.
Carey Asset Management Corp. employs a variety of other strategies and practices
in connection with CIP(R)'s acquisitions. These strategies include attempting to
obtain equity enhancements in connection with transactions. Typically, these
equity enhancements involve warrants to purchase stock of the tenant to which
the property is leased or the stock of the parent of the tenant. In certain
instances, CIP(R) grants to the tenant a right to purchase the property leased
by the tenant, but generally the option purchase price will be not less than the
fair market value of the property. Carey Asset Management Corp.'s practices
include performing evaluations of the physical condition of properties and
performing environmental surveys in an attempt to determine potential
environmental liabilities associated with a property prior to its acquisition.
As a transaction is structured, it is evaluated by the Chairman of the
Investment Committee with respect to the potential tenant's credit, business
prospects, position within its industry and other characteristics important to
the long-term value of the property and the capability of the tenant to meet its
lease obligations. Before a property is acquired, the transaction is reviewed by
the Investment Committee to ensure that it satisfies CIP(R)'s investment
criteria. Aspects of the transaction that are typically reviewed by the
Investment Committee include the expected financial returns, the
creditworthiness of the tenant, the real estate characteristics and the lease
terms.
The Investment Committee is not directly involved in originating or negotiating
potential acquisitions, but instead functions as a separate and final step in
the acquisition process. Carey Asset Management Corp. places special emphasis on
having experienced individuals serve on its Investment Committee and does not
invest in a transaction unless it is approved by the Investment Committee.
CIP(R) believes that the Investment Committee review process gives it a unique,
competitive advantage over other unaffiliated net lease companies because of the
substantial experience and perspective that the Investment Committee has in
evaluating the blend of corporate credit, real estate and lease terms that
combine to make an acceptable risk.
The following people serve on the Investment Committee:
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the
CPA(R) Programs for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice
Chairman, Director and Chief Investment Officer of The
Prudential Insurance Company of America. As Chief Investment
Officer, Mr. Hoenemeyer was responsible for all of
Prudential's investments, including stocks, bonds, private
placements, real estate and mortgages.
- Nathaniel S. Coolidge previously served as Senior Vice
President - Head of Bond & Corporate Finance Department of the
John Hancock Mutual Life Insurance Company. His
responsibilities included overseeing $21 billion of Fixed
income investments for Hancock, its affiliates and outside
clients.
- Lawrence R. Klein is Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton
School. Dr. Klein has been awarded the Alfred Nobel Memorial
Prize in Economic Sciences and currently advises various
governments and government agencies.
ASSET MANAGEMENT
CIP(R) believes that effective management of its net lease assets is essential
to maintain and enhance property values. Important aspects of asset management
include restructuring transactions to meet the evolving needs of current
tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
Carey Asset Management Corp. monitors, on an ongoing basis, compliance by
tenants with their lease obligations and other factors that could affect the
financial performance of any of its properties. Monitoring involves receiving
assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the properties it occupies and confirming that appropriate
insurance coverage is being maintained by the tenant. Carey Asset Management
Corp. reviews financial statements of its tenants and undertakes regular
physical inspections of the
-5-
condition and maintenance of its properties. Additionally, Carey Asset
Management Corp. periodically analyzes each tenant's financial condition, the
industry in which each tenant operates and each tenant's relative strength in
its industry.
HOLDING PERIOD
CIP(R) intends to hold each property it acquires for an extended period.
The determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors with a view to
achieving maximum capital appreciation and after-tax return for the CIP(R)
shareholders. If CIP(R)'s common stock is not listed for trading on a national
securities exchange or included for quotation on Nasdaq, CIP(R) will generally
begin selling properties approximately ten years after the proceeds of the
public offering were substantially invested, subject to market conditions. The
board of directors will make the decision whether to list the shares, liquidate
or devise an alternative liquidation strategy which is likely to result in the
greatest value for the shareholders.
COMPETITION
CIP(R) faces competition for the acquisition of office and industrial properties
in general, and such properties net leased to major corporations in particular,
from insurance companies, credit companies, pension funds, private individuals,
investment companies and other REITs. CIP(R) also faces competition from
institutions that provide or arrange for other types of commercial financing
through private or public offerings of equity or debt or traditional bank
financings. CIP(R) believes its management's experience in real estate, credit
underwriting and transaction structuring will allow CIP(R) to compete
effectively for office and industrial properties.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. CIP(R)'s leases often provide
that the tenant is responsible for all environmental liability and for
compliance with environmental regulations relating to the tenant's operations.
CIP(R) typically undertakes an investigation of potential environmental risks
when evaluating an acquisition. Phase I environmental assessments are performed
by independent environmental consulting and engineering firms for all properties
acquired by CIP(R). Where warranted, Phase II environmental assessments are
performed. Phase I assessments do not involve subsurface testing, whereas Phase
II assessments involve some degree of soil and/or groundwater testing. CIP(R)
may acquire a property which is known to have had a release of hazardous
materials in the past, subject to a determination of the level of risk and
potential cost of remediation. CIP(R) normally requires property sellers to
indemnify it fully against any environmental problem existing as of the date of
purchase. Additionally, CIP(R) often structures its leases to require the tenant
to assume most or all responsibility for compliance with the environmental
provisions of the lease or environmental remediation relating to the tenant's
operations and to provide that non-compliance with environmental laws is a lease
default. In some cases, CIP(R) may also require a cash reserve, a letter of
credit or a guarantee from the tenant, the tenant's parent company or a third
party to assure lease compliance and funding of remediation. The value of any of
these protections depends on the amount of the collateral and/or financial
strength of the entity providing the protection. Such a contractual arrangement
does not eliminate CIP(R)'s statutory liability or preclude claims against
CIP(R) by governmental authorities or persons who are not a party to the
arrangement. Contractual arrangements in CIP(R)'s leases may provide a basis for
CIP(R) to recover from the tenant damages or costs for which it has been found
liable.
INDUSTRY SEGMENT
CIP(R) operates in one industry segment, investment in net leased real property.
For the year ended December 31, 2002, no tenant represented 10% or more of the
total operating revenue of CIP(R).
-6-
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") became effective in December 1995. The Act provides a "safe harbor" for
companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
CIP(R) wishes to take advantage of the "safe harbor" provisions of the Act and
is therefore including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks" or "plans" or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
CIP(R)'s future results may be affected by certain risks and uncertainties
including the following:
We are subject to the risks of real estate ownership which could reduce the
value of our properties.
Our properties may include net leased industrial and commercial property. The
performance of CIP(R) is subject to risks incident to the ownership and
operation of these types of properties, including:
- changes in the general economic climate;
- changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
- changes in interest rates and the availability of financing;
- competition from other available space; and
- changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
We may have difficulty selling or re-leasing our properties.
Real estate investments are relatively illiquid compared to most financial
assets and this illiquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. Many of the
net leases we enter into or acquire are for properties that are specially suited
to the particular needs of our tenant. With these properties, if the current
lease is terminated or not renewed, we may be required to renovate the property
or to make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, we may have
difficulty selling it to a party other than the tenant due to the special
purpose for which the property may have been designed. In addition, provisions
of the Internal Revenue Code relating to REITs limit our ability to sell
properties held for fewer than four years. These and other limitations may
affect our ability to sell properties without adversely affecting returns to our
shareholders.
The inability of a tenant in a single tenant property to pay rent will reduce
our revenues.
Most of our properties are occupied by a single tenant and, therefore, the
success of our investments are materially dependent on the financial stability
of our tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and cause us
to have to find an alternative source of revenue to meet the mortgage payment
and prevent a foreclosure if the property is subject to a mortgage. In the event
of a default, we may experience delays in enforcing our rights as landlord and
may incur substantial costs in protecting our investment and reletting our
property. If a lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell the property
without incurring a loss.
The bankruptcy of tenants would cause a reduction in revenue.
A tenant in bankruptcy could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim. The
maximum claim will be
-7-
capped at the amount owed for unpaid rent prior to the bankruptcy unrelated to
the termination, plus the greater of one year's lease payments or 15% of the
remaining lease payments payable under the lease (but no more than three years'
lease payments). In addition, due to the long-term nature of our leases and
terms providing for the repurchase of a property by the tenant, a bankruptcy
court could recharacterize a net lease transaction as a secured lending
transaction. If that were to occur, we would not be treated as the owner of the
property, but might have additional rights as a secured creditor.
Some of the programs managed by Carey Asset Management Corp. or its affiliates
have had tenants file for bankruptcy protection and are involved in litigation.
Four CPA(R) programs had to reduce the rate of distributions to their partners
as a result of adverse developments involving tenants.
If our tenants are highly leveraged, they may have a higher possibility of
filing for bankruptcy.
Of tenants that experience downturns in their operating results due to adverse
changes to their business or economic conditions, those that are highly
leveraged may have a higher possibility of filing for bankruptcy. In bankruptcy,
a tenant has the option of vacating a property instead of paying rent. Until
such a property is released from bankruptcy, our revenues would be reduced and
could cause us to reduce distributions to shareholders. We have highly leveraged
tenants at this time, and we may have additional highly leveraged tenants in the
future.
Our tenants generally do not have a recognized credit rating, which may create a
higher risk of lease defaults and therefore lower revenues than if our tenants
had a recognized credit rating.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of our tenants, as we seek tenants that we believe will have improving
credit profiles. Our long-term leases with certain of these tenants may
therefore pose a higher risk of default than would long term leases with tenants
whose credit potential has already been recognized by the market.
There is not, and may never be a public market for our shares, so it will be
difficult for shareholders to sell shares quickly.
There is no current public market for the shares and, therefore, it will be
difficult for shareholders to sell their shares promptly. In addition, the price
received for any shares sold is likely to be less than the proportionate value
of the real estate we own.
Our success is dependent on the performance of W. P. Carey & Co.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of W. P. Carey & Co. in the acquisition of
investments, the selection of tenants, the determination of any financing
arrangements, and upon the management of the assets. You will have no
opportunity to evaluate the terms of transactions or other economic or financial
data concerning our investments. You must rely entirely on the management
ability of W. P. Carey & Co. and the oversight of the board of directors.
W. P. Carey & Co. may be subject to conflicts of interest.
W. P. Carey & Co. manages our business and selects our real estate investments.
W. P. Carey & Co. has some conflicts of interest in its management of CIP(R),
which arise primarily from the involvement of W. P. Carey & Co. and its
affiliates in other activities that may conflict with CIP(R) and the payment of
fees by us to W. P. Carey & Co. and its affiliates. The activities in which a
conflict could arise between CIP(R) and W. P. Carey & Co. are:
- the receipt of commissions, fees and other compensation by W. P.
Carey & Co. and its affiliates for property purchases, leases, sales
and financing for CIP(R), which may cause W. P. Carey & Co. and its
affiliates to engage in transactions that generate higher fees,
rather than transactions that are more appropriate or beneficial for
our business;
- agreements between CIP(R) and W. P. Carey & Co. or any of its
affiliates, including agreements regarding compensation of W. P.
Carey & Co. and its affiliates, will not be negotiated on an arm's
length basis as would occur if the agreements were with unaffiliated
third parties;
- purchases and loans from affiliates, subject to CIP(R)'s investment
procedures, objectives and policies, which will increase fees and
interest payable to affiliates, thereby decreasing our net income
and possibly causing us to incur higher leverage levels;
- competition with certain affiliates for property acquisitions, which
may cause W. P. Carey & Co. and its affiliates to direct properties
suitable for us to other related entities;
- disposition, incentive and termination fees, which are based on the
sale price of properties, may cause a conflict between the advisor's
desire to sell a property and our plans to hold or sell the
property.
-8-
Inherent in these transactions is the conflict of interest that arises due to
the potential impact of the transaction on the amount of fees received by W. P.
Carey & Co. and/or its affiliates and the distributions to shareholders.
Liability for uninsured losses could adversely affect our financial condition.
Losses from disaster-type occurrences (such as wars or earthquakes) may be
either uninsurable or not insurable on economically viable terms. Should an
uninsured loss occur, we could lose our capital investment and/or anticipated
profits and cash flow from one or more properties.
Potential liability for environmental matters could adversely affect our
financial condition..
We own industrial and commercial properties and are subject to the risk of
liabilities under federal, state and local environmental laws. Some of these
laws could impose the following on CIP(R):
- Responsibility and liability for the cost of removal or remediation
of hazardous substances released on our property, generally without
regard to our knowledge or responsibility of the presence of the
contaminants.
- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of these substances.
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
Our costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to borrow using
the property as collateral.
Our use of debt to finance acquisitions could adversely affect our cash flow.
Most of our property acquisitions have been made by borrowing a portion of the
purchase price of our properties and securing the loan with a mortgage on the
property. If we are unable to make our debt payments as required, a lender could
foreclose on the property or properties securing its debt. This could cause us
to lose part or all of our investment which in turn could cause the value of the
shares and distributions to shareholders to be reduced. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity
invested in the property. We typically borrow between 55% and 65% of the
purchase price of our properties. There is no limitation on the amount borrowed
on a single property and the aggregate borrowings may not exceed 75% of the
value of all properties. Any borrowings in excess of 75% of the value of all
properties must be approved by a majority of the independent directors and
disclosed to shareholders. As of December 31, 2002, we had limited recourse
mortgage notes payable outstanding of $251,580,000.
Failure to qualify as a REIT could adversely affect our operations and ability
to make distributions.
If we fail to qualify as a REIT for any taxable year, we would be subject to
federal income tax on our taxable income at corporate rates. In addition, we
would generally be disqualified from treatment as a REIT for the four taxable
years following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to shareholders
because of the additional tax liability. In addition, distributions to
shareholders would no longer qualify for the distributions paid deduction and we
would no longer be required to make distributions. We might be required to
borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and
various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
The IRS may treat sale-leaseback transactions as loans, which could jeopardize
our REIT status.
The Internal Revenue Service may take the position that specific sale-leaseback
transactions we will treat as true leases are not true leases for federal income
tax purposes but are, instead, financing arrangements or loans. If a
sale-leaseback transaction were so recharacterized, we might fail to satisfy the
Asset Tests or the Income Tests and consequently lose our REIT status effective
with the year of recharacterization. Alternatively, the amount of our REIT
Taxable Income could be recalculated which could cause us to fail the
Distribution Test.
Balloon payment obligations may adversely affect our financial condition..
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to obtain additional financing or our ability to sell the
property. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on
-9-
terms as favorable as the original loan or sell the property at a price
sufficient to make the balloon payment. A refinancing or sale could affect the
rate of return to shareholders and the projected time of disposition of our
assets.
Scheduled balloon payments for the next five years are as follows:
- 2003 - $9.2 million;
- 2004 - $12.9 million;
- 2005 - $6.6 million;
- 2006 - $0; and
- 2007 - $9.5 million.
A limit on the number of shares a person may own may discourage a takeover.
Our articles of incorporation restrict ownership of more than 9.8% of the
outstanding shares by one person. These restrictions may discourage a change of
control of CIP(R) and may deter individuals or entities from making tender
offers for shares, which offers might be financially attractive to shareholders
or which may cause a change in the management of CIP(R).
Maryland law could restrict change in control.
Provisions of Maryland law applicable to us prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting power of
outstanding shares;
- an affiliate of us who, at any time within the two-year period prior
to the date in question, was the beneficial owner of 10% or more of
the voting power of our outstanding shares ("an interested
shareholder"); or
- an affiliate of an interested shareholder.
These prohibitions last for five years after the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in shareholders' interest. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of directors prior to the time that
someone becomes an interested shareholder.
Our participation in joint ventures creates additional risk.
We participate in joint ventures with other entities, some of which may be
unaffiliated with us. There are additional risks involved in these types of
transactions. These risks include the potential of our joint venture partner
becoming bankrupt and the possibility of diverging or inconsistent economic or
business interests of us and our partner. These diverging interests could result
in, among other things, exposing us to liabilities of the joint venture in
excess of our proportionate share of these liabilities. The partition rights of
each owner in a jointly owned property could reduce the value of each portion of
the divided property. In addition, the fiduciary obligation that W. P. Carey &
Co. or our board may owe to our partner in an affiliated transaction may make it
more difficult for us to enforce our rights.
In some of our joint venture relationships with publicly registered investment
programs or other entities sponsored by Carey Asset Management Corp. or one of
its affiliates, we enter into investments as tenants-in-common. This poses risks
in addition to those mentioned above. The partition rights of each co-tenant in
a tenancy-in-common could reduce the value of each portion of the divided
property. In addition, the fiduciary obligation that Carey Asset Management
Corp. or our board may owe to our partner in an affiliated transaction may make
it more difficult for us to enforce our rights.
We may incur costs to finish build-to-suit properties.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Oftentimes,
completion risk, cost overruns and on-time delivery are the obligations of the
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process we may be required to incur project costs to complete all or part of the
project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio returns.
-10-
Item 2. Properties.
Set forth below is certain information relating to the Company's properties
owned as of December 31, 2002.
LEASE OBLIGOR/ OWNERSHIP SQUARE RENT PER
Location INTEREST(1) FOOTAGE SQUARE FOOT
-------- ----------- ------- -----------
MARRIOTT INTERNATIONAL, INC. (3),(4)
Irvine, Sacramento and San Diego,
CA; Orlando, FL (2); Des Plaines, 47.35% interest in a
IL; Indianapolis, IN; Louisville, real estate
KY; Linthicum, MD; Newark, NJ; investment trust
Albuquerque, NM; Las Vegas, NV; owning land and 1,115,687 $15.98
Spokane, WA buildings
OMNICOM GROUP, INC. (3)
Playa Vista, CA 100% 120,000 26.79
Venice, CA 100% 77,719 13.93
------
Total: 197,719
INFORMATION RESOURCES, INC. (3)
66.67% interest in a
limited partnership
Chicago, IL owning land and
buildings 252,000 19.57
ADVANCED MICRO DEVICES, INC. (3)
33 1/3% interest in
a limited liability
Sunnyvale, CA company owning land
and buildings 361,965 27.01
ELECTRONIC DATA SYSTEMS CORPORATION (3)
Louisville, CO 100% 403,871 7.87
BEST BUY CO., INC. (3)
Fort Collins, CO; Matteson and
Schaumburg, IL; Attleboro, MA;
Nashua, NH; Albuquerque, NM; 63% interest in a
Arlington, Beaumont, Dallas, Fort general partnership
Worth and Houston, TX; Virginia owning land and 585,644 7.23
Beach, VA buildings
TITAN CORPORATION (3)
81.46% interest in a
limited partnership
San Diego, CA owning land and
buildings 166,403 16.43
LUCENT TECHNOLOGIES, INC. (3)
Charlotte, NC 100% 568,670 3.58
LEASE OBLIGOR/ SHARE OF CURRENT INCREASE
Location ANNUAL RENTS (2) FACTOR LEASE TERM MAXIMUM TERM
-------- --------------- ------ ---------- ------------
MARRIOTT INTERNATIONAL, INC. (3),(4)
Irvine, Sacramento and San Diego,
CA; Orlando, FL (2); Des Plaines,
IL; Indianapolis, IN; Louisville,
KY; Linthicum, MD; Newark, NJ; Stated/
Albuquerque, NM; Las Vegas, NV; $8,441,019 % of sales Feb. 2012 Feb. 2032
Spokane, WA
OMNICOM GROUP, INC. (3)
Playa Vista, CA 3,214,996 CPI Sep. 2018 Sep. 2048
Venice, CA 1,082,685 CPI Sep. 2010 Sep. 2030
---------
Total: 4,297,681
INFORMATION RESOURCES, INC. (3)
Chicago, IL 3,287,700 CPI Oct. 2010 Oct. 2015
ADVANCED MICRO DEVICES, INC. (3)
Sunnyvale, CA
3,258,938 CPI Dec. 2018 Dec. 2038
ELECTRONIC DATA SYSTEMS CORPORATION (3)
Louisville, CO 3,179,732 CPI Dec. 2014 Dec. 2034
BEST BUY CO., INC. (3)
Fort Collins, CO; Matteson and
Schaumburg, IL; Attleboro, MA;
Nashua, NH; Albuquerque, NM;
Arlington, Beaumont, Dallas, Fort
Worth and Houston, TX; Virginia 2,666,860 Stated Apr. 2018 Apr. 2033
Beach, VA
TITAN CORPORATION (3)
San Diego, CA 2,226,673 CPI Jul. 2007 Jul. 2023
LUCENT TECHNOLOGIES, INC. (3)
Charlotte, NC 2,035,304 None Mar. 2005 Mar. 2022
-11-
LEASE OBLIGOR/ OWNERSHIP SQUARE RENT PER
Location INTEREST (1) FOOTAGE SQUARE FOOT
-------- ----------- ------- -----------
SHOPRITE SUPERMARKETS, INC. (3)
Greenport, NY 100% 59,772 10.65
55% interest in a
limited partnership
owning land and
Ellenville and Warwick, NY (3),(4) buildings 136,438 16.44
-------
Total: 196,210
UTI HOLDINGS, INC. (3)
Glendale Heights, IL 100% 74,410 17.26
Glendale Heights, IL 100% 38,143 10.27
-------
112,553
NEW WAI. L.P./WAREHOUSE ASSOCIATES (3)
Lima, OH 100% 534,108 3.10
GARDEN RIDGE, INC. (3)
Oklahoma City, OK 100% 141,284 6.38
Round Rock, TX 100% 152,500 4.63
-------
Total: 293,784
CHILDTIME CHILDCARE, INC. (3)
Naperville, IL; Centreville,
Century Oaks, Manassas and Newport
News, VA 100% 37,306 17.39
Chandler and Tucson, AZ; Alhambra,
Chino, Garden Grove and Tustin, 66.07% interest in a
CA; Westland (2) and Sterling limited partnership
Heights, MI; Carrolton, owning land and
Duncanville and Lewisville, TX buildings 83,988 15.41
-------
121,294
Q CLUBS, INC. (3)
Bedford, TX 100% 46,658 14.02
Memphis, TN 100% 43,311 19.13
------
Total: 89,969
DEL MONTE CORPORATION (3)
Mendota, IL; Plover, WI; Toppenish 50% (5) 735,766 4.02
and Yakima, WA
SICOR, INC. (3)
50% interest in a
general partner-ship
San Diego, CA owning land and
buildings 144,312 20.41
MERIT MEDICAL SYSTEMS, INC. (3)
South Jordan, UT 100% 172,925 8.47
LEASE OBLIGOR/ SHARE OF CURRENT INCREASE
Location ANNUAL RENTS (2) FACTOR LEASE TERM MAXIMUM TERM
- -------- ---------------- ------ ---------- ------------
SHOPRITE SUPERMARKETS, INC. (3)
Greenport, NY 636,515 Stated Dec. 2017 Dec. 2037
Stated/%
Ellenville and Warwick, NY (3),(4) 1,233,742 of sales Oct. 2024 Oct. 2044
---------
Total: 1,870,257
UTI HOLDINGS, INC. (3)
Glendale Heights, IL 1,284,609 CPI Nov. 2010 Nov. 2030
Glendale Heights, IL 391,838 Stated Apr. 2016 Apr. 2031
---------
1,676,447
NEW WAI. L.P./WAREHOUSE ASSOCIATES (3)
Lima, OH 1,653,683 CPI Mar. 2016 Mar. 2041
GARDEN RIDGE, INC. (3)
Oklahoma City, OK 901,017 CPI Apr. 2015 Apr. 2035
Round Rock, TX 706,188 CPI Dec. 2013 Dec. 2038
---------
Total: 1,607,205
CHILDTIME CHILDCARE, INC. (3)
Naperville, IL; Centreville,
Century Oaks, Manassas and Newport
News, VA 648,892 CPI Aug. 2015 Aug. 2025
Chandler and Tucson, AZ; Alhambra,
Chino, Garden Grove and Tustin,
CA; Westland (2) and Sterling
Heights, MI; Carrolton,
Duncanville and Lewisville, TX 854,856 CPI Jan. 2016 Jan. 2041
---------
1,503,748
Q CLUBS, INC. (3)
Bedford, TX 654,325 CPI Feb. 2016 Feb. 2036
Memphis, TN 828,755 CPI Jul. 2013 Jul. 2033
---------
Total: 1,483,080
DEL MONTE CORPORATION (3)
Mendota, IL; Plover, WI; Toppenish 1,477,714 CPI Jun. 2016 Jun. 2056
and Yakima, WA
SICOR, INC. (3)
San Diego, CA
1,472,736 CPI Jul. 2009 Jul. 2044
MERIT MEDICAL SYSTEMS, INC. (3)
South Jordan, UT 1,465,404 CPI Jan. 2020 Jan. 2040
-12-
LEASE OBLIGOR/ OWNERSHIP SQUARE RENT PER
Location INTEREST (1) FOOTAGE SQUARE FOOT
-------- ------------ ------- -----------
THE UPPER DECK COMPANY(3)
50% interest in a
limited liability
Carlsbad, CA company owning land
and building 294,780 9.85
COMPUCOM SYSTEMS, INC. (3)
33 1/3% interest in
a limited liability
Dallas, TX company owning land
and buildings 255,351 16.54
MICHIGAN MUTUAL INSURANCE COMPANY(3)
Charleston, SC 100% 134,985 10.09
BARNES & NOBLE, INC. (3)
Farmington, CT 100% 21,600 31.62
Braintree, MA 100% 19,661 30.55
------
Total: 41,261
PLEXUS CORP. (3)
Neenah, WI 100% 179,000 7.09
BELL SPORTS, INC.
