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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-20016
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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
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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
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ].
Registrant has no active market for its common stock as of March 12,
2004. Non-affiliates held 26,019,031 shares as of March 12, 2004.
As of March 12, 2004, there are 28,180,173 shares of common stock of
Registrant outstanding.
CIP(R) incorporates by reference its definitive Proxy Statement with
respect to its 2004 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.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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 and internationally, primarily on a triple net basis. As of
December 31, 2003, CIP(R)'s portfolio consisted of 101 properties leased to 45
tenants and totaling more than 8,291,000 million 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 in the
jurisdiction in which the property is located 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 ("WPC"), 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) on April 16, 2002 and CPA(R):10 merged with and into CIP(R)
effective May 1, 2002. Upon consummation of the merger, CPA(R):10 ceased to
exist.
CIP(R) was formed as a Maryland corporation on February 15, 1991. Between August
1991 and August 1993, CIP(R) sold a total of 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. Through December
31, 1999, CIP(R) had issued a total of 6,250,262 shares for a total of
$74,440,000 in connection with the private placement. Through December 31, 2003,
CIP(R) has also issued 1,486,990 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.
One of CIP(R)'s objectives is to provide liquidity for its shareholders
beginning eight to twelve years after the net proceeds of its public offerings
were substantially invested. CIP(R) is within that period and the Board of
Directors is evaluating liquidity options. CIP(R) is working to present a
liquidity plan to shareholders before the end of the second quarter; however,
there is no assurance that the Board of Directors will approve any liquidity
options within such period.
WPC, CIP(R)'s advisor, 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. WPC also provides office space and other facilities
for CIP(R). WPC 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 WPC and pays certain transactional fees. CIP(R) also
reimburses WPC for certain expenses. WPC also serves in this capacity for
Corporate Property Associates 12 Incorporated, Corporate Property Associates 14
Incorporated, Corporate Property Associates 15 Incorporated and Corporate
Property Associates 16 - Global Incorporated. WPC is 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,
2003, CIP(R) had no employees. WPC employs 120 individuals who perform services
for CIP(R).
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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;
- own a diversified portfolio of net-leased real estate that
will increase in value; and
- 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 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. As
described above, CIP(R)'s board of directors has begun exploring options for the
liquidation of the company, either through the merger with CPA(R):15 described
above, or through other means. Once liquidation begins, the business objectives
and strategy could change to maximizing shareholder returns upon the liquidation
of properties.
DEVELOPMENTS DURING 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 selling its business. The current occupant of the property
is under no obligation to accept the current lease and CIP(R) believes the lease
will be terminated. CIP(R) is in discussions with the occupant to enter into a
six-month agreement at the current rent followed by a new lease with an initial
term of five-years.
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 affirmed its leases for its properties in
Drayton Plains, Michigan and Citrus Hill, California, which contribute aggregate
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) is
seeking to re-lease the Denton property.
In April 2003, CIP(R) received $2,362,000 from the sale of a property in Broken
Arrow, Oklahoma leased to Hobby Lobby, Inc. The Hobby Lobby lease had
contributed annual rental revenues of $254,000. On October 24, 2003, CIP(R) sold
a vacant property located in Austin, Texas for approximately $2,550,000.
ACQUISITION STRATEGIES
CIP(R)'s board of directors has begun exploring liquidity options for the
company. If the board of directors decides not to pursue a liquidation strategy,
CIP(R) may continue to acquire properties until the board of directors decides
to pursue liquidation.
WPC 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,
WPC 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 WPC's presence in the net lease market to build
its portfolio. In evaluating opportunities for CIP(R), WPC 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 WPC has
one of the most extensive underwriting processes in the industry and has an
experienced staff of professionals involved with underwriting transactions. WPC
seeks to identify those prospective tenants whose creditworthiness is likely to
improve over time. CIP(R) believes that the experience of WPC's management in
structuring sale-leaseback transactions to meet the needs of a prospective
tenant enables WPC 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.
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
WPC's strategy in structuring its net lease investments for CIP(R) is to:
- 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, 2003, CIP(R) held a warrant position in
1 tenant.
FINANCING STRATEGIES
Consistent with its investment policies, CIP(R) uses leverage when available on
favorable terms. As of December 31, 2003, CIP(R) had approximately $244,106,000
in property level debt outstanding. These mortgages mature between the current
year and 2021 and, as of December 31, 2003, have interest rates between 3.97%
and 10.00%. WPC 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. WPC continues to make
acquisitions for CIP(R) using these funds. In analyzing potential acquisitions,
WPC 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 WPC include the following:
Tenant Evaluation. WPC subjects each potential tenant to an extensive
evaluation of its credit, management, position within its industry,
operating history and profitability. WPC 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). WPC 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. WPC 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. WPC, 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. WPC 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.
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Lease Provisions that Enhance and Protect Value. When appropriate, WPC
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.
Diversification. WPC 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.
WPC 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. WPC'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. WPC 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.
- Ralph F. Verni, is a private investor and business
consultant and formerly Chief Investment Officer of
The New England Mutual Life Insurance Company.
- Karsten von Koller was formerly Chairman and Member
of the Board of Managing Directors of Eurohypo AG,
the leading commercial real estate financing company
in Europe.
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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.
WPC 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. WPC reviews financial statements of its tenants
and undertakes regular physical inspections of the condition and maintenance of
its properties. Additionally, WPC 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. Based upon these criteria, and others, the board of directors is
currently evaluating liquidity options.
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
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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, 2003, Marriott International, Inc. represented
13% of lease revenues of CIP(R).
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
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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 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 WPC 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 WPC.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of WPC 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 WPC and the oversight of the
board of directors.
WPC may be subject to conflicts of interest.
WPC manages our business and selects our real estate investments. WPC has some
conflicts of interest in its management of CIP(R), which arise primarily from
the involvement of WPC and its affiliates in other activities that may conflict
with CIP(R) and the payment of fees by us to WPC and its affiliates. The
activities in which a conflict could arise between CIP(R) and WPC are:
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
- the receipt of commissions, fees and other compensation by WPC
and its affiliates for property purchases, leases, sales and
financing for CIP(R), which may cause WPC 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 WPC or any of its affiliates,
including agreements regarding compensation of WPC 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 WPC 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.
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 WPC
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, 2003, we had limited recourse
mortgage notes payable outstanding of $244,106,000.
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.
-8-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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 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:
- 2004 - 8.0 million;
- 2005 - 3.0 million;
- 2006 - None;
- 2007 - 9.5 million; and
- 2008 - None.
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.
-9-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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 WPC may owe to
our partner in an affiliated transaction may make it more difficult for us to
enforce our rights. Certain of CIP(R)'s independent directors are independent
directors of affiliated CPA(R) REITs.
In some of our joint venture relationships with publicly registered investment
programs or other entities sponsored by WPC 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 WPC may owe to our partner in an affiliated
transaction may make it more difficult for us to enforce our rights.
International investments involve additional risks.
We own properties in the United Kingdom and France and we may purchase
additional property located outside the United States. These investments may be
affected by factors peculiar to the laws of the jurisdiction in which the
property is located. These laws may expose us to risks that are different from
and in addition to those commonly found in the United States. Foreign
investments could be subject to the following risks:
- changing governmental rules and policies;
- enactment of laws relating to the foreign ownership of
property and laws relating to the ability of foreign persons
or corporations to remove profits earned from activities
within the country to the person's or corporation's country of
origin;
- variations in the currency exchange rates;
- adverse market conditions caused by changes in national or
local economic conditions;
- changes in relative interest rates;
- change in the availability, cost and terms of mortgage funds
resulting from varying national economic policies;
- changes in real estate and other tax rates and other operating
expenses in particular countries;
- changes in land use and zoning laws; and
- more stringent environmental laws or changes in such laws.
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-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. Properties.
Set forth below is certain information relating to the Company's properties
owned as of December 31, 2003.
