Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] 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)
MARYLAND 13-3602400
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
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
-------------------------
CIP(R) has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CIP(R) HAS NO SECURITIES registered on any exchanges.
CIP(R) does not have any Securities registered pursuant to Section 12(b) of the
Act.
CIP(R) (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ].
CIP(R) has no active market for common stock at May 12, 2003.
CIP(R) has 27,931,302 shares of common stock, $.001 par value outstanding at May
12, 2003.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of March 31, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Comprehensive Income
for the three ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. - Controls and Procedures 19
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 20
Item 6. - Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22-23
* The summarized condensed financial statements contained herein is unaudited;
however, in the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included.
-1-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Land and buildings, net of accumulated depreciation of $32,337,437 at
March 31, 2003 and $30,938,834 at December 31, 2002 $304,482,241 $300,808,511
Net investment in direct financing leases 130,329,327 133,955,555
Real estate under construction - 5,725,416
Assets held for sale 7,696,775 2,500,000
Equity investments 59,510,538 58,578,685
cash and cash equivalents 23,529,169 25,782,304
Marketable securities 11,430,368 11,014,711
Other assets 12,395,675 11,861,713
------------ ------------
Total assets $549,374,093 $550,226,895
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $246,433,620 $251,579,579
Limited recourse mortgage note payable on asset held for sale 3,033,792 -
Accrued interest 1,771,936 1,550,184
Accounts payable and accrued expenses 1,512,548 1,832,633
Due to affiliates 2,424,610 2,552,528
Dividends payable 5,962,026 5,938,632
Other liabilities 6,069,440 6,259,707
------------ ------------
Total liabilities 267,207,972 269,713,263
------------ ------------
Minority interest 14,010,318 13,703,146
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares; 28,932,887 and
28,833,385 shares issued and outstanding at March
31, 2003 and December 31, 2002 28,933 28,833
Additional paid-in capital 310,032,633 308,659,610
Dividends in excess of accumulated earnings (31,702,733) (31,519,364)
Accumulated other comprehensive income 1,493,422 956,456
------------ ------------
279,852,255 278,125,535
Less, common stock in treasury at cost, 1,014,498 and 984,755 shares
at March 31, 2003 and December 31, 2002 (11,696,452) (11,315,049)
------------ ------------
Total shareholders' equity 268,155,803 266,810,486
------------ ------------
Total liabilities, minority interest and shareholders' equity $549,374,093 $550,226,895
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements at that date.
-2-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
Revenues:
Rental income $ 9,494,659 $ 6,605,689
Interest income from direct financing leases 3,871,842 2,842,033
Interest and other income 514,617 34,204
------------ ------------
13,881,118 9,481,926
------------ ------------
Expenses:
Interest 4,888,459 2,962,620
Depreciation 1,710,283 1,118,597
General and administrative 991,807 809,847
Property expenses 2,243,500 1,474,079
Impairment charge on real estate 674,370 -
Charge on early extinguishment of debt - 2,086,383
------------ ------------
10,508,419 8,451,526
------------ ------------
Income from continuing operations before minority interest, income from
equity investments and gains and losses 3,372,699 1,030,400
Minority interest in (income) loss, including charge on early extinguishment of
debt of $771,962 in 2002 (755,715) 525,422
Income from equity investments 3,005,065 1,898,588
------------ ------------
Income from continuing operations before gains and losses 5,622,049 3,454,410
Unrealized loss on interest rate cap derivative instrument (918) -
Reversal of unrealized gain on warrants in connection with disposition - (2,128,000)
Gain on sale of warrants, net - 1,992,678
------------ ------------
Income from continuing operations 5,621,131 3,319,088
Income from operations of discontinued properties 155,650 26,546
------------ ------------
Net income $ 5,776,781 $ 3,345,634
============ ============
Basic earnings per share:
Income from continuing operations $ .20 $ .15
Discontinued operations .01 -