Rantoul, IL 100% 307,397 3.82
ENVIROWORKS, INC. (3)
Apopka, FL 100% 374,829 2.92
GATX LOGISTICS, INC. (3)
Jacksonville, FL 100% 240,000 3.89
DETROIT DIESEL CORPORATION
Hollywood and Orlando, FL 100% 81,318 11.17
PSC SCANNING, INC. (3)
Eugene, OR 100% 110,665 8.00
CUSTOM FOOD PRODUCTS, INC. (3)
Owingsville, KY 100% 37,094 23.73
NICHOLSON WAREHOUSE, L.P. (3)
Maple Heights, OH 100% 341,282 2.50
HUMCO HOLDING GROUP, INC. (3)
Texarkana, TX; Orem, UT 100% 164,565 5.16
HIBBETT SPORTING GOODS, INC. (3)
Birmingham, AL 100% 219,312 3.58
SOCIETE HOTELIERE TOURISME GRAND NOBLE(3)
Toulouse, France 100% 42,000 15.40
LEASE OBLIGOR/ SHARE OF CURRENT INCREASE
Location ANNUAL RENTS (2) FACTOR LEASE TERM MAXIMUM TERM
-------- --------------- ------ ---------- ------------
THE UPPER DECK COMPANY(3)
Carlsbad, CA
1,452,220 CPI Dec. 2020 Dec. 2040
COMPUCOM SYSTEMS, INC. (3)
Dallas, TX
1,408,043 CPI Apr. 2019 Apr. 2029
MICHIGAN MUTUAL INSURANCE COMPANY(3)
Charleston, SC 1,362,252 Stated Dec. 2007 Dec. 2027
BARNES & NOBLE, INC. (3)
Farmington, CT 683,000 Stated Feb. 2013 Feb. 2028
Braintree, MA 600,734 Stated Feb. 2014 Feb. 2024
---------
Total: 1,283,734
PLEXUS CORP. (3)
Neenah, WI 1,268,693 CPI Aug. 2014 Aug. 2044
BELL SPORTS, INC.
Rantoul, IL 1,175,071 CPI Nov. 2012 Nov. 2032
ENVIROWORKS, INC. (3)
Apopka, FL 1,095,072 CPI Mar. 2010 Mar. 2035
GATX LOGISTICS, INC. (3)
Jacksonville, FL 932,640 Stated Mar. 2004 Sep. 2004
DETROIT DIESEL CORPORATION
Hollywood and Orlando, FL 908,037 PPI Jun. 2020 Jun. 2040
PSC SCANNING, INC. (3)
Eugene, OR 885,750 CPI May 2014 May 2014
CUSTOM FOOD PRODUCTS, INC. (3)
Owingsville, KY 880,404 CPI Jun. 2020 Jun. 2035
NICHOLSON WAREHOUSE, L.P. (3)
Maple Heights, OH 854,540 CPI Dec. 2018 Dec. 2043
HUMCO HOLDING GROUP, INC. (3)
Texarkana, TX; Orem, UT 849,853 CPI Dec. 2016 Dec. 2016
HIBBETT SPORTING GOODS, INC. (3)
Birmingham, AL 784,224 CPI Feb. 2011 Feb. 2026
SOCIETE HOTELIERE TOURISME GRAND NOBLE(3)
Toulouse, France 646,828(6) INSEE(7) Nov. 2012 Nov. 2030
-13-
LEASE OBLIGOR/ OWNERSHIP SQUARE RENT PER
Location INTEREST(1) FOOTAGE SQUARE FOOT
- -------- ----------- ------- -----------
SUPERIOR TELECOMMUNICATIONS, INC. (3)
Brownwood, TX 100% 307,850 2.08
ISA INTERNATIONAL PLC(3)
Bradford, West Yorkshire, United 100% 41,432 15.30
Kingdom
GLOYSTARNE & CO., LTD. (3)
Rotherdam, South Yorkshire, United 100% 120,000 5.07
Kingdom
KMART CORPORATION.
Denton, TX 100% 87,406 2.46
Drayton Plains, MI 100% 103,018 2.04
Citrus Heights, CA 100% 89,760 2.01
-------
Total: 280,184
PETSMART, INC. (3)
Ennis, TX 100% 229,950 2.27
OSHMAN SPORTING GOODS, INC. (3)
Plano, TX 100% 47,054 9.16
KROGER CO.
Conway and
N. Little Rock, AR 100% 78,075 5.30
AFFILIATED FOODS SOUTHWEST, INC.
Hope, AR 100% 35,784 2.25
Little Rock, AR 100% 21,932 1.58
Little Rock, AR 100% 64,358 4.09
-------
Total: 122,074
US WEST COMMUNICATIONS, INC. (3)
Scottsdale, AZ 100% 4,460 60.60
HOBBY LOBBY STORES, INC.
Broken Arrow, OK 100% 50,340 5.05
XEROX CORPORATION 100% 36,850 4.22
PHOTO CENTER 100% 340 14.12
------
Total for property in
Hot Springs, AR: 37,190
NORTHSTAR COMPUTER FORMS, INC. 100% 23,042 5.33
VACANT 100% 126,720
-------
Total for property in
Golden, CO: 149,762
VACANT
Austin, TX 100% 99,680
LEASE OBLIGOR/ SHARE OF CURRENT INCREASE
Location ANNUAL RENTS(2) FACTOR LEASE TERM MAXIMUM TERM
- -------- --------------- ------ ---------- ------------
SUPERIOR TELECOMMUNICATIONS, INC. (3)
Brownwood, TX 640,879 CPI Dec. 2013 Dec. 2038
ISA INTERNATIONAL PLC(3)
Bradford, West Yorkshire, United 633,738(6) Open May 2014 None
Kingdom Market
GLOYSTARNE & CO., LTD. (3)
Rotherdam, South Yorkshire, United 608,469(6) Stated Dec. 2019 Dec. 2019
Kingdom
KMART CORPORATION.
Denton, TX 215,280 % of Sales Nov. 2007 Nov. 2057
Drayton Plains, MI 210,000 % of Sales Mar. 2006 Mar. 2026
Citrus Heights, CA 180,000 % of Sales May 2006 May 2026
-------
Total: 605,280
PETSMART, INC. (3)
Ennis, TX 522,240 CPI Jan. 2013 Jan. 2013
OSHMAN SPORTING GOODS, INC. (3)
Plano, TX 431,197 Stated Jan. 2013 Jan. 2033
KROGER CO.
Conway and
N. Little Rock, AR 413,612 CPI Feb. 2017 Feb. 2037
AFFILIATED FOODS SOUTHWEST, INC.
Hope, AR 80,514 CPI Mar. 2007 Mar. 2037
Little Rock, AR 34,745 CPI Mar. 2007 Mar. 2037
Little Rock, AR 263,432 CPI Feb. 2009 Feb. 2024
-------
Total: 378,691
US WEST COMMUNICATIONS, INC. (3)
Scottsdale, AZ 270,270 Stated Feb. 2007 Feb. 2017
HOBBY LOBBY STORES, INC.
Broken Arrow, OK 253,995 % of Sales Jan. 2008 Jan. 2033
XEROX CORPORATION 155,507 Stated May 2011 May 2011
PHOTO CENTER 4,800 None Monthly
------- renewals
Total for property in
Hot Springs, AR: 160,307
NORTHSTAR COMPUTER FORMS, INC. 122,814 Stated Sep. 2005 Sep. 2005
VACANT
Total for property in
Golden, CO:
VACANT
Austin, TX
1. Percentage of ownership in land and building, except as noted. If
ownership is less than 100%, ownership is as tenant-in-common unless
otherwise indicated.
2. Share of Current Annual Rents is the product of the Square Footage, the
Rent per Square Foot, and the Ownership Interest percentage.
-14-
3. These properties are encumbered by mortgage notes payable.
4. Includes percentage of sales rents.
5. Mendota, Plover and Toppenish properties are owned through an interest in
a limited liability company and the Yakima property is owned as a
tenant-in-common.
6. Based on exchange rates at December 31, 2002.
7. INSEE construction index, an index published quarterly by the French
Government.
Item 3. Legal Proceedings.
As of the date hereof, the Company is not a party to any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2002 to a vote of security holders, through the solicitation of proxies or
otherwise.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the year ended December 31, 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.
-15-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to Registrant's common equity is hereby incorporated by
reference to page 36 of the Company's Annual Report contained in Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of the
Company's Annual Report contained in Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 2 to 11 of the Company's Annual Report contained in Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
Approximately $233,955,000 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 fixed rate debt as of December 31, 2002 ranged
from 6.95% to 10%. The interest rate on the variable rate debt as of December
31, 2002 ranged from 5.438% to 9.625%.
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total Fair Value
------- ------- ------ ------ ------- -------- -------- --------
Fixed rate debt $13,944 $14,635 $7,515 $4,834 $14,719 $178,308 $233,955 $239,669
Weighted average
interest rate 9.10% 9.36% 8.28% 7.78% 8.55% 7.51%
Variable rate debt $ 1,492 $ 4,251 $4,030 $ 205 $ 256 $ 7,390 $ 17,624 $ 17,624
CIP(R) conducts business in the United Kingdom and France. The foreign
operations were not material to CIP(R)'s consolidated financial position,
results of operations or cash flows during the three-year period ended December
31, 2002. Additionally, foreign currency transaction gains and losses were not
material to our results of operations for the three-year period ended December
31, 2002. Accordingly, we were not subject to material foreign currency exchange
rate risk from the effects that exchange rate movements of foreign currencies
may have on our future costs or on future cash flows we may receive from our
foreign subsidiaries. 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.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable
leases resulting from CIP(R)'s foreign operations are as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total
------ ------ ------ ------ ------ ------- -------
Rental income(1) $1,281 $1,281 $1,281 $1,281 $1,281 $ 7,259 $13,664
Interest income from direct financing
leases(1) $ 608 $ 608 $ 633 $ 705 $ 705 $10,751 $14,010
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2002 and thereafter are as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- ------
Fixed rate debt(1) $ 81 $115 $124 $245 $255 $7,523 $8,343
Variable rate debt (1) $128 $154 $180 $205 $256 $7,391 $8,314
(1) Based on December 31, 2002 exchange rate.
-16-
Item 8. Consolidated Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data are
hereby incorporated by reference to pages 12 to 35 of the Company's Annual
Report contained in Appendix A:
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 2002 and 2001.
(iii) Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000.
(iv) Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 2001 and 2002.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
(vi) Notes to Consolidated Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
NONE
-17-
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information will be contained in the Company's definitive Proxy Statement
with respect to the Company's 2003 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in the Company's definitive Proxy Statement
with respect to the Company's 2003 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in the Company's definitive Proxy Statement
with respect to the Company's 2003 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in the Company's definitive Proxy Statement
with respect to the Company's 2003 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days following the end of
the Company's fiscal year, and is hereby incorporated by reference.
Item 14. Controls and Procedures
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
December 31, 2002.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its chief executive officers and chief financial
officer, to allow timely decisions regarding required disclosure and to ensure
that such information is recorded, processed, summarized and reported, within
the required time periods. Based upon this review, the Company's chief executive
officers and chief financial officer have concluded that the Company's
disclosure controls (as defined in pursuant to Rule 13a-14(c) promulgated under
the Exchange Act) are sufficiently effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is recorded, processed, summarized and reported with adequate
timeliness. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referred to above.
-18-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a part
of this Report:
Report of Independent Accountants.
Consolidated Balance Sheets, December 31, 2002, 2001 and 2000.
Consolidated Statements of Income for the years ended December
31, 2002, 2001 and 2000.
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 2000, 2001 and 2002.
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by
reference to pages 12 to 35 of the Company's Annual Report contained
in Appendix A.
(a) 2. Financial Statements of Material Equity Investee:
Marcourt Investments Incorporated
Report of Independent Accountants.
Balance Sheets, December 31, 2002 and 2001.
Statements of Income for the years ended December 31, 2002,
2001 and 2000.
Statement of Shareholders' Equity for the years ended December
31, 2000, 2001 and 2002.
Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
Notes to Financial Statements.
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 2002 of Marcourt Investments Incorporated.
The financial statements of material equity investees are
contained herewith in Item 15 on pages 20 to 29.
The separate financial statements of material equity investees
have been audited as of December 31, 2002 and for the year
then ended in accordance with Rule 3-09 of Regulation S-X.
(a) 3. Financial Statement Schedule:
The following schedule is filed as a part of this Report:
Report of Independent Accountants.
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 2002.
Notes to Schedule III.
Schedule III and notes thereto are contained herein on pages 48 to
52 of this Form 10-K.
Financial Statement Schedules other than those listed above are
omitted because the required information is given in the
Consolidated Financial Statements, including the Notes thereto, or
because the conditions requiring their filing do not exist.
-19-
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Marcourt Investments Incorporated:
In our opinion, the financial statements listed in the index appearing under
Item 15(a)(2) on page 19 present fairly, in all material respects, the financial
position of Marcourt Investments Incorporated at December 31, 2002 and 2001, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(a)(2) on page 19 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 14, 2003
-20-
MARCOURT INVESTMENTS INCORPORATED
BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
---- ----
ASSETS:
Net investment in direct financing lease $147,841,914 $148,056,251
Cash and cash equivalents 48,793 159,667
Other assets 390,539 475,130
------------ ------------
Total assets $148,281,246 $148,691,048
============ ============
LIABILITIES and SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 80,033,471 $ 85,178,685
Accrued interest payable 1,154,769 1,228,867
Accounts payable and accrued expenses 30,200 27,500
Accounts payable to affiliates 440 15,246
State and local taxes payable 16,300 14,364
------------ ------------
Total liabilities 81,235,180 86,464,662
------------ ------------
Commitments and contingencies
Common stock, Class A; $.01 par value; authorized,
999,750 shares; issued and outstanding,
369,850 shares; Class B; $.01 par value;
authorized, 250 shares; issued and outstanding,
150 shares 3,700 3,700
Additional paid-in capital 40,058,056 36,996,300
Retained earnings 26,984,310 25,226,386
------------ ------------
Total shareholders' equity 67,046,066 62,226,386
------------ ------------
Total liabilities and shareholders' equity $148,281,246 $148,691,048
============ ============
The accompanying notes are an integral part of these financial statements.
-21-
MARCOURT INVESTMENTS INCORPORATED
STATEMENTS OF INCOME
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Revenue:
Interest income on direct financing lease $17,612,525 $17,636,625 $17,657,881
Percentage rents 1,230,011 1,393,980 1,210,640
Other income 627,629 954 19,624
----------- ----------- -----------
19,470,165 19,031,559 18,888,145
----------- ----------- -----------
Expenses:
Interest on mortgages 8,636,177 9,147,331 9,608,615
General and administrative 34,370 135,307 69,346
State and local taxes 67,908 4,096 60,100
----------- ----------- -----------
8,738,455 9,286,734 9,738,061
----------- ----------- -----------
Net income $10,731,710 $ 9,744,825 $ 9,150,084
=========== =========== ===========
Basic earnings per share of common
stock, 370,000 common shares
outstanding (Class A and Class B) $ 29.00 $ 26.34 $ 24.73
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-22-
MARCOURT INVESTMENTS INCORPORATED
STATEMENT OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 2001 and 2002
Additional Paid-in
Common Stock Capital Retained Earnings Total
------------ ----------------- ----------- -----------
Balance, December 31, 1999 $3,700 $36,996,300 $16,454,117 $53,454,117
Dividends (5,095,183) (5,095,183)
Net income 9,150,084 9,150,084
------ ----------- ----------- -----------
Balance, December 31, 2000 3,700 36,996,300 20,509,018 57,509,018
Dividends (5,027,457) (5,027,457)
Net income 9,744,825 9,744,825
------ ----------- ----------- -----------
Balance, December 31, 2001 3,700 36,996,300 25,226,386 62,226,386
Dividends (8,973,786) (8,973,786)
Consent dividends declared 3,061,756 3,061,756
Net income 10,731,710 10,731,710
------ ----------- ----------- -----------
Balance, December 31, 2002 $3,700 $40,058,056 $26,984,310 $67,046,066
====== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-23-
MARCOURT INVESTMENTS INCORPORATED
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 10,731,710 $ 9,744,825 $ 9,150,084
Adjustments to reconcile net income to net cash provided by
operating activities:
Cash receipts on direct financing lease greater than revenues
recognized 214,337 190,237 168,978
Amortization of deferred interest 58,218 61,586 64,626
Decrease (increase) in other assets 26,373 (29,933) (86,754)
Increase (decrease) in accounts payable and
accrued expenses 2,700 (11,800) (23,000)
Decrease in accrued interest payable (74,098) (66,869) (60,345)
Increase (decrease) in state and local taxes payable 1,936 (4,136) 6,500
Decrease (increase) in accounts payable to affiliates (14,806) (76,228) 86,474
------------ ----------- -----------
Net cash provided by operating activities 10,946,370 9,807,682 9,306,563
------------ ----------- -----------
Cash flows from investing activities:
Purchase of securities -- -- (2,772)
------------ ----------- -----------
Net cash used in investing activities -- -- (2,772)
------------ ----------- -----------
Cash flows from financing activities:
Dividends paid (5,912,030) (5,027,457) (5,095,183)
Payment of mortgage principal (5,145,214) (4,644,658) (4,192,937)
------------ ----------- -----------
Net cash used in financing activities (11,057,244) (9,672,115) (9,288,120)
------------ ----------- -----------
Net (decrease) increase in cash and cash equivalents (110,874) 135,567 15,671
Cash and cash equivalents, beginning of year 159,667 24,100 8,429
------------ ----------- -----------
Cash and cash equivalents, end of year $ 48,793 $ 159,667 $ 24,100
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
-24-
MARCOURT INVESTMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business:
Marcourt Investments Incorporated (the "Company") was formed on January 2,
1992 under the General Corporation Law of Maryland. Under its by-laws, the
Company was organized for the purpose of engaging in the business of
investing in and owning industrial and commercial real estate. It is
intended that the Company carry on business as a real estate investment
trust ("REIT") as defined under the Internal Revenue Code of 1986.
The Company's business consists of the leasing of 13 hotel properties to a
wholly-owned subsidiary of Marriott International, Inc. ("Marriott")
pursuant to a master lease. The master lease has an initial term of 20
years through February 10, 2012, followed by a 10-year renewal term and
two 5-year renewal terms. Minimum annual rentals are $17,826,850 with the
lease providing for additional rent of 4% of annual sales in excess of
$36,000,000 with such additional rent capped at $1,766,717. In connection
with the restructuring of Marriott Corporation in 1993, Marriott assumed a
guarantee of the lease obligations. In addition, Host Marriott Corporation
has also provided a guarantee of the lease obligation for the greater of
10 years from the Marriott Corporation restructuring or until the
resolution of all claims and litigation with respect to such
restructuring. The lessee paid real estate taxes on behalf of the Company
of $2,435,550 in 2002. In 2002, the Company received $625,570 from
Marriott as consideration for opening a new Courtyard by Marriott hotel in
San Diego, California within a specified distance from one of the
Company's hotels. Such amount is included in other income in the
accompanying financial statements.
2. Summary of Significant Accounting Policies:
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Net Investment in Direct Financing Lease:
The Company's master lease for land and thirteen hotel properties is
accounted for under the direct financing method whereby the gross
investment in the lease consists of minimum lease payments to be
received plus the estimated value of the properties at the end of
the lease. Unearned income, representing the difference between
gross investment and actual cost of the leased properties, is
amortized to income over the lease term so as to produce a constant
periodic rate of return.
Additional rentals based on a percentage of Marriott's sales in
excess of the specified volume and increases in the consumer price
index are generally included in income when reported to the Company,
that is, after the level of sales requiring a rental payment to the
Company is reached.
Under a direct financing lease, the Company is required to assess
the estimated unguaranteed residual value of the leased assets at
least annually. If a decline in the estimated value is other than
temporary, the net investment is reduced and the remaining interest
income to be earned over the remaining noncancelable lease term is
also reduced.
Cash Equivalents:
The Company considers all short-term highly liquid investments that
are both readily convertible to cash and have a maturity of three
months or less at the time of purchase to be cash equivalents. Items
classified as cash equivalents may include commercial paper and
money market funds. At December 31, 2002 and 2001, the Company had
on deposit at two financial institutions substantially all of its
cash and cash equivalents.
-25-
MARCOURT INVESTMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Federal Income Taxes:
The Company is qualified as a REIT as of December 31, 2002 as
defined under the Internal Revenue Code of 1986. The Company is not
subject to Federal income taxes on amounts distributed to
shareholders provided it distributes at least 90% of its REIT
taxable income to its shareholders and meets other conditions
necessary to retain its REIT status. In order to meet the
distribution requirement for the year ended December 31, 2002, the
Class A shareholders recognized consent dividends of $3,061,756;
that is, each shareholder recognized and will reflect a taxable
dividend on its Federal income tax return even though it did not
receive a cash distribution. The Company projects that consent
dividends will be declared in future years.
Other Assets:
Included in other assets are deferred charges which resulted from
increased interest obligations on the Company's mortgage notes paid
in a prior period and are being amortized on an effective interest
method over the remaining term of the mortgage notes. The Company
owns shares in a private company which are recorded at a nominal
cost.
Earnings Per Share:
The Company has a simple capital structure, that is, one with only
common stock outstanding. As a result, the Company has presented
basic per-share amounts in the statements of income.
3. Transactions with Related Parties:
An affiliate of W.P. Carey & Co. LLC ("W.P. Carey") is the advisor to a
shareholder whose ownership interest in the Company represents
approximately 47% of the Company's outstanding shares. The Company has
entered into a service agreement with W. P. Carey which has been engaged
to perform various administrative services which include, but are not
limited to, accounting and cash management. The agreement provides that
W.P. Carey be reimbursed for its costs incurred in connection with
performing the necessary services under the agreement. For the years ended
December 31, 2002, 2001 and 2000, the Company incurred expenses of $2,472,
$3,138 and $378, respectively, under the agreement.
Coolidge Investment Partners, L.P. ("Coolidge") owns approximately 53% of
the outstanding shares of the Company. Coolidge acquired the shares from
Frontier Equity Partners II, Ltd. and PA/FP Limited Partnership in April
2002. Coolidge and its predessors are advised by Sarofim Realty Advisors
Co. ("Sarofim"). The Company has also agreed to reimburse Sarofim for
certain costs incurred in connection with the physical inspection of the
Company's leased properties. For the year ended December 31, 2000, the
Company incurred expenses of $16,572 in connection with reimbursement for
physical inspections. No inspection expenses were incurred in 2002 and
2001.
-26-
MARCOURT INVESTMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
4. Net Investment in Direct Financing Lease:
The net investment in the direct financing lease is summarized as follows:
2002 2001
---- ----
Minimum lease payments receivable $160,441,650 $178,268,500
Unguaranteed residual value 146,045,268 146,045,268
------------ ------------
306,486,918 324,313,768
Less, unearned income 158,645,004 176,257,517
------------ ------------
$147,841,914 $148,056,251
============ ============
The anticipated minimum future rentals, exclusive of renewals and any
rents based on percentage of sales, amount to $17,826,850 in each of the
years 2003 through 2007 and aggregate $160,441,650 through 2011.
5. Mortgage Notes Payable:
The Company's mortgage notes payable are collateralized by the Company's
thirteen hotel properties and by the rights of assignment on the Company's
master lease on the properties. $51,081,413 of the mortgage notes bear
interest at a rate of 9.94% per annum and the remaining $28,952,058 bear
interest at a rate of 11.18% per annum. The mortgage notes will fully
amortize in November 2011. The note may be prepaid subject to a yield
maintenance formula. As of December 31, 2002, the prepayment premium would
be approximately $21,000,000 if the mortgage notes payable were prepaid in
their entirety.
Scheduled principal payments during each of the next five years following
December 31, 2002 and thereafter are as follows:
Year Ending December 31,
------------------------
2003 $ 5,699,903
2004 6,314,600
2005 6,995,822
2006 7,750,793
2007 8,587,526
Thereafter 44,684,827
-----------
Total $80,033,471
===========
6. Dividends:
Dividends to shareholders consist of ordinary income and a return of
capital for income tax purposes. For each of the three years ended
December 31, 2002, dividends paid per share were reported as follows for
income tax purposes:
2002 2001 2000
-------- -------- --------
Ordinary income (a) $ 24.25 $ 13.58 $ 13.77
Return of capital -- -- --
-------- -------- --------
$ 24.25 $ 13.58 $ 13.77
======== ======== ========
(a) Includes a consent dividend to Class A shareholders of $8.28 per
share in 2002.
-27-
MARCOURT INVESTMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
7. Disclosure About Fair Value of Financial Instruments:
The fair value of the Company's mortgage notes payable at December 31,
2002 and 2001 is approximately $100,908,918 and $93,197,000, respectively.
Based on projections of settlement costs, including prepayment charges,
the Company would not realize a benefit from refinancing the existing
mortgage debt.
-28-
MARCOURT INVESTMENTS INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
Costs Capitalized
Subsequent to Increase in Net
Description Encumbrances Land Personal Property Buildings Acquisition (a) Investments(b)
Direct Financing Method:
Hotels leased to Marriott
International, Inc. $80,033,471 $27,559,637 $14,199,292 $104,241,071 $45,268 $1,796,646
=========== =========== =========== ============ ======= ==========
Description Total Date Acquired
Direct Financing Method:
Hotels leased to Marriott
International, Inc. $147,841,914 February 10, 1992
============
(a) Consists of acquisition costs including legal fees, appraisal fees, title
costs and other related professional fees.
(b) The increase in net investment is due to the amortization of unearned
income producing a constant periodic rate of return on the net investment
which is more than the lease payments received.
(c) At December 31, 2001, the aggregate cost of real estate owned by Marcourt
Investments Incorporated for Federal income tax purposes is $146,045,268.
-29-
(a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents
other than those designated as being filed herewith are incorporated
herein by reference.
Exhibit No. Description Method of Filing
----------- ----------- ----------------
2 Agreement and Plan of Merger Filed as Exhibit 2 to
Registrant's Form 8-K dated
April 30, 2002
3.1 Articles of Amendment and Restatement. Exhibit 3(A) to Registration
Statement (Form S-11) No.