LEASE OBLIGOR/ OWNERSHIP SQUARE RENT PER SHARE OF CURRENT INCREASE
LOCATION INTEREST(1) FOOTAGE SQUARE FOOT 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; 47.35% interest in
Indianapolis, IN; Louisville, a real estate Stated/ Feb. 2027
KY; Linthicum, MD; Newark, investment trust 1,115,687 $15.98 $8,441,019 % of Feb. 2012 and
NJ; Albuquerque, NM; Las owning land and sales Feb. 2032
Vegas, NV; Spokane, WA buildings
OMNICOM GROUP, INC.(3)
Playa Vista, CA 100% 120,000 29.54 3,544,533 CPI Sep. 2018 Sep. 2048
Venice, CA 100% 77,719 13.93 1,082,685 CPI Sep. 2010 Sep. 2038
------- ---------
Total: 197,719 4,627,218
INFORMATION RESOURCES, INC.(3)
66.67% interest in
a limited 252,000 19.57 3,287,700 CPI Oct. 2010 Oct. 2015
Chicago, IL partnership owning
land and buildings
ADVANCED MICRO DEVICES,
INC. (3)
33 1/3% interest in
a limited liability 361,965 27.01 3,258,938 CPI Dec. 2018 Dec. 2038
Sunnyvale, CA company owning land
and buildings
BEST BUY CO., INC.(3)
Fort Collins, CO; Matteson
and Schaumburg, IL;
Attleboro, MA; Nashua, NH; 63% interest in a
Albuquerque, NM; Arlington, general
Beaumont, Dallas, Fort Worth partnership owning 512,281 9.94 3,206,467 Stated Apr. 2018 Apr. 2038
and Houston, TX; Virginia land and buildings
Beach, VA
ELECTRONIC DATA SYSTEMS
CORPORATION(3)
Louisville, CO 100% 403,871 7.87 3,179,732 CPI Dec. 2014 Dec. 2034
TITAN CORPORATION(3)
81.46% interest in
a limited 166,403 17.20 2,331,441 CPI Jul. 2007 Jul. 2023
San Diego, CA partnership owning
land and buildings
LUCENT TECHNOLOGIES, INC.(3)
Charlotte, NC 100% 568,670 3.58 2,035,304 Fair value Mar. 2005 Mar. 2020
-11-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
RENT PER
LEASE OBLIGOR/ SQUARE SQUARE SHARE OF CURRENT INCREASE
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR LEASE TERM MAXIMUM TERM
- ---------------------------------------------------------------------------------------------------------------------------------
SHOPRITE SUPERMARKETS, INC. (3)
Greenport, NY 100% 59,772 10.65 636,515 Stated Dec. 2017 Dec. 2037
Ellenville and Warwick, 55% interest in a
NY (3,4) limited partnership Stated/%
owning land and of
buildings 136,438 14.73 1,105,180 sales Oct. 2024 Oct. 2044
------- ---------
Total: 196,210 1,741,695
UTI HOLDINGS, INC. (3)
Glendale Heights, IL 100% 101,194 13.67 1,383,387 CPI Nov. 2012 Nov. 2032
Glendale Heights, IL 100% 38,143 10.56 402,613 Stated Sep. 2020 Sep. 2035
------- ---------
Total: 139,337 1,786,000
NEW WAI. L.P./WAREHOUSE ASSOCIATES (3)
Lima, OH 100% 534,108 3.10 1,653,683 CPI Mar. 2016 Mar. 2041
BARNES & NOBLE, INC. (3)
Farmington, CT 100% 21,600 36.36 785,400 Stated Feb. 2013 Feb. 2028
Braintree, MA 100% 19,661 43.66 858,463 Stated Feb. 2014 Feb. 2024
------ ---------
Total: 41,261 1,643,863
CHILDTIME CHILDCARE, INC. (3)
Naperville, IL; Centreville,
Century Oaks, Manassas and
Newport News, VA 100% 37,360 18.65 696,902 CPI Aug. 2015 Aug. 2025
Chandler and Tucson, AZ;
Alhambra, Chino, Garden Grove
and Tustin, CA; Westland (2) 66.07% interest in
and Sterling Heights, MI; a limited
Carrolton, Duncanville and partnership owning
Lewisville, TX land and buildings 83,988 16.57 919,697 CPI Jan. 2016 Jan. 2041
------- ---------
Total: 121,348 1,616,599
GARDEN RIDGE, INC. (3)
Oklahoma City, OK 100% 141,284 6.38 901,017 CPI Apr. 2015 Apr. 2035
Round Rock, TX 100% 152,500 4.63 706,188 CPI Dec. 2013 Dec. 2038
------- ---------
Total: 293,784 1,607,205
ENVIROWORKS, INC. (3)
Apopka, FL 100% 374,829 4.17 1,564,389 CPI Mar. 2010 Mar. 2035
Q CLUBS, INC. (3)
Bedford, TX 100% 46,658 14.02 654,325 CPI Feb. 2016 Feb. 2036
Memphis, TN 100% 43,311 19.13 828,755 CPI Jul. 2013 Jul. 2033
------ ---------
Total: 89,969 1,483,080
DEL MONTE CORPORATION (3)
Mendota, IL; Plover, WI; 50%(5) 735,766 4.02 1,477,714 CPI Jun. 2016 Jun. 2046
Toppenish and Yakima, WA
SICOR, INC. (3)
50% interest in a
general
San Diego, CA partnership owning
land and buildings 144,312 20.41 1,472,736 CPI Jul. 2009 Jul. 2049
-12-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
RENT PER
LEASE OBLIGOR/ SQUARE SQUARE SHARE OF CURRENT INCREASE
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR LEASE TERM MAXIMUM TERM
- ---------------------------------------------------------------------------------------------------------------------------------
MERIT MEDICAL SYSTEMS, INC. (3)
South Jordan, UT 100% 172,925 8.47 1,465,404 CPI Jan. 2020 Jan. 2040
THE UPPER DECK COMPANY (3)
50% interest in a
limited liability
Carlsbad, CA company owning land
and building 294,780 9.85 1,452,220 CPI Dec. 2020 Dec. 2040
COMPUCOM SYSTEMS, INC. (3)
33 1/3% interest in
a limited liability
Dallas, TX company owning land
and buildings 242,313 17.43 1,408,043 CPI Apr. 2019 Apr. 2029
MICHIGAN MUTUAL INSURANCE COMPANY (3)
Charleston, SC 100% 134,985 10.24 1,382,256 Stated Dec. 2007 Dec. 2027
ELECTRONICS ASSEMBLY CORPORATION (3)
Neenah, WI 100% 179,250 7.58 1,357,906 CPI Aug. 2014 Aug. 2044
BELL SPORTS, INC.
Rantoul, IL 100% 317,340 3.76 1,192,222 CPI Nov. 2012 Nov. 2032
SEARS LOGISTICS, INC. (3)
Jacksonville, FL 100% 240,000 3.89 932,640 Stated Mar. 2004 Sep. 2004
PSC SCANNING, INC. (3)
Eugene, OR 100% 110,665 8.23 911,143 CPI May 2014 May 2014
DETROIT DIESEL CORPORATION
Hollywood and Orlando, FL 100% 81,318 11.17 908,037 PPI Dec. 2019 Dec. 2039
CUSTOM FOOD PRODUCTS, INC. (3)
Owingsville, KY 100% 37,094 24.13 895,148 CPI Jun. 2020 Jun. 2035
HUMCO HOLDING GROUP, INC. (3)
Texarkana, TX; Orem, UT 100% 164,565 5.32 875,349 CPI Feb. 2016 Feb. 2016
NICHOLSON WAREHOUSE, L.P. (3)
Maple Heights, OH 100% 341,282 2.50 854,540 CPI Dec. 2018 Dec. 2043
HIBBETT SPORTING GOODS, INC. (3)
Birmingham, AL 100% 219,312 3.58 784,224 CPI Dec. 2014 Dec. 2029
SUPERIOR TELECOMMUNICATIONS, INC. (3)
Brownwood, TX 100% 315,252 2.12 668,758 CPI Dec. 2014 Dec. 2029
SOCIETE HOTELIERE TOURISME GRAND NOBLE (3)
Toulouse, France 100% 69,300 14.36 646,828(6) INSEE(7) Jan. 2013 Jan. 2013
ISA INTERNATIONAL PLC (3)
Bradford, West Yorkshire, 100% 41,432 15.30 633,738(6) Open May 2014 None
United Kingdom Market
-13-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
RENT PER
LEASE OBLIGOR/ SQUARE SQUARE SHARE OF CURRENT INCREASE
LOCATION OWNERSHIP INTEREST(1) FOOTAGE FOOT ANNUAL RENTS(2) FACTOR LEASE TERM MAXIMUM TERM
- ---------------------------------------------------------------------------------------------------------------------------------
GLOYSTARNE & CO., LTD. (3)
Rotherdam, South Yorkshire, 100% 120,000 5.07 608,469(6) Stated Dec. 2019 Dec. 2019
United Kingdom
PETSMART, INC. (3)
Ennis, TX 100% 229,950 2.33 534,653 CPI Jan. 2013 Jan. 2013
OSHMAN SPORTING GOODS, INC. (3)
Plano, TX 100% 47,054 10.17 478,752 Stated Jan. 2013 Jan. 2033
KROGER CO.
Conway and
N. Little Rock, AR 100% 78,075 6.10 475,975 CPI Feb. 2017 Feb. 2037
KMART CORPORATION.
% of
Drayton Plains, MI 100% 103,018 2.04 210,000 Sales Mar. 2006 Mar. 2026
% of
Citrus Heights, CA 100% 89,760 2.01 180,000 Sales May 2006 May 2026
------- ---------
Total: 192,778 390,000
AFFILIATED FOODS SOUTHWEST, INC.
Hope, AR 100% 35,784 2.40 85,882 CPI Mar. 2007 Mar. 2037
Little Rock, AR 100% 21,932 1.58 34,745 CPI Mar. 2007 Mar. 2037
Little Rock, AR 100% 64,358 4.09 263,432 CPI Feb. 2009 Feb. 2024
------- ---------
Total: 122,074 384,059
US WEST COMMUNICATIONS, INC. (3)
Scottsdale, AZ 100% 4,460 60.60 270,270 Stated Feb. 2007 Feb. 2017
XEROX CORPORATION 100% 36,850 4.33 159,860 Stated May 2011 May 2021
PHOTO CENTER 100% 340 14.12 4,800 None Monthly renewals
------ ---------
Total for property in Hot Springs, AR: 37,190 164,660
COGNITIVE SOLUTIONS, INC. 100% 42,628 4.84 206,320 Stated Sep. 2014 Sep. 2020
VACANT 100% 107,134
-------
Total for property in Golden, CO: 149,762
VACANT
Denton, TX 100% 87,406
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.
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, 2003.
7. INSEE construction index, an index published quarterly by the French
Government.
-14-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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,
2003 to a vote of security holders, through the solicitation of proxies or
otherwise.
-15-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to CIP(R)'s common equity is hereby incorporated by
reference to page 36 of Appendix A.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of
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 12 of Appendix A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the exposure to loss resulting from changes in interest rates,
credit spreads, foreign currency exchange rates and equity prices. In pursuing
our business plan, the primary market risks to which we are exposed are interest
rate risk and currency exchange rates.
The value of our real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect our ability to refinance our
debt when balloon payments are scheduled.
Approximately $225,424,000 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, 2003 ranged
from 6.08% to 10%. The interest rate on the variable rate debt as of December
31, 2003 ranged from 3.97% to 5.625%.
(in thousands) 2004 2005 2006 2007 2008 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $4,594 $7,963 $5,309 $15,222 $9,949 $182,387 $225,424 $226,429
Weighted average
interest rate 7.68% 8.20% 7.64% 8.39% 7.44% 7.43%
Variable rate debt $8,209 $ 215 $ 246 $ 307 $ 307 $ 9,398 $ 18,682 $ 18,682
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, 2003. An unrealized foreign currency translation gain of $923,000 for the
year ended December 31, 2003 is included in the accompanying consolidated
financial statements and is due to changes in foreign currency on notes
receivable from wholly-owned subsidiaries. CIP(R) was 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, CIP(R) has 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) 2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Rental income(1) $2,152 $2,179 $2,259 $2,259 $2,259 $18,003 $29,111
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2003 and thereafter are as follows:
(in thousands) 2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Fixed rate debt(1) $128 $137 $272 $282 $4,089 $4,251 $ 9,159
Variable rate debt (1) $184 $215 $246 $307 $307 $9,397 $10,656
(1) Based on December 31, 2003 exchange rate.
-16-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 8. Consolidated Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data are
hereby incorporated by reference to pages 13 to 35 of the Company's Annual
Report contained in Appendix A:
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of December 31, 2003 and 2002.
(iii) Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001.
(iv) Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2001, 2002 and 2003.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001.
(vi) Notes to Consolidated Financial Statements.
Item 9. Disagreements on Accounting and Financial Disclosure.
NONE
Item 9A. 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, 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 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.
-17-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS OF CIP(R)
The Company directors and executive officers are as follows:
Name Office
Wm. Polk Carey Chairman, Co-CEO and Director
Gordon F. DuGan Vice Chairman, Co-CEO
Francis X. Diebold III Director
William Ruder Director
George E. Stoddard Director
Warren G. Wintrub Director
Edward V. LaPuma President
John J. Park Managing Director and Chief Financial Officer
The following is a biographical summary of the experience of our directors and
executive officers:
Wm. Polk Carey, age 73, is Chairman of the Board of Directors and Co-CEO. Mr.