------------ ------------
Net income $ .21 $ .15
============ ============
Diluted earnings per share:
Income from continuing operations $ .19 $ .15
Discontinued operations .01 -
------------ ------------
Net income $ .20 $ .15
============ ============
Weighted average common shares outstanding-basic 27,895,272 22,236,523
============ ============
Weighted average common shares outstanding-diluted 28,458,953 22,800,204
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Net income $ 5,776,781 $ 3,345,634
----------- -----------
Other comprehensive income (loss):
Change in unrealized appreciation of marketable securities 463,396 -
Change in foreign currency translation adjustment 73,570 (145,490)
----------- -----------
Other comprehensive income (loss) 536,966 (145,490)
----------- -----------
Comprehensive income $ 6,313,747 $ 3,200,144
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 5,776,781 $ 3,345,634
Adjustments to reconcile net income to net cash provided by continuing operations:
Income from discontinued operations (155,650) (26,546)
Depreciation and amortization 1,974,135 1,175,457
Income from equity investments in excess of distributions received (1,058,607) (495,459)
Extraordinary charge on extinguishment of debt, net of minority interest - 1,314,421
Minority interest in income 755,715 246,540
Straight-line rent adjustments (325,024) (302,949)
Reversal of unrealized gain on warrants in connection with disposition - 2,128,000
Gain on sale of warrants - (1,992,678)
Impairment charge on real estate 674,370 -
Issuance of shares in satisfaction of performance fees 899,243 678,313
Net change in operating assets and liabilities (1,055,535) (1,030,352)
------------ ------------
Net cash provided by continuing operations 7,485,428 5,040,381
Net cash provided by discontinued operations 164,708 140,660
Prepayment premium on extinguishment of debt - (2,086,383)
------------ ------------
Net cash provided by operating activities 7,650,136 3,094,658
------------ ------------
Cash flows from investing activities:
Equity distributions received in excess of equity income 126,754 302,671
Payment of leasing costs - (244,237)
Acquisition of real estate and additional capitalized costs (1,508,209) (2,453,082)
Costs incurred in connection with acquisition of business operations - (503,041)
Proceeds from sale of securities, warrants and real estate - 1,992,678
------------ ------------
Net cash used in investing activities (1,381,455) (905,011)
------------ ------------
Cash flows from financing activities:
Dividends paid (5,936,756) (4,714,132)
Prepayment of mortgage payable (1,264,892) (29,762,278)
Mortgage principal payments (1,531,747) (957,624)
Proceeds from mortgages 582,522 36,460,999
Proceeds from stock issuance 473,880 215,683
Distributions to minority partners (520,684) (179,854)
Contributions from minority partners 77,903 211,255
Payment of financing costs - (697,371)
Purchase of treasury stock (381,403) (456,973)
------------ ------------
Net cash (used in) provided by financing activities (8,501,177) 119,705
------------ ------------
Effect of exchange rate changes on cash (20,639) 2,354
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,253,135) 2,311,706
Cash and cash equivalents, beginning of period 25,782,304 7,388,480
------------ ------------
Cash and cash equivalents, end of period $ 23,529,169 $ 9,700,186
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-5-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of Carey
Institutional Properties Incorporated (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods presented have been included.
The results of operations for the interim periods are not necessarily indicative
of results for the full year. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust mortgage securitization as an available-for-sale security, which
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 March 31, 2003, the fair value of the Company's interest was
$11,430,368, reflecting an aggregate unrealized gain of $915,128 and cumulative
net amortization of $101,405 ($47,739 for the three months ended March 31,
2003). The fair value of the Company's 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 key variable in determining the fair value of the subordinated interest 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 interest based on adverse
changes in the market interest rates of 1% and 2% is as follows:
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Interest rate 7.5% 8.5% 9.5%
Fair value of the interests $11,430,368 $10,864,344 $10,337,971
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.