33-39409
3.2 Amended Bylaws of Registrant. Exhibit 3(B) to Registration
Statement (Form S-11) No.
33-39409
7.1 Financial Statements of Corporate Property Filed as Exhibit 7(A) to
Associates 10 Incorporated Amendment No. 1 to
Registrant's Form 8-K dated
June 26, 2002
7.2 Pro Forma Financial Statements of Corporate Filed as Exhibit 7(B) to
Property Associates 10 Incorporated Amendment No. 1 to
Registrant's Form 8-K dated
June 26, 2002
10.1 Amended Advisory Agreement. Exhibit 10(A)(2) to
Registration Statement (Form
S-11) No. 33-39409
10.2 Lease between Marcourt Investments Filed as Exhibit 10(D)(1) to
Incorporated ("Marcourt") and CTYD III Registrant's Post Effective
Corporation ("CTYD"). Amendment No. 1 to Form S-11
10.3 Series A-2 9.94% Secured Note from Marcourt to Filed as Exhibit 10(D)(2) to
the registered owner of note (Various Series Registrant's Post Effective
A-1 9.94% Notes in an aggregate amount of Amendment No. 1 to Form S-11
38,750,000 substantially in the form of the
Series A-1 9.94% Note attached , were issued
by Marcourt in connection with the Financing).
10.4 Series A-2 11.18% Secured Note from Marcourt Filed as Exhibit 10(D)(3) to
to the registered owner of note (Various notes Registrant's Post Effective
in an aggregate amount of 70,250,000 Amendment No. 1 to Form S-11
substantially in the form of the Series A-2
11.18% Note attached , were issued by Marcourt
in connection with the Financing.
10.5 Indenture between Marcourt, as borrower, to Filed as Exhibit 10(D)(4) to
First Fidelity Bank, National Association, New Registrant's Post Effective
Jersey, as trustee ("Trustee"). Amendment No. 1 to Form S-11
10.6 Real Estate Deed of Trust from Marcourt to Filed as Exhibit 10(D)(5) to
Albuquerque Title Company, as trustee for Registrant's Post Effective
benefit of the Trustee filed in New Mexico, Amendment No. 1 to Form S-11
securing Series A-1 9.94% Notes and Series A-2
ll.18% notes allocated to Albuquerque, New
Mexico Marriott property (Deeds of Trust or
Mortgages substantially similar to this Deed
of Trust were filed in all other jurisdictions
in which Marriott Properties are located.
Such other deeds of trust or mortgages secure
the principal amount of Series A-1 9.94% Notes
and Series A-2 11.18% Notes allocated to the
Marriott Properties located in such other
jurisdictions)
-30-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.7 Second Real Estate Deed of Trust from Marcourt Filed as Exhibit 10(D)(6) to
to Albuquerque Title Company as trustee for Registrant's Post Effective
the benefit of the Trustee, filed in New Amendment No. 1 to Form S-11
Mexico, securing all Series A-1 9.94% Notes
and Series A-2 11.18% Notes other than those
notes allocated to the Albuquerque, New Mexico
Marriott property (Deeds of trust or mortgages
substantially similar to this Second Real
Estate Deed of Trust were filed in all other
jurisdictions in which the remaining Marriott
Properties are located. Such other deeds of
trust or mortgages secure the principal
amount of Series A-1 9.94% Notes and Series
A-2 11.18% Notes allocated to all Marriott
Properties not located in the jurisdiction
in which such other deeds of trust were filed
for recording).
10.8 Guaranty from the Registrant, Corporate Filed as Exhibit 10(D)(7) to
Property Associates 10 Incorporated, Trammell Registrant's Post Effective
Crow Equity Partners II, Ltd. ("TCEP II") and Amendment No. 1 to Form S-11
PA/First Plaza Limited Partnership ("First
Plaza") as guarantors, to the Trustee.
10.9 Shareholders Agreement between the Registrant, Filed as Exhibit 10(D)(8) to
Corporate Property Associates10 Incorporated Registrant's Post Effective
("CPA(R):10"), TCEP II and First Plaza. Amendment No. 1 to Form S-11
10.10 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(a)
for property located in Glendale, Arizona to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.11 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(b)
for property located in Ft. Smith, Arkansas to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.12 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(c)
for property located in Escondido, California. to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.13 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(d)
for property located in Broken Arrow, Oklahoma. to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.14 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(e)
for property located in Weatherford, Oklahoma. to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.15 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(f)
for property located in Center, Texas. to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.16 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(g)
for property located in Groves, Texas. to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.17 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)( 1)(h)
for property located in Silsbee, Texas. to Registrant's Post
Effective Amendment No. 1 to
Form S-11
-31-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.18 Assignment and Assumptions of Lease Agreement Filed as Exhibit 10(E)(1)(i)
for property located in Vidor, Texas. to Registrant's Post
Effective Amendment No. 1 to
Form S-11
10.19 Lease Amendments for the Ft. Smith, Arkansas Filed as Exhibit 10(E)(2) to
and Weatherford, Oklahoma properties. Registrant's Post Effective
Amendment No. 1 to Form S-11
10.20 Promissory Note from subsidiaries of the Filed as Exhibit 10(E)(3) to
Registrant and CPA(R):10 to The New England Registrant's Post Effective
Mutual Life Insurance Company ("New England"). to Form S-11Amendment No. 1
10.21 Mortgage/Deed of Trust from subsidiaries of Filed as Exhibit 10(E)(4)(a)
the Registrant and CPA(R):10 to New England to Registrant's Post
encumbering the property in Ft. Smith, Arkansas Effective Amendment No. 1 to
Form S-11
10.22 Mortgage/Deed of Trust from subsidiaries of Filed as Exhibit 10(E)(4)(b)
the Registrant and CPA(R):10 to New England to Registrant's Post
encumbering the property in Weatherford, Effective Amendment No. 1 to
Oklahoma Form S-11
10.23 Mortgage/Deed of Trust from subsidiaries of Filed as Exhibit 10(E)(4)(c)
the Registrant and CPA(R):10 to New England to Registrant's Post
encumbering the properties in Center, Groves, Effective Amendment No. 1 to
Silsbee, and Vidor, Texas. Form S-11
10.24 Lease Agreement between QRS 10-9 (AR), Inc. Filed as Exhibit 10(F)(1) to
("QRS 10-9") and QRS 11-2(AR), Inc. ("QRS Registrant's Post Effective
11-2") as landlord and Acadia Stores 63, Inc. Amendment No. 3 to Form S-11
("Tenant") as tenant.
10.25 Co-Tenancy Agreement between QRS 10-9 and QRS Filed as Exhibit 10(F)(2) to
11-2. Registrant's Post Effective
Amendment No. 3 to Form S-11
10.26 Term Loan Agreement among The First National Filed as Exhibit 10(F)(3) to
Bank of Boston ("First Lender"), QRS 10-9 and Registrant's Post Effective
QRS 11-2. Amendment No. 3 to Form S-11
10.27 Note of QRS 10-9 and QRS 11-2 to First Lender. Filed as Exhibit 10(F)(4) to
Registrant's Post Effective
Amendment No. 3 to Form S-11
10.28 Fee and Leasehold Mortgages from QRS10-9 and Filed as Exhibit 10(F)(5) to
QRS 11-2 to First Lender for the following Registrant's Post Effective
jurisdictions: Amendment No. 3 to Form S-11
a. Arkansas (one representative fee
mortgage and leasehold mortgage
included)
b. Louisiana
c. Mississippi
10.29 Term Loan Agreement among Acadia Partners , Filed as Exhibit 10(F)(6) to
L.P. ("Second Lender"), QRS 10-9 and QRS 11-2. Registrant's Post Effective
Amendment No. 3 to Form S-11
10.30 Note of QRS 10-9 and QRS 11-2 to Second Lender. Filed as Exhibit 10(F)(7) to
Registrant's Post Effective
Amendment No. 3 to Form S-11
-32-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.31 Fee Mortgages and Leasehold Mortgages from QRS Filed as Exhibit 10(F)(8) to
10-9 and QRS 11 -2 to Second Lender for the Registrant's Post Effective
following jurisdictions: Amendment No. 3 to Form S-11
a. Arkansas (one representative fee
mortgage and leasehold mortgage
included)
b. Louisiana
c. Mississippi
10.32 Guaranty from Harvest Foods, Inc., a Delaware Filed as Exhibit 10(F)(9) to
corporation, to QRS 10-9 and QRS 11-2. Registrant's Post Effective
Amendment No. 3 to Form S-11
10.33 Guaranty from Harvest Foods, Inc., an Arkansas Filed as Exhibit 10(F)(10) to
corporation, to QRS 10-9 and QRS 11-2. Registrant's Post Effective
Amendment No. 3 to Form S-11
10.34 Lease between QRS 10-12 (TX), Inc. ("QRS Filed as Exhibit 10(G)(1) to
10-12"), QRS 11-5 (TX), Inc. ("QRS 11-5") and Registrant's Post Effective
Summagraphics. Amendment No. 3 to Form S-11
10.35 Co-Tenancy Agreement between QRS 10-12, and Filed as Exhibit 10(G)(2) to
QRS 11-5. Registrant's Post Effective
Amendment No. 3 to Form S-11
10.36 $3,700,000 Promissory Note from QRS 10-12 Filed as Exhibit 10(H)(1) to
(TX), Inc., ("QRS 10-12"), and QRS 11-5 (TX) Registrant's Post Effective
Inc. ("QRS 11-5"), to Creditanstalt-Bankverein Amendment No. 4 to Form S-11
("Lender").
10.37 Deed of Trust and Security Agreement from QRS Filed as Exhibit 10(H)(2) to
10- 12 and QRS 11-5 to John O. Langdon, Registrant's Post Effective
Trustee, for benefit of Lender. Amendment No. 4 to Form S-11
10.38 Guaranty Agreement between Registrant and Filed as Exhibit 10(H)(3) to
Corporate Property Associates 10 Incorporated Registrant's Post Effective
as guarantor and Lender. Amendment No. 4 to Form S-11
10.39 Real Estate Purchase and Sale Contract between Filed as Exhibit 10(I)(1) to
Belmet (IL) QRS 11-9, Inc. ("QRS 11-9") as Registrant's Post Effective
purchaser and Mission Leasing and Bank of Amendment No. 4
Rantoul (collectively, to Form S-11"Seller").
10.40 Assignment and Assumption of Lease between QRS Filed as Exhibit 10(I)(2) to
11-9 and Seller. Registrant's Post Effective
Amendment No. 4 to Form S-11
10.41 Assignment of Permits and Warranties from Filed as Exhibit 10(I)(3) to
Seller to QRS 11-9. Registrant's Post Effective
Amendment No. 4 to Form S-11
10.42 Industrial Building Lease ("Lease") dated Filed as Exhibit 10(I)(4) to
November 16, 1989 between Seller and Bell, Registrant's Post Effective
together with First Amendment to Lease, dated Amendment No. 4 to Form S-11
September 19, 1991.
10.43 Second Amendment to Lease. Filed as Exhibit 10(I)(5) to
Registrant's Post Effective
Amendment No. 4 to Form S-11
-33-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.44 Land Purchase Agreement between MMI (SC) QRS Filed as Exhibit 10(J)(1) to
11-11 Inc. ("QRS 11-11") and Amerisure, Inc. Registrant's Post Effective
regarding three acre parcel. Amendment No. 5 to Form S-11
10.45 Mortgage from Amerisure, Inc. to QRS 11-11 Filed as Exhibit 10(J)(2) to
regarding three acre parcel. Registrant's Post Effective
Amendment No. 5 to Form S-11
10.46 Lease Agreement between QRS 11-11, as Filed as Exhibit 10(J)(3) to
Landlord. and MMI, as tenant. Registrant's Post Effective
Amendment No. 5 to Form S-11
10.47 Assignment, Reassignment and Assumption of Filed as Exhibit 10(J)(4) to
Lease among Amerisure, Inc., QRS11-11 and UIC. Registrant's Post Effective
Amendment No. 5 to Form S-11
10.48 Loan Agreement between The Penn Mutual Life Filed as Exhibit 10(J)(5) to
Insurance Company ("Penn Mutual") and QRS Registrant's Post Effective
11-11. Amendment No. 5 to Form S-11
10.49 $9,500,000 Promissory Note from QRS 11-11 to Filed as Exhibit 10(J)(6) to
Penn Mutual. Registrant's Post Effective
Amendment No. 5 to Form S-11
10.50 Mortgage and Security Agreement from QRS 11-11 Filed as Exhibit 10(J)(7) to
to Penn Mutual. Registrant's Post Effective
Amendment No. 5 to Form S-11
10.51 Lease Agreement between BVS (NY) QRS 11-10, Filed as Exhibit 10(K)(1) to
Inc. ("QRS 11-10") as landlord, and BVS, as Registrant's Post Effective
tenant. Amendment No. 5 to Form S-11
10.52 Reciprocal Easement and Operation Agreement Filed as Exhibit 10(K)(2) to
between QRS 11-10 and Fairview Plaza Registrant's Post Effective
Corporation ("FPC"). Amendment No. 5 to Form S-11
10.53 Lease Agreement between QRS 11-12, (FL), Inc., Filed as Exhibit 10(L)(2) to
("QRS 11-12"), as Landlord, and Unit, as Registrant's Post Effective
tenant. Amendment No. 5 to Form S-11
10. 54 Guaranty and Suretyship Agreement from Unit to Filed as Exhibit 10(L)(4) to
QRS 11-12. Registrant's Post Effective
Amendment No. 5 to Form S-11
10.55 Indemnity Agreement between GATX Corporation Filed as Exhibit 10(L)(5) to
and QRS 11-12. Registrant's Post Effective
Amendment No. 5 to Form S-11
10.56 Assignment and Assumption of Lease by Filed as Exhibit 10(M)(1) to
Charlotte Telephone Associates Limited Registrant's Post Effective
Partnership ("CTA") to QRS 11-14 (NC), Inc. Amendment No. 5 to Form S-11
("QRS 11-14").
10.57 Purchase and Sale Agreement between Neoserv Filed as Exhibit 10.1 to
(CO) QRS 10-13, Inc. ("QRS:10") and Neoserv Registrant's Form 8-K dated
(CO) QRS 11-8, Inc. ("QRS:11") as purchasers October 29, 1992
and Homart Development Co. ("Homart").
-34-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.58 Promissory Note of QRS:10 and QRS:11 to Homart. Filed as Exhibit 10.2 to
Registrant's Form 8-K dated
October 29, 1992
10.59 Deed of Trust from QRS:10 and QRS:11 for Filed as Exhibit 10.3 to
benefit of Homart. Registrant's Form 8-K dated
October 29, 1992
10.60 Option Agreement between QRS:10 and QRS:11 as Filed as Exhibit 10.4 to
option grantee and Homart as option grantor. Registrant's Form 8-K dated
October 29, 1992
10.61 Co-Tenancy Agreement between QRS:10 and QRS:11. Filed as Exhibit 10.5 to
Registrant's Form 8-K dated
October 29, 1992
10.62 Lease from QRS:10 and QRS:11 as lessor and Filed as Exhibit 10.6 to
Neodata Services, Inc. ("Neodata") as lessee. Registrant's Form 8-K dated
October 29, 1992
10.63 Guaranty Agreement from Neodata Corporation as Filed as Exhibit 10.7 to
guarantor to QRS:10 and QRS:11. Registrant's Form 8-K dated
October 29, 1992
10.64 Promissory Note of QRS:10 and QRS:11 to Filed as Exhibit 10.8 to
Neodata. Registrant's Form 8-K dated
October 29, 1992
10.65 Deed of Trust from QRS:10 and QRS:11 for Filed as Exhibit 10.9 to
benefit of Neodata. Registrant's Form 8-K dated
October 29, 1992
10.66 Construction Contract between QRS:10 and Filed as Exhibit 10.10 to
QRS:11 as owners and Austin Commercial, Inc. Registrant's Form 8-K dated
("Austin") as contractor. October 29, 1992
10.67 Guaranty from Austin to QRS:10 and QRS:11. Filed as Exhibit 10.11 to
Registrant's Form 8-K dated
October 29, 1992
10.68 Construction Agency Agreement between QRS:10 Filed as Exhibit 10.12 to
and QRS:11 as owners and Neodata as agent. Registrant's Form 8-K dated
October 29, 1992
10.69 Land Purchase Agreement between MMI (SC) QRS Filed as Exhibit 10.1 to
11-11, Inc. ("QRS 11-11") and Amerisure, Inc. Registrant's Form 8-K dated
("Amerisure") regarding three acre parcel. January 5, 1993
10.70 Mortgage from Amerisure to QRS 11-11 regarding Filed as Exhibit 10. 2 to
three acre parcel. Registrant's Form 8-K dated
January 5, 1993
10.71 Lease Agreement between QRS 11-11, as Filed as Exhibit 10.3 to
Landlord, and MMI as tenant. Registrant's Form 8-K dated
January 5, 1993
10.72 Assignment, Reassignment and Assumption of Filed as Exhibit 10.4 to
Lease among Amerisure, Inc., QRS 11-11 and UIC. Registrant's Form 8-K dated
January 5, 1993
10.73 Loan Agreement between The Penn Mutual Life Filed as Exhibit 10.5 to
Insurance Company ("Penn Mutual") and QRS Registrant's Form 8-K dated
11-11. January 5, 1993
10.74 $9,500,000 Promissory Note from QRS 11-11 to Filed as Exhibit 10.6 to
Penn Mutual. Registrant's Form 8-K dated
January 5, 1993
10.75 Mortgage and Security Agreement from QRS 11-11 Filed as Exhibit 10.7 to
to Penn Mutual. Registrant's Form 8-K dated
January 5, 1993
10.76 Lease Agreement between BVS (NY) QRS 11-10, Filed as Exhibit 10.8 to
Inc. ("QRS 11-10"), as landlord, and BVS, as Registrant's Form 8-K dated
tenant. January 5, 1993
-35-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.77 Reciprocal Easement and Operation Agreement Filed as Exhibit 10.9 to
between QRS 11-10 and Fairview Plaza, Inc. Registrant's Form 8-K dated
January 5, 1993
10.78 Lease Agreement between QRS 11-12 (FL), Inc. Filed as Exhibit 10.10 to
("QRS 11-12"), as landlord, and Unit, as Registrant's Form 8-K dated
tenant. January 5, 1993
10.79 Guaranty and Suretyship Agreement from Unit to Filed as Exhibit 10.11 to
QRS 11-12. Registrant's Form 8-K dated
January 5, 1993
10.80 Indemnity Agreement between GATX Corporation Filed as Exhibit 10.12 to
and QRS 11-12. Registrant's Form 8-K dated
January 5, 1993
10.81 Assignment and Assumption of Lease and Lease Filed as Exhibit 10.1 to
Guaranty from Oakbrook Development Corp. Registrant's Form 8-K dated
("Oakbrook") to Books CT QRS 11-15, Inc. ("QRS April 5, 1993
11-15").
10.82 Co-Tenancy Agreement between DDI (NE) QRS Filed as Exhibit 10.2 to
10-15, Inc. ("QRS 10-15") and DDI (NE) QRS Registrant's Form 8-K dated
11-13, Inc. ("QRS 11-13"). April 5, 1993
10.83 Cross Indemnity Agreement between QRS 10-15 Filed as Exhibit 10.3 to
and QRS 11-13. Registrant's Form 8-K dated
April 5, 1993
10.84 Lease Agreement between QRS 10-15 and QRS Filed as Exhibit 10.4 to
11-13, as landlord, and Data Documents, Inc. Registrant's Form 8-K dated
("DDI"), as tenant. April 5, 1993
10.85 Loan Agreement between QRS 10-15 and QRS Filed as Exhibit 10.5 to
11-13, as borrower, and U S West Financial Registrant's Form 8-K dated
Services, Inc. ("US West"), as lender. April 5, 1993
10.86 $8,000,000 Promissory Note from QRS 10-15 and Filed as Exhibit 10.6 to
QRS 11-13 to US West. Registrant's Form 8-K dated
April 5, 1993
10.87 Deed of Trust from QRS 10-15 and QRS 11-13 to Filed as Exhibit 10.7 to
US West (for filing in the states of Colorado, Registrant's Form 8-K dated
Nebraska and Texas). April 5, 1993
10.88 Mortgage from QRS 10-15 and QRS 11-13 to US Filed as Exhibit 10.8 to
West (for filing in the state of Kansas). Registrant's Form 8-K dated
April 5, 1993
10.89 Assignment of Parent Guaranty from QRS 10-15 Filed as Exhibit 10.9 to
and QRS 11-13. Registrant's Form 8-K dated
April 5, 1993
10.90 Deed of Trust Note from QRS 11-14 (NC), Inc. Filed as Exhibit 10.1 to
("QRS 11-14") to Kredietbank N.V. Registrant's Form 8-K dated
("Kredietbank"). April 13, 1993
10.91 Deed of Trust from QRS 11-14 for the benefit Filed as Exhibit 10.2 to
of Kredietbank. Registrant's Form 8-K dated
April 13, 1993
10.92 Assignment of Leases and Rents from QRS 11-14 Filed as Exhibit 10.3 to
to Kredietbank. Registrant's Form 8-K dated
April 13, 1993
10.93 Escrow Agreement between QRS 11-14 and Filed as Exhibit 10.4 to
Kredietbank. Registrant's Form 8-K dated
April 13, 1993
-36-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.94 Lease Agreement between BB Property Company, Filed as Exhibit 10.1 to
as lessor, and Best Buy, as lessee. Registrant's Form 8-K dated
May 6, 1993
10.95 Note Purchase Agreement among BB Property Filed as Exhibit 10.2 to
Company, Best Buy, and TIAA. Registrant's Form 8-K dated
May 6, 1993
10.96 $32,800,000 Note from BB Property Company to Filed as Exhibit 10.3 to
TIAA. Registrant's Form 8-K dated
May 6, 1993
10.97 Deed of Trust and Security Agreement from BB Filed as Exhibit 10.4 to
Property Company for the benefit of TIAA. Registrant's Form 8-K dated
May 6, 1993
10.98 $3,200,000 Promissory Note from BVS (NY) QRS Filed as Exhibit 10.5 to
11-10, Inc. ("BVS") to Orix. Registrant's Form 8-K dated
May 6, 1993
10.99 Mortgage, Assignment of Leases and Rents, Filed as Exhibit 10.6 to
Security Agreement and Fixture Filing from BVS Registrant's Form 8-K dated
to Orix. May 6, 1993
10.100 Purchase Agreement between QRS 11-19, as Filed as Exhibit 10.2 to
owner, and Lincoln Technical Institute, as Registrant's Form 8-K dated
buyer. August 13, 1993
10.101 Lease Agreement between Unitech (IL) QRS Filed as Exhibit 10(P)(1) to
11-19, Inc. ("QRS 11-19"), as landlord, and Registrant's Post Effective
UTI. Amendment No. 6 to Form S-11
10.102 Guaranty and Suretyship Agreement from Lincoln Filed as Exhibit 10(P)(2) to
Technical Institute of Arizona, Inc. to QRS Registrant's Post Effective
11-19. Amendment No. 6 to Form S-11
10.103 Modification of Loan Documents and Assumption Filed as Exhibit 10(P)(3) to
Agreement among Chicago Investment Properties Registrant's Post Effective
Limited Partnership, the Guarantors QRS 11-19 Amendment No. 6 to Form S-11
and the Fidelity Mutual Life Insurance Company.
10.104 Rate Cap Transaction letter Agreement between Filed as Exhibit 10(Q)(4) to
BVS and Chemical Bank ("Chemical"). Registrant's Post Effective
Amendment No. 6 to Form S-11
10.105 Consent and Agreement between Chemical, Orix Filed as Exhibit 10(Q)(5) to
and BVS. Registrant's Post Effective
Amendment No. 6 to Form S-11
10.106 Assignment of Interest Rate Protection Filed as Exhibit 10(Q)(6) to
Agreement from BVS to Orix. Registrant's Post Effective
Amendment No. 6 to Form S-11
10.107 Warrant issued by Merit to the Registrant. Filed as Exhibit 10(S)(1) to
Registrant's Post Effective
Amendment No. 6 to Form S-11
10.108 Lease Agreement between QRS 11-20 (UT), Inc. Filed as Exhibit 10(S)(2) to
("QRS 11-20"), as landlord, and Merit, as Registrant's Post Effective
tenant. Amendment No. 6 to Form S-11
10.109 Guaranty Agreement from the Registrant to Filed as Exhibit 10(S)(3) to
Merit. Registrant's Post Effective
Amendment No. 6 to Form S-11
-37-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.110 Construction Management Agreement between Filed as Exhibit 10(S)(4) to
Merit and the Koll Company. Registrant's Post Effective
Amendment No. 6 to Form S-11
10.111 Construction Agreement between Merit and Camco Filed as Exhibit 10(S)(5) to
Construction Company, Inc. Registrant's Post Effective
Amendment No. 6 to Form S-11
10.112 Construction Agency Agreement between Merit Filed as Exhibit 10(S)(6) to
and QRS 11-20. Registrant's Post Effective
Amendment No. 6 to Form S-11
10.113 $8,250,000 Promissory Note from QRS 11-20 to Filed as Exhibit 10(S)(7) to
First Interstate Bank of Utah, N.A. ("Lender"). Registrant's Post Effective
Amendment No. 6 to Form S-11
10.114 Deed of Trust, Assignment of Rents, Security Filed as Exhibit 10(S)(8) to
Agreement and Financing Statement from QRS Registrant's Post Effective
11-20 for the benefit of Lender. Amendment No. 6 to Form S-11
10.115 Assignment of Leases and Rents made by QRS Filed as Exhibit 10(S)(9) to
11-20 in favor of Lender. Registrant's Post Effective
Amendment No. 6 to Form S-11
10.116 Loan Agreement between QRS 11-20 and Lender. Filed as Exhibit 10(S)(10) to
Registrant's Post Effective
Amendment No. 6 to Form S-11
10.117 Assignment and Assumption of Bid dated as of Filed as Exhibit 10(T)(1) to
April 14, 1993 among QRS 11-17 (NY), Inc. Registrant's Post Effective
("QRS 11-17"), E.B. Properties, Inc. ("EB") Amendment No. 7 to Form S-11
and The Dime Savings Bank of New York, FSB
("Dime"), as amended and supplemented by the
First Supplement dated April 15, 1993 and by
the Second Supplement dated April 22, 1993 and
by letters dated May 12, June 9 and June 18,
1993.