Carey has served as a director of CIP(R) since 1993, CPA(R):15 since 2001, of
CPA(R):14 since 1997, of CPA(R):12 since 1993, of CPA(R):16 - Global since
2003,and of W. P. Carey & Co. LLC since 1997. Mr. Carey was also elected
Chairman of WPC in June 1997, has been active in lease financing since 1959, and
a specialist in net leasing of corporate real estate property since 1964. Before
founding WPC in 1973, he served as Chairman of the Executive Committee of
Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate
and Equipment Financing at Loeb, Rhoades & Co. (now Lehman Brothers) and Vice
Chairman of the Investment Banking Board and Director of Corporate Finance of
duPont Glore Forgan Inc. Mr. Carey was educated at Princeton University and is a
graduate of the University of Pennsylvania's Wharton School. He currently serves
on the board of The Johns Hopkins University. Mr. Carey also serves as Chairman
of the Board and Co-Chief Executive officer of CPA(R):12, CPA(R):14, CPA(R):15,
CPA(R):16 - Global, and W. P. Carey & Co. LLC.
Gordon F. DuGan, age 37, is Vice Chairman and Co-CEO. Mr. DuGan joined W. P.
Carey & Co. LLC as Assistant to the Chairman in 1988, and in 1995 was elevated
to Senior Vice President in the Acquisitions Department. From October 1995 until
February 1997 he was Chief Financial officer of a Colorado-based wireless
communications equipment manufacturer. In 1997 Mr. DuGan rejoined WPC as Deputy
Head of Acquisitions, was elected to Executive Vice President and Managing
Director, and was elevated to President in 1999 and Co-CEO in 2002. Mr. DuGan
has served as a Trustee of the W. P. Carey Foundation since 1999. He also serves
on the Boards of the New York Pops and the Hewitt School and is a member of the
Young Presidents Organization. Mr. DuGan received his BS degree in Economics
from the Wharton School of the University of Pennsylvania. Mr. DuGan also serves
as Vice Chairman and Co-CEO of CPA(R):12, CPA(R):14 and CPA(R):15 and CPA(R):16
- - Global.
Francis X. Diebold III, age 44. Mr. Diebold is a William Polk Carey Professor of
Economics, Finance and Statistics at the University of Pennsylvania, where he
has been a member of the faculty since 1989. He has also served as a Research
Associate at the National Bureau of Economic Research since 1999, and was
Director of the Institute for Economic Research from 1999 to 2000. From 1986 to
1989, he served as an economist under Paul Volker and Alan Greenspan at the
Board of Governors of the Federal Reserve System in Washington, DC. Mr. Diebold
has published extensively and has served on the editorial boards of numerous
journals, including Econometrica and Review of Economics and Statistics. He is
the founder of FX Diebold Group, LLC, a Fellow of the Econometric Society and
the recipient of several prizes for outstanding teaching. Mr. Diebold has held
visiting appointments at several institutions, including Princeton University,
the Graduate School of Business at the University of Chicago, and the Stern
School of Business at New York University. Mr. Diebold received his B.S. from
the Wharton School at the University of Pennsylvania in 1981 and his Ph.D. in
1986, also from the University of Pennsylvania. He has served as an independent
director of CIP(R) and CPA(R):15 since 2002, and of CPA(R):16 - Global since
2003.
William Ruder, age 82, is Chairman of the Board of William Ruder Incorporated, a
consulting firm founded in 1981. From 1948 to 1981, Mr. Ruder was in partnership
with David Finn at the firm of Ruder & Finn, an international public relations
company. He is a former Assistant Secretary of Commerce of the United States and
has served on
-18-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
the Boards of Directors of the United Nations Association of the United States
of America, and Junior Achievement and on the Council on Economic Priorities and
is a Trustee of the Committee for Economic Development. He is a member of the
Board of Overseers of the Wharton School of the University of Pennsylvania and
has also served as a consultant to the Communications Advisory Board to the
White House Press Secretary, the Committee for economic Development and the
Office of Overseas Schools for the U.S. State Department. Mr. Ruder was a
lecturer at Harvard Graduate School of Business and is associated with several
other business, civic and cultural organizations. He received a B.S.S. degree
from the City College of New York. Mr. Ruder served as a director of W. P. Carey
& Co., Inc. from 1987 to 1990. He also is a director of CPA(R):12 and CPA(R):14.
Mr. Ruder was elected to the board of CIP(R) in 2003.
George E. Stoddard, age 87, has been with WPC since 1979. Mr. Stoddard has
served as a director of CIP(R) since 1997, of CPA(R):15 since 2001 and of W. P.
Carey & Co. LLC since 2000. He is also currently a director of CPA(R):12 and
CPA(R):14. Prior to joining WPC Mr. Stoddard was officer-in-Charge of the Direct
Placement Department of The Equitable Life Assurance Society of the United
States ("Equitable"), with responsibility for all activities related to
Equitable's portfolio of corporate investments acquired through direct
negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He
holds an AB degree from Brigham Young University, an MBA from Harvard Business
School and an LL.B. from Fordham University Law School. Mr. Stoddard serves as
Chairman of the Investment Committee of WPC and has been a Trustee of the W. P.
Carey Foundation since December 1990.
Warren G. Wintrub, age 70, has served as a director of CIP(R) since 2001,
CPA(R):14 since 1997 and CPA(R):16 - Global since 2003. He also served as an
independent director of CPA(R):15 from 2001 to 2003. Mr. Wintrub is also a
special advisor to the W. P. Carey & Co. LLC audit committee. He retired in 1992
from Coopers & Lybrand L.L.P., now PricewaterhouseCoopers LLP, after 35 years.
Mr. Wintrub was elected a senior U.S. Tax partner in PricewaterhouseCoopers LLP
in 1963, and specialized in tax matters and served on that firm's Executive
Committee from 1976 to 1988, and as a chairman of its Retirement Committee from
1979 to 1992. Mr. Wintrub holds a B.S. degree from Ohio State University and an
LL.B. from Harvard Law School. He currently serves as a director of Chromcraft
Revington, Inc. and Getty Realty Co.
Edward V. LaPuma, age 31, President, joined WPC as an Assistant to the Chairman
in 1994. He established WPC's Institutional Department, which he heads as
President of CIP(R). Prior to joining WPC, Mr. LaPuma was a consultant with the
Sol C. Snider Entrepreneurial Center where he advised small business owners on
ways to make their companies more profitable through the implementation of
appropriate financial management strategies. A magna cum laude graduate of the
University of Pennsylvania, Mr. LaPuma received a B.A. in Global Economic
Strategies from The College of Arts and Sciences and a B.S. in Economics with a
concentration in Finance from the Wharton School. He is a member of the Board of
Directors of W. P. Carey International LLC and is a Trustee for the W. P. Carey
Foundation and the Rensselaerville Institute.
John J. Park, age 39, joined WPC as an investment analyst in 1987 and rose to
Managing Director and Chief Financial officer in 1999. Mr. Park received a B.S.
in Chemistry from the Massachusetts Institute of Technology in 1986, and an
M.B.A. in finance from the Stern School of Business at New York University in
1991. He is also Managing Director and Chief Financial officer of CPA(R):12,
CPA(R):14, CPA(R):15 and CPA(R):16 - Global.
Some of our future directors and officers may act as directors or officers of
WPC and its affiliates and other CPA(R) funds and may owN interests in those
entities.
INVESTMENT COMMITTEE
WPC manages CIP(R) and the investment committee. WPC specializes in arranging
private financing for major corporations, principally neT lease financings of
real property. The investment committee evaluates the structure and terms of
property acquisition transactions for CIP(R) and recommends acquisitions to the
Company.
The following are the members of WPC's investment committee:
George E. Stoddard Chairman
Frank J. Hoenemeyer Vice Chairman
Lawrence R. Klein Member and Chair of the Economic Policy Committee
Nathaniel S. Coolidge Member
Ralph F. Verni Member
-19-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Mr. Stoddard's biographical information is described above.
Frank J. Hoenemeyer, age 83, elected Vice Chairman of the Investment Committee
and Director in May 1992, was Vice Chairman, Director and Chief Investment
officer of The Prudential Insurance Company of America until his retirement in
November 1984. As Chief Investment officer he was responsible for all of
Prudential's investment in stocks, bonds, private placements, leveraged buyouts,
venture capital, real estate ownership and mortgages. Mr. Hoenemeyer graduated
with a BS in Economics from Xavier University, Cincinnati, Ohio and an MBA from
the Wharton School of the University of Pennsylvania, and joined Prudential in
1947. Under his direction as Chief Investment officer, Prudential built the
world's largest real estate and securities investment portfolio and became a
leader in investments including the purchase and development of real estate,
leveraged buyouts and venture capital. Mr. Hoenemeyer serves on the Boards of
American International Group and Mitsui Trust Bank (U.S.A.) and is formerly a
director of Corporate Property Investors, a private real estate investment
trust. He has also been active in community affairs and at present is Chairman
of the Turrell Fund and a Trustee and Chairman of the Finance Committee of the
Robert Wood Johnson Foundation.
Dr. Lawrence R. Klein, age 82, is the Benjamin Franklin Professor Emeritus of
Economics and Finance at the University of Pennsylvania and its Wharton School,
having joined the faculty of the University in 1958. He is a holder of earned
degrees from the University of California at Berkeley, the Massachusetts
Institute of Technology and Oxford and has been awarded the Alfred Nobel
Memorial Prize in Economic Sciences as well as a number of honorary degrees.
Founder of Wharton Econometric Forecasting Associates, Inc. Dr. Klein has been
counselor to various corporations, governments and government agencies,
including the Federal Reserve Board and the President's Council of Economic
Advisers. Dr. Klein joined WPC in 1984, as Chairman of the Economic Policy
Committee and as a director.
Nathaniel S. Coolidge, age 64, former Senior Vice President of John Hancock
Mutual Life Insurance retired in 1995 after 20 years of service. From 1986 to
1995, Mr. Coolidge headed the Bond and Corporate Finance Department, which was
responsible for managing its entire fixed income investments portfolio. Prior to
1986, Mr. Coolidge served as Second Vice President and Senior Investment
officer. Mr. Coolidge is a graduate of Harvard University and served as a U. S.
naval officer.