Note 3. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
periods ended March 31, 2003 and 2002 were calculated as follows:
Three Months Ended March 31,
----------------------------
2003 2002
----------- -----------
Income from continuing operations $ 5,621,131 $ 3,319,088
Discontinued operations 155,650 26,546
----------- -----------
Net income $ 5,776,781 $ 3,345,634
=========== ===========
Weighted average shares - basic 27,895,272 22,236,523
Effect of dilutive securities: Stock warrants 563,681 563,681
----------- -----------
Weighted average shares - diluted 28,458,953 22,800,204
=========== ===========
Basic earnings per share from continuing operations $ .20 $ .15
Discontinued operations .01 -
----------- -----------
Basic earnings per share $ .21 $ .15
=========== ===========
-6-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Diluted earnings per share from continuing operations $.19 $.15
Discontinued operations .01 -
---- ----
Diluted earnings per share $.20 $.15
==== ====
Note 4. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and the Advisor, Carey Asset Management Corp, a
wholly-owned subsidiary of W. P. Carey & Co. LLC, 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 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
$893,696 and $703,750 for the three months ended March 31, 2003 and 2002,
respectively, with performance fees in like amount. The Company incurred
personnel cost reimbursements of $412,066 and $287,514 for the three months
ended March 31, 2003 and 2002, respectively.
Note 5. Lease Revenues:
The Company's operations consist of the direct and indirect investment in and
the leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the three-month periods ended March 31, 2003
and 2002 are as follows:
2003 2002
------------ ------------
Per Statements of Income:
Rental income from operating leases $ 9,494,659 $ 6,605,689
Interest from direct financing leases 3,871,842 2,842,033
Adjustments:
Share of leasing revenue applicable to
minority interest (1,420,591) (439,121)
Share of leasing revenue from equity
investments 4,870,418 3,677,379
------------ ------------
$ 16,816,328 $ 12,685,980
============ ============
-7-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
For the three-month periods ended March 31, 2003 and 2002, the Company earned
its net lease revenues from its investments as follows:
2003 % 2002 %
---- --- ---- ---
Marriott International, Inc. (a) $ 2,575,268 15% $ 1,482,188 11%
Omnicom Group, Inc. 1,091,509 7 1,066,344 8
Information Resources, Inc. (b) 870,827 5 - -
Advanced Micro Devices, Inc. (a) 814,734 5 814,734 6
Electronic Data Systems Corporation 751,732 5 635,947 5
Best Buy Co., Inc. (b) 742,699 4 747,693 6
Titan Corporation (b) 556,668 3 - -
Lucent Technologies, Inc. 508,826 3 463,207 4
ShopRite Supermarkets, Inc. (b) 468,567 3 463,742 4
UTI Holdings, Inc. 437,396 3 419,111 3
EnviroWorks, Inc. 435,478 3 - -
New WAI, L.P./Warehouse Associates 430,016 3 - -
Garden Ridge, Inc. 401,801 2 386,570 3
Sicor, Inc. (a) 395,921 2 368,184 3
Q Clubs, Inc. 370,904 2 355,049 3
Del Monte Corporation (a) 369,429 2 323,051 2
Merit Medical Systems, Inc. 366,351 2 366,351 3
Barnes & Noble, Inc. 365,969 2 360,718 3
The Upper Deck Company (a) 363,055 2 363,055 3
Childtime Childcare, Inc. (b) 356,356 2 162,223 1
Compucom Systems, Inc. (a) 352,011 2 326,167 2
Michigan Mutual Insurance Company 340,688 2 340,751 3
Plexus Corp. 317,173 2 317,173 2
Bell Sports Corp. 298,056 2 293,768 2
Gloystarne & Co., Ltd. 247,613 2 210,501 2
Other 2,587,281 15 2,419,453 21
----------- --- ----------- ---
$16,816,328 100% $12,685,980 100%
=========== === =========== ===
(a) Represents the Company's proportionate share of lease revenues from its
equity investments.
(b) Net of amounts applicable to minority interests.
For the three-month period ended March 31, 2003, lessees were responsible for
the direct payment of approximately $1,565,000 of real estate taxes on behalf of
the Company.
Note 6. Equity Investments:
The Company owns a 47.3% interest in Marcourt Investments, Inc., 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 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.