10.118 Assignment and Assumption Agreement, dated Filed as Exhibit 10(T)(2) to
March 4, 1993, as amended , between Dime and Registrant's Post Effective
EB, as assigned by Assignment dated April 14, Amendment No. 7 to Form S-11
1993.
10.119 Lease dated as of August 1, 1986 between D. Filed as Exhibit 10(T)(3) to
Grossman and Mormax Corporation (as assumed by Registrant's Post Effective
QRS 11-21, Inc. ("QRS 11-21") by virtue of Amendment No. 7 to Form S-11
documents listed at (10)(T)(1)).
10.120 Promissory Note from QRS 11-17 to Dime in the Filed as Exhibit 10(T)(4) to
amount of $7,000,000. Registrant's Post Effective
Amendment No. 7 to Form S-11
10.121 Mortgage from QRS 11-17 to Dime. Filed as Exhibit 10(T)(5) to
Registrant's Post Effective
Amendment No. 7 to Form S-11
10.122 Collateral Assignment of Leases and Rents by Filed as Exhibit 10(T)(6) to
QRS 11-17 in favor of Dime. Registrant's Post Effective
Amendment No. 7 to Form S-11
-38-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.123 Agreement of Indemnity by QRS 11-17 in favor Filed as Exhibit 10(T)(7) to
of Dime. Registrant's Post Effective
Amendment No. 7 to Form S-11
10.124 Lease Agreement between SCF (TN) QRS 11-21, as Filed as Exhibit 10(U)(1) to
landlord, and SCM, as tenant. Registrant's Post Effective
Amendment No. 7 to Form S-11
10.125 Warrant issued by Sports & Fitness Clubs Inc. Filed as Exhibit 10(U)(2) to
("SFC") to QRS 11-21. Registrant's Post Effective
Amendment No. 7 to Form S-11
10.126 Guaranty and Suretyship Agreement by SFC and Filed as Exhibit 10(U)(3) to
Sports and Fitness Clubs of America, Inc. Registrant's Post Effective
("SFCA") to QRS 11-21. Amendment No. 7 to Form S-11
10.127 Purchase Agreement between QRS 11-21, as Filed as Exhibit 10(U)(4) to
owner, and SFC, as buyer. Registrant's Post Effective
Amendment No. 7 to Form S-11
10.128 Term Loan Agreement between QRS 11-21, as Filed as Exhibit 10(U)(5) to
borrower, and Union Planters National Bank, as Registrant's Post Effective
lender ("Union Planters"). Amendment No. 7 to Form S-11
10.129 Note in the amount of $2,800,000 dated July Filed as Exhibit 10(U)(6) to
20, 1993 from QRS 11-21 for the benefit of Registrant's Post Effective
Union Planters. Amendment No. 7 to Form S-11
10.130 Deed of Trust, Assignment of Rents and Filed as Exhibit 10(U)(7) to
Security Agreement from QRS 11-21 for the Registrant's Post Effective
benefit of Union Planters. Amendment No. 7 to Form S-11
10.131 Acknowledgment of Assignment of Lease, Filed as Exhibit 10(U)(8) to
Guaranty and Purchase Agreements between SCM, Registrant's Post Effective
SFC, SFCA, QRS 11-21 and Union Planters. Amendment No. 7 to Form S-11
10.132 Real Estate Contract of Sale between Abacus Filed as Exhibit 10(V)(1) to
Capital Corporation, as seller, and Registrant's Post Effective
Registrant, or its assigns, as Buyer. Amendment No. 7 to Form S-11
10.133 Real Estate Contract of Sale between Abacus Filed as Exhibit 10.1 to
Capital Corporation ("Abacus"), as seller, and Registrant's Form 8-K dated
Registrant, as buyer. February 24, 1994
10.134 Assignment of Real Estate Contract of Sale Filed as Exhibit 10.2 to
from Registrant to the PETSMART Subsidiary. Registrant's Form 8-K dated
February 24, 1994
10.135 Assignment and Assumption of Lease between Filed as Exhibit 10.3 to
Abacus and the PETsMART Subsidiary. Registrant's Form 8-K dated
February 24, 1994
10.136 Loan Agreement between NationsBank and the Filed as Exhibit 10.4 to
PETsMART Subsidiary. Registrant's Form 8-K dated
February 24, 1994
10.137 $2,500,000 Promissory Note made by the Filed as Exhibit 10.5 to
PETsMART Subsidiary to NationsBank. Registrant's Form 8-K dated
February 24, 1994
-39-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.138 Deed of Trust, Assignment, Security Agreement Filed as Exhibit 10.6 to
and Financing Statement from the PETsMART Registrant's Form 8-K dated
Subsidiary to NationsBank. February 24, 1994
10.139 Lease Agreement between the Braintree Filed as Exhibit 10.7 to
Subsidiary, as landlord, and Barnes & Noble, Registrant's Form 8-K dated
as tenant. February 24, 1994
10.140 Real Estate Purchase and Sale Contract between Filed as Exhibit 10.8 to
the ELWA Subsidiary, as buyer, and Big V, as Registrant's Form 8-K dated
seller. February 24, 1994
10.141 Lease Agreement between the ELWA Subsidiary, Filed as Exhibit 10.9 to
as landlord, and Big V as tenant. Registrant's Form 8-K dated
February 24, 1994
10.142 Guaranty and Suretyship Agreement executed by Filed as Exhibit 10.10 to
Big V Holding. Registrant's Form 8-K dated
February 24, 1994
10.143 Amended, Restated and Consolidated Bonds to Filed as Exhibit 10.11 to
Key Bank, as lender, from the ELWA Subsidiary, Registrant's Form 8-K dated
as borrower. February 24, 1994
10.144 Amended and Restated Mortgage and Security Filed as Exhibit 10.12 to
Agreement from the ELWA Subsidiary, to Key Registrant's Form 8-K dated
Bank. February 24, 1994
10.145 Limited Guaranty of Payment from the Company Filed as Exhibit 10.13 to
to Key Bank. Registrant's Form 8-K dated
February 24, 1994
10.146 Lease Agreement between the Brownwood Filed as Exhibit 10.14 to
Subsidiary, as landlord, and Superior, as Registrant's Form 8-K dated
tenant. February 24, 1994
10.147 Guaranty and Suretyship Agreement from Alpine Filed as Exhibit 10.15 to
to Registrant. Registrant's Form 8-K dated
February 24, 1994
10.148 $2,700,000 Real Estate Note from the Brownwood Filed as Exhibit 10.16 to
Subsidiary, as maker, to Creditanstalt, as Registrant's Form 8-K dated
holder. February 24, 1994
10.149 Deed of Trust and Security Agreement by the Filed as Exhibit 10.17 to
Brownwood Subsidiary, as guarantor to Hazen H. Registrant's Form 8-K dated
Dempster, as trustee. February 24, 1994
10.150 Guaranty and Agreement between the Company and Filed as Exhibit 10.18 to
Creditanstalt. Registrant's Form 8-K dated
February 24, 1994
10.151 Assignment of Contract from Hyde Park Filed as Exhibit 10.19 to
Holdings, Inc. to the Cleveland Subsidiary. Registrant's Form 8-K dated
February 24, 1994
10.152 Lease Agreement between the Cleveland Filed as Exhibit 10.20 to
Subsidiary, as landlord, and Nicholson, as Registrant's Form 8-K dated
tenant. February 24, 1994
10.153 $4,000,000 Cognovit Promissory Note from the Filed as Exhibit 10.21 to
Cleveland Subsidiary to Bank One. Registrant's Form 8-K dated
February 24, 1994
10.154 Mortgage Deed, Security Agreement and Filed as Exhibit 10.22 to
Assignment of Rents and Leases from the Registrant's Form 8-K dated
Cleveland Subsidiary to Bank One. February 24, 1994
10.155 Business Loan Agreement between the Cleveland Filed as Exhibit 10.23 to
Subsidiary, and Bank One. Registrant's Form 8-K dated
February 24, 1994
-40-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.156 Guaranty from Registrant to Bank One. Filed as Exhibit 10.24 to
Registrant's Form 8-K dated
February 24, 1994
10.157 Lease Agreement between the Gensia Filed as Exhibit 10.25 to
Partnership, as landlord, and Gensia, as Registrant's Form 8-K dated
tenant. February 24, 1994
10.158 $13,000,000 Promissory Note from the Gensia Filed as Exhibit 10.26 to
Partnership to Northwestern. Registrant's Form 8-K dated
February 24, 1994
10.159 Deed of Trust, Security Agreement and Filed as Exhibit 10.27 to
Financing Statement from the Gensia Registrant's Form 8-K dated
Partnership to Northwestern. February 24, 1994
10.160 Guarantee of Recourse Obligations from Filed as Exhibit 10.28 to
Registrant and CPA(R):12 to Northwestern. Registrant's Form 8-K dated
February 24, 1994
10.161 Assignment of Earnest Money Contract from Filed as Exhibit 10.29 to
Garden Ridge to the Round Rock Subsidiary. Registrant's Form 8-K dated
February 24, 1994
10.162 Lease Agreement between the Round Rock Filed as Exhibit 10.30 to
Subsidiary, as landlord, and Garden Ridge, as Registrant's Form 8-K dated
tenant. February 24, 1994
10.163 $3,465,000 Note from the Round Rock Subsidiary Filed as Exhibit 10.31 to
to Garden Ridge. Registrant's Form 8-K dated
February 24, 1994
10.164 Deed of Trust and Security Agreement from the Filed as Exhibit 10.32 to
Round Rock Subsidiary to Garden Ridge. Registrant's Form 8-K dated
February 24, 1994
10.165 $1,700,000 Promissory Note from the Plano Filed as Exhibit 10.33 to
Subsidiary to National Western. Registrant's Form 8-K dated
February 24, 1994
10.166 Deed of Trust, Security Agreement and Filed as Exhibit 10.34 to
Financing Statement from the Plano Subsidiary Registrant's Form 8-K dated
to National Western. February 24, 1994
10.167 Lease Agreement dated June 15, 1994 between Filed as Exhibit 10.167 to
CTC (VA) QRS 11-32, Inc., as Landlord, and Registrant's Form 10-K for
Childtime Childcare, Inc., as Tenant. the year ended December 31,
1994 dated March 31, 1995
10.168 Construction Agency Agreement dated June 15, Filed as Exhibit 10.168 to
1994 between Childtime Childcare, Inc. and CTC Registrant's Form 10-K for
(VA) QRS 11-32, Inc. the year ended December 31,
1994 dated March 31, 1995
10.169 Lease Agreement dated August 11, 1994 by and Filed as Exhibit 10.169 to
between Neenah (WI) QRS 11-31, Inc., as Registrant's Form 10-K for
Landlord, and Exide Electronic Assembly the year ended December 31,
Corporation, as Tenant. 1994 dated March 31, 1995
10.170 $5,000,000 Real Estate Note dated August 11, Filed as Exhibit 10.170 to
1994 from Neenah (WI) QRS 11-31, Inc., as Registrant's Form 10-K for
Maker, and Creditanstalt Corporate Finance, the year ended December 31,
Inc., as Holder. 1994 dated March 31, 1995
-41-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.171 Lease Agreement dated December 31, 1994 by and Filed as Exhibit 10.171 to
between CFP Associates, as Landlord, and Registrant's Form 10-K for
Custom Foods Products, Inc., as Tenant. the year ended December 31,
1994 dated March 31, 1995
10.172 Loan Agreement dated December 31, 1994 between Filed as Exhibit 10.172 to
CFP Associates, as Borrower, and Greyrock Registrant's Form 10-K for
Capital Group Inc., as Lender. the year ended December 31,
1994 dated March 31, 1995
10.173 $2,000,000 Note dated December 31, 1994 from Filed as Exhibit 10.173 to
CFP Associates, as Maker, and Greyrock Capital Registrant's Form 10-K for
Group Inc., as Payee. the year ended December 31,
1994 dated March 31, 1995
10.174 $200,000 Maximum Amount Promissory Note dated Filed as Exhibit 10.174 to
December 31, 1994 from CFP Associates, as Registrant's Form 10-K for
Maker, to Custom Foods Products, Inc., as the year ended December 31,
Payee. 1994 dated March 31, 1995
10.175 Lease Agreement dated October 14, 1994 by and Filed as Exhibit 10.175 to
between ADS (CA) QRS 11-34, Inc., as Landlord, Registrant's Form 10-K for
and Chiat/Day Inc. Advertising, as Tenant. the year ended December 31,
1994 dated March 31, 1995
10.176 $6,000,000 Promissory Note dated October 14, Filed as Exhibit 10.176 to
1994 from ADS (CA) QRS 11-34, Inc., as Registrant's Form 10-K for
Borrower, to Kearneys Street Real Estate the year ended December 31,
Company, L.P., as Lender. 1994 dated March 31, 1995
10.177 $3,000,000 Purchase Money Promissory Note Filed as Exhibit 10.177 to
secured by Deed of Trust dated October 14, Registrant's Form 10-K for
1994 from ADS (CA) QRS 11-34, Inc., as Maker, the year ended December 31,
to Venice Operating Corp., as Holder. 1994 dated March 31, 1995
10.178 Lease Agreement dated October 31, 1995 by and Filed as Exhibit 10.33 to
between DELMO (PA) QRS 11-36 and DELMO (PA) Registrant's Form 8-K dated
QRS 12-10 together as Landlord and Del Monte March 21, 1996
Corporation, as Tenant.
10.179 Lease Agreement dated December 26, 1995 by and Filed as Exhibit 2.1 to
between Cards Limited Liability Company, as Registrant's Form 8-K dated
Landlord, and The Upper Deck Company, as March 21, 1996
Tenant.
10.180 $15,000,000 Promissory Note dated January 3, Filed as Exhibit 2.2 to
1996 from Cards Limited Liability Company to Registrant's Form 8-K dated
Column Financial, Inc. March 21, 1996
21.1 Subsidiaries of Registrant as of March 20, 2003 Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
23.2 Consent of PricewaterhouseCoopers LLP Filed as Exhibit 23.2 to
Amendment No.2 to
Registrant's Form 4 dated
February 8, 2002
-42-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
28.1 General Warranty Deed from Amerisure, Inc. to Filed as Exhibit 28(C)(1) to
(SC) QRS 11-11 Registrant's Post Effective
Amendment No. 5 to Form S-11
28.2 Amended and Restated Sublease Agreement Filed as Exhibit 28(C)(2) to
between MMI, as sublandlord, and Unisun Registrant's Post Effective
Insurance Company ("UIC"). Amendment No. 5 to Form S-11
28.3 General warranty Deed from FPC to QRS 11-10. Filed as Exhibit 28(D)(1) to
Registrant's Post Effective
Amendment No. 5 to Form S-11
28.4 Deed from Unit to QRS 11-12. Filed as Exhibit 28(E)(1) to
Registrant's Post Effective
Amendment No. 5 to Form S-11
28.5 Lease between Unit, as landlord, and SLS, as Filed as Exhibit 28(E)(2) to
tenant, as amended. Registrant's Post Effective
Amendment No. 5 to Form S-11
28.6 Special warranty Deed from CTA, as Grantor to Filed as Exhibit 28(F)(1) to
QRS 11-14, as Grantee. Registrant's Post Effective
Amendment No. 5 to Form S-11
28.7 Lease Agreement between CTA and AT&T. Filed as Exhibit 28(F)(2) to
Registrant's Post Effective
Amendment No. 5 to Form S-11
28.8 Leasehold Deed of Trust from Neodata for Filed as Exhibit 28.1 to
benefit of General Electric Capital Registrant's Form 8-K dated
Corporation. October 29, 1992
28.9 General Warranty Deed from Amerisure QRS 11-11. Filed as Exhibit 28.1 to
Registrant's Form 8-K dated
January 5, 1993
28.10 Amended and Restated Sublease Agreement Filed as Exhibit 28.2 to
between MMI, as sublandlord, and Unisun Registrant's Form 8-K dated
Insurance Company. January 5, 1993
28.11 General Warranty Deed from Fairview Plaza Filed as Exhibit 28.3 to
Corporation to QRS 11-10. Registrant's Form 8-K dated
January 5, 1993
28.12 Deed from Unit to QRS 11-12. Filed as Exhibit 28.4 to
Registrant's Form 8-K dated
January 5, 1993
28.13 Lease between Unit, as landlord, and SLS, as Filed as Exhibit 28.5 to
tenant, as amended. Registrant's Form 8-K dated
January 5, 1993
28.14 Prospectus dated January 21, 1993 of Filed pursuant to Rule
Registrant. 424(b)(s) on January 26, 1993
(Registration No. 33-39409)
28.15 Supplement No. 1 dated March 17, 1993 to Filed pursuant to Rule
Prospectus dated January 21, 1993. 424(b)(s) on March 17, 1993
(Registration No. 33-39409)
28.16 Quit Claim Deed from Oakbrook to QRS 11-15. Filed as Exhibit 28.1 to
Registrant's Form 8-K dated
April 5, 1993
-43-
Exhibit No. Description Method of Filing
----------- ----------- ----------------
28.17 Lease Agreement between Oakbrook and B. Dalton Filed as Exhibit 28.2 to
Bookseller, Inc. ("B. Dalton"). Registrant's Form 8-K dated
April 5, 1993
28.18 First Amendment between Oakbrook and B. Dalton Filed as Exhibit 28.3 to
Bookseller, Inc. Registrant's Form 8-K dated
April 5, 1993
28.19 Lease Guaranty to Oakbrook from Barnes & Filed as Exhibit 28.4 to
Noble, Inc. Registrant's Form 8-K dated
April 5, 1993
28.20 Guaranty and Suretyship Agreement from Data Filed as Exhibit 28.5 to
Documents Holdings, Inc. to QRS 10-15 and QRS Registrant's Form 8-K dated
11-13. April 5, 1993
28.21 Guaranty from Corporate Property Associates 10 Filed as Exhibit 28.6 to
Incorporated and Registrant to US West. Registrant's Form 8-K dated
April 5, 1993
28.22 Guaranty from Registrant to Orix. Filed as Exhibit 28.1 to
Registrant's Form 8-K dated
May 6, 1993
28.23 Special Warranty Deed from Merit to QRS 11-20. Filed as Exhibit 28(G)(1) to
Registrant's Post Effective
Amendment No. 6 to Form S-11
28.24 Table VI: Acquisitions of Properties by Prior Filed as Exhibit 28(H) to
Programs. Registrant's Post Effective
Amendment No. 6 to Form S-11
28.25 Limited Warranty Deed from the David F. Bolger Filed as Exhibit 28.1 to
Revocable Trust to the Braintree Subsidiary. Registrant's Form 8-K dated
February 24, 1994
28.26 Special Warranty Deed from Superior to the Filed as Exhibit 28.2 to
Brownwood Subsidiary. Registrant's Form 8-K dated
February 24, 1994
28.27 Corporation Grant Deed from Gensia to the Filed as Exhibit 28.3 to
Gensia Partnership. Registrant's Form 8-K dated
February 24, 1994
28.28 Supplement No. 2 dated June 15, 1993 to Filed as Exhibit 28.28 to
Prospectus dated January 21, 1993. Registrant's Form 10-K for
the year ended December 31,
1993
28.29 Supplement No. 3 dated August 11, 1993 to Filed as Exhibit 28.29 to
Prospectus dated January 21, 1993. Registrant's Form 10-K for
the year ended December 31,
1993
99 Press Release Dated April 30, 2002 Filed as Exhibit 99 to
Registrant's Form 8-K dated
April 30, 2002
99.1 Certification of Chief Executive Officer Filed herewith
99.2 Certification of Chief Financial Officer Filed herewith
(b) Reports on Form 8-K
During the year ended December 31, 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.
-44-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
a Maryland corporation
3/25/03 BY: /s/ John J. Park
- ---------------- -------------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
3/25/03 BY: /s/ William Polk Carey
- ---------------- -----------------------------------------
Date William Polk Carey
Chairman of the Board and Director
(Principal Executive Officer)
3/25/03 BY: /s/ Gordon F. DuGan
- ---------------- -----------------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board, Senior
Managing Director and Chief Acquisitions
Officer
3/25/03 BY: /s/ Edward V. LaPuma
- ---------------- -----------------------------------------
Date Edward V. LaPuma
President
3/25/03 BY: /s/ Francis X. Diebold
- ---------------- -----------------------------------------
Date Francis X. Diebold
Director
3/25/03 BY: /s/ William Ruder
- ---------------- -----------------------------------------
Date William Ruder
Director
3/25/03 BY: /s/ George E. Stoddard
- ---------------- -----------------------------------------
Date George E. Stoddard
Director
3/25/03 BY: /s/ Ralph F. Verni
- ---------------- -----------------------------------------
Date Ralph F. Verni
Director
3/25/03 BY: /s/ Warren G. Wintrub
- ---------------- -----------------------------------------
Date Warren G. Wintrub
Director
3/25/03 BY: /s/ John J. Park
- ---------------- -----------------------------------------
Date John J. Park
Managing Director and Chief Financial
Officer
(Principal Financial Officer)
3/25/03 BY: /s/ Claude Fernandez
- ---------------- -----------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting
Officer
(Principal Accounting Officer)
-45-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this annual report on Form 10-K of Carey Institutional
Properties Incorporated (the "Registrant");
2. Based on our knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and we have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date 3/25/03 Date 3/25/03
/s/ William Polk Carey /s/ Gordon F. DuGan
------------------------------ ---------------------
William Polk Carey Gordon F. DuGan
Chairman Vice Chairman
(Co-Chief Executive Officer) (Co-Chief Executive Officer)
-46-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this annual report on Form 10-K of Carey Institutional
Properties Incorporated (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date 3/25/03
/s/ John J. Park
-----------------------
John J. Park
Chief Financial Officer
-47-
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CAREY INSTITUTIONAL PROPERTIES INCORPORATED:
Our audits of the consolidated financial statements referred to in our report
dated March 20, 2003 appearing in the 2002 Annual Report to Shareholders of
CAREY INSTITUTIONAL PROPERTIES INCORPORATED (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
15(a)(3) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2003
-48-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs Capitalized
Subsequent to Increase (Decrease)
Description Encumbrances Land Buildings Acquisition (a) in Net Investments (c)
----------- ------------ ---- --------- ----------------- ----------------------
Operating Method:
Retail store leased to Hobby
Lobby Stores, Inc. $ 676,701 $ 1,712,531 $ 30,370
Manufacturing/distributing
facility leased to
Electronic Data Systems
Corporation $ 11,594,068 1,895,796 4,576,940 15,125,189
Warehouse/manufacturing
facility leased to
Bell Sports, Inc. 283,726 5,066,274 3,322,270
Warehouse leased to GATX
Logistics, Inc. 3,280,330 1,350,444 4,574,557 60,676
Warehouse leased to Lucent
Technologies, Inc. 6,250,000 1,290,631 15,937,368 232,870
Land leased to
Barnes & Noble, Inc. 3,525,658 4,759,017 47,962
Land leased to
Best Buy Co., Inc. 11,789,042 18,579,019 646
Technical training institute
leased to UTI Holdings, Inc. 953,254 3,147,367 2,646,819
Office/warehouse leased to
Merit Medical Systems, Inc. 9,148,410 380,000 10,505,349
Land leased to Q Clubs, Inc. 1,585,064 2,073,578 1,026
Manufacturing/warehouse
facilities leased to Humco
Holding Group 3,973,812 1,240,000 6,604,324
Office/warehouse facility
leased to PSC Scanning, Inc. 5,196,939 1,125,000 7,615,414 10,621 (109,998)
Industrial/manufacturing
facility formerly leased to
Bolder Technologies
Corporation 3,382,322 1,076,000 5,759,878 85,060
Warehouse facility leased to
Petsmart, Inc. 3,021,375 106,603 4,444,397 42,817
Manufacturing facility leased
to Plexus Corp. 5,433,503 125,340 9,124,660 5,744
Childcare centers leased to
Childtime Childcare, Inc. 6,869,204 4,649,299 3,422,172
Office buildings leased to
Omnicom Group, Inc. 23,846,562 6,316,880 27,397,945 9,389,472
Retail stores leased to Garden
Ridge Corporation 13,091,740 2,197,500 4,112,500 5,054,413
Gross Amount at which Carried
at Close of Period (d)
----------------------
Accumulated
Description Land Buildings Total Depreciation (d)
----------- ---- --------- ----- ----------------
Operating Method:
Retail store leased to Hobby
Lobby Stores, Inc. $ 680,548 $ 1,739,054 $ 2,419,602 $ 306,403
Manufacturing/distributing
facility leased to
Electronic Data Systems
Corporation 1,899,802 19,698,123 21,597,925 3,187,083
Warehouse/manufacturing
facility leased to
Bell Sports, Inc. 283,793 8,388,477 8,672,270 2,012,629
Warehouse leased to GATX
Logistics, Inc. 1,364,272 4,621,405 5,985,677 1,160,142
Warehouse leased to Lucent
Technologies, Inc. 1,295,387 16,165,482 17,460,869 4,047,717
Land leased to
Barnes & Noble, Inc. 4,806,979 4,806,979
Land leased to
Best Buy Co., Inc. 18,579,665 18,579,665
Technical training institute
leased to UTI Holdings, Inc. 3,147,367 2,646,819 5,794,186 113,090
Office/warehouse leased to
Merit Medical Systems, Inc. 380,000 10,505,349 10,885,349 2,079,183
Land leased to Q Clubs, Inc. 2,074,604 2,074,604
Manufacturing/warehouse
facilities leased to Humco
Holding Group 1,240,000 6,604,324 7,844,324 639,794
Office/warehouse facility
leased to PSC Scanning, Inc. 1,125,000 7,516,037 8,641,037 687,358
Industrial/manufacturing
facility formerly leased to
Bolder Technologies
Corporation 1,076,000 5,844,938 6,920,938 534,307
Warehouse facility leased to
Petsmart, Inc. 107,606 4,486,211 4,593,817 1,032,763
Manufacturing facility leased
to Plexus Corp. 125,417 9,130,327 9,255,744 1,911,663
Childcare centers leased to
Childtime Childcare, Inc. 4,649,299 3,422,172 8,071,471 623,833
Office buildings leased to
Omnicom Group, Inc. 6,319,147 36,785,150 43,104,297 6,304,599
Retail stores leased to Garden
Ridge Corporation 2,197,998 9,166,415 11,364,413 1,536,114
Life on which
Depreciation in
Latest Statement
of Income
Description Date Acquired is Computed
----------- ------------- ---------------
Operating Method:
Retail store leased to Hobby December 19, 1991
Lobby Stores, Inc. and May 1, 2002 40 yrs.