Ralph F. Verni, age 60, is currently serving on several Boards of Directors,
including our Advisor, Commonwealth Capital, a venture capital Firm and The
MacGregor Group, the leading provider of order management systems and FIX
network services to institutional investors. He also serves on the Advisory
Boards of several start up companies, including Broad Reach Communications and
Execs Only. Starting in 2000, he served as President, CEO and Director of
Redwood Investment Systems, Inc. Redwood, a start-up software Firm, developed
web-based and wireless solutions to help investment professionals tame
information overload. In 2001, Redwood merged into Verilytics, Inc. Prior to
Redwood, Mr. Verni was President and CEO of State Street Research & Management,
MetLife's investment management subsidiary located in Boston. He was also
President and CEO of SSRM Holdings, Inc., an asset management company, and
Chairman of its subsidiary, SSR Realty. Mr. Verni joined State Street Research
in 1992 after serving 10 years as Executive Vice President, Board Member and
Chief Investment officer of The New England Mutual Life Insurance Company. While
at the New England, he founded and served as President and Chief Executive
officer of New England Investment Companies, a holding company of over ten money
management firms. Prior to joining the New England, he spent sixteen years in a
variety of investment management Firms. Prior to joining The New England, he
spent sixteen years in a variety of investment management positions at The
Equitable. Mr. Verni received a BA from Colgate University and an MBA from
Columbia University and is a Chartered Financial Analyst. Mr. Verni also serves
on the Advisory Committee of the MIT Center For Real Estate, the Board of
Trustees of Colgate University, where he also is the Vice-Chairperson of the
Endowment Committee, the Boston Economic Club, and the Commercial Club of
Boston. Mr. Verni has also served as a director of CIP(R), CPA(R):12 and CPA(R)
from 2001 to 2003, and as a director of W. P. Carey & Co. LLC since December
2003.
Although the Company has no employees to whom salaries are paid, WPC is
reimbursed for the services of its personnel, including those who serve as
officers of the Company. Wm. Polk Carey and Edward V. LaPuma serve as co-Chief
Executive Officers of CIP(R).
Item 11. Executive Compensation.
The Company has no employees. Day-to-day management functions are performed by
WPC. Please see Item 13 for a description of the contractual arrangements
between the Company and WPC.
-20-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
During 2003, CIP(R) paid no cash compensation to any of its executive officers.
During 2003, the directors as a group received fees of $58,083. Wm. Polk Carey
and George E. Stoddard did not receive compensation for serving as directors.
Code of Ethics
The Company has adopted a code of ethics which applies to its officers and
directors, including its principal executive officers, principal financial
officer and principal accounting officer. A copy of the code of ethics can be
found on the Company's website at http://www.careyinstitutional.com [direct
link].
Item 12. Security Ownership of Certain Beneficial Owners and Management.
"Beneficial Ownership" as used herein has been determined in accordance with the
rules and regulations of the Securities and Exchange Commission and is not to be
construed as a representation that any of such shares are in fact beneficially
owned by any person. Except as set forth below, as of March 12, 2004, CIP(R)
knows of no shareholder who owns beneficially 5% or more of CIP(R)'s outstandiNg
shares. The following table shows how many shares of CIP(R)'s common stock the
directors and executive officers owned as of March 12, 2004. Wm. Polk Carey
beneficially owned 7% of the common stock. No other director or executive
officer beneficially owned more than 1% of the common stock. The directors and
executive officers as a group owned 8% of the common stock.
DIRECTOR AND OFFICER STOCK OWNERSHIP
SHARES OF COMMON STOCK
NAME BENEFICIALLY OWNED
Wm. Polk Carey. ................ 5,519,349(1)
William Ruder................... 3,611
Warren G. Wintrub............... 2,476
George E. Stoddard.............. 922
Francis X. Diebold III.......... 300
Edward V. LaPuma................ 4,669
Gordon F. DuGan................. 63,954
John J. Park.................... 8,496
Directors & Executive Officers
as a Group (8 persons)......... 5,603,777
(1) The amount shown includes 3,510,026 shares and currently exercisable
warrants to purchase shares owned by W. P. Carey & Co., Inc., 1,050,231 shares
owned by Carey Property Advisors L.P., 874,553 shares owned by Carey Asset
Management Corp., 1,453 shares owned by W. P. Carey International LLC and 83,086
shares owned by W. P. Carey Foundation, a charitable foundation of which Mr.
Carey is Chairman. The inclusion of these shares in the table shown above is not
to be construed as a representation by Mr. Carey that he beneficially owns such
shares.
Item 13. Certain Relationships and Related Transactions.
Wm. Polk Carey, Chief Executive Officer, is a member of CIP(R)'s Board of
Directors. During 2003, CIP(R)'s advisor, WPC, of which Wm. Polk Carey is
Chairman of the Board and Co-CEO, was retained by CIP(R) to provide advisory
services in connection with identifying and analyzing prospective property
investments as well as providing day-to-day management services to CIP(R). For
the services provided to CIP(R), the advisor earns an asset management fee and a
performance fee, each equal to a percentage of the average invested assets of
CIP(R) for the preceding month, payable monthly. The payment of the performance
fee, however, is subordinated to specified returns to shareholders. During 2003,
the asset management and performance fees earned by the advisors was $3,563,820
and $3,563,820 respectively. There were no transaction and refinancing fees in
2003.
-21-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 14. Principal Accountant Fees and Services.
AUDIT FEES
The aggregate fees billed to the Company by PricewaterhouseCoopers LLP for
professional services rendered in 2003 for the audit of the Company's financial
statements included in this Annual Report on Form 10-K were $111,400.
AUDIT RELATED FEES
Audit related fees billed the Company by PricewaterhouseCoopers LLP for audit
related services for the year ended December 31, 2003 were $10,000.
TAX SERVICES FEES
The aggregate fees billed to the Company by PricewaterhouseCoopers LLP for tax
compliance and consultation services for the year ended December 31, 2003 were
$207,000.
ALL OTHER FEES
No fees were billed for other services rendered by PricewaterhouseCoopers LLP
for the year ended December 31, 2003. The Audit Committee considered whether the
provision of services described above under "All Other Fees" is compatible with
maintaining PricewaterhouseCoopers LLP's independence.
-22-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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 Auditors.
Consolidated Balance Sheets at December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended December
31, 2003, 2002 and 2001.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2001, 2002 and 2003.
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by
reference to pages 13 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 Auditors.
Balance Sheets at December 31, 2003 and 2002.
Statements of Income for the years ended December 31, 2003, 2002 and
2001.
Statements of Shareholders' Equity for the years ended December 31,
2001, 2002 and 2003.
Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001.
Notes to Financial Statements.
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 2003 of Marcourt Investments Incorporated.
The financial statements of material equity investees are contained
herewith in Item 15 on pages 24 to 32.
The separate financial statements of material equity investees have
been audited as of December 31, 2003 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 Auditors.
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 2003.
Notes to Schedule III.
Schedule III and notes thereto are contained herein on pages 49 to 53
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.
-23-
REPORT of INDEPENDENT AUDITORS
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) present fairly, in all material respects, the financial position
of Marcourt Investments Incorporated at December 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2003 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) 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 13, 2004
-24-
MARCOURT INVESTMENTS INCORPORATED
BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS:
Net investment in direct financing lease $147,442,681 $147,841,914
Cash and cash equivalents 513,101 48,793
Other assets 255,348 390,539
------------ ------------
Total assets $148,211,130 $148,281,246
============ ============
LIABILITIES and SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 74,333,568 $ 80,033,471
Accrued interest payable 1,072,654 1,154,769
Accounts payable and accrued expenses 279,526 30,200
Accounts payable to affiliates - 440
State and local taxes payable 16,151 16,300
------------ ------------
Total liabilities 75,701,899 81,235,180
------------ ------------
Commitments and contingencies
Shareholders' Equity:
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 42,026,746 40,058,056
Retained earnings 30,478,785 26,984,310
------------ ------------
Total shareholders' equity 72,509,231 67,046,066
------------ ------------
Total liabilities and shareholders' equity $148,211,130 $148,281,246
============ ============
The accompanying notes are an integral part of these financial statements.
-25-
MARCOURT INVESTMENTS INCORPORATED
STATEMENTS OF INCOME
For the years ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Revenue:
Interest income on direct financing lease $17,585,372 $17,612,525 $17,636,625
Percentage rents 1,039,777 1,230,011 1,393,980
Other income 41,595 627,629 954
----------- ----------- -----------
18,666,744 19,470,165 19,031,559
----------- ----------- -----------
Expenses:
Interest on mortgages 8,069,740 8,636,177 9,147,331
General and administrative 108,954 34,370 135,307
State and local taxes 8,996 67,908 4,096
----------- ----------- -----------
8,187,690 8,738,455 9,286,734
----------- ----------- -----------
Income before gain on sale 10,479,054 10,731,710 9,744,825
----------- ----------- -----------
Gain on sale 60,257 - -
----------- ---------- -----------
Net income $10,539,311 $10,731,710 $ 9,744,825
=========== =========== ===========
Basic earnings per share of
common stock, 370,000 common
shares outstanding (Class A
and Class B) $ 28.48 $ 29.00 $ 26.34
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-26-
MARCOURT INVESTMENTS INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2002 and 2003
Additional
Paid-in Retained
Common Stock Capital Earnings Total
------------ ------------- ----------- -----------
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
Dividends (7,044,836) (7,044,836)
Consent dividends declared 1,968,690 1,968,690
Net income 10,539,311 10,539,311
--------- ------------- ----------- -----------
Balance, December 31, 2003 $ 3,700 $42,026,746 $30,478,785 $72,509,231
========= ============= =========== ===========
The accompanying notes are an integral part of these financial statements.
-27-
MARCOURT INVESTMENTS INCORPORATED
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 10,539,311 $ 10,731,710 $ 9,744,825
Adjustments to reconcile net income to net cash provided
by operating activities:
Cash receipts on direct financing lease greater than
revenues recognized 241,490 214,337 190,237
Amortization of deferred interest 54,486 58,218 61,586
Gain on sale of land (60,257) - -
Decrease (increase) in other assets 80,705 26,373 (29,933)
Increase (decrease) in accounts payable and
accrued expenses 249,326 2,700 (11,800)
Decrease in accrued interest payable (82,115) (74,098) (66,869)
(Decrease) increase in state and local taxes payable (149) 1,936 (4,136)
Decrease in accounts payable to affiliates (440) (14,806) (76,228)
------------ ------------ ------------
Net cash provided by operating activities 11,022,357 10,946,370 9,807,682
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of land 218,000 - -
------------ ------------ ------------
Net cash provided by investing activities 218,000 - -
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid (5,076,146) (5,912,030) (5,027,457)
Payment of mortgage principal (5,699,903) (5,145,214) (4,644,658)
------------ ------------ ------------
Net cash used in financing activities (10,776,049) (11,057,244) (9,672,115)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 464,308 (110,874) 135,567
Cash and cash equivalents, beginning of year 48,793 159,667 24,100
------------ ------------ ------------
Cash and cash equivalents, end of year $ 513,101 $ 48,793 $ 159,667
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-28-
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. The lessee paid real estate taxes on behalf of
the Company of $2,319,756, $2,435,550 and $2,213,899 in 2003, 2002 and
2001 respectively. 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, 2003 and 2002, the Company
had on deposit at two financial institutions substantially all of
its cash and cash equivalents.