Summarized combined financial information of the Company's equity investees is
as follows:
(in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Assets (primarily real estate) $343,016 $343,846
Liabilities (primarily mortgage notes payable) 210,703 212,820
Shareholders' and members' equity 132,313 131,026
-8-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Three Months Ended March 31,
----------------------------
2003 2002
------- -------
Revenues (primarily rental income and interest income from
direct financing leases) $11,201 $11,793
Expenses (primarily interest on mortgage and depreciation) 5,171 5,383
------- -------
Net income $ 6,030 $ 6,410
======= =======
Note 7. Assets Held for Sale and Discontinued Operations:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the net income
(or loss) and gain or loss on sale of real estate for properties sold or held
for sale are to be reflected in the consolidated statements of income 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 Company owns a property in Maple Heights, Ohio leased to Nicholson
Warehouse, L.P. and a vacant property in Austin, Texas as well as a property in
Broken Arrow, Oklahoma (sold in April 2003), which are held for sale as of March
31, 2003.
The results of operations of the three properties held for sale and a property
in Little Rock, Arkansas that was sold in June 2002 are included as
"Discontinued Operations" and are summarized as follows:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Revenues (primarily rental revenues and miscellaneous income) $277,134 $242,830
Expenses (primarily interest on mortgages, depreciation and
property expenses) 121,484 216,284
-------- --------
Income from discontinued operations $155,650 $ 26,546
======== ========
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 to reduce the expense by $94,128 and $114,114 for the
three-month periods ended March 31, 2003 and 2002, respectively.
Note 8. Impairment Charge on Real Estate:
The Company determined that an other than temporary decline in estimated
residual value had occurred at two properties which are included in net
investment in direct financing leases in the accompanying condensed consolidated
financial statements. The accounting for the direct financing leases was revised
using the changed estimates, which resulted in the recognition of impairment
charges of (i) $436,831 on the Company's property in Owingsville, Kentucky
leased to Custom Foods Products, Inc. and (ii) $237,539 on its property in the
United Kingdom leased to Gloystarne, Inc. ("Gloystarne"). During the three
months ended March 31, 2003, Gloystarne entered into receivership and is
attempting to sell its business.
Note 9. Accounting Pronouncements:
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. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
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
-9-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Company adopted this Statement effective January 1, 2003, and the adoption did
not have a material effect on the Company's financial statements. The Company
will no longer classify gains and losses for the extinguishment of debt as
extraordinary items and will adjust comparative periods presented.
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. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on the Company's
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. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the 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
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not 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 Company's maximum loss
exposure is the carrying value of its equity investments. The Company has
evaluated the impact of this interpretation on its accounting for its
investments in unconsolidated joint ventures and it does not expect to
consolidate those investments as none of these investments will be classified as
VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the
-10-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
characteristics of a derivative instrument discussed in paragraph 6(b) of SFAS
No. 133, (2) clarifies when a derivative contains a financing component, (3)
amends the definition of an underlying to conform it to language used in FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", and (4) amends certain other
existing pronouncements. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The guidance is to be applied prospectively.
-11-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with Carey Institutional
Properties Incorporated's ("CIP(R)") condensed consolidated financial statements
and notes thereto as of March 31, 2003 included in this quarterly report and
CIP(R)'s Annual Report on Form 10-K for the year ended December 31, 2002. This
quarterly report contains forward looking statements. Such statements involve
known and unknown risks, uncertainties, and other factors that may cause the
actual results, performance, or achievement of CIP(R) to be materially different
from the results of operations or plans expressed or implied by such forward
looking statements. Accordingly, such information should not be regarded as
representations by CIP(R) that the results or conditions described in such
statements or the objectives and plans of CIP(R) will be achieved. Item 1 of the
Annual Report on Form 10-K for the year ended December 31, 2002 provides a
description of CIP(R)'s business objectives, acquisition and financing
strategies and risk factors which could affect future operating results.
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 CIP(R)'s accounting policies.
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.
Operating real estate is stated at cost less accumulated deprecation. Costs
directly related to build-to-suit projects, primarily interest, if applicable,
are capitalized. No interest was capitalized in the three months ended March 31,
2003. 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. 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.