Manufacturing/distributing
facility leased to
Electronic Data Systems October 1, 1992 and
Corporation May 1, 2002 40 yrs.
Warehouse/manufacturing
facility leased to
Bell Sports, Inc. November 6, 1992 40 yrs.
Warehouse leased to GATX
Logistics, Inc. December 23, 1992 40 yrs.
Warehouse leased to Lucent
Technologies, Inc. December 30, 1992 40 yrs.
Land leased to February 23, 1993
Barnes & Noble, Inc. and October 1, 1993 N/A
Land leased to
Best Buy Co., Inc. April 15, 1993 N/A
Technical training institute May 3, 1993 and
leased to UTI Holdings, Inc. September 29, 2000 N/A
Office/warehouse leased to
Merit Medical Systems, Inc. June 3, 1993 40 yrs.
Land leased to Q Clubs, Inc. July 16, 1993 N/A
Manufacturing/warehouse
facilities leased to Humco
Holding Group February 5, 1999 40 yrs.
Office/warehouse facility
leased to PSC Scanning, Inc. May 12, 1999 40 yrs.
Industrial/manufacturing
facility formerly leased to
Bolder Technologies
Corporation April 16, 1999 40 yrs.
Warehouse facility leased to
Petsmart, Inc. October 26, 1993 40 yrs.
Manufacturing facility leased
to Plexus Corp. August 11, 1994 40 yrs.
June 15, 1994 through
Childcare centers leased to November 18, 1994 and
Childtime Childcare, Inc. May 1, 2002 40 yrs.
Office buildings leased to
Omnicom Group, Inc. October 14, 1994 11-40 yrs.
Retail stores leased to Garden
Ridge Corporation May 29,1995 40 yrs.
See accompanying notes to Schedule.
-49-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs Capitalized
Subsequent to Increase (Decrease)
Description Encumbrances Land Buildings Acquisition (a) in Net Investments (c)
----------- ------------ ---- --------- ----------------- ----------------------
Operating Method:
Health club leased to
Q Clubs, Inc. 3,598,825 912,855 4,323,145
Warehouse/office leased to
Hibbett Sporting Goods, Inc. 5,121,776 660,000 4,040,000 2,323,784
Distribution/warehouse leased
to Detroit Diesel Corporation. 2,782,860 6,542,140
Office building leased to Xerox
Corporation 283,763 936,921 10,680
Supermarkets leased to
Affiliated Southwest, Inc. 759,921 3,116,753 497 (784,874)
Distribution/warehouse leased
to ISA International plc 4,171,440 149,350 6,034,442 506,365
Hotel leased to Societe
Hoteliere Tourisme Grand Noble 8,313,906 463,290 5,255,298 1,047,545
Office/repair facility leased
to US West Communications,
Inc. 1,588,537 509,550 1,687,006
Office buildings leased to
Information Resources, Inc. 24,777,636 4,992,731 39,098,231
Retail stores leased to Kmart
Corporation 2,944,073 5,943,350
Office building leased to Titan
Corporation 8,319,096 3,910,146 20,426,386
Manufacturing/distribution
facility leased to
EnviroWorks, Inc. 4,521,629 1,045,856 13,752,114
============ =========== ============ =========== ==========
$173,354,128 $70,687,296 $202,827,276 $57,573,735 $ 659,038
============ =========== ============ =========== ==========
Gross Amount at which Carried
at Close of Period (d)
----------------------
Accumulated
Description Land Buildings Total Depreciation (d)
----------- ---- --------- ----- ----------------
Operating Method:
Health club leased to
Q Clubs, Inc. 912,855 4,323,145 5,236,000 743,040
Warehouse/office leased to
Hibbett Sporting Goods, Inc. 660,000 6,363,784 7,023,784 856,556
Distribution/warehouse leased
to Detroit Diesel Corporation. 2,782,860 6,542,140 9,325,000 988,136
Office building leased to Xerox
Corporation 283,763 947,601 1,231,364 69,242
Supermarkets leased to
Affiliated Southwest, Inc. 765,578 2,326,719 3,092,297 216,249
Distribution/warehouse leased
to ISA International plc 160,440 6,529,717 6,690,157 488,354
Hotel leased to Societe
Hoteliere Tourisme Grand Noble 548,156 6,217,977 6,766,133 133,633
Office/repair facility leased
to US West Communications,
Inc. 509,550 1,687,006 2,196,556 26,359
Office buildings leased to
Information Resources, Inc. 4,992,731 39,098,231 44,090,962 612,091
Retail stores leased to Kmart
Corporation 2,944,073 5,943,350 8,887,423 93,656
Office building leased to Titan
Corporation 3,910,146 20,426,386 24,336,532 319,963
Manufacturing/distribution
facility leased to
EnviroWorks, Inc. 1,045,856 13,752,114 14,797,970 214,877
=========== ============ ============ ===========
$70,868,892 $260,878,453 $331,747,345 $30,938,834
=========== ============ ============ ===========
Life on which
Depreciation in
Latest Statement
of Income
Description Date Acquired is Computed
----------- ------------- ---------------
Operating Method:
Health club leased to
Q Clubs, Inc. February 6, 1996 40 yrs.
Warehouse/office leased to
Hibbett Sporting Goods, Inc. February 12, 1996 40 yrs.
Distribution/warehouse leased
to Detroit Diesel Corporation. December 17, 1996 40 yrs.
Office building leased to Xerox February 21, 1992
Corporation and May 1, 2002 40 yrs.
Supermarkets leased to February 21, 1992
Affiliated Southwest, Inc. and May 1, 2002 40 yrs.
Distribution/warehouse leased
to ISA International plc March 7, 2000 40 yrs.
Hotel leased to Societe
Hoteliere Tourisme Grand Noble October 21, 2000 40 yrs
Office/repair facility leased
to US West Communications,
Inc. May 1, 2002 40 yrs
Office buildings leased to
Information Resources, Inc. May 1, 2002 40 yrs
Retail stores leased to Kmart
Corporation May 1, 2002 40 yrs
Office building leased to Titan
Corporation May 1, 2002 40 yrs
Manufacturing/distribution
facility leased to
EnviroWorks, Inc. May 1, 2002 40 yrs
See accompanying notes to Schedule.
-50-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
Initial Cost to Company
-----------------------
Costs Capitalized
Subsequent to Increase (Decrease)
Description Encumbrances Land Buildings Acquisition (a) in Net Investments (c)
----------- ------------ ---- --------- ----------------- ----------------------
Direct Financing Method:
Retail store leased to Oshman
Sporting Goods, Inc. $ 1,270,650 $ 700,356 $ 2,494,843 $ 37,695 $ 421,090
Office buildings leased to
Michigan Mutual Insurance
Company 9,500,000 1,965,093 11,884,907 5,919 124,300
Supermarkets leased to
ShopRite Supermarkets, Inc. 15,516,421 4,882,183 21,653,570 3,657,931 (3,225,133)
Retail stores leased to
Barnes & Noble, Inc. 5,179,964 5,525,983 49,806 1,486,716
Retail stores leased to
Best Buy Co., Inc. 16,394,039 27,653,981 962 (1,817,751)
Technical training institute
leased to UTI Holdings, Inc. 2,304,360 6,083,329 2,059
Health club leased to
Q Clubs, Inc. 2,684,166 3,511,422 1,737
Warehouse/distribution
facility leased to Nicholson
Warehouse, Inc. 3,060,478 598,544 6,316,456 1,370 (3,823,736)
Manufacturing facility leased
to Superior
Telecommunica-tions, Inc. 4,531,423 295,032 4,704,968 1,885 (161,794)
Food processing/warehouse
facility leased to Custom
Food Products, Inc. 178,358 27,000 5,536,384
Office buildings and
supermarkets leased to
Kroger Company 503,520 2,833,549
Warehouse/distribution
facility leased to
Gloystarne & Co., Ltd. 4,171,441 1,132,627 6,069,257 14,103 826,243
Office/warehouse facility
leased to New Wai L.P./
Warehouse Associates 8,775,453 307,775 14,983,073
Daycare centers leased to
Childtime Childcare, Inc. 4,658,698 6,688,301
----------- ----------- ------------ ---------- ------------
$78,225,451 $10,412,130 $120,403,639 $9,309,851 $(6,170,065)
=========== =========== ============ ========== ===========
Gross Amount at which Carried
at Close of Period (d)
Description Total Date Acquired
----------- ------------- ---------------
Direct Financing Method:
Retail store leased to Oshman
Sporting Goods, Inc. $ 3,653,984 December 10, 1992
Office buildings leased to
Michigan Mutual Insurance
Company 13,980,219 December 21, 1993
Supermarkets leased to December 23, 1993
ShopRite Supermarkets, Inc. 26,968,551 and October 8, 1993
Retail stores leased to February 23, 1993
Barnes & Noble, Inc. 7,062,505 and October 1, 1993
Retail stores leased to
Best Buy Co., Inc. 25,837,192 April 15, 1993
Technical training institute
leased to UTI Holdings, Inc. 6,085,388 May 3, 1993
Health club leased to
Q Clubs, Inc. 3,513,159 July 16, 1999
Warehouse/distribution
facility leased to Nicholson
Warehouse, Inc. 3,092,634 December 13, 1993
Manufacturing facility leased
to Superior
Telecommunica-tions, Inc. 4,840,091 December 16, 1993
Food processing/warehouse
facility leased to Custom
Food Products, Inc. 5,563,384 December 31, 1994
Office buildings and
supermarkets leased to February 21, 1992
Kroger Company 3,337,069 and May 1, 2002
Warehouse/distribution
facility leased to
Gloystarne & Co., Ltd. 8,042,230 December 8, 1999
Office/warehouse facility
leased to New Wai L.P./
Warehouse Associates 15,290,848 May 1, 2002
Daycare centers leased to
Childtime Childcare, Inc. 6,688,301 May 1, 2002
------------
$133,955,555
============
-51-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and
other acquisition costs including legal fees, appraisal fees, title
costs and other related professional fees.
(b) At December 31, 2002, the aggregate cost of real estate owned by
Registrant and its subsidiaries for Federal income tax purposes is
$316,720,739.
(c) The increase (decrease) in net investment is due to (i) the
amortization of unearned income producing a constant periodic rate
of return on the net investment which is more (less) than lease
payments received, (ii) the sales of properties and of
tenancy-in-common interests to an affiliate, (iii) foreign currency
translation adjustments and (iv) impairment charges.
(d)
Reconciliation of Real Estate Accounted for Under the
Operating Method
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $ 222,202,821 $ 247,246,819
Additions 108,312,336 3,409,223
Impairment loss (1,090,347) (2,300,000)
Dispositions (292,348) (7,762,907)
Foreign currency translation adjustment 1,684,889 (175,072)
Reclassification from real estate under construction 5,035,398 --
Reclassification to assets held for sale (4,105,404) (7,680,327)
Reclassification to equity investment -- (10,534,915)
------------- -------------
Balance at close of year $ 331,747,345 $ 222,202,821
============= =============
Reconciliation of Accumulated Depreciation
December 31,
------------
2002 2001
---- ----
Balance at beginning of year $ 26,240,326 $ 24,771,906
Depreciation expense 5,931,695 4,806,925
Depreciation expense from discontinued operations 317,945 423,129
Dispositions -- (1,674,173)
Foreign currency translation adjustment 54,273 (3,208)
Reclassification to asset held for sale (1,605,405) (769,773)
Reclassification to equity investment -- (1,314,480)
------------- -------------
Balance at close of year $ 30,938,834 $ 26,240,326
============= =============
-52-
APPENDIX A TO FORM 10-K
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
2002 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATING DATA:
Revenues $ 49,346 $ 41,107 $ 40,618 $ 39,584 $ 34,583
Income from continuing operations (1) 18,114 15,849 15,877 15,205 11,960
Basic earnings from continuing operations per
share .70 .72 .72 .70 .63
Diluted earnings from continuing operations per
share .68 .71 .71 .69 .62
Net income 13,479 15,366 15,377 14,836 13,732
Basic earnings per share .52 .70 .70 .68 .72
Diluted earnings per share .51 .68 .69 .67 .71
Dividends paid 20,879 18,550 18,187 17,715 14,958
Dividends paid per share .85 .84 .83 .83 .83
Payments of mortgage principal(2) 5,242 4,642 4,322 4,355 4,159
BALANCE SHEET DATA:
Total consolidated assets 550,227 369,307 380,209 381,711 372,076
Long-term obligations(3) 236,129 131,659 149,023 147,715 142,389
(1) Includes (loss) gain from sales of real estate, net.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents limited recourse mortgage and note payable obligations
due after more than one year.
-1-
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The following discussion and analysis of financial condition and results of
operations of Carey Institutional Properties Incorporated ("CIP(R)") should be
read in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 2002. The following discussion includes forward
looking statements. Forward looking statements, which are based on certain
assumptions, describe future plans, strategies and expectations of CIP(R). 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 plan expressed or implied
by such forward looking statements. The risk factors are fully described in Item
1 of this Annual Report on Form 10-K. Accordingly, such information should not
be regarded as representations by CIP(R) that the results or conditions
described in such statements or objectives and plans of CIP(R) will be achieved.
CIP(R) was formed in 1991 and used the proceeds from its public offering of
shares of common stock along with limited recourse mortgage financing to
purchase properties and enter into long-term net leases with corporate tenants.
On May 1, 2002, CIP(R) acquired the business of Corporate Property Associates 10
Incorporated ("CPA(R):10") in a stock-for-stock merger. A majority of CIP(R)'s
net leases have been structured to place certain economic burdens of ownership
on these corporate tenants by requiring them to pay the costs of maintenance and
repair, insurance and real estate taxes. The lease obligations are
unconditional. If possible, CIP(R) also negotiates guarantees of the obligations
from the parent company of the lessees. The leases have generally been
structured to include periodic rent increases that are stated or based on
increases in the Consumer Price Index ("CPI") or, for certain retail properties,
provide for additional rents based on sales in excess of a specified base
amount. In addition to investing directly, CIP(R) may also acquire interests in
real estate through joint ventures. These joint ventures are generally with
affiliates.
As a real estate investment trust ("REIT"), CIP(R) is not subject to federal
income taxes on amounts distributed to shareholders provided it meets certain
conditions including distributing at least 90% of its REIT taxable income to its
shareholders. CIP(R)'s primary objectives are to provide rising cash flow and
pay quarterly dividends at an increasing rate and to protect its investors from
the effects of inflation through rent escalation provisions, property
appreciation, tenant credit improvement and regular paydown of limited recourse
mortgage debt. In addition, CIP(R) has successfully negotiated grants of common
stock warrants from selected tenants and, in several instances, realized the
benefits of appreciation from those grants. While CIP(R) cannot guarantee that
its objectives will be ultimately realized, annual independent valuations of
CIP(R)'s assets have reflected significant appreciation in property values.
CIP(R) is advised by Carey Asset Management Corp., a wholly-owned subsidiary of
W. P. Carey & Co. LLC pursuant to an Advisory Agreement. CIP(R)'s Advisory
Agreement is renewable annually by Independent Directors who are elected by
CIP(R)'s shareholders. In connection with each renewal, Carey Asset Management
is required to provide the Independent Directors with a comparison of the fee
structure with several similar companies. The Advisory Agreement also provides
that an independent portfolio valuation be performed annually, and Average
Invested Assets, the basis for determining asset management and performance
fees, is based on the results of the independent valuation.
Critical Accounting Policies
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) generally
recognizes a provision for uncollected rents which typically ranges between
0.25% and 1% of lease revenues (rental income and interest income from direct
financing leases) and will measure its allowance against actual rent arrearages
and adjust the percentage applied.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Based on its actual experience in 2002, CIP(R) recorded a provision equal to
approximately 1.5% of lease revenues. At December 31, 2002, CIP(R) had rent
arrearages of approximately $2,848,000 that are at risk of default.
Operating real estate is stated at cost less accumulated deprecation. Costs
directly related to build-to-suit projects, primarily interest, if applicable,
are capitalized. Interest capitalized in 2002 and 2001 was $327,000 and
$236,000, respectively. No interest was capitalized in 2000. CIP(R) considers a
build-to-suit project as substantially completed upon the completion of
improvements, but no later than a date that is negotiated and stated in the
lease. If portions of a project are substantially completed and occupied and
other portions have not yet reached that stage, the substantially completed
portions are accounted for separately. CIP(R) allocates costs incurred between
the portions under construction and the portions substantially completed and
only capitalizes those costs associated with the portion under construction.
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, residual values and holding periods. As
CIP(R)'s investment objective is to hold properties on a long-term basis,
holding periods will range from five to ten years. 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
estimated cash flow projected in the evaluation of long-lived assets can vary
within a range of outcomes. 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. This makes the risk different than the
risks faced by companies that own 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. For its direct financing leases,
CIP(R) performs a review of its estimated residual value of properties at least
annually to determine whether there has been an other than temporary decline in
CIP(R)'s current estimate of residual value of the underlying real estate assets
of direct financing leases. If the review indicates a decline in residual values
that is other than temporary, a loss is recognized and the accounting for the
direct financing lease will be revised using the changed estimate, that is, a
portion of the future cash flow from the lessee will be recognized as a return
of principal rather than as revenue.
When assets are identified by management as held for sale, CIP(R) discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in Management's opinion, the net sales price of the assets which
have been identified for sale is less than the net book value of the assets, an
impairment charge is recognized, and a valuation allowance is established. If
circumstances arise that previously were considered unlikely and, as a result,
the Company decides not to sell a property previously classified as held for
sale, the property is reclassified as held and used. A property that is
reclassified is measured and recorded individually at the lower of (a) its
carrying amount before the property was classified as held for sale, adjusted
for any depreciation expense that would have been recognized had the property
been continuously classified as held and used, or (b) the fair value at the date
of the subsequent decision not to sell.
In 2002, CIP(R) acquired a subordinated interest in a mortgage trust that
consists of limited recourse loans on 62 properties that are owned by CIP(R) or
three of its affiliates. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. If there are adverse changes
in either market rates or the credit quality of the lessees, the model and,
therefore, the income recognized from the subordinated interests and the fair
value will be adjusted.
CIP(R) measures derivative instruments, including certain derivative instruments
embedded in other contracts, if any, at fair value and records them as an asset
or liability, depending on CIP(R)'s right or obligations under the applicable
derivative contract. For derivatives designated as fair value hedges, the
changes in the fair value of both the derivative instrument and the hedged item
are recorded in earnings (i.e., the forecasted event occurs). For derivatives
designated as cash flow hedges, the effective portions of the derivatives are
reported in other comprehensive income and are subsequently reclassified into
earnings when the hedged item affects earnings.
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Changes in the fair value of derivative instruments not designated as hedging
and ineffective portions of hedges are recognized in earnings in the affected
period.
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 the 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. No
fees are payable to affiliates under any of the partnership or joint venture
agreements. All of the jointly held investments are subject to contractual
agreements. The presentation of these jointly held investments and their related
results in the accompanying consolidated financial statements is based on
factors such as controlling interest, significant influence and whether each
party has the ability to make independent decisions. Equity method investments
are reviewed for impairment in the event of a change in circumstances that is
other than temporary. An investment is only impaired if Management's estimate of
the net realizable value of the investment is less than the carrying value of
the investment. To the extent that an impairment has occurred, the loss shall be
measured as the excess of the carrying amount of the investment over the fair
value of the investment.
Stated rental revenue and interest income from direct financing leases are
recognized on a straight-line basis and a constant rate of interest,
respectively, over the terms of the respective leases. Unbilled rents receivable
represents the amount by which straight-line rental revenue exceeds rents
currently billed in accordance with the lease agreements. The majority of
CIP(R)'s leases provide for periodic rent based on formulas indexed to increases
in the CPI. CPI-based and other contingent-type rents are recognized currently.
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) 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 at the inception of a lease 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 non-cancelable lease
term. Different estimates of residual value result in different implicit
interest rates and could possibly affect the financial reporting classification
of leased assets. The general terms of CIP(R)'s leases are not necessarily
different for operating and direct financing leases; however the classification
is based on accounting pronouncements which are intended to indicate whether the
risks and rewards of ownership are retained by the lessor or transferred to the
lessee. Management believes that it retains certain risks of ownership
regardless of accounting classification.
Costs incurred in connection with leases are capitalized and amortized on a
straight-line basis over the terms of the related leases and included in
property expense. Unamortized leasing costs are also charged to property expense
upon early termination of the lease. Costs incurred in connection with obtaining
mortgages and debt financing are capitalized and amortized over the term of the
related debt and included in interest expense. Unamortized financing costs are
included in charges for early extinguishment of debt if a loan is retired and
the costs have not been fully amortized.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. Operating segments are
components of an enterprise about which financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management evaluates the
performance of its portfolio of properties as a whole, rather than by
identifying discrete operating segments. This evaluation includes assessing
CIP(R)'s ability to meet distribution objectives, increase the dividend and
increase value by evaluating potential investments in single tenant net lease
real estate and by seeking opportunities such as refinancing mortgage debt at
lower rates of interest, restructuring leases or paying off lenders at a
discount to the face value of the outstanding mortgage balance. As of December
31, 2002 and 2001, CIP(R) owned real estate in the United States, the United
Kingdom and France.
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Effective May 1, 2002, CIP(R) acquired the business operations of CPA(R):10,
through a merger approved by the shareholders of both companies. CPA(R):10 was
an affiliate with investments in net lease real estate with objectives that are
the same as CIP(R)'s. CPA(R):10's portfolio included investments that were
jointly-owned with CIP(R). As a result of the merger, CIP(R) 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 assumed 17 leases with 14
tenants. The real estate acquired 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 year ended December
31, 2002 is not directly comparable to the year ended December 31, 2001.
Net income for the year ended December 31, 2002 decreased by $1,887,000 to
$13,479,000 as compared with $15,366,000 for the year ended December 31, 2001.
Excluding the effect of gains and losses, charges on the early extinguishment of
debt and noncash impairment charges, income as adjusted would have reflected an
increase of $3,111,000. The increase was primarily due to an increase in income
from lease revenues and equity investments and was partially offset by increases
in interest expense, depreciation, general and administrative and property
expenses. A substantial portion of all of these increases was due to the
increase in the asset base as a result of the merger.
Lease revenues increased by $8,015,000 for the year ended December 31, 2002.
Revenues of $9,716,000 were attributable to the property interests acquired from
CPA(R):10. Lease revenues benefited from scheduled rent increases on eight
leases. Lease revenues also increased from the completion of build-to-suit
projects at a property leased to UTI Holdings, Inc. and a Holiday Inn in
Toulouse, France in April 2001 and February 2002, respectively. These increases
were partially offset by the September 2001 sale of six retail stores leased to
Wal-Mart Stores, Inc., a lease termination and the subsequent sale of a property
leased to Waban, Inc. and the termination of a lease with Bolder Technologies
Corporation. The Wal-Mart, Waban and Bolder leases contributed annual lease
revenues of $2,894,000. Additionally, lease revenues for the year ended December
31, 2001 include $965,000 from Del Monte Corporation that is included in income
from equity investments in 2002. Twenty-eight leases have rent increases
scheduled for 2003 and 2004. The majority of these rent increases are based on
formulas indexed to increases in the CPI. The annual increase in the CPI over
the past several years has ranged between 1.5% and 3%. CIP(R)'s leases generally
have increases scheduled in intervals of between one and five years. Lease
revenues also increased as a result of a change in the accounting of CIP(R)'s
interest in properties leased to Childtime Childcare, Inc. and ShopRite
Supermarkets, Inc. (formerly Big V Holding Corp.) as a result of contributing
its majority interests in the properties to limited partnerships, as general
partner. For the period from such contribution (August 1, 2002), CIP(R) reflects
100% of the revenues and expenses of the partnerships with the limited partners'
share of income recorded as minority interest income. This change in ownership
increased lease revenues by $636,000; however, the ownership change has no
overall effect on net income or cash flow.
CIP(R) renewed leases in 2002 on properties leased to Lucent Technologies, Inc.,
GATX Logistics, Inc., US West Communications, Inc. and Hobby Lobby Stores, Inc.
at an aggregate rent of approximately $3,500,000. Other than the GATX and Lucent
leases, which current terms expire in 2004 and 2005, respectively, no
single-tenant property lease will expire until 2007. Kmart Corporation has
notified CIP(R) that it will be closing its Denton, Texas store in connection
with its bankruptcy reorganization but has not indicated whether it will
terminate its lease. Annual lease revenues from the Denton store are $215,000;
however, Kmart has not indicated its plans for its leased properties in Michigan
and California. Annual revenues from these two Kmart properties are $390,000.