-29-
MARCOURT INVESTMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Federal Income Taxes:
The Company is qualified as a REIT as of December 31, 2003 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 years ended December
31, 2003 and 2002, the Class A shareholders recognized consent
dividends of $1,968,690 and $3,061,756, respectively; that is,
each Class A 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, 2003, 2002 and 2001, the Company
incurred expenses of $3,276, $2,472 and $3,138, 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 predecessors 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. No inspection expenses
were incurred in 2003, 2002 or 2001.
4. Net Investment in Direct Financing Lease:
The net investment in the direct financing lease is summarized as
follows:
2003 2002
---- ----
Minimum lease payments receivable $142,614,800 $160,441,650
Unguaranteed residual value 145,887,525 146,045,268
------------ ------------
288,502,325 306,486,918
Less, unearned income 141,059,644 158,645,004
------------ ------------
$147,442,681 $147,841,914
============ ============
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 2004
through 2008 and aggregate $142,614,800 through 2011.
-30-
MARCOURT INVESTMENTS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. $47,369,562 of the
mortgage notes bear interest at a rate of 9.94% per annum and the
remaining $26,964,006 bear interest at a rate of 11.18% per annum. The
mortgage notes will fully amortize in November 2011. The notes may be
prepaid subject to a yield maintenance formula. As of December 31,
2003, the prepayment premium would be approximately $16,300,000 if the
mortgage notes payable were prepaid in their entirety.
Scheduled principal payments during each of the next five years
following December 31, 2003 and thereafter are as follows:
Year Ending December 31,
- ------------------------
2004 $ 6,314,600
2005 6,995,822
2006 7,750,793
2007 8,587,526
2008 9,514,908
Thereafter 35,169,919
-----------
Total $74,333,568
===========
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, 2003, dividends paid per share were reported as follows
for income tax purposes:
2003 2002 2001
---- ---- ----
Ordinary income (a) $19.04 $24.25 $13.58
Return of capital - - -
------ ------ ------
$19.04 $24.25 $13.58
====== ====== ======
(a) Includes a consent dividend to Class A shareholders of $5.32 and
$8.28 per share in 2003 and 2002, respectively.
7. Disclosure About Fair Value of Financial Instruments:
The fair value of the Company's mortgage notes payable at December 31,
2003 and 2002 is approximately $90,652,705 and $100,908,918,
respectively. Based on projections of settlement costs, including
prepayment charges, the Company would not realize a benefit from
refinancing the existing mortgage debt.
-31-
MARCOURT INVESTMENTS INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2003
Initial Cost
to Company
Personal -
Description Encumbrances Land Property Buildings
Direct Financing Method:
Hotels leased to
Marriott
International, Inc. $74,333,568 $27,559,637 $14,199,292 $104,241,071
=========== =========== =========== ============
Costs
Capitalized
Subsequent to Increase in Net
Description Acquisition (a) Investments(b) Total Date Acquired
Direct Financing Method:
Hotels leased to
Marriott
International, Inc. $45,268 $1,397,413 %147,442,681 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, 2003, the aggregate cost of real estate owned by
Marcourt Investments Incorporated for Federal income tax purposes is
$145,887,525.
-32-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
(a) 4. 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
- ----------- ----------- ----------------
1 Notice to shareholders sent January 26, 2004 issued by the Filed as Exhibit 1 to Registrant's
Company Schedule 14D-9 dated January 26, 2004
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 Associates 10 Filed as Exhibit 7(A) to Amendment No. 1
Incorporated to Registrant's Form 8-K dated June 26,
2002
7.2 Pro Forma Financial Statements of Corporate Property Associates Filed as Exhibit 7(B) to Amendment No. 1
10 Incorporated 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 Incorporated ("Marcourt") and Filed as Exhibit 10(D)(1) to Registrant's
CTYD III Corporation ("CTYD"). Post Effective Amendment No. 1 to Form S-11
10.3 Series A-2 9.94% Secured Note from Marcourt to the registered Filed as Exhibit 10(D)(2) to Registrant's
owner of note (Various Series A-1 9.94% Notes in an aggregate Post Effective Amendment No. 1 to Form S-11
amount of 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 to the registered Filed as Exhibit 10(D)(3) to Registrant's
owner of note (Various notes in an aggregate amount of Post Effective Amendment No. 1 to Form S-11
70,250,000 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 First Fidelity Bank, Filed as Exhibit 10(D)(4) to Registrant's
National Association, New Jersey, as trustee ("Trustee"). Post Effective Amendment No. 1 to Form S-11
-33-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.6 Real Estate Deed of Trust from Marcourt to Albuquerque Title Filed as Exhibit 10(D)(5) to Registrant's
Company, as trustee for benefit of the Trustee filed in New Post Effective Amendment No. 1 to Form S-11
Mexico, 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)
10.7 Second Real Estate Deed of Trust from Marcourt to Albuquerque Filed as Exhibit 10(D)(6) to Registrant's
Title Company as trustee for the benefit of the Trustee, filed Post Effective Amendment No. 1 to Form S-11
in New 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 Property Associates 10 Filed as Exhibit 10(D)(7) to Registrant's
Incorporated, Trammell Crow Equity Partners II, Ltd. ("TCEP II") Post Effective Amendment No. 1 to Form S-11
and PA/First Plaza Limited Partnership ("First Plaza") as
guarantors, to the Trustee.
10.9 Shareholders Agreement between the Registrant, Corporate Filed as Exhibit 10(D)(8) to Registrant's
Property Associates 10 Incorporated ("CPA(R):10"), TCEP II and Post Effective Amendment No. 1 to Form S-11
First Plaza.
10.10 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(a) to
located in Glendale, Arizona Registrant's Post Effective Amendment No.
1 to Form S-11
10.11 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(b) to
located in Ft. Smith, Arkansas Registrant's Post Effective Amendment No.
1 to Form S-11
10.12 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(c) to
located in Escondido, California. Registrant's Post Effective Amendment No.
1 to Form S-11
10.13 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(d) to
located in Broken Arrow, Oklahoma. Registrant's Post Effective Amendment No.
1 to Form S-11
10.14 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(e) to
located in Weatherford, Oklahoma. Registrant's Post Effective Amendment No.
1 to Form S-11
10.15 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(f) to
located in Center, Texas. Registrant's Post Effective Amendment No.
1 to Form S-11
-34-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.16 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(g) to
located in Groves, Texas. Registrant's Post Effective Amendment No.
1 to Form S-11
10.17 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)( 1)(h) to
located in Silsbee, Texas. Registrant's Post Effective Amendment No.
1 to Form S-11
10.18 Assignment and Assumptions of Lease Agreement for property Filed as Exhibit 10(E)(1)(i) to
located in Vidor, Texas. Registrant's Post Effective Amendment No.
1 to Form S-11
10.19 Lease Amendments for the Ft. Smith, Arkansas and Weatherford, Filed as Exhibit 10(E)(2) to Registrant's
Oklahoma properties. Post Effective Amendment No. 1 to Form S-11
10.20 Promissory Note from subsidiaries of the Registrant and Filed as Exhibit 10(E)(3) to Registrant's
CPA(R):10 to The New England Mutual Life Insurance Company ("New Post Effective to Form S-11 Amendment No. 1
England").
10.21 Mortgage/Deed of Trust from subsidiaries of the Registrant and Filed as Exhibit 10(E)(4)(a) to
CPA(R):10 to New England encumbering the property in Ft. Smith, Registrant's Post Effective Amendment No.
Arkansas 1 to Form S-11
10.22 Mortgage/Deed of Trust from subsidiaries of the Registrant and Filed as Exhibit 10(E)(4)(b) to
CPA(R):10 to New England encumbering the property in Registrant's Post Effective Amendment No.
Weatherford, Oklahoma 1 to Form S-11
10.23 Mortgage/Deed of Trust from subsidiaries of the Registrant and Filed as Exhibit 10(E)(4)(c) to
CPA(R):10 to New England encumbering the properties in Center, Registrant's Post Effective Amendment No.
Groves, Silsbee, and Vidor, Texas. 1 to Form S-11
10.24 Lease Agreement between QRS 10-9 (AR), Inc. ("QRS 10-9") and QRS Filed as Exhibit 10(F)(1) to Registrant's
11-2(AR), Inc. ("QRS 11-2") as landlord and Acadia Stores 63, Post Effective Amendment No. 3 to Form S-11
Inc. ("Tenant") as tenant.
10.25 Co-Tenancy Agreement between QRS 10-9 and QRS 11-2. Filed as Exhibit 10(F)(2) to Registrant's
Post Effective Amendment No. 3 to Form S-11
10.26 Term Loan Agreement among The First National Bank of Boston Filed as Exhibit 10(F)(3) to Registrant's
("First Lender"), QRS 10-9 and QRS 11-2. Post Effective 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 QRS 11-2 to First Filed as Exhibit 10(F)(5) to Registrant's
Lender for the following jurisdictions: Post Effective Amendment No. 3 to Form S-11
a. Arkansas (one representative fee mortgage and
leasehold mortgage included)
b. Louisiana
c. Mississippi
-35-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.29 Term Loan Agreement among Acadia Partners , L.P. ("Second Filed as Exhibit 10(F)(6) to Registrant's
Lender"), QRS 10-9 and QRS 11-2. 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
10.31 Fee Mortgages and Leasehold Mortgages from QRS 10-9 and QRS 11 Filed as Exhibit 10(F)(8) to Registrant's
-2 to Second Lender for the following jurisdictions: Post Effective 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 corporation, to Filed as Exhibit 10(F)(9) to Registrant's
QRS 10-9 and QRS 11-2. Post Effective Amendment No. 3 to Form S-11
10.33 Guaranty from Harvest Foods, Inc., an Arkansas corporation, to Filed as Exhibit 10(F)(10) to Registrant's
QRS 10-9 and QRS 11-2. Post Effective Amendment No. 3 to Form S-11
10.34 Lease between QRS 10-12 (TX), Inc. ("QRS 10-12"), QRS 11-5 (TX), Filed as Exhibit 10(G)(1) to Registrant's
Inc. ("QRS 11-5") and Summagraphics. Post Effective Amendment No. 3 to Form S-11
10.35 Co-Tenancy Agreement between QRS 10-12, and QRS 11-5. Filed as Exhibit 10(G)(2) to Registrant's
Post Effective Amendment No. 3 to Form S-11
10.36 $3,700,000 Promissory Note from QRS 10-12 (TX), Inc., ("QRS Filed as Exhibit 10(H)(1) to Registrant's
10-12"), and QRS 11-5 (TX) Inc. ("QRS 11-5"), to Post Effective Amendment No. 4 to Form S-11
Creditanstalt-Bankverein ("Lender").