-12-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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. 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
-13-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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
written off and included in charges for early extinguishment of debt if a loan
is retired.
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 March 31,
2003 and 2002, CIP(R) owned real estate in the United States, the United Kingdom
and France.
RESULTS OF OPERATIONS:
CIP(R)'s results of operations for the three-month period ended March 31, 2003
and 2002 are not directly comparable because the results for 2003 reflect a
company whose asset base is approximately 50% greater than the assets of CIP(R)
prior to its merger with Corporate Property Associates 10 Incorporated
("CPA(R):10"), an affiliate, and includes income generated from assets acquired
in CIP(R)'s merger. On May 1, 2002, CIP(R) acquired the business operations of
CPA(R):10 with investments in net lease real estate and with the same objectives
as CIP(R)'s, through a merger approved by the shareholders of both companies.
CIP(R) increased its asset base by acquiring interests in 45 properties with a
fair value of $139,716,000 and assumed 17 leases with 14 tenants, nine of which
leases had previously been jointly-owned with CIP(R). CIP(R) also acquired
limited recourse mortgage debt with a fair value of $52,077,000 as of the date
of acquisition.
Net income for the three months ended March 31, 2003 increased by $2,431,000 to
$5,777,000 as compared with net income of $3,346,000 for the three months ended
March 31, 2002. Excluding the effect of gains and losses, a charge on the early
extinguishment of debt in 2002 and noncash impairment charges in 2003, income as
adjusted would have reflected an increase of $1,656,000. The increase was
primarily due to an increase in lease revenues, interest income and income from
equity investments resulting from the increase in assets and was partially
offset by increases in interest expense, depreciation, general and
administrative and property expenses.
Lease revenues increased by $3,919,000 to $13,367,000, of which $3,518,000 was
attributable to the property interests acquired from CPA(R):10. Lease revenues
benefited from scheduled rent increases on twelve leases in 2002 and 2003 from
the completion of a build-to-suit project at a Holiday Inn in Toulouse, France
in February 2002 and a further expansion of the property which was completed in
February 2003. Lease revenues also increased as a result of consolidating
investments in properties leased to Childtime Childcare, Inc. and ShopRite
Supermarkets, Inc. as a result of contributing CIP(R)'s majority interests in
the properties to limited partnerships in August 2002. Prior to the contribution
CIP(R) recorded its share of revenues and expenses from these properties on a
pro-rata basis. The change in ownership increased lease revenues by $445,000;
however, this had no overall effect on net income or cash flow. These increases
in lease revenues were partially offset by a lease termination and the
subsequent sale of a property leased to Waban, Inc. and the termination of a
lease with Bolder Technologies Corporation, both in 2002. The Waban and Bolder
leases contributed annual lease revenues of $1,779,000. Twenty-six 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.
-14-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In April 2003, Kmart Corporation terminated its lease for its Denton, Texas
store in connection with its bankruptcy reorganization. Annual rent from the
Denton store was $215,000. Kmart has affirmed its leases for its properties in
Drayton Plains, Michigan and Citrus Hills, California, which contribute annual
lease revenues of $390,000. Kmart's plan of reorganization was confirmed by the
bankruptcy court and it emerged from bankruptcy on May 6, 2003. CIP(R) leases a
property in the United Kingdom to Gloystarne & Co., Ltd. at an annual rent of
approximately $610,000. In January 2003, Gloystarne entered into receivership
and is attempting to sell its business. Although Gloystarne is current in its
rent obligation through March 24, 2003, there is no assurance that its future
rent obligations will be met or that a purchaser of Gloystarne's operations will
rent the property on similar terms.
Interest and other income increased by $480,000 to $515,000 for the three months
ended March 31, 2003, primarily as a result of interest income earned from
CIP(R)'s subordinated interest in Carey Commercial Mortgage Trust. Interest
income from the mortgage trust participation was $370,000.
Income from equity investments increased by $1,106,000 to $3,005,000, primarily
because CIP(R)'s ownership interest in Marcourt Investments, Inc., a lessee of
13 Courtyard by Marriott hotels, increased from 24% to 47% as a result of the
merger with CPA(R):10. Income from equity investments also benefited from rent
increases at properties leased to Del Monte Corporation and Compucom Systems,
Inc.