Kmart is currently meeting its rental obligations on all three properties.
During 2002, ShopRite assumed the business operations of Big V Holding Corp.
including the lease obligations for CIP(R)'s three Big V Properties in
connection with Big V's bankruptcy. The Big V lease terms were not modified when
the lease obligations were transferred to ShopRite. CIP(R) leases a property in
the United Kingdom to Gloystarne & Co., Ltd. at an annual rent of approximately
$610,000. Subsequent to December 31, 2002, Gloystarne entered into liquidation
and is attempting to sell its business as a going concern. Although Gloystarne
is current in its rent obligation, there is no assurance that its future rent
obligation will be met.
Income from equity investments increased $3,454,000 for the year ended December
31, 2002, primarily because CIP(R)'s ownership interest in Marcourt Investments,
Inc., a lessee of 13 Courtyard by Marriott hotels, increased from
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
24% to 47% as a result of the merger. Income from equity investments also
increased as a result of the reclassification to equity investments, in October
2001, of CIP(R)'s 50% interest in the Del Monte properties, which were
contributed to a partnership that CIP(R) owns with an affiliate. The Del Monte
reclassification has no effect on net income; however, since CIP(R) now reports
its share of net income from the equity investment in its financial statements
as income from equity investments rather than reporting its share of underlying
revenues and expenses. The reclassification resulted in an increase in income
from equity investments of $645,000 for the year ended December 31, 2002, but
had no net effect on the determination of earnings.
Interest expense for the year ended December 31, 2002 increased by $2,842,000 as
the result of obtaining $83,667,000 of new loans in August 2002 in connection
with a mortgage securitization and assuming $52,077,000 of existing mortgages on
the properties acquired from CPA(R):10. Interest expense for the prior year
included approximately $897,000 of interest expense from the loan on the Del
Monte properties.
General and administrative expense for the year ended December 31, 2002
increased primarily because 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
and the reimbursement of personnel costs. The increase in property expenses was
due to an increase in asset management fees and performance fees, which are
based on the appraised value of CIP(R)'s real estate assets. The appraised value
of CIP(R)'s real estate assets increased by approximately 29% as a result of the
acquisition of CPA(R):10's real estate assets. The increase in the asset-based
fees that resulted solely from the newly-acquired assets was approximately
$1,069,000. Included in property expenses in 2002 are $281,000 of carrying costs
for the former Bolder property. CIP(R) has made a proposal to a potential tenant
which, if accepted, would provide annual income of approximately $380,000.
In August 2002, CIP(R) acquired $10,617,000 of subordinated interests in a
mortgage securitization pool which will generate interest income. Prior to this
transaction, CIP(R)'s interest income represented amounts earned in investing
cash in money market instruments. Management projects that the effective rate of
interest on the mortgages obtained through the securitization, net of the
projected cash flow from the interest in the mortgage trust, will be
approximately 6.25%.
CIP(R) recognized gains of $2,003,000 including $1,992,000 from the sale of its
warrant position in Merit Medical Systems, Inc. The gain on the Merit Medical
warrants is offset by the reversal of an unrealized gain on the warrants of
$2,128,000 that had been recognized in 2001. In December 2002, CIP(R) sold its
property in Farmingdale, New York formerly leased to Waban, Inc. for $6,743,000
and recognized a $167,000 loss on sale. CIP(R)'s lease with Waban for a BJ's
Warehouse retail property ended in January 2002 and the property was sold in
December 2002. Annual cash flow from the Waban property was $505,000.
CIP(R) recorded a $1,490,000 loss from discontinued operations in connection
with a vacant property in Austin, Texas which is held for sale as of December
31, 2002 and the sale in May 2002 of a property in Little Rock, Arkansas
formerly leased to Affiliated Southwest, Inc. Of this loss, $1,090,000 was due
to an impairment charge on the writedown of the Austin property to its fair
value.
In 2002, CIP(R) incurred extraordinary charges on extinguishment of debt of
$3,145,000. Of this amount, $2,857,000 represents prepayment premiums and the
writeoff of unamortized financing costs on mortgage loans paid off and
refinanced in connection with a mortgage securitization, the Best Buy Co.
refinancing and the satisfaction of the Waban, Inc. loan in connection with the
sale of the property. CIP(R) also incurred a $288,000 early extinguishment
charge in paying off the promissory notes held by former CPA(R):10 shareholders.
The extinguishment charge of $3,145,000 is net of minority interest of
$1,011,000.
Because of the long-term nature of CIP(R)'s net leases, inflation and changing
prices have not unfavorably affected CIP(R)'s revenues and net income. CIP(R)'s
net leases have rent increases based on formulas indexed to increases in the
CPI, sales overrides, or other periodic increases that are designed to increase
lease revenues in the future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net income for the year ended December 31, 2001 decreased $11,000 as compared
with the year ended December 31, 2000. Excluding the effects of gains and
impairment charges, income would have increased $993,000. The increase in
income, as adjusted, was primarily due to increases in lease revenues and income
from equity investments and a decrease in interest expense. These increases were
partially offset by an increase in property expense and a decrease in interest
income.
Lease revenues increased by $490,000 to $41,107,000 as a result of rent
increases on several leases, including leases with Electronic Data Systems
Corporation and Plexus Corp. in 2000 and Q Clubs, Inc. and Garden Ridge
Corporation in 2001. Lease revenues in 2001 also benefited from the completion
in April 2001 of a build-to-suit property leased to UTI Holdings and a full year
of rent from a property acquired in March 2000 leased to ISA International plc.
As a result of the rent increases, the lease with ISA International and the
completion of the UTI build-to-suit, annual rents increased $1,107,000.
As a result of the sale of a portfolio of six Wal-Mart Stores properties in
September 2001, annual lease revenues decreased by $1,039,000 (based on rents
received in 2000 including percentage of sales rents of $280,000). A mortgage
extension agreement on the Wal-Mart property loan required monthly payments of
$65,000 and a separate annual payment to the lender of all percentage of sales
rents received, resulting in no cash flow (lease revenues less mortgage debt
service) from the Wal-Mart properties.
Income from equity investments increased by $468,000 to $5,412,000. This
increase was due, in part, to the reclassification of the Del Monte properties
in October 2001. In connection with refinancing the mortgage loan on the Del
Monte properties, the Del Monte properties were contributed to a jointly held
affiliate. As a result of the change in the form of ownership, accounting for
the Del Monte properties changed to the equity method.
Income from equity investments also increased as a result of an increase in
Marcourt's earnings. The increase in Marcourt's net income was due to an
increase in percentage rent from the Marriott hotels and a reduction in interest
expense due to amortizing mortgage debt. The lease with Marriott includes a
provision for additional rents based on a percentage of sales, including room
revenues, in excess of a specified amount at the hotel properties. Income from
equity investments also benefited from a rent increase in April 2001 on the
lease with The Upper Deck Company in which CIP(R) owns a 50% interest in the
property partnership.
Interest expense decreased $774,000 to $13,810,000 as a result of the
amortization of mortgage debt, lower interest rates on several variable rate
loans, the payoff of mortgage loans on the Wal-Mart properties and the property
leased to Superior Telecommunications, Inc. and, to a lesser extent, the
capitalization of interest charges on build-to-suit properties under
construction prior to being placed in service.
The increase in property expense of $680,000 to $7,082,000 was primarily due to
an increase in CIP(R)'s provision for uncollected rents as the provision for
rent arrearages increased and, to a lesser extent, the carrying costs on the
Bolder property. The increase in the rent provision was primarily due to
deterioration in the financial condition of Nicholson Warehouse, L.P. As a
result, CIP(R) recorded an impairment charge of $2,000,000 on the Nicholson
property. CIP(R) also recorded an impairment charge in 2002 of $1,550,000 on the
Nicholson property.
The decrease in interest income was the result of a decrease in average cash
balances between December 2001 and December 2000. The cash balance decreased as
funds were used for the completion of build-to-suit projects and to purchase
properties in 2000 to further diversify CIP(R)'s portfolio.
CIP(R)'s results for 2001 included net gains of $3,176,000 including a realized
gain of $1,081,000 from the sale of the Wal-Mart properties and an unrealized
gain of $2,128,000 from holding warrants for common stock of certain lessees.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was effective in 2001. Under SFAS
No. 133, warrants for common stock that provide for net settlement (i.e., as a
cashless exercise) or are readily convertible to cash are defined as a
derivative instrument and changes in the value of warrants for common stock
which meet the SFAS No. 133 definition of a derivative instrument are recognized
in earnings. The unrealized gain in 2001 represents the value attributed to
194,326 warrants for common stock of Merit Medical that were granted to CIP(R)
in connection with structuring the lease transaction with Merit Medical in 1993
and those warrants meeting the criteria for treatment as a derivative
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
instrument. The value of the Merit Medical warrants was determined using
Black-Scholes and Binomial Tree option pricing methods.
Financial Condition
Since December 31, 2001, CIP(R)'s cash and cash equivalents have increased by
$18,394,000 to $25,782,000, primarily as a result of obtaining new mortgage
financing in connection with the mortgage securitization described below. CIP(R)
intends to invest its available cash in new real estate investments to further
diversify its portfolio, and projects that it will continue to have sufficient
cash flow from operations and equity investments to meet its cash flow
objectives. Cash flows from operations of $25,599,000 included $3,439,000 of
prepayment premiums incurred in connection with paying off eight mortgage loans.
Management considers the prepayment premiums as financing costs and does not
include the payments in its evaluation of CIP(R)'s ongoing ability to generate
cash from operations to increase dividends at current cash levels. Prepayment
costs are incurred only if CIP(R) can refinance debt on more favorable terms or
if it projects it will benefit from liquidating high-interest rate debt. Cash
flows from operations, excluding the prepayment premiums, of $28,663,000 and
equity investments of $659,000 were sufficient to fund dividends to shareholders
of $20,877,000, fund distributions to minority partners of $1,830,000 and pay
mortgage principal installments of $5,242,000.
During 2002, CIP(R)'s investing activities included using $14,777,000 to
purchase interests in the mortgage loan pool. CIP(R) subsequently sold its
investment-grade rated participation in the mortgage pool interests for
$4,172,000. CIP(R) issued approximately 5,500,000 shares of common stock to
acquire the business operations of CPA(R):10 in May 2002 and used $594,000 in
2002 to pay costs related to the merger with CPA(R):10 and the related
acquisition of CPA(R):10's assets and liabilities. The acquired assets included
$765,000 of cash. CIP(R) used $1,774,000 to satisfy the interests of certain
CPA(R):10 shareholders who exercised dissenters' rights. CIP(R) received
proceeds of $7,041,000 from the sales of the Waban property and a Little Rock,
Arkansas property formerly leased to Affiliated Southwest, Inc. and $1,993,000
from its sale of Merit Medical stock warrants. CIP(R) used $2,743,000 to fund
construction of an expansion at its hotel property in Toulouse, France and other
additional capitalized real estate costs at existing properties. In February
2003, the additional expansion of the Toulouse property was completed. The final
addition was funded by CIP(R)'s joint venture partner in the Toulouse property.
CIP(R) participated in a mortgage pool consisting solely of $172,335,000 of
newly-issued mortgage loans collateralized by properties and lease assignments
on properties owned by CIP(R) and three affiliates. Investment-grade interests
representing $148,206,000 of the securitized mortgage assets are owned by
institutional investors and subordinated interests of $24,129,000 were purchased
by CIP(R) and its affiliates, with CIP(R) owning a 44% share of the subordinated
interest. The subordinated interests are payable only after all other classes of
ownership receive their stated interest and, therefore, will be affected by any
defaults or nonpayments of rents by lessees at the mortgaged properties,
regardless of which affiliate owns the underlying property. CIP(R)'s cash flow,
therefore, may be affected by events that occur at affiliates and not only from
its own properties. To the extent that there are no defaults or nonpayments,
CIP(R) may realize up to $1,575,000 in annual cash flow from its subordinated
interest. Because the subordinated interests incur any losses before the other
interests, the risk of a loss in cash flow and market value of the investment is
greatest for this interest, and there is no assurance that there will be no
adverse events that would significantly diminish cash flow from this investment.
In addition to the payment of dividends and scheduled principal mortgage
payments, CIP(R)'s financing activities for the year ended December 31, 2002
included obtaining proceeds of $120,140,000 from limited recourse mortgage
financing, including $83,667,000 received in connection with the mortgage pool
financing. As a result of placing loans in the mortgage pool, CIP(R) was able to
obtain favorable terms (7.5% annual interest on a 25-year amortization schedule)
on its supermarkets and day care centers, properties which traditional mortgage
lenders are currently averse to financing. CIP(R) and its affiliates may seek to
obtain additional limited recourse mortgages through another securitization,
although there are no current plans for an additional securitization
transaction. All of the loans are limited recourse loans and have maturity dates
between September 2009 and September 2012, at which time balloon payments are
scheduled. Annual debt service payments will increase by $3,187,000. CIP(R) also
refinanced existing mortgage loans on properties leased to Best Buy and Plexus
Corp. and obtained advances on a construction loan for the completion of the
Toulouse hotel expansion. CIP(R) used $74,138,000 to pay off existing mortgages,
including $33,486,000 used to satisfy seven existing loans in connection with
the mortgage securitization.
CIP(R)'s financing strategy has been to purchase substantially all of its
properties with a combination of equity and limited recourse mortgage debt. A
lender on a limited recourse mortgage loan has recourse only to the property
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
collateralizing such debt and not to any of CIP(R)'s other assets. The use of
limited recourse mortgage debt, therefore, allows CIP(R) to limit its exposure
of all of its assets, and this strategy has allowed CIP(R) to diversify its
portfolio of properties and, thereby, limit its risk. In the event that a
balloon payment comes due, CIP(R) may seek to refinance the loan, restructure
the debt with existing lenders, evaluate its ability to pay the balloon payment
from its cash reserves or sell the property and use the proceeds to satisfy the
mortgage debt. CIP(R) may seek to finance its unencumbered properties and use
the proceeds to make additional investments in real estate. To the extent that
CIP(R) obtains such financing, it may increase CIP(R)'s overall leverage.
Balloon payments of approximately $9,221,000 and $12,850,000 are scheduled in
2003 and 2004, respectively. CIP(R) expects to refinance the maturing loans but
may use some of its available cash to satisfy the balloon payments. In January
2003, CIP(R) used $1,265,000 to satisfy one of the scheduled 2003 balloon
payments. CIP(R)'s equity investees use the same financing strategy and have
purchased their properties with a combination of equity and limited recourse
mortgage debt.
CIP(R) expects to meet its capital requirements to fund future property
acquisitions, capital expenditures on existing properties and scheduled debt
maturities through long-term limited recourse mortgages and possibly unsecured
indebtedness. CIP(R) is not currently seeking additional sources of refinancing
such as an unsecured line of credit; however, its financing strategies could
change in the future. Unsecured financing, if obtained, would require CIP(R) to
meet financial covenants such as maintaining specific operating ratios and
leverage ratios.
Four lessees have purchase options which are exercisable over 2003 through 2005.
In the event that the options are exercised, annual revenues and cash flow would
decrease by $3,693,000 and $1,934,000, respectively. If the options are
exercised, CIP(R) would likely seek to reinvest the proceeds from sale in
additional real estate investments. In the event that the options are exercised,
CIP(R) would receive no less than $27,106,000 from the proceeds of sale before
satisfaction of any mortgage debt. All of the purchase options provide for an
exercise price of the higher of fair value or a stated purchase price.
In connection with the merger with CPA(R):10, each shareholder of CPA(R):10 who
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 5,500,000
(totaling approximately $73,155,000) 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 owned. In December 2002, CIP(R)
used $11,739,000 to pay off the promissory notes.
Due to its rapidly amortizing debt, Marcourt's taxable income exceeds its
distributable cash flow and it is not able to distribute 90% of its REIT taxable
income from its available cash. The shareholder agreement of Marcourt provides
for declaration of consent dividends, which allows Marcourt to meet its dividend
requirements but requires shareholders to recognize dividend income even though
Marcourt is not distributing such amounts currently. Consent dividends allowed
Marcourt to retain REIT status for 2002; however, it affects the amount of
taxable income that CIP(R) reports to its shareholders. In 2002, Marcourt
declared a consent dividend of $3,062,000.
Off-Balance Sheet and Aggregate Contractual Agreements
A summary of CIP(R)'s obligations under contractual arrangements is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
-------- ------- ------- ------- ------- -------- ----------
Limited recourse mortgage notes
payable $251,580 $15,436 $18,886 $11,545 $ 5,040 $ 14,975 $185,698
Subordinated disposition fees 1,002 1,002
Ground lease obligations 594 160 126 100 100 100 8
Share of minimum rents payable
under office cost-sharing
agreement 776 207 207 207 155
-------- ------- ------- ------- ------- -------- --------
$253,952 $15,803 $19,219 $11,852 $ 5,295 $ 15,075 $186,708
======== ======= ======= ======= ======= ======== ========
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
not currently significant to CIP(R)'s risk management. CIP(R) has not hedged its
foreign investments and uses mortgage financing in the local currency to reduce
the effect of foreign currency fluctuations on cash flow.
In connection with the purchase of its properties, CIP(R) requires the sellers
to perform environmental reviews. Management believes, based on the results of
such reviews, that CIP(R)'s properties were in substantial compliance with
Federal and state environmental statutes at the time the properties were
acquired. However, portions of certain properties have been subject to some
degree of contamination, principally in connection with either leakage from
underground storage tanks, surface spills from facility activities or historical
on-site activities. In most instances where contamination has been identified,
tenants are actively engaged in the remediation process and addressing
identified conditions. Tenants are generally subject to environmental statutes
and regulations regarding the discharge of hazardous materials and any related
remediation obligations. In addition, CIP(R)'s leases generally require tenants
to indemnify CIP(R) from all liabilities and losses related to the leased
properties with provisions of such indemnification specifically addressing
environmental matters. The leases generally include provisions which allow for
periodic environmental assessments, paid for by the tenant, and allow CIP(R) to
extend leases until such time as a tenant has satisfied its environmental
obligations. Certain of the leases allow CIP(R) to require financial assurances
from tenants such as performance bonds or letters of credit if the costs of
remediating environmental conditions are, in the estimation of CIP(R), in excess
of specified amounts. Accordingly, Management believes that the ultimate
resolution of any environmental matter will not have a material adverse effect
on CIP(R)'s financial condition, liquidity or results of operations.
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued 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 initiated after June 30,
2001 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 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 and the accounting for asset
acquisitions. The provisions of SFAS No. 142 are effective for fiscal years
beginning after December 15, 2001 and must be adopted at the beginning of a
fiscal year. SFAS No. 142 provides that goodwill and indefinite-lived intangible
assets will no longer be amortized but will be tested for impairment at least
annually. Intangible assets acquired and liabilities assumed in business
combinations will only be amortized if such assets or 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 142 did not have a
material effect on CIP(R)'s financial statements.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. CIP(R) does not expect SFAS No. 143 to have a material effect on its
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 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 144 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
must be presented as a discontinued operation for all periods presented.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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 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.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions" which amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No.
9. SFAS No. 147 provides guidance on the accounting for the acquisitions of
certain financial institutions and includes long-term customer relationships as
intangible assets within the scope of SFAS No. 144. CIP(R) does not expect SFAS
No. 147 to have a material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. CIP(R) does not have any employees nor any stock-based
compensation plans.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require
CIP(R) to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
accounting provisions only apply for certain new transactions entered into and
existing guarantee contracts modified after December 31, 2002. The adoption of
the accounting provisions of FIN 45 is not expected to have a material effect on
CIP(R)'s financial statements.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE to make additional disclosures. The transitional disclosures
requirements will take effect almost immediately and are required for all
financial statements initially issued after January 31, 2003. CIP(R)'s maximum
loss exposure is the carrying value of its equity investments. CIP(R) is
assessing the impact of this interpretation on its accounting for its
investments in unconsolidated joint ventures and does not expect FIN 46 to have
a material effect on its financial statements. .
-11-
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CAREY INSTITUTIONAL PROPERTIES INCORPORATED:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of CAREY INSTITUTIONAL
PROPERTIES INCORPORATED and its subsidiaries at December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Carey Asset Management Corp. (the "Advisor"); our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the Advisor, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 13 to the consolidated financial statements, effective
January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets", which requires that the results of
operations, including any gain or loss on sale, relating to real estate that has
been disposed of or is classified as held for sale after initial adoption be
reported in discontinued operations for all periods presented.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2003
-12-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
---- ----
ASSETS:
Real estate leased to others:
Accounted for under the operating method:
Land $ 70,868,892 $ 52,993,337
Buildings 260,878,453 169,209,484
------------- -------------
331,747,345 222,202,821
Less, accumulated depreciation 30,938,834 26,240,326
------------- -------------
300,808,511 195,962,495
Net investment in direct financing leases 133,955,555 101,498,035
Real estate under construction 5,725,416 7,969,435
Assets held for sale 2,500,000 6,910,554
Equity investments 58,578,685 43,776,928
cash and cash equivalents 25,782,304 7,388,480
Marketable securities 11,014,711 --
Other assets, net of accumulated amortization of $1,119,325 and $1,101,382 in 2002
and 2001, and net of allowance for uncollected rents of $2,825,000 and
$2,100,000 in 2002 and 2001 11,861,713 5,800,715
------------- -------------
Total assets $ 550,226,895 $ 369,306,642
============= =============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 251,579,579 $ 152,532,007
Accrued interest 1,550,184 874,728
Accounts payable and accrued expenses 1,832,633 1,454,040
Due to affiliates 2,552,528 1,898,009
Dividends payable 5,938,632 4,714,132
Prepaid rental income and security deposits 2,418,930 2,349,622
Other liabilities 3,840,777
------------- -------------
Total liabilities 269,713,263 163,822,538
------------- -------------
Minority interest 13,703,146 7,031,014
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares; 28,833,385 and
22,994,375 shares issued and outstanding at December 31, 2002 and 2001 28,833 22,994
Additional paid-in capital 308,659,610 230,880,420
Dividends in excess of accumulated earnings (31,519,364) (22,897,031)
Accumulated other comprehensive income (loss) 956,456 (411,420)
------------- -------------
278,125,535 207,594,963
Less, common stock in treasury at cost, 984,755 and 810,237 shares at December 31,
2002 and 2001 (11,315,049) (9,141,873)
------------- -------------
Total shareholders' equity 266,810,486 198,453,090
------------- -------------
Total liabilities and shareholders' equity $ 550,226,895 $ 369,306,642
============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
-13-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of INCOME
For the years ended December 31,
2002 2001 2000
---- ---- ----
Revenues:
Rental income $ 33,941,070 $ 28,199,756 $ 27,618,916
Interest income from direct financing leases 14,645,638 12,372,019 12,306,721
Interest and other income 759,309 535,450 691,948
------------ ------------ ------------
49,346,017 41,107,225 40,617,585
------------ ------------ ------------
Expenses:
Interest 16,893,051 13,809,810 14,565,522
Depreciation 5,931,695 4,806,925 4,887,595
Property expenses 9,160,245 7,081,597 6,401,704
General and administrative 4,167,215 2,971,751 2,877,270
Impairment charge on real estate 1,550,000 4,300,000 143,919
------------ ------------ ------------
37,702,206 32,970,083 28,876,010
------------ ------------ ------------
Income from continuing operations before minority
interest, income from equity investments and gains
(losses) 11,643,811 8,137,142 11,741,575
Minority interest in income (2,069,620) (875,599) (833,012)
Income from equity investments 8,865,740 5,411,560 4,943,863
------------ ------------ ------------
Income from continuing operations before gains (losses) 18,439,931 12,673,103 15,852,426
Unrealized gain on warrants -- 2,128,000 --
Unrealized loss on interest rate cap derivative instrument (34,611) -- --
Reversal of unrealized gain on warrants in connection with
disposition (2,128,000) -- --
Gain on sale of warrants and securities, net 2,003,629 -- --
------------ ------------ ------------
Income from continuing operations before (loss) gain on
real estate, net 18,280,949 14,801,103 15,852,426
Discontinued operations:
Loss from operations of discontinued properties (407,983) (483,310) (499,967)
Gain on sale of real estate 8,874 -- --
Impairment charge on real estate (1,090,347) -- --
------------ ------------ ------------
Loss from discontinued operations (1,489,456) (483,310) (499,967)
------------ ------------ ------------
(Loss) gain on sale of real estate, net (167,403) 1,048,335 24,269
------------ ------------ ------------
Income before extraordinary charge 16,624,090 15,366,128 15,376,728
Extraordinary charge on early extinguishment of debt, net of
minority interest of $1,011,353 (3,145,089) -- --
------------ ------------ ------------
Net income $ 13,479,001 $ 15,366,128 $ 15,376,728
============ ============ ============
- Continued -
-14-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of INCOME (Continued)
Basic earnings per common share:
Income from continuing operations $ .70 $ .72 $ .72
Discontinued operations (.06) (.02) (.02)
Extraordinary charge (.12) -- --
-------------- -------------- --------------
Basic earnings per common share: $ .52 $ .70 $ .70
============== ============== ==============
Diluted earnings per common share:
Income from continuing operations $ .68 $ .70 $ .71
Discontinued operations (.06) (.02) (.02)
Extraordinary charge (.11) -- --
-------------- -------------- --------------
Basic earnings per common share: $ .51 $ .68 $ .69
============== ============== ==============
Weighted average shares outstanding-basic 26,032,753 22,105,243 21,916,934
============== ============== ==============
Weighted average shares outstanding-diluted 26,596,434 22,460,138 22,271,829
============== ============== ==============
The accompanying notes are an integral part of the
consolidated financial statements.