10.37 Deed of Trust and Security Agreement from QRS 10- 12 and QRS Filed as Exhibit 10(H)(2) to Registrant's
11-5 to John O. Langdon, Trustee, for benefit of Lender. Post Effective Amendment No. 4 to Form S-11
10.38 Guaranty Agreement between Registrant and Corporate Property Filed as Exhibit 10(H)(3) to Registrant's
Associates 10 Incorporated as guarantor and Lender. Post Effective Amendment No. 4 to Form S-11
10.39 Real Estate Purchase and Sale Contract between Belmet (IL) QRS Filed as Exhibit 10(I)(1) to Registrant's
11-9, Inc. ("QRS 11-9") as purchaser and Mission Leasing and Post Effective Amendment No. 4
Bank of Rantoul (collectively, to Form S-11"Seller").
10.40 Assignment and Assumption of Lease between QRS 11-9 and Seller. Filed as Exhibit 10(I)(2) to Registrant's
Post Effective Amendment No. 4 to Form S-11
10.41 Assignment of Permits and Warranties from Seller to QRS 11-9. Filed as Exhibit 10(I)(3) to Registrant's
Post Effective Amendment No. 4 to Form S-11
-36-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.42 Industrial Building Lease ("Lease") dated November 16, 1989 Filed as Exhibit 10(I)(4) to Registrant's
between Seller and Bell, together with First Amendment to Post Effective Amendment No. 4 to Form S-11
Lease, dated 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
10.44 Land Purchase Agreement between MMI (SC) QRS 11-11 Inc. ("QRS Filed as Exhibit 10(J)(1) to Registrant's
11-11") and Amerisure, Inc. regarding three acre parcel. Post Effective Amendment No. 5 to Form S-11
10.45 Mortgage from Amerisure, Inc. to QRS 11-11 regarding three acre Filed as Exhibit 10(J)(2) to Registrant's
parcel. Post Effective Amendment No. 5 to Form S-11
10.46 Lease Agreement between QRS 11-11, as Landlord. and MMI, as Filed as Exhibit 10(J)(3) to Registrant's
tenant. Post Effective Amendment No. 5 to Form S-11
10.47 Assignment, Reassignment and Assumption of Lease among Filed as Exhibit 10(J)(4) to Registrant's
Amerisure, Inc., QRS 11-11 and UIC. Post Effective Amendment No. 5 to Form S-11
10.48 Loan Agreement between The Penn Mutual Life Insurance Company Filed as Exhibit 10(J)(5) to Registrant's
("Penn Mutual") and QRS 11-11. Post Effective Amendment No. 5 to Form S-11
10.49 $9,500,000 Promissory Note from QRS 11-11 to Penn Mutual. Filed as Exhibit 10(J)(6) to Registrant's
Post Effective Amendment No. 5 to Form S-11
10.50 Mortgage and Security Agreement from QRS 11-11 to Penn Mutual. Filed as Exhibit 10(J)(7) to Registrant's
Post Effective Amendment No. 5 to Form S-11
10.51 Lease Agreement between BVS (NY) QRS 11-10, Inc. ("QRS 11-10") Filed as Exhibit 10(K)(1) to Registrant's
as landlord, and BVS, as tenant. Post Effective Amendment No. 5 to Form S-11
10.52 Reciprocal Easement and Operation Agreement between QRS 11-10 Filed as Exhibit 10(K)(2) to Registrant's
and Fairview Plaza Corporation ("FPC"). Post Effective Amendment No. 5 to Form S-11
10.53 Lease Agreement between QRS 11-12, (FL), Inc., ("QRS 11-12"), as Filed as Exhibit 10(L)(2) to Registrant's
Landlord, and Unit, as tenant. Post Effective Amendment No. 5 to Form S-11
10.54 Guaranty and Suretyship Agreement from Unit to QRS 11-12. Filed as Exhibit 10(L)(4) to Registrant's
Post Effective Amendment No. 5 to Form S-11
10.55 Indemnity Agreement between GATX Corporation and QRS 11-12. Filed as Exhibit 10(L)(5) to Registrant's
Post Effective Amendment No. 5 to Form S-11
-37-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.56 Assignment and Assumption of Lease by Charlotte Telephone Filed as Exhibit 10(M)(1) to Registrant's
Associates Limited Partnership ("CTA") to QRS 11-14 (NC), Inc. Post Effective Amendment No. 5 to Form S-11
("QRS 11-14").
10.57 Purchase and Sale Agreement between Neoserv (CO) QRS 10-13, Inc. Filed as Exhibit 10.1 to Registrant's Form
("QRS:10") and Neoserv (CO) QRS 11-8, Inc. ("QRS:11") as 8-K dated October 29, 1992
purchasers and Homart Development Co. ("Homart").
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 benefit of Homart. Filed as Exhibit 10.3 to Registrant's Form
8-K dated October 29, 1992
10.60 Option Agreement between QRS:10 and QRS:11 as option grantee and Filed as Exhibit 10.4 to Registrant's Form
Homart as option grantor. 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 Neodata Services, Filed as Exhibit 10.6 to Registrant's Form
Inc. ("Neodata") as lessee. 8-K dated October 29, 1992
10.63 Guaranty Agreement from Neodata Corporation as guarantor to Filed as Exhibit 10.7 to Registrant's Form
QRS:10 and QRS:11. 8-K dated October 29, 1992
10.64 Promissory Note of QRS:10 and QRS:11 to Neodata. Filed as Exhibit 10.8 to Registrant's Form
8-K dated October 29, 1992
10.65 Deed of Trust from QRS:10 and QRS:11 for benefit of Neodata. Filed as Exhibit 10.9 to Registrant's Form
8-K dated October 29, 1992
10.66 Construction Contract between QRS:10 and QRS:11 as owners and Filed as Exhibit 10.10 to Registrant's
Austin Commercial, Inc. ("Austin") as contractor. Form 8-K dated 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 and QRS:11 as Filed as Exhibit 10.12 to Registrant's
owners and Neodata as agent. Form 8-K dated October 29, 1992
10.69 Land Purchase Agreement between MMI (SC) QRS 11-11, Inc. ("QRS Filed as Exhibit 10.1 to Registrant's Form
11-11") and Amerisure, Inc. ("Amerisure") regarding three acre 8-K dated January 5, 1993
parcel.
10.70 Mortgage from Amerisure to QRS 11-11 regarding three acre parcel. Filed as Exhibit 10. 2 to Registrant's
Form 8-K dated January 5, 1993
10.71 Lease Agreement between QRS 11-11, as Landlord, and MMI as Filed as Exhibit 10.3 to Registrant's Form
tenant. 8-K dated January 5, 1993
10.72 Assignment, Reassignment and Assumption of Lease among Filed as Exhibit 10.4 to Registrant's Form
Amerisure, Inc., QRS 11-11 and UIC. 8-K dated January 5, 1993
10.73 Loan Agreement between The Penn Mutual Life Insurance Company Filed as Exhibit 10.5 to Registrant's Form
("Penn Mutual") and QRS 11-11. 8-K dated January 5, 1993
-38-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.74 $9,500,000 Promissory Note from QRS 11-11 to Penn Mutual. Filed as Exhibit 10.6 to Registrant's Form
8-K dated January 5, 1993
10.75 Mortgage and Security Agreement from QRS 11-11 to Penn Mutual. Filed as Exhibit 10.7 to Registrant's Form
8-K dated January 5, 1993
10.76 Lease Agreement between BVS (NY) QRS 11-10, Inc. ("QRS 11-10"), Filed as Exhibit 10.8 to Registrant's Form
as landlord, and BVS, as tenant. 8-K dated January 5, 1993
10.77 Reciprocal Easement and Operation Agreement between QRS 11-10 Filed as Exhibit 10.9 to Registrant's Form
and Fairview Plaza, Inc. 8-K dated January 5, 1993
10.78 Lease Agreement between QRS 11-12 (FL), Inc. ("QRS 11-12"), as Filed as Exhibit 10.10 to Registrant's
landlord, and Unit, as tenant. Form 8-K dated January 5, 1993
10.79 Guaranty and Suretyship Agreement from Unit to QRS 11-12. Filed as Exhibit 10.11 to Registrant's
Form 8-K dated January 5, 1993
10.80 Indemnity Agreement between GATX Corporation and QRS 11-12. Filed as Exhibit 10.12 to Registrant's
Form 8-K dated January 5, 1993
10.81 Assignment and Assumption of Lease and Lease Guaranty from Filed as Exhibit 10.1 to Registrant's Form
Oakbrook Development Corp. ("Oakbrook") to Books CT QRS 11-15, 8-K dated April 5, 1993
Inc. ("QRS 11-15").
10.82 Co-Tenancy Agreement between DDI (NE) QRS 10-15, Inc. ("QRS Filed as Exhibit 10.2 to Registrant's Form
10-15") and DDI (NE) QRS 11-13, Inc. ("QRS 11-13"). 8-K dated April 5, 1993
10.83 Cross Indemnity Agreement between QRS 10-15 and QRS 11-13. Filed as Exhibit 10.3 to Registrant's Form
8-K dated April 5, 1993
10.84 Lease Agreement between QRS 10-15 and QRS 11-13, as landlord, Filed as Exhibit 10.4 to Registrant's Form
and Data Documents, Inc. ("DDI"), as tenant. 8-K dated April 5, 1993
10.85 Loan Agreement between QRS 10-15 and QRS 11-13, as borrower, and Filed as Exhibit 10.5 to Registrant's Form
U S West Financial Services, Inc. ("US West"), as lender. 8-K dated April 5, 1993
10.86 $8,000,000 Promissory Note from QRS 10-15 and QRS 11-13 to US Filed as Exhibit 10.6 to Registrant's Form
West. 8-K dated April 5, 1993
10.87 Deed of Trust from QRS 10-15 and QRS 11-13 to US West (for Filed as Exhibit 10.7 to Registrant's Form
filing in the states of Colorado, Nebraska and Texas). 8-K dated April 5, 1993
10.88 Mortgage from QRS 10-15 and QRS 11-13 to US West (for filing in Filed as Exhibit 10.8 to Registrant's Form
the state of Kansas). 8-K dated April 5, 1993
10.89 Assignment of Parent Guaranty from QRS 10-15 and QRS 11-13. Filed as Exhibit 10.9 to Registrant's Form
8-K dated April 5, 1993
10.90 Deed of Trust Note from QRS 11-14 (NC), Inc. ("QRS 11-14") to Filed as Exhibit 10.1 to Registrant's Form
Kredietbank N.V. ("Kredietbank"). 8-K dated April 13, 1993
10.91 Deed of Trust from QRS 11-14 for the benefit of Kredietbank. Filed as Exhibit 10.2 to Registrant's Form
8-K dated April 13, 1993
-39-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.92 Assignment of Leases and Rents from QRS 11-14 to Kredietbank. Filed as Exhibit 10.3 to Registrant's Form
8-K dated April 13, 1993
10.93 Escrow Agreement between QRS 11-14 and Kredietbank. Filed as Exhibit 10.4 to Registrant's Form
8-K dated April 13, 1993
10.94 Lease Agreement between BB Property Company, as lessor, and Best Filed as Exhibit 10.1 to Registrant's Form
Buy, as lessee. 8-K dated May 6, 1993
10.95 Note Purchase Agreement among BB Property Company, Best Buy, and Filed as Exhibit 10.2 to Registrant's Form
TIAA. 8-K dated May 6, 1993
10.96 $32,800,000 Note from BB Property Company to TIAA. Filed as Exhibit 10.3 to Registrant's Form
8-K dated May 6, 1993
10.97 Deed of Trust and Security Agreement from BB Property Company Filed as Exhibit 10.4 to Registrant's Form
for the benefit of TIAA. 8-K dated May 6, 1993
10.98 $3,200,000 Promissory Note from BVS (NY) QRS 11-10, Inc. ("BVS") Filed as Exhibit 10.5 to Registrant's Form
to Orix. 8-K dated May 6, 1993
10.99 Mortgage, Assignment of Leases and Rents, Security Agreement and Filed as Exhibit 10.6 to Registrant's Form
Fixture Filing from BVS to Orix. 8-K dated May 6, 1993
10.100 Purchase Agreement between QRS 11-19, as owner, and Lincoln Filed as Exhibit 10.2 to Registrant's Form
Technical Institute, as buyer. 8-K dated August 13, 1993
10.101 Lease Agreement between Unitech (IL) QRS 11-19, Inc. ("QRS Filed as Exhibit 10(P)(1) to Registrant's
11-19"), as landlord, and UTI. Post Effective Amendment No. 6 to Form S-11
10.102 Guaranty and Suretyship Agreement from Lincoln Technical Filed as Exhibit 10(P)(2) to Registrant's
Institute of Arizona, Inc. to QRS 11-19. Post Effective Amendment No. 6 to Form S-11
10.103 Modification of Loan Documents and Assumption Agreement among Filed as Exhibit 10(P)(3) to Registrant's
Chicago Investment Properties Limited Partnership, the Post Effective Amendment No. 6 to Form S-11
Guarantors QRS 11-19 and the Fidelity Mutual Life Insurance
Company.