Interest expense for the three months ended March 31, 2003 increased by
$1,925,000 to $4,888,000 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 in
May 2002.
General and administrative expense for the three months ended March 31, 2003
increased by $182,000 to $992,000. The increase was primarily due to an increase
in the reimbursement of personnel costs, which increased as a result of the
increase in CIP(R)'s asset base. The increase in property expense of $769,000
was due to an increase in asset management fees and performance fees and to
carrying costs of a partially occupied property in Golden, Colorado. Asset
management and performance fees are based on the appraised value of CIP(R)'s
real estate assets, which increased as a result of the assets acquired in the
merger. Included in property expense are $294,000 of carrying costs for the
Golden property. During the three months ended March 31, 2003, CIP(R) recognized
impairment charges totaling $674,000 on properties leased to Custom Foods
Products, Inc. and Gloystarne as a result of an other than temporary decline in
the estimated residual values of its direct financing leases.
The results for the three months ended March 31, 2002 includes a charge of
$1,314,000, net of minority interest, for early extinguishment of debt in
connection with the refinancing in January 2002 of a mortgage on properties
leased to Best Buy Co., Inc. which was refinanced at a lower rate of interest.
Financial Condition:
There has been no material change in CIP(R)'s financial condition. Cash flows
from operations of $7,650,000 and equity investments of $127,000 were not
sufficient to fund dividends to shareholders of $5,937,000, pay scheduled
mortgage principal installments of $1,532,000 and fund distributions to minority
partners of $521,000, resulting in a shortfall of $213,000. As of March 31,
2003, CIP(R) has in excess of $15,000,000 available for investment. CIP(R)
intends to invest its available cash in new real estate investments to further
diversify its portfolio, and projects that it will have sufficient cash flow
from operations and equity investments to meet its cash flow objectives.
During 2003, CIP(R)'s investing activities included using $889,000 to purchase
land at CIP(R)'s property in Conway, Arkansas leased to Kroger Co. and $615,000
to fund construction of an expansion at its hotel property in Toulouse, France.
The ground lease on the Conway property is an obligation of Kroger and will
generate additional annual rent of $62,000. The expansion of the Toulouse hotel
was completed in February 2003; however, CIP(R) does not expect to collect rent
from the lessee until cash flows from hotel operations are in excess of mortgage
debt service. Based on current cash flow projections, CIP(R) expects to start
receiving rents before the end of the year. The current occupancy rate at the
Toulouse hotel is 56%.
In addition to the payment of dividends and scheduled principal mortgage
payments, CIP(R)'s financing activities for the three months ended March 31,
2003 included using $1,265,000 to pay off a mortgage loan in January 2003 and
obtaining
-15-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
$583,000 from advances on a construction loan for the completion of the Toulouse
hotel expansion. Annual debt service on the retired loan was $180,000.
Balloon payments of approximately $7,956,000 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. 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 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. 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.
CIP(R) has reached an agreement-in-principle to sell its property leased to
Nicholson Warehouse, L.P. for $3,700,000. Because of Nicholson's financial
difficulties, it has not been able to pay rent in excess of CIP(R)'s debt
service on the property. The proposed sale, if completed, would have little
effect on CIP(R)'s operating cash flow.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CIP(R)'s contractual obligations and commitments is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Limited recourse mortgage notes
payable (1) $249,467 $12,539 $18,967 $11,548 $5,040 $14,978 $ 186,395
Subordinated disposition fees 1,002 1,002
Commitments:
Share of minimum rents payable
under office cost-sharing
agreement 701 132 207 207 155
-------- ------- ------- ------- ------ ------- --------
$251,170 $12,671 $19,174 $11,755 $5,195 $14,978 $187,397
======== ======= ======= ======= ====== ======= ========
(1) The limited recourse mortgage notes payable were obtained in connection
with the acquisition of properties in the ordinary course of business.