-15-
CONSOLIDATED STATEMENT of SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 2001 and 2002
Dividends in Excess
Common Additional Comprehensive of Accumulated
Stock Paid-in Capital Income Earnings
Balance at
January 1, 1999 $22,216 $220,747,880 $(16,728,182)
381,275 shares issued,
$.001 par, net of costs 381 4,974,760
Dividends declared (18,225,976)
Repurchase of 283,986
shares
Comprehensive income:
Net income $15,376,728 15,376,728
Other comprehensive
income:
Foreign currency
translation adjustment (254,598)
-----------
$15,122,130
===========
Balance at
December 31, 2000 22,597 225,722,640 (19,577,430)
------- ------------ -----------
396,245 shares issued,
$.001 par, net of costs 397 5,157,780
Dividends declared (18,685,729)
Repurchase of 174,943
shares
Comprehensive income:
Net income $15,366,128 15,366,128
Other comprehensive
income:
Foreign currency
translation adjustment (180,579)
-----------
$15,185,549
===========
Balance at
December 31, 2001 22,994 230,880,420 (22,897,031)
------- ------------ ------------
5,829,010 shares issued,
$.001 par, net of costs 5,839 77,779,190
Dividends declared (22,101,334)
Repurchase of 174,518
shares
Comprehensive income:
Net income $13,479,001 13,479,001
Other comprehensive
income:
Foreign currency
translation adjustment 916,144
Unrealized gain on
marketable securities 451,732
-----------
1,367,876
-----------
$14,846,877
===========
Balance at
December 31, 2002 $28,833 $308,659,610 $(31,519,364)
======= ============ ============
Accumulated Other
Comprehen-
sive Treasury
Income (Loss) Stock Total
------------- ----- -----
Balance at
January 1, 1999 $23,757 $(3,500,014) $200,565,657
381,275 shares issued,
$.001 par, net of costs 4,975,141
Dividends declared (18,225,976)
Repurchase of 283,986
shares (3,415,716) (3,415,716)
Comprehensive income:
Net income 15,376,728
Other comprehensive
income:
Foreign currency
translation adjustment (254,598) (254,598)
Balance at
--------- ----------- ------------
December 31, 2000 (230,841) (6,915,730) 199,021,236
--------- ----------- ------------
396,245 shares issued,
$.001 par, net of costs 5,158,177
Dividends declared (18,685,729)
Repurchase of 174,943
shares (2,226,143) (2,226,143)
Comprehensive income:
Net income 15,366,128
Other comprehensive
income:
Foreign currency
translation adjustment (180,579) (180,579)
Balance at
--------- ----------- ------------
December 31, 2001 (411,420) (9,141,873) 198,453,090
--------- ----------- ------------
5,829,010 shares issued,
$.001 par, net of costs 77,785,029
Dividends declared (22,101,334)
Repurchase of 174,518
shares (2,173,176) (2,173,176)
Comprehensive income:
Net income 13,479,001
Other comprehensive
income:
Foreign currency
translation adjustment
Unrealized gain on
marketable securities
1,367,876 1,367,876
Balance at
--------- ------------ ------------
December 31, 2002 $ 956,456 $(11,315,049) $266,810,486
========= ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
-16-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 13,479,001 $ 15,366,128 $ 15,376,728
Adjustments to reconcile net income to net cash provided by continuing
operations:
Loss from discontinued operations, including gain on sale of real estate and
impairment loss 1,489,456 483,310 499,967
Depreciation and amortization 6,423,811 4,806,925 4,887,595
Straight-line adjustments (459,654) (207,229) (170,609)
Minority interest in income 2,069,620 875,599 833,012
Income from equity investments in excess of distributions received (3,182,381) (1,430,181) (962,968)
Extraordinary charge on extinguishment of debt, net of minority interest 3,145,089 -- --
Gain on sale of real estate and securities, net (1,836,226) (1,048,335) (24,269)
Impairment charge on real estate 1,550,000 4,300,000 143,919
Issuance of stock in satisfaction of performance fee 3,122,939 2,767,451 2,716,377
Provision for uncollected rents 725,000 593,615 99,852
Unrealized gain on warrants -- (2,128,000) --
Reversal of unrealized gain on warrants in connection with disposition 2,128,000 -- --
Net change in operating assets and liabilities 500,189 (609,355) 1,208,330
------------- ------------ ------------
Net cash provided by continuing operations 29,154,844 23,769,928 24,607,934
------------- ------------ ------------
Net cash (used in) provided by discontinued operations (116,054) 146,160 122,651
Prepayment premiums paid on extinguishment of debt (3,439,379) -- --
------------- ------------ ------------
Net cash provided by operating activities 25,599,411 23,916,088 24,730,585
------------- ------------ ------------
Cash flows from investing activities:
Distributions received from equity investments in excess of
equity income 658,737 426,120 479,359
Capital distributions from equity investments -- 5,839,315 --
Purchases of real estate and equity investments and costs capitalized
subsequent to acquisition (2,743,054) (7,838,388) (11,383,189)
Proceeds from sales of real estate and securities 13,208,838 8,055,093 24,269
Purchase of securities (14,777,285) -- --
Payment of leasing costs (244,237) -- --
Redemption of dissenter interests (1,774,385) -- --
Costs incurred in connection with acquisition of business operations (593,900) -- --
Cash acquired on acquisition of business operations 765,493 -- --
------------- ------------ ------------
Net cash (used in) provided by investing activities (5,499,793) 6,482,140 (10,879,561)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from mortgages 120,139,853 6,262,563 4,100,720
Prepayments of mortgages (74,137,547) (13,788,316) (590,301)
Payments of mortgage principal (5,241,873) (4,641,965) (4,322,311)
Deferred financing costs (4,630,624) (50,000) (64,290)
Prepayment of notes payable (11,738,888) -- --
Dividends paid (20,876,834) (18,550,352) (18,187,256)
Proceeds from issuance of shares, net of costs 1,506,612 2,390,726 2,258,764
Purchase of treasury stock (2,173,176) (2,226,143) (3,415,716)
Capital (distributions to) contributions from minority partners (2,734,951) 902,220 --
Distributions paid to minority partners (1,829,770) (488,294) (543,169)
------------- ------------ ------------
Net cash used in financing activities (1,717,198) (30,189,561) (20,763,559)
------------- ------------ ------------
- Continued -
-17-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS (Continued)
Effect of exchange rate changes on cash 11,404 (1,386) (6,846)
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 18,393,824 207,281 (6,919,381)
Cash and cash equivalents, beginning of year 7,388,480 7,181,199 14,100,580
------------- ------------ ------------
Cash and cash equivalents, end of year $ 25,782,304 $ 7,388,480 $ 7,181,199
============= ============ ============
Noncash investing and financing activities:
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 $ 73,155,478
Notes payable issued, net of discount of $383,737 11,355,151
Cash paid for redemption of dissenter interests 1,774,385
-------------
Consideration paid $ 86,285,014
=============
In connection with contributing its greater than 50% tenancy-in-common interests
in properties owned with affiliates to two limited partnerships, assets and
liabilities applicable to minority interests were as follows:
Real estate assets $ 11,936,092
Other assets 148,697
Mortgage notes payable (4,163,792)
-------------
Minority interests $ 7,920,997
=============
The accompanying notes are an integral part of the
consolidated financial statements.
-18-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of Carey
Institutional Properties Incorporated, its wholly-owned subsidiaries
and controlling majority-owned general partnership interests
(collectively, the "Company"). All material inter-entity
transactions are eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates relate to the
assessment of the realizability of real estate assets and
investments. Actual results could differ from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the
tenant is generally responsible for all operating expenses relating
to the property, including property taxes, insurance, maintenance,
repairs, renewals and improvements. For the year ended December 31,
2002, lessees were responsible for direct payments of real estate
taxes of approximately $5,262,000. Expenditures for maintenance and
repairs including routine betterments are charged to operations as
incurred. Significant renovations which increase the useful life of
the properties are capitalized.
The Company diversifies its real estate investments among various
corporate tenants engaged in different industries, by property type
and geographically.
The leases are accounted for under either the direct financing or
the operating methods. Such methods are described below:
Direct financing method - Leases accounted for under the
direct financing method are recorded at their net investment
(Note 7). Unearned income is deferred and amortized to income
over the lease terms so as to produce a constant periodic rate
of return on the Company's net investment in the lease.
Operating method - Real estate is recorded at cost less
accumulated depreciation, rental revenue is recognized on a
straight-line basis over the term of the leases and expenses
(including depreciation) are charged to operations as
incurred.
When events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable, the Company
assesses the recoverability of its long-lived assets, including
residual interests of real estate assets and investments, based on
projections of undiscounted cash flows, without interest charges,
over the life of such assets. In the event that such cash flows are
insufficient, the assets are adjusted to their estimated fair value.
Residual values of direct financing leases are reviewed at least
annually. If a decline in the estimated residual value is other than
temporary, the accounting for the direct financing lease will be
revised using the changed estimate. The resulting reduction in the
net investment in the direct financing lease is recognized as a loss
in the period in which the estimate is changed.
The Company is committed under long-term ground leases for certain
properties through 2008. Future ground lease rental commitments
aggregate $593,983.
For properties under construction, operating expenses including
interest charges are capitalized rather than expensed and rentals
received are recorded as a reduction of capitalized project (i.e.,
construction) costs.
-19-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Substantially all of the Company's leases provide for either
scheduled rent increases, periodic rent increases based on formulas
indexed to increases in the Consumer Price Index ("CPI") or sales
overrides. Rents from sales overrides (percentage of sales rent) are
recognized as reported by lessees, that is, after the level of sales
requiring a rental payment to the Company is reached.
Assets Held for Sale:
Assets held for sale are accounted for at the lower of carrying
value or fair value, less costs to dispose. Assets are classified as
held for sale when the Company has committed to a plan to actively
market a property for sale and expects that a sale will be completed
within one year.
The Company recognizes gains and losses on the sale of properties
when, among other criteria, the parties are bound by the terms of
the contract, all consideration has been exchanged and all
conditions precedent to closing have been performed. At the time the
sale is consummated, a gain or loss is recognized as the difference
between the sale price less any closing costs and the carrying value
of the property.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of the properties - generally 40 years.
Depreciation of tenant improvements is computed using the
straight-line method over the remaining term of the leases.
Equity Investments:
The Company's ownership interests in entities in which it owns 50%
or less and has the ability to exercise significant influence, and
jointly controlled tenancies-in-common are accounted for under the
equity method; i.e., at cost, increased or decreased by the
Company's share of earnings or losses, less distributions.
Foreign Currency Translation:
The Company consolidates its real estate investments in France and
the United Kingdom. The functional currency for these investments is
the Euro and the British pound. The translation from the Euro and
British pound to U.S. dollars is performed for assets and
liabilities using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. The gains and losses
resulting from such translation are reported as a component of other
comprehensive income (loss) as part of shareholders' equity.
Cash Equivalents:
The Company considers all short-term, highly liquid investments that
are both readily convertible to cash and have a maturity of
generally three months or less at the time of purchase to be cash
equivalents. Items classified as cash equivalents include commercial
paper and money market funds. Substantially all of the Company's
cash and cash equivalents at December 31, 2002 and 2001 were held in
the custody of two financial institutions, and which balances at
times exceed federally insurable limits. The Company mitigates this
risk by depositing funds with major financial institutions.
Marketable Securities:
Marketable securities are classified as available for sale
securities and reported at fair value with the Company's interest in
unrealized gains and losses on these securities reported as a
component of other comprehensive income (loss) until realized. Such
marketable securities had a cost basis of $10,562,979 and reflected
a fair value of $11,014,711 at December 31, 2002. The Company held
no marketable securities at December 31, 2001.
Other Assets:
Included in other assets are deferred charges and deferred rental
income. Deferred charges are costs incurred in connection with
mortgage note financing and refinancing and are deferred and
amortized over the terms of
-20-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
the mortgages and included in interest expense in the accompanying
consolidated financial statements. Deferred rental income is the
aggregate difference between scheduled rents that vary during the
lease term and income recognized on a straight-line basis.
Derivative Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 133.
"Accounting for Derivative Instruments and Hedging Activities"
became effective in 2001 and established accounting and reporting
standards for derivative instruments. Certain stock warrants which
were granted to the Company by lessees in connection with
structuring the initial lease transactions are defined as derivative
instruments because such stock warrants are readily convertible to
cash or provide for net settlement upon conversion. Pursuant to SFAS
No. 133, changes in the fair value of such derivative instruments as
determined using an option pricing model are recognized currently in
earnings as gains or losses. For the year ended December 31, 2001,
the Company recognized an unrealized gain on warrants of $2,128,000.
All warrants which met the definition of derivative instruments and
were accounted for under SFAS No. 133 were sold in 2002. The Company
also holds certain stock warrants which are not defined as
derivative instruments and have been recorded at nominal values. The
Company has only recognized unrealized gains or losses on stock
warrants that are derivative instruments.
In 2002, the Company was required to enter into an interest rate cap
agreement 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 is being charged to interest expense over the life of
the contract. To determine the fair value 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 at December 31, 2002 was $1,389. The interest rate cap is
marked to market but did not meet the criteria to qualify for hedge
accounting and, therefore, the change in the fair value of the
interest rate cap of $34,611 has been charged to earnings for the
year ended December 31, 2002.
Treasury Stock:
Treasury stock is recorded at cost.
Offering Costs:
Costs incurred in connection with the raising of capital through the
sale of common stock are charged to shareholders' equity upon the
issuance of shares.
Federal Income Taxes:
The Company is qualified as a real estate investment trust ("REIT")
as of December 31, 2002 as defined under the Internal Revenue Code
of 1986. The Company is not subject to Federal income taxes on
amounts distributed to shareholders provided it distributes at least
90% of its REIT taxable income to its shareholders and meets certain
other conditions.
Earnings Per Share:
The Company presents both basic and diluted earnings per share
("EPS"). Basic EPS excludes dilution and is computed by dividing net
income available to shareholders by the weighted average number of
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue shares were executed or converted into common stock, where
such exercise or conversion would result in a lower EPS amount.
-21-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Basic and diluted earnings per share were calculated as follows:
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Income from continuing operations before (loss) gain
on sale of real estate, net $ 18,280,949 $ 14,801,103 $ 15,852,426
Loss (gain) on sale of real estate, net (167,403) 1,048,335 24,269
------------ ------------ ------------
Income from continuing operations 18,113,546 15,849,438 15,876,695
Discontinued operations (1,489,456) (483,310) (499,967)
Extraordinary charge (3,145,089) -- --
------------ ------------ ------------
Net income $ 13,479,001 $ 15,366,128 $ 15,376,728
============ ============ ============
Weighted average shares - basic 26,032,753 22,105,243 21,916,934
Effect of dilutive securities: Stock warrants 563,681 354,895 354,895
------------ ------------ ------------
Weighted average shares - diluted 26,596,434 22,460,138 22,271,829
============ ============ ============
Basic earnings per share from
continuing operations $ .70 $ .72 $ .72
Discontinued operations (.06) (.02) (.02)
Extraordinary charge (.12) -- --
------------ ------------ ------------
Basic earnings per share $ .52 $ .70 $ .70
============ ============ ============
Diluted earnings per share from continuing operations $ .68 $ .70 $ .71
Discontinued operations (.06) (.02) (.02)
Extraordinary charge (.11) -- --
------------ ------------ ------------
Diluted earnings per share $ .51 $ .68 $ .69
============ ============ ============
Operating Segments:
Accounting standards have been established for the way public
business enterprises report selected information about operating
segments and guidelines for defining the operating segment of an
enterprise. Based on the standards' definition, the Company has
reported its real estate operations both domestically and
internationally (see Note 15).
Reclassifications:
Certain prior year amounts have been reclassified to conform to the
current year's financial statement presentation.
2. Organization and Offering:
The Company was formed on February 15, 1991 under the General
Corporation Law of Maryland for the purpose of engaging in the
business of investing in and owning industrial real estate. Subject
to certain restrictions and limitations, the business of the Company
is managed by Carey Asset Management Corp. (the "Advisor"). Pursuant
to a public offering, which concluded in August 1993, the Company
issued 14,167,581 shares of common stock.
3. Business Combination with Corporate Property Associates 10 Incorporated:
On May 1, 2002, the Company and Corporate Property Associates 10
Incorporated (CPA(R):10"), a 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.
Under the terms of the merger, the Company is the surviving company.
The total purchase price was $87,232,302, including transaction
costs of $947,288. CPA(R):10 shareholders 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 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 holding 6,513,217 shares of
CPA(R):10 common stock received 5,500,412 shares of
-22-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Company common stock ($73,155,478 according to the independent
appraisal performed in connection with the transaction) and
shareholders representing 1,045,315 shares of CPA(R):10 common stock
elected to receive promissory notes with a total principal amount of
$11,738,888. On December 27, 2002, the Company paid off the
promissory notes at par. 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 the accompanying Consolidated Statements of Cash
Flows in the accompanying consolidated financial statements). The
purchase price has been allocated to the assets and liabilities
acquired based upon their fair values. The assets acquired consisted
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 consisted primarily of limited recourse
mortgage obligations and notes issued 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.
4. Mortgage Financing Through Loan Securitization:
On August 28, 2002, The Company and three affiliates, W.P. Carey &
Co. LLC ("W. P. Carey"), Corporate Property Associates 12
Incorporated ("CPA(R):12") and Corporate Property Associates 14
Incorporated obtained an aggregate of approximately $172,335,000 of
limited recourse mortgage financing on 62 leased properties. The
lender pooled the loans into a trust, Carey Commercial Mortgage
Trust, a non-affiliate, whose assets consist solely of the loans and
sold the loans, as collateralized mortgage obligations in a private
placement to institutional investors (the "Offered Interests"). The
Company and the three affiliates agreed to acquire a separate class
of interests in the trust (the "CPA(R) Interests"). The amount of
CPA(R) Interests acquired by the Company was proportional to the
mortgage amounts obtained.
All of the mortgage loans provide for payments of principal and
interest at a stated annual rate of 7.5% and are based on a 25-year
amortization schedule. Each loan is collateralized by mortgages on
the properties and lease assignments. Under the lease assignments,
the lessees direct their rent payment to the mortgage servicing
company which in turn distributes amounts in excess of debt service
requirements to the applicable lessors. Under certain limited
conditions, a property may be released from its mortgage by the
substitution of another property. Such substitution is subject to
the approval of the trustee of the trust.
The Offered Interests consist of $148,206,000 of mortgage loan
balances with different tranches of principal entitled to
distributions at annual interest rates as follows: $119,772,000 -
5.97%, $9,478,000 - 6.58%, $9,478,000 - 7.18% and $9,478,000 -
8.43%. The assumed final distribution dates for the four classes of
Offered Interests range from December 2011 through March 2012.
The CPA(R) Interests were purchased for $24,128,739 of which the
Company's share was $10,616,645, or 44% and are comprised of two
components, a component that will receive payments of principal and
interest and a component that will receive payments of interest
only. The CPA(R) Interests are subordinated to the Offered Interests
and will be payable only when and if all distributions to the
Offered Interests are current. The assumed final distribution date
for the CPA(R) Interests is June 30, 2012. The distributions to the
CPA(R) Interests do not have a stated rate of interest and will be
affected by any shortfall in rents received from lessees or defaults
at the mortgaged properties. As of the purchase date, the Company's
cost basis attributable to the principal and interest and interest
only components was $6,357,765 and $4,258,880, respectively. Over
the term of its ownership interest in the CPA(R) Interests, the
value of the interest only component will fully amortize to $0 and
the principal and interest component will amortize to its
anticipated face value of its share in the underlying mortgages
-23-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
($10,616,645). For financial reporting purposes, the effect of such
amortization will be reflected in interest income. Interest income,
including all related amortization, will be recognized using an
effective interest method.
The Company is accounting for its interest in the CPA(R) Interests
as an available-for-sale security and it is measured at fair value
with all gains and losses from changes in fair value reported as a
component of other comprehensive income as part of shareholders'
equity. As of December 31, 2002, the fair value of the Company's
CPA(R) Interests was $11,014,711, reflecting an unrealized gain of
$451,732 and amortization of $53,666. The fair value of the
interests in the trust is determined using a discounted cash flow
model with assumptions of market rates and the credit quality of the
underlying lessees.
The Company obtained new mortgage financing of $83,666,787 of which
approximately $33,486,400 was used to payoff existing loans. In
connection with paying off the loans, the Company incurred
prepayment charges of $1,352,994. After paying off the loans,
incurring costs in connection with obtaining the new mortgages,
distributing $2,734,951 to two equity interests and purchasing its
CPA(R) Interest in the trust, the Company retained cash of
approximately $30,690,000. The loans which were paid off bore
interest at annual rates ranging from 8.125% to 11%.
The principal amount of loans obtained, which are collateralized by
real estate with a carrying value of $105,136,990, were as follows:
Lease Obligor Loan Amount Annual Debt Service Maturity Date
------------- ----------- ------------------- -------------
ShopRite Supermarkets, Inc. $15,570,000 $1,380,734 July 2010 and September 2011
Garden Ridge Corporation 13,136,946 1,164,976 October 2009 and May 2010
Childtime Childcare, Inc. 11,567,709 1,025,815 January 2011 and June 2010
Merit Medical Systems, Inc. 9,180,000 814,073 October 2011
Barnes & Noble, Inc. 8,735,682 774,673 November 2009 and September 2012
Q Clubs, Inc. 7,895,224 700,142 September 2009 and December 2010
Hibbett Sporting Goods, Inc. 5,139,462 455,762 April 2010
Superior Telecommunications, Inc. 4,547,071 403,229 September 2009
UTI Holdings, Inc. 3,268,862 289,879 July 2012
Petsmart, Inc. 3,031,808 268,858 December 2009
US West Communications, Inc. 1,594,023 141,356 June 2012
----------- ----------
$83,666,787 $7,419,497
=========== ==========
The loans paid off were as follows:
Lease Obligor Loan Amount Annual Debt Service
------------- ----------- -------------------
Garden Ridge Corporation $ 6,775,746 $ 817,992
ShopRite Supermarkets, Inc. 6,721,104 755,280
Childtime Childcare, Inc. 5,516,637 707,172
Merit Medical Systems, Inc. 5,328,730 742,356
Barnes & Noble, Inc. 4,788,074 642,447
Hibbett Sporting Goods, Inc. 2,459,952 293,796
Petsmart, Inc. 1,896,210 273,417
----------- ----------
$33,486,453 $4,232,460
=========== ==========
The Company jointly-owns properties leased to Childtime Childcare
Inc. and ShopRite Supermarkets, Inc. (formerly Big V Holding Corp.)
with W.P. Carey and CPA(R):12, respectively. In connection with
structuring the transaction, the jointly-owned properties were
contributed to limited partnerships with the Company owning majority
interests as general partner. The accounts of the limited
partnerships are consolidated in the accounts of the Company, with
the interests of W.P. Carey and CPA(R):12 reflected as minority
interests.
The key variable in determining the fair value of the CPA(R)
Interests is current interest rates. As required by SFAS No. 140,
"Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities," a sensitivity analysis of the
current value of the CPA(R) Interests based on adverse changes in
the market interest rates of 1% and 2% is as follows:
-24-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Interest rate 7.5% 8.5% 9.5%
Fair value of CPA(R) Interests $11,014,711 $10,470,909 $9,965,417
The above sensitivity is hypothetical and changes in fair value
based on a 1% or 2% variation should not be extrapolated because the
relationship of the change in assumption to the change in fair value
may not always be linear.
5. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the
Advisory Agreement between the Company and the Advisor provides that
the Advisor receive asset management and performance fees, each of
which are 1/2 of 1/% of Average Invested Assets as defined in the
Advisory Agreement. The performance fee is subordinated to the
Preferred Return, a cumulative non-compounded dividend return of 7%
(based on an initial issuance of shares at $10). The Advisor has
elected at its option to receive the performance fee in restricted
shares of common stock of the Company rather than cash. The Advisor
is also reimbursed for the actual cost of personnel needed to
provide administrative services necessary to the operation of the
Company. The Company incurred asset management fees of $3,343,870,
$2,753,759 and $2,761,896 in 2002, 2001, and 2000 respectively, with
performance fees in like amount. The Company incurred personnel
reimbursements of $1,509,832, $1,161,996 and $1,107,736 in 2002,
2001, and 2000, respectively.
Fees are payable to the Advisor for services provided to the Company
relating to the identification, evaluation, negotiation, financing
and purchase of properties and refinancing of mortgages. For
transactions and refinancings that were completed in 2002, 2001 and
2000, fees were $654,632, $60,625 and $625,468, respectively.
The Advisor is obligated to reimburse the Company for the amount by
which operating expenses of the Company exceeds the 2%/25%
Guidelines (the greater of 2% of Average Invested Assets or 25% of
Net Income) as defined in the Advisory Agreement for any
twelve-month period. If in any year the operating expenses of the
Company exceed the 2%/25% Guidelines, the Advisor will have an
obligation to reimburse the Company for such excess, subject to
certain conditions. Only if the Independent Directors find that such
excess expenses were justified based on any unusual and nonrecurring
factors which they deem sufficient, the Advisor may be paid in
future years for the full amount or any portion of such excess
expenses, but only to the extent that such reimbursement would not
cause the Company's operating expenses to exceed this limit in any
such year. Charges related to asset impairment, bankruptcy of
lessees, lease payment defaults, extinguishment of debt or uninsured
losses are generally not considered unusual and nonrecurring. A
determination that a charge is unusual and nonrecurring, such as the
costs of significant litigation that are not associated with day-to
day operations, or uninsured losses that are beyond the size or
scope of the usual course of business based on the event history and
experience of the Advisor and Independent Directors, is made at the
sole discretion of the Independent Directors. The Company will
record any reimbursement of operating expenses as a liability until
any contingencies are resolved and will record the reimbursement as
a reduction of asset management and performance fees at such time
that a reimbursement is fixed, determinable and irrevocable. The
operating expenses of the Company have not exceeded the amount that
would require the Advisor to reimburse the Company.