10.104 Rate Cap Transaction letter Agreement between BVS and Chemical Filed as Exhibit 10(Q)(4) to Registrant's
Bank ("Chemical"). Post Effective Amendment No. 6 to Form S-11
10.105 Consent and Agreement between Chemical, Orix and BVS. Filed as Exhibit 10(Q)(5) to Registrant's
Post Effective Amendment No. 6 to Form S-11
10.106 Assignment of Interest Rate Protection Agreement from BVS to Filed as Exhibit 10(Q)(6) to Registrant's
Orix. 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
-40-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.108 Lease Agreement between QRS 11-20 (UT), Inc. ("QRS 11-20"), as Filed as Exhibit 10(S)(2) to Registrant's
landlord, and Merit, as tenant. Post Effective Amendment No. 6 to Form S-11
10.109 Guaranty Agreement from the Registrant to Merit. Filed as Exhibit 10(S)(3) to Registrant's
Post Effective Amendment No. 6 to Form S-11
10.110 Construction Management Agreement between Merit and the Koll Filed as Exhibit 10(S)(4) to Registrant's
Company. Post Effective Amendment No. 6 to Form S-11
10.111 Construction Agreement between Merit and Camco Construction Filed as Exhibit 10(S)(5) to Registrant's
Company, Inc. Post Effective Amendment No. 6 to Form S-11
10.112 Construction Agency Agreement between Merit and QRS 11-20. Filed as Exhibit 10(S)(6) to Registrant's
Post Effective Amendment No. 6 to Form S-11
10.113 $8,250,000 Promissory Note from QRS 11-20 to First Interstate Filed as Exhibit 10(S)(7) to Registrant's
Bank of Utah, N.A. ("Lender"). Post Effective Amendment No. 6 to Form S-11
10.114 Deed of Trust, Assignment of Rents, Security Agreement and Filed as Exhibit 10(S)(8) to Registrant's
Financing Statement from QRS 11-20 for the benefit of Lender. Post Effective Amendment No. 6 to Form S-11
10.115 Assignment of Leases and Rents made by QRS 11-20 in favor of Filed as Exhibit 10(S)(9) to Registrant's
Lender. 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 April 14, 1993 Filed as Exhibit 10(T)(1) to Registrant's
among QRS 11-17 (NY), Inc. ("QRS 11-17"), E.B. Properties, Inc. Post Effective Amendment No. 7 to Form S-11
("EB") 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 March 4, 1993, as Filed as Exhibit 10(T)(2) to Registrant's
amended , between Dime and EB, as assigned by Assignment dated Post Effective Amendment No. 7 to Form S-11
April 14, 1993.
10.119 Lease dated as of August 1, 1986 between D. Grossman and Mormax Filed as Exhibit 10(T)(3) to Registrant's
Corporation (as assumed by QRS 11-21, Inc. ("QRS 11-21") by Post Effective Amendment No. 7 to Form S-11
virtue of documents listed at (10)(T)(1)).
10.120 Promissory Note from QRS 11-17 to Dime in the amount of Filed as Exhibit 10(T)(4) to Registrant's
$7,000,000. Post Effective Amendment No. 7 to Form S-11
-41-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
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 QRS 11-17 in favor Filed as Exhibit 10(T)(6) to Registrant's
of Dime. Post Effective Amendment No. 7 to Form S-11
10.123 Agreement of Indemnity by QRS 11-17 in favor of Dime. Filed as Exhibit 10(T)(7) to Registrant's
Post Effective Amendment No. 7 to Form S-11
10.124 Lease Agreement between SCF (TN) QRS 11-21, as landlord, and Filed as Exhibit 10(U)(1) to Registrant's
SCM, as tenant. Post Effective Amendment No. 7 to Form S-11
10.125 Warrant issued by Sports & Fitness Clubs Inc. ("SFC") to QRS Filed as Exhibit 10(U)(2) to Registrant's
11-21. Post Effective Amendment No. 7 to Form S-11
10.126 Guaranty and Suretyship Agreement by SFC and Sports and Fitness Filed as Exhibit 10(U)(3) to Registrant's
Clubs of America, Inc. ("SFCA") to QRS 11-21. Post Effective Amendment No. 7 to Form S-11
10.127 Purchase Agreement between QRS 11-21, as owner, and SFC, as Filed as Exhibit 10(U)(4) to Registrant's
buyer. Post Effective Amendment No. 7 to Form S-11
10.128 Term Loan Agreement between QRS 11-21, as borrower, and Union Filed as Exhibit 10(U)(5) to Registrant's
Planters National Bank, as lender ("Union Planters"). Post Effective Amendment No. 7 to Form S-11
10.129 Note in the amount of $2,800,000 dated July 20, 1993 from QRS Filed as Exhibit 10(U)(6) to Registrant's
11-21 for the benefit of Union Planters. Post Effective Amendment No. 7 to Form S-11
10.130 Deed of Trust, Assignment of Rents and Security Agreement from Filed as Exhibit 10(U)(7) to Registrant's
QRS 11-21 for the benefit of Union Planters. Post Effective Amendment No. 7 to Form S-11
10.131 Acknowledgment of Assignment of Lease, Guaranty and Purchase Filed as Exhibit 10(U)(8) to Registrant's
Agreements between SCM, SFC, SFCA, QRS 11-21 and Union Planters. Post Effective Amendment No. 7 to Form S-11
10.132 Real Estate Contract of Sale between Abacus Capital Corporation, Filed as Exhibit 10(V)(1) to Registrant's
as seller, and Registrant, or its assigns, as Buyer. Post Effective Amendment No. 7 to Form S-11
10.133 Real Estate Contract of Sale between Abacus Capital Corporation Filed as Exhibit 10.1 to Registrant's Form
("Abacus"), as seller, and Registrant, as buyer. 8-K dated February 24, 1994
10.134 Assignment of Real Estate Contract of Sale from Registrant to Filed as Exhibit 10.2 to Registrant's Form
the PETSMART Subsidiary. 8-K dated February 24, 1994
10.135 Assignment and Assumption of Lease between Abacus and the Filed as Exhibit 10.3 to Registrant's Form
PETsMART Subsidiary. 8-K dated February 24, 1994
-42-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.136 Loan Agreement between NationsBank and the PETsMART Subsidiary. Filed as Exhibit 10.4 to Registrant's Form
8-K dated February 24, 1994
10.137 $2,500,000 Promissory Note made by the PETsMART Subsidiary to Filed as Exhibit 10.5 to Registrant's Form
NationsBank. 8-K dated February 24, 1994
10.138 Deed of Trust, Assignment, Security Agreement and Financing Filed as Exhibit 10.6 to Registrant's Form
Statement from the PETsMART Subsidiary to NationsBank. 8-K dated February 24, 1994
10.139 Lease Agreement between the Braintree Subsidiary, as landlord, Filed as Exhibit 10.7 to Registrant's Form
and Barnes & Noble, as tenant. 8-K dated February 24, 1994
10.140 Real Estate Purchase and Sale Contract between the ELWA Filed as Exhibit 10.8 to Registrant's Form
Subsidiary, as buyer, and Big V, as seller. 8-K dated February 24, 1994
10.141 Lease Agreement between the ELWA Subsidiary, as landlord, and Filed as Exhibit 10.9 to Registrant's Form
Big V as tenant. 8-K dated February 24, 1994
10.142 Guaranty and Suretyship Agreement executed by Big V Holding. Filed as Exhibit 10.10 to Registrant's
Form 8-K dated February 24, 1994
10.143 Amended, Restated and Consolidated Bonds to Key Bank, as lender, Filed as Exhibit 10.11 to Registrant's
from the ELWA Subsidiary, as borrower. Form 8-K dated February 24, 1994
10.144 Amended and Restated Mortgage and Security Agreement from the Filed as Exhibit 10.12 to Registrant's
ELWA Subsidiary, to Key Bank. Form 8-K dated February 24, 1994
10.145 Limited Guaranty of Payment from the Company to Key Bank. Filed as Exhibit 10.13 to Registrant's
Form 8-K dated February 24, 1994
10.146 Lease Agreement between the Brownwood Subsidiary, as landlord, Filed as Exhibit 10.14 to Registrant's
and Superior, as tenant. Form 8-K dated February 24, 1994
10.147 Guaranty and Suretyship Agreement from Alpine to Registrant. Filed as Exhibit 10.15 to Registrant's
Form 8-K dated February 24, 1994
10.148 $2,700,000 Real Estate Note from the Brownwood Subsidiary, as Filed as Exhibit 10.16 to Registrant's
maker, to Creditanstalt, as holder. Form 8-K dated February 24, 1994
10.149 Deed of Trust and Security Agreement by the Brownwood Filed as Exhibit 10.17 to Registrant's
Subsidiary, as guarantor to Hazen H. Dempster, as trustee. Form 8-K dated February 24, 1994
10.150 Guaranty and Agreement between the Company and Creditanstalt. Filed as Exhibit 10.18 to Registrant's
Form 8-K dated February 24, 1994
10.151 Assignment of Contract from Hyde Park Holdings, Inc. to the Filed as Exhibit 10.19 to Registrant's
Cleveland Subsidiary. Form 8-K dated February 24, 1994
10.152 Lease Agreement between the Cleveland Subsidiary, as landlord, Filed as Exhibit 10.20 to Registrant's
and Nicholson, as tenant. Form 8-K dated February 24, 1994
10.153 $4,000,000 Cognovit Promissory Note from the Cleveland Filed as Exhibit 10.21 to Registrant's
Subsidiary to Bank One. Form 8-K dated February 24, 1994
10.154 Mortgage Deed, Security Agreement and Assignment of Rents and Filed as Exhibit 10.22 to Registrant's
Leases from the Cleveland Subsidiary to Bank One. Form 8-K dated February 24, 1994
-43-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.155 Business Loan Agreement between the Cleveland Subsidiary, and Filed as Exhibit 10.23 to Registrant's
Bank One. Form 8-K dated February 24, 1994