ACCOUNTING PRONOUNCEMENTS:
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. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
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
-16-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
classified as extraordinary items unless it can be considered unusual in nature
and infrequent in occurrence. CIP(R) adopted this statement effective January 1,
2003, and the adoption did not have a material affect on CIP(R)'s financial
statements. CIP(R) will no longer classify gains and losses for the
extinguishment of debt as extraordinary items and will adjust comparative
periods presented.
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. SFAS No. 146 was adopted
on January 1, 2003, and did not have a material effect on CIP(R)'s 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. SFAS No. 147 was adopted on
January 1, 2003, and did not have a material effect on the 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
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
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on CIP(R)'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. CIP(R) 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. CIP(R)'s maximum loss exposure is
the carrying value of its equity investments. CIP(R) has evaluated the impact of
this interpretation on its accounting for its investments in unconsolidated
joint ventures and it does not expect to consolidate those investments as none
of these investments will be classified as VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement
-17-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, the statement (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative instrument discussed in paragraph 6(b)
of SFAS No. 133, (2) clarifies when a derivative contains a financing component,
(3) amends the definition of an underlying to conform it to language used in FIN
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", and (4) amends certain
other existing pronouncements. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The guidance is to be applied prospectively.
-18-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risks to which CIP(R) is exposed are interest rate risk
and foreign currency exchange risk.
The value of CIP(R)'s real estate is subject to fluctuations based on changes in
interest rates and foreign currency exchange rates, local and regional economic
conditions, changes in the creditworthiness of lessees and may affect CIP(R)'s
ability to refinance its debt when balloon payments are scheduled.
CIP(R) owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuations based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of March 31,
2003 the interests in CCMT had a fair value of $11,430,000.
Approximately $231,318,000 of CIP(R)'s long-term debt bears interest at fixed
rates, and therefore the fair value of these instruments is affected by changes
in the market interest rates. The following table presents principal cash flows
based upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. The annual interest rates on the fixed rate debt as of March 31, 2003
ranged from 6.95% to 10.00%. The annual interest rates on the variable rate debt
as of March 31, 2003 ranged from 3.97% to 5.625%.
(in thousands) 2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $11,473 $14,633 $7,513 $4,829 $14,714 $178,156 $231,318 $234,912
Weighted average
interest rate 9.26% 9.38% 8.32% 7.78% 8.44% 7.51%
Variable rate debt $ 1,066 $ 4,334 $4,035 $ 211 $ 264 $ 8,239 $ 18,149 $ 18,149
CIP(R) has one interest rate cap agreement contract, a derivative financial
instrument, with a notional amount of $6,750,000, and a strike of 8% based on
the one-month London Inter-Bank Offered Rate. The use of derivative financial
instruments is not currently significant to CIP(R)'s risk management.
CIP(R) has foreign operations. Accordingly, CIP(R) is subject to foreign
currency exchange risk from the effects of exchange rate movements of foreign
currencies and this may affect future costs and cash flows; however, exchange
rate movements to date have not had a significant effect on CIP(R)'s financial
position or results of operations. To date we have not entered into any foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
Item 4. - 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
March 31, 2003.
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 Co-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 Co-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.
-19-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2003, no matters were submitted to a
vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Co-Chief Executive Officers 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 quarter ended March 31, 2003, the Company was not required
to file any reports on Form 8-K.
-20-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
5/13/2003 By: /s/ John J. Park
Date -----------------------------------
John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
5/13/2003 By: /s/ Claude Fernandez
Date -----------------------------------
Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
-21-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CERTIFICATIONS
We, William Polk Carey and Gordon F. DuGan, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Carey Institutional
Properties Incorporated (the "Registrant");
2. Based on our knowledge, this quarterly 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 quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The Registrant's other certifying officer 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 officer 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 function):
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 officer and we have indicated in this
quarterly 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 5/13/2003 Date 5/13/2003
/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)
-22-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CERTIFICATIONS (Continued)
I, John J. Park, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carey Institutional
Properties Incorporated (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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 5/13/2003
/s/ John J. Park
---------------------------
John J. Park
Chief Financial Officer
-23-