The Advisor will be entitled to receive subordinated disposition
fees based upon the cumulative proceeds arising from the sale of
Company assets since the inception of the Company, subject to
certain conditions. Pursuant to the subordination provisions of the
Advisory Agreement, the disposition fees may be paid only after the
shareholders receive 100% of their initial investment from the
proceeds of asset sales and a cumulative annual return of 6% (based
on an initial share price of $10) since the inception of the
Company. The Advisor's interest in such disposition fees amounts to
$1,001,865 as of December 31, 2002. Payment of such amount, however,
cannot be made until the subordination provisions are met.
Management has concluded that payment of such disposition fees is
probable and all fees from completed property sales have been
accrued. Subordinated disposition fees are included in the
determination of realized gain or loss on the sale of properties.
The obligation for disposition fees is included in due to affiliates
in the accompanying consolidated financial statements.
The Company owns interests in limited partnerships and limited
liability companies which range from 33.33% to 63% and a
jointly-controlled 50% tenancy-in-common interest in a property with
the remaining interests held by
-25-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
affiliates. Controlling interests in jointly-owned entities are
consolidated and non-controlled interests in which the Company has a
significant interest are accounted for under the equity method of
accounting.
The Company is a participant in an agreement with certain affiliates
for the purpose of leasing office space used for the administration
of real estate entities and for sharing the associated costs.
Pursuant to the terms of the agreement, the Company's share of
rental, occupancy and leasehold improvement costs is based on gross
revenues. Expenses incurred in 2002, 2001, 2000 were $286,796,
$205,366, and $167,458 respectively. The Company's current share of
future minimum lease payments is $775,729 through 2006.
In 1997, the Company's shareholders approved a proposal to grant
warrants for the Company's common stock in lieu of cash compensation
in consideration for raising capital in a private placement to
institutional investors. Under the plan, W. P. Carey & Co., Inc. was
granted, subject to the approval of the Company's Board of
Directors, 3,956,447 warrants at exercise prices ranging from $10 to
$12.80 per share. The warrants are exercisable over a ten-year
period.
6. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases amount to approximately $35,824,000
in 2003; $35,158,000 in 2004; $33,364,000 in 2005; $32,552,000 in
2006; $30,728,000 in 2007 and aggregate approximately $361,029,000
through 2020.
Contingent rents (including percentage rents and CPI-based
increases) were approximately $1,573,000, $1,731,000 and $1,134,000
in 2002, 2001 and 2000, respectively.
7. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
------------
2002 2001
---- ----
Minimum lease payments receivable $230,082,139 $180,076,202
Unguaranteed residual value 131,359,885 99,322,325
------------ ------------
361,442,024 279,398,527
Less: unearned income 227,486,469 177,900,492
------------ ------------
$133,955,555 $101,498,035
============ ============
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable direct financing leases amount to approximately
$15,418,000 in 2003; $15,629,000 in 2004; $15,721,000 in 2005;
$15,710,000 in 2006; $25,710,000 in 2007 and aggregate approximately
$230,082,000 through 2024.
Contingent rents (including CPI-based increases) were approximately
$752,000, $473,000 and $425,000 and in 2002, 2001 and 2000,
respectively.
8. Mortgage Notes Payable:
Mortgage notes payable, all of which are limited recourse
obligations, are collateralized by the assignment of various leases
and by real property with a carrying value of approximately
$404,981,000. As of December 31, 2002, mortgage notes payable had
fixed interest rates ranging from 6.950% to 10.00% per annum and
variable interest rates ranging from 5.438% to 9.625%.
-26-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Scheduled principal payments during each of the five years following
December 31, 2002 and thereafter are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
------------------------ ---------- --------------- ------------------
2003 $ 15,436,228 $ 13,944,493 $ 1,491,735
2004 18,885,949 14,635,056 4,250,893
2005 11,544,584 7,515,034 4,029,550
2006 5,039,522 4,834,322 205,200
2007 14,975,202 14,718,702 256,500
Thereafter 185,698,094 178,307,590 7,390,504
------------ ------------ -----------
Total $251,579,579 $233,955,197 $17,624,382
============ ============ ===========
Interest paid, excluding capitalized interest, was $15,769,528,
$13,875,312 and $13,876,301 in 2002, 2001 and 2000, respectively.
Capitalized interest was $327,477 and $235,515 in 2002 and 2001,
respectively. No interest was capitalized in 2000.
9. Dividends:
Dividends paid to shareholders consist of ordinary income, capital
gains, return of capital or a combination thereof for income tax
purposes. For the years ended December 31, 2002, 2001 and 2000,
dividends paid per share were reported as follows for tax purposes:
2002 2001 2000
---- ---- ----
Ordinary income $ .48 $ .59 $ .61
Capital gains -- .05 --
Return of capital .37 .20 .22
-------- -------- --------
$ .85 $ .84 $ .83
======== ======== ========
A dividend of $.2133 per share for the quarter ended December 31,
2002 ($5,938,632) was declared in December 2002 and paid in January
2003.
10. Lease Revenues:
The Company's operations consist of the investment in and the
leasing of industrial and commercial real estate. The financial
reporting sources of the leasing revenues are as follows:
2002 2001 2000
---- ---- ----
Per Statements of Income:
Rental income from operating leases $ 33,941,070 $ 28,214,756 $ 27,633,916
Interest income from direct financing leases 14,645,638 12,372,019 12,306,721
Adjustments:
Share of leasing revenues applicable to
minority interest (4,040,861) (1,760,787) (1,770,596)
Share of leasing revenues from equity
investments 16,185,418 12,076,852 11,611,950
------------ ------------ ------------
$ 60,731,265 $ 50,902,840 $ 49,781,991
============ ============ ============
-27-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company earned its share of net leasing revenues in 2002, 2001
and 2000 from its direct and indirect ownership of real estate from
the following lease obligors:
2002 % 2001 % 2000 %
----------- --- ----------- --- ----------- ---
Marriott International, Inc.(1) $ 7,237,343 12% $ 4,510,253 9% $ 4,466,178 9%
Omnicom Group, Inc. 4,290,542 7 4,265,378 8 4,265,378 9
Advanced Micro Devices, Inc.(1) 3,258,938 5 3,048,500 6 3,048,500 6
Best Buy Co., Inc.(2) 2,979,273 5 2,998,098 6 3,014,798 6
Electronic Data Systems Corporation 2,872,979 5 2,466,762 5 2,358,928 5
Information Resources, Inc.(3) 2,278,701 4 -- -- -- --
Big V Holding Corp.(2) 2,086,778 4 2,068,860 4 2,052,967 4
Lucent Technologies, Inc. 1,989,685 3 1,852,829 3 1,852,829 4
UTI Holdings, Inc. 1,767,869 3 1,615,056 3 1,252,252 2
Garden Ridge Corporation 1,581,820 3 1,546,281 3 1,496,217 3
Titan Corporation(3) 1,484,449 3 -- -- -- --
Sicor, Inc.(1) 1,472,736 2 1,472,736 3 1,472,736 3
Merit Medical Systems, Inc. 1,465,404 2 1,465,404 3 1,451,894 3
The Upper Deck Company(1) 1,452,220 2 1,419,134 3 1,319,875 3
Barnes & Noble, Inc. 1,450,536 2 1,431,117 3 1,413,962 3
Q Clubs, Inc. 1,448,279 2 1,407,393 3 1,343,372 3
Compucom Systems, Inc.(1) 1,382,199 2 1,304,666 2 1,304,666 3
Del Monte Corporation(1), (4) 1,381,982 2 1,286,250 2 1,286,250 2
Michigan Mutual Insurance Company 1,363,031 2 1,362,959 3 1,362,893 3
Plexus Corp. 1,268,693 2 1,268,693 2 1,212,504 2
Bell Sports, Inc. 1,175,071 2 1,146,221 2 1,108,341 2
Environworks, Inc. 1,161,274 2 -- -- -- --
New Wai, L.P. / Warehouse Associates 1,146,709 2 -- -- -- --
Childtime Childcare, Inc.(3) 1,137,763 2 648,892 1 628,871 1
Detroit Diesel Corporation 908,037 2 897,934 2 868,239 2
Gloystarne & Co., Inc. 902,164 2 827,633 2 836,652 2
PSC Scanning, Inc. 881,186 1 862,833 2 835,221 2
Custom Food Products, Inc. 873,929 1 855,484 2 833,046 2
Humco Holding Group 849,853 1 845,727 2 825,100 2
Nicholson Warehouse L.P. 805,353 1 808,069 2 815,414 2
GATX Logistics, Inc. 794,893 1 794,893 2 794,893 1
Hibbett Sporting Goods, Inc. 784,224 1 777,015 2 740,972 1
Superior Telecommunications, Inc. 642,568 1 648,745 1 647,092 1
ISA International plc 593,989 1 569,317 1 479,941 --
Petsmart, Inc. 521,598 1 514,716 1 505,586 1
Other(5) 3,039,197 7 3,914,992 7 3,886,424 8
----------- --- ----------- --- ----------- ---
$60,731,265 100% $50,902,840 100% $49,781,991 100%
=========== === =========== === ----------- ===
(1) Represents the Company's proportionate share of revenues from its
equity investment.
(2) Net of amount applicable to CPA(R):12's minority interest.
(3) Net of amount applicable to W. P. Carey & Co. LLC's minority
interest.
(4) As of October 1, 2001, interest in these properties were transferred
to a limited liability company and are accounted for under the
equity method.
(5) Net of ground lease rental expense of approximately $133,000,
$80,000 and $74,000 in 2002, 2001 and 2000, respectively.
11. 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. with the remaining interests owned by a
non-affiliate. The Company also owns interests with affiliates in
properties leased to corporations through equity interests in
various partnerships and limited liability companies and a
tenancy-in-common interest subject to joint control. The ownership
interests range from 33.33% to 50%, and the underlying
-28-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
investments are owned 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.
Distributions and allocations of income or loss from equity
investees are based on ownership percentages and no fees are paid by
the Company or the partnerships to any of the general partners of
the limited partnerships.
Summarized combined financial information of the Company's equity
investees is as follows:
(In thousands) December 31,
------------
2002 2001
---- ----
Assets (primarily real estate) $343,846 $347,429
Liabilities (primarily limited recourse mortgage notes
payable) 212,820 220,750
Capital 131,026 126,679
(In thousands) Year Ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Revenues (primarily rental revenues) $42,026 $38,667 $37,533
Expenses (primarily interest on mortgages and
depreciation) 21,285 21,031 21,159
------- ------- -------
Net income $20,741 $17,636 $16,374
======= ======= =======
12. Gains (Losses) on Sale of Real Estate and Securities:
2002
In December 2002, the Company sold a vacant property in Farmingdale,
New York formerly leased to Waban, Inc. ("Waban") for $6,743,251 and
recognized a loss on sale of $167,403. In 2001, in connection with
the proposed sale, the property was written down to its estimated
fair value and an impairment charge of $2,300,000 was recognized. As
of December 31, 2001, the $6,910,554 carrying value of the Waban
property was classified as held for sale, and the property was
subsequently sold in December 2002. The Waban property generated
operating losses of $831,494 in 2002 and operating income of
$440,005 in 2001. The reclassification to assets held for sale was
effective as of December 31, 2001, and, therefore, such
reclassification had no effect on depreciation expense in 2001. The
effect of suspending depreciation expense in 2002 as a result of
reclassification as a held for sale asset was $89,039.
In May 2002 the Company sold a property in Little Rock, Arkansas
leased to Affiliated Southwest, Inc for $297,452 and recognized a
gain of $8,874.
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 $1,992,078. Changes in
the fair value of the warrants had been recognized for financial
statement purposes have been included 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.
2001
In September 2001, the Company sold six retail properties leased to
Wal-Mart Stores, Inc. for $7,445,932, net of costs, and realized a
gain on sale of $1,086,755.
-29-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In June 2001, the Company sold its interest in a vacant property in
Texarkana, Arkansas for $609,161, net of closing costs, and incurred
a realized loss of $38,420 on the sale. An impairment charge of
$143,919 was recognized in 2000 in connection with the agreement to
sell the property.
2000
The Company sold a vacant property in Clarksdale, Mississippi in
March 2000 for a nominal amount. An impairment loss of $412,067 was
recognized in 1999 in connection with the agreement to sell the
property was recognized in 1999. A gain of $24,269 was realized in
connection with the sale.
13. Discontinued Operations and Impairment Charges:
In addition to the impairment charges recognized on the Waban and
Texarkana properties in 2001 and 2000, respectively, described in
Note 12, the Company also recognized impairment charges as follows:
The Company owns a property in Austin, Texas which is held for sale
with a carrying value of $2,500,000 as of December 31, 2002 and
which it expects to sell within the next twelve months. In
connection with an evaluation of the fair value of the property the
Company has recognized an impairment charge of $1,090,347 in 2002,
included in discontinued operations in the accompanying consolidated
financial statements. As a result of classifying the properties as
held for sale, no depreciation has been incurred from the date of
reclassification. The effect of suspending depreciation expense was
$92,316 in 2002 and had no effect in 2001 and 2000.
The Company owns a property in Maple Heights, Ohio leased to
Nicholson Warehouse, L.P. ("Nicholson"). Because of a prolonged
weakness in Nicholson's financial condition and the risk that
Nicholson will not meet its lease obligations, the Company recorded
an impairment charge of $2,000,000 in 2001. An additional impairment
charge of $1,550,000 was recorded in 2002.
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective for financial statements
issued for fiscal years beginning after December 15, 2001, the
results of operations and gain or loss on sales of real estate for
properties sold or held for sale are to be reflected in the
consolidated statements of operations as "Discontinued Operations"
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 it is initially
applied (January 1, 2002). The Waban property was held for sale as
of December 31, 2001 and, therefore, is not included in discontinued
operations.
As of December 31, 2002, the operations of a vacant property in
Austin, Texas which is held for sale and a property in Little Rock,
Arkansas which was sold in June 2002 are included as "Discontinued
Operations." A summary of Discontinued Operations for the years
ended December 31, 2002, 2001 and 2000 is as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Revenues (primarily rental revenues and miscellaneous
income) $ 11,565 $ 15,000 $ 15,000
Expenses (primarily interest on mortgages, depreciation
and property expenses) (419,548) (498,310) (514,967)
Impairment charge on real estate (1,090,347) -- --
Gain on sale of real estate 8,874 -- --
----------- --------- ---------
Loss from discontinued operations $(1,489,456) $(483,310) $(499,967)
=========== ========= =========
14. Extraordinary Charge on Early Extinguishment of Debt:
In February 2002, the Company paid off a mortgage loan of
$25,743,178 on the properties leased to Best Buy, Inc. ("Best Buy")
and incurred an extraordinary charge on the early extinguishment of
debt of $1,314,422 consisting of a prepayment premium of $2,086,384,
net of a minority interest share of $771,962. The Company
subsequently obtained new limited recourse mortgage financing on the
Best Buy properties of $28,500,000. The new loan
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
provides for monthly payments of $210,427 at an annual interest rate
of 7.49% based on a 25-year amortization schedule and matures in May
2012. The retired loan provided for monthly debt service payments of
$291,290.
The Company paid prepayment premiums of $1,352,995 and wrote off
deferred financing costs of $429,261 in connection with paying off
$33,486,452 of mortgage loans in connection with the mortgage
securitization transaction and the pay off of another mortgage loan
in December 2002. Net of amounts applicable to minority interests of
$239,391, the Company recognized a charge of $1,542,865.
In connection with paying off promissory notes that were issued in
connection with the merger with CPA(R):10 and had a maturity date of
December 31, 2004, the Company incurred a charge on extinguishment
of $287,802, representing a noncash charge for the difference
between the carrying amount of the notes payable and the par value
at which the notes were paid off (see Note 3).
15. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage notes payable
at December 31, 2002 and 2001 was approximately $257,293,000 and
$154,249,000 respectively. The fair value of debt instruments was
evaluated using a discounted cash flow model with rates which take
into account the credit of the tenants and interest rate risks.
16. Segment Information:
The Company has determined that it operates in one business segment,
real estate operations with domestic and foreign investments. The
Company acquired its first foreign real estate investment in
December 1999 and currently has investments in the United Kingdom
and France.
For 2002, geographic information for the real estate operations
segment is as follows:
Domestic Foreign Total Company
-------- ------- -------------
Revenues $ 47,329,003 $ 2,017,014 $ 49,346,017
Expenses 36,404,751 1,297,455 37,702,206
Income from equity investments 8,865,740 -- 8,865,740
Net operating income(1) 17,861,532 578,399 18,439,931
Total assets 522,418,896 27,807,999 550,226,895
Total long-lived assets 475,917,418 25,650,749 501,568,167
For 2001, geographic information for the real estate operations
segment is as follows:
Domestic Foreign Total Company
-------- ------- -------------
Revenues $ 39,690,964 $ 1,416,261 $ 41,107,225
Expenses 31,687,768 1,282,315 32,970,083
Income from equity investments 5,411,560 -- 5,411,560
Net operating income(1) 12,534,724 138,379 12,673,103
Total assets 346,944,404 22,362,238 369,306,642
Total long-lived assets 329,060,109 20,146,784 349,206,893
For 2000, geographic information for the real estate operations
segment is as follows:
Domestic Foreign Total Company
-------- ------- -------------
Revenues $ 39,289,847 $ 1,327,738 $ 40,617,585
Expenses 28,219,390 656,620 28,876,010
Income from equity investments 4,943,863 -- 4,943,863
Net operating income(1) 15,181,308 671,118 15,852,426
Total assets 365,571,046 14,637,575 380,208,621
Total long-lived assets 355,846,651 14,074,076 369,920,727
(1) Net operating income (loss) is after minority interest and
excludes gains and losses and extraordinary items.
17. Accounting Pronouncements:
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 initiated after
June 30, 2001 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 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 and the accounting
for asset acquisitions. The provisions of SFAS No. 142 are effective
for fiscal years beginning after December 15, 2001 and must be
adopted at the beginning of a fiscal year. SFAS No. 142 provides
that goodwill and indefinite-lived intangible assets will no longer
be amortized but will be tested for impairment at least annually.
Intangible assets acquired and liabilities assumed in business
combinations will only be 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 142 did not have a material effect on
the Company's financial statements.
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 was issued to establish
standards for the recognition and measurement of an asset retirement
obligation. SFAS No. 143 requires retirement obligations associated
with tangible long-lived assets to be recognized at fair value as
the liability is incurred with a corresponding increase in the
carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company does not expect SFAS No. 143 to
have a material effect on its 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
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 144 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
must be presented as a discontinued operation for all periods
presented.
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
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 its financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of
Certain Financial Institutions" which amends SFAS No. 72, SFAS No.
144 and FASB Interpretation No. 9. SFAS No. 147 provides guidance on
the accounting for the acquisitions of certain financial
institutions and includes long-term customer relationships as
intangible
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
assets within the scope of SFAS No. 144. The Company does not expect
SFAS No. 147 to have a material effect on its financial statements.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," ("FIN 45")
which changes the accounting for, and disclosure of certain
guarantees. Beginning with transactions entered into after December
31, 2002, certain guarantees are required to be recorded at fair
value, which is different from prior practice, under which a
liability was recorded only when a loss was probable and reasonably
estimable. In general, the change applies to contracts or
indemnification agreements that contingently require the Company to
make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed
party. The accounting provisions only apply for certain new
transactions entered into and existing guarantee contracts modified
after December 31, 2002. The adoption of the accounting provisions
of FIN 45 is not expected to have a material effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends
SFAS No. 123, Accounting for Stock Based Compensation. SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock based
compensation (i.e., recognition of a charge for issuance of stock
options in the determination of income.). However, SFAS No. 148 does
not permit the use of the original SFAS No. 123 prospective method
of transition for changes to the fair value based method made in
fiscal years beginning after December 15, 2003. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock based employee
compensation, description of transition method utilized and the
effect of the method used on reported results. The transition and
annual disclosure provisions of SFAS No. 148 are to be applied for
fiscal years ending after December 15, 2002. The Company does not
have any employees nor any stock-based compensation plans.
On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), the
primary objective of which is to provide guidance on the
identification of entities for which control is achieved through
means other than voting rights ("variable interest entities" or
"VIEs") and to determine when and which business enterprise should
consolidate the VIE (the "primary beneficiary"). This new model
applies when either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk
is insufficient to finance that entity's activities without
additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. The
transitional disclosures requirements will take effect almost
immediately and are required for all financial statements initially
issued after January 31, 2003. The Company's maximum loss exposure
is the carrying value of its equity investments. The Company is
assessing the impact of this interpretation on its accounting for
its investments in unconsolidated joint ventures and believes the
adoption will not have a material effect on the Company's financial
statements.
8. Selected Quarterly Financial Data (unaudited):
Three Months Ended
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
---------------- ---------------- ---------------- ----------------
Revenues $ 9,722,035 $ 12,038,261 $ 13,564,194 $ 14,021,527
Expenses (1) 6,580,796 8,201,473 10,053,258 12,866,679
Income from continuing operations (2) 4,785,792 5,293,493 5,241,152 2,793,109
Income from continuing operations per share -
Basic .22 .20 .19 .10
Diluted .21 .20 .18 .10
Income before extraordinary item (3) 4,660,055 5,157,576 4,095,987 2,710,472
Income before extraordinary item per share
Basic .21 .20 .15 .10
Diluted .20 .19 .14 .10
Net income (4) 3,345,634 5,157,576 2,564,760 2,411,031
Net income per share -
Basic .15 .20 .09 .09
Diluted .15 .19 .09 .08
Dividends declared per share .2127 .2129 .2131 .2133
-33-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(1) Includes an impairment loss on real estate of $1,550,000 for the
three-month period ended December 31, 2002.
(2) Includes realized and unrealized losses of $135,322, $28,794, $4,645 and
$57,624 for the three-month periods ended March 31, 2002, June 30, 2002,
September 30, 2002 and December 31, 2002, respectively.
(3) Includes income (loss) from discontinued operations of $2,090, $14,679,
$(1,423,588) and $(82,637) for the three-month periods ended March 31,
2002, June 30, 2002, September 30, 2002 and December 31, 2002,
respectively.
(4) Includes extraordinary charges on early extinguishment of debt of
$1,314,421 and $1,531,227 for the three-month periods ended March 31, 2002
and September 30, 2002, respectively.
Three Months Ended
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
-------------- ------------- ------------------ -----------------
Revenues $10,325,887 $10,454,781 $10,350,718 $ 9,975,839
Expenses(1) 7,227,823 9,917,308 7,363,029 8,461,923
Income from continuing operations (2) 4,419,547 2,325,113 6,455,937 2,648,841
Income from continuing operations per share -
Basic .20 .11 .29 .12
Diluted .20 .10 .29 .12
Income before extraordinary item 4,332,388 2,168,283 6,335,411 2,530,046
Income before extraordinary item per share
Basic .20 .10 .29 .11
Diluted .19 .10 .28 .11
Net income (3) 4,332,388 2,168,283 6,335,411 2,530,046
Net income per share -
Basic .20 .10 .29 .11
Diluted .19 .10 .28 .11
Dividends declared per share .2086 .2120 .2122 .2125
(1) Includes impairment losses on real estate of $2,300,000 and
$2,000,000 for the three-month periods ended June 30, 2001 and
December 31, 2001, respectively.
(2) Includes unrealized gain (loss) of $799,070, $1,378,930 and
$(50,000) for the three-month periods ended June 30, 2001, September
30, 2001 and December 31, 2001, respectively, and gain (loss) on
sale of real estate of $(38,420) and $1,082,400 for the three-month
periods ended June 30, 2001 and September 30, 2001, respectively.
(3) Includes income (loss) from discontinued operations of $3,120,
$3,120, $(370,755) and $(112,555) for the three-month periods ended
March 31, 2001, June30, 2001, September 30, 2001 and December 31,
2001, respectively.
19. Pro Forma Financial Information (unaudited):
The following consolidated pro forma financial information has been
presented as if the merger of CPA(R):10 into the Company had
occurred on January 1, 2001 for the years ended December 31, 2002
and 2001. 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 per share amounts)
Years ended December 31,
2002 2001
------- -------
Pro forma total revenues $54,058 $56,682
Income from continuing operations 20,894 19,798
Pro forma net income 15,784 23,055
Pro forma earnings per share:
Basic: .83 .57
Diluted: .82 .56
-34-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The pro forma net income and earnings per share figures for the year
ended December 31, 2002 presented above includes a nonrecurring,
noncash impairment charge on real estate of $1,550,000, unrealized
and realized losses of $326,000, a loss from discontinued operations
of $1,489,000 and an extraordinary charge of $3,145,000. The pro
forma net income and earnings per share for the year ended December
31, 2001 presented above includes a nonrecurring, non-cash
impairment charge on real estate of $4,300,000, unrealized and
realized gains of $3,176,000 and a loss from discontinued operations
of $483,000.
-35-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the Company. As
of December 31, 2002, there were 11,936 holders of record of the Shares of the
Company.
The Company is required to distribute annually at least 90% of its Distributable
REIT taxable income to maintain its status as a REIT. Quarterly dividends paid
by the Company since December 31, 1999 are as follows:
Cash Dividends Paid Per Share
-----------------------------
2002 2001 2000
---- ---- ----
First quarter $ .21250 $ .20840 $ .20760
Second quarter .21270 .20860 .20780
Third quarter .21290 .21200 .20800
Fourth quarter .21310 .21220 .20820
----------- ----------- -----------
$ .85120 $ .84120 $ .83160
=========== =========== ===========
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and without
charge, a copy of the Annual Report on Form 10-K ("10-K") for the year ended
December 31, 2002 as filed with the Securities and Exchange Commission ("SEC").
The 10-K may also be obtained through the SEC's EDGAR database at www.sec.gov.
-36-