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 Partnership, as landlord, and Filed as Exhibit 10.25 to Registrant's
Gensia, as tenant. Form 8-K dated February 24, 1994
10.158 $13,000,000 Promissory Note from the Gensia Partnership to Filed as Exhibit 10.26 to Registrant's
Northwestern. Form 8-K dated February 24, 1994
10.159 Deed of Trust, Security Agreement and Financing Statement from Filed as Exhibit 10.27 to Registrant's
the Gensia Partnership to Northwestern. Form 8-K dated February 24, 1994
10.160 Guarantee of Recourse Obligations from Registrant and CPA(R):12 Filed as Exhibit 10.28 to Registrant's
to Northwestern. Form 8-K dated February 24, 1994
10.161 Assignment of Earnest Money Contract from Garden Ridge to the Filed as Exhibit 10.29 to Registrant's
Round Rock Subsidiary. Form 8-K dated February 24, 1994
10.162 Lease Agreement between the Round Rock Subsidiary, as landlord, Filed as Exhibit 10.30 to Registrant's
and Garden Ridge, as tenant. Form 8-K dated February 24, 1994
10.163 $3,465,000 Note from the Round Rock Subsidiary to Garden Ridge. Filed as Exhibit 10.31 to Registrant's
Form 8-K dated February 24, 1994
10.164 Deed of Trust and Security Agreement from the Round Rock Filed as Exhibit 10.32 to Registrant's
Subsidiary to Garden Ridge. Form 8-K dated February 24, 1994
10.165 $1,700,000 Promissory Note from the Plano Subsidiary to National Filed as Exhibit 10.33 to Registrant's
Western. Form 8-K dated February 24, 1994
10.166 Deed of Trust, Security Agreement and Financing Statement from Filed as Exhibit 10.34 to Registrant's
the Plano Subsidiary to National Western. Form 8-K dated February 24, 1994
10.167 Lease Agreement dated June 15, 1994 between CTC (VA) QRS 11-32, Filed as Exhibit 10.167 to Registrant's
Inc., as Landlord, and Childtime Childcare, Inc., as Tenant. Form 10-K for the year ended December 31,
1994 dated March 31, 1995
10.168 Construction Agency Agreement dated June 15, 1994 between Filed as Exhibit 10.168 to Registrant's
Childtime Childcare, Inc. and CTC (VA) QRS 11-32, Inc. Form 10-K for the year ended December 31,
1994 dated March 31, 1995
10.169 Lease Agreement dated August 11, 1994 by and between Neenah (WI) Filed as Exhibit 10.169 to Registrant's
QRS 11-31, Inc., as Landlord, and Exide Electronic Assembly Form 10-K for the year ended December 31,
Corporation, as Tenant. 1994 dated March 31, 1995
10.170 $5,000,000 Real Estate Note dated August 11, 1994 from Neenah Filed as Exhibit 10.170 to Registrant's
(WI) QRS 11-31, Inc., as Maker, and Creditanstalt Corporate Form 10-K for the year ended December 31,
Finance, Inc., as Holder. 1994 dated March 31, 1995
10.171 Lease Agreement dated December 31, 1994 by and between CFP Filed as Exhibit 10.171 to Registrant's
Associates, as Landlord, and Custom Foods Products, Inc., as Form 10-K for the year ended December 31,
Tenant. 1994 dated March 31, 1995
-44-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.172 Loan Agreement dated December 31, 1994 between CFP Associates, Filed as Exhibit 10.172 to Registrant's
as Borrower, and Greyrock Capital Group Inc., as Lender. Form 10-K for the year ended December 31,
1994 dated March 31, 1995
10.173 $2,000,000 Note dated December 31, 1994 from CFP Associates, as Filed as Exhibit 10.173 to Registrant's
Maker, and Greyrock Capital Group Inc., as Payee. Form 10-K for the year ended December 31,
1994 dated March 31, 1995
10.174 $200,000 Maximum Amount Promissory Note dated December 31, 1994 Filed as Exhibit 10.174 to Registrant's
from CFP Associates, as Maker, to Custom Foods Products, Inc., Form 10-K for the year ended December 31,
as Payee. 1994 dated March 31, 1995
10.175 Lease Agreement dated October 14, 1994 by and between ADS (CA) Filed as Exhibit 10.175 to Registrant's
QRS 11-34, Inc., as Landlord, and Chiat/Day Inc. Advertising, as Form 10-K for the year ended December 31,
Tenant. 1994 dated March 31, 1995
10.176 $6,000,000 Promissory Note dated October 14, 1994 from ADS (CA) Filed as Exhibit 10.176 to Registrant's
QRS 11-34, Inc., as Borrower, to Kearneys Street Real Estate Form 10-K for the year ended December 31,
Company, L.P., as Lender. 1994 dated March 31, 1995
10.177 $3,000,000 Purchase Money Promissory Note secured by Deed of Filed as Exhibit 10.177 to Registrant's
Trust dated October 14, 1994 from ADS (CA) QRS 11-34, Inc., as Form 10-K for the year ended December 31,
Maker, to Venice Operating Corp., as Holder. 1994 dated March 31, 1995
10.178 Lease Agreement dated October 31, 1995 by and between DELMO (PA) Filed as Exhibit 10.33 to Registrant's
QRS 11-36 and DELMO (PA) QRS 12-10 together as Landlord and Del Form 8-K dated March 21, 1996
Monte Corporation, as Tenant.
10.179 Lease Agreement dated December 26, 1995 by and between Cards Filed as Exhibit 2.1 to Registrant's Form
Limited Liability Company, as Landlord, and The Upper Deck 8-K dated March 21, 1996
Company, as Tenant.
10.180 $15,000,000 Promissory Note dated January 3, 1996 from Cards Filed as Exhibit 2.2 to Registrant's Form
Limited Liability Company to Column Financial, Inc. 8-K dated March 21, 1996
21.1 Subsidiaries of Registrant as of March 11, 2004 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
28.1 General Warranty Deed from Amerisure, Inc. to (SC) QRS 11-11 Filed as Exhibit 28(C)(1) to Registrant's
Post Effective Amendment No. 5 to Form S-11
28.2 Amended and Restated Sublease Agreement between MMI, as Filed as Exhibit 28(C)(2) to Registrant's
sublandlord, and Unisun Insurance Company ("UIC"). Post Effective 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
-45-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
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 tenant, as amended. Filed as Exhibit 28(E)(2) to Registrant's
Post Effective Amendment No. 5 to Form S-11
28.6 Special warranty Deed from CTA, as Grantor to QRS 11-14, as Filed as Exhibit 28(F)(1) to Registrant's
Grantee. 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 benefit of General Filed as Exhibit 28.1 to Registrant's Form
Electric Capital Corporation. 8-K dated 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 between MMI, as Filed as Exhibit 28.2 to Registrant's Form
sublandlord, and Unisun Insurance Company. 8-K dated January 5, 1993
28.11 General Warranty Deed from Fairview Plaza Corporation to QRS Filed as Exhibit 28.3 to Registrant's Form
11-10. 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 tenant, as amended. Filed as Exhibit 28.5 to Registrant's Form
8-K dated January 5, 1993
28.14 Prospectus dated January 21, 1993 of Registrant. Filed pursuant to Rule 424(b)(s) on
January 26, 1993 (Registration No.
33-39409)
28.15 Supplement No. 1 dated March 17, 1993 to Prospectus dated Filed pursuant to Rule 424(b)(s) on March
January 21, 1993. 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
28.17 Lease Agreement between Oakbrook and B. Dalton Bookseller, Inc. Filed as Exhibit 28.2 to Registrant's Form
("B. Dalton"). 8-K dated April 5, 1993
28.18 First Amendment between Oakbrook and B. Dalton Bookseller, Inc. Filed as Exhibit 28.3 to Registrant's Form
8-K dated April 5, 1993
28.19 Lease Guaranty to Oakbrook from Barnes & Noble, Inc. Filed as Exhibit 28.4 to Registrant's Form
8-K dated April 5, 1993
28.20 Guaranty and Suretyship Agreement from Data Documents Holdings, Filed as Exhibit 28.5 to Registrant's Form
Inc. to QRS 10-15 and QRS 11-13. 8-K dated April 5, 1993
-46-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
28.21 Guaranty from Corporate Property Associates 10 Incorporated and Filed as Exhibit 28.6 to Registrant's Form
Registrant to US West. 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 Programs. Filed as Exhibit 28(H) to Registrant's
Post Effective Amendment No. 6 to Form S-11
28.25 Limited Warranty Deed from the David F. Bolger Revocable Trust Filed as Exhibit 28.1 to Registrant's Form
to the Braintree Subsidiary. 8-K dated February 24, 1994
28.26 Special Warranty Deed from Superior to the Brownwood Subsidiary. Filed as Exhibit 28.2 to Registrant's Form
8-K dated February 24, 1994
28.27 Corporation Grant Deed from Gensia to the Gensia Partnership. Filed as Exhibit 28.3 to Registrant's Form
8-K dated February 24, 1994
28.28 Supplement No. 2 dated June 15, 1993 to Prospectus dated January Filed as Exhibit 28.28 to Registrant's
21, 1993. Form 10-K for the year ended December 31,
1993
28.29 Supplement No. 3 dated August 11, 1993 to Prospectus dated Filed as Exhibit 28.29 to Registrant's
January 21, 1993. Form 10-K for the year ended December 31,
1993
31.1 Certification of Co-Chief Executive Officers Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith
32.1 Certification of Co-Chief Executive Officers Filed herewith
32.2 Certification of Chief Financial Officer Filed herewith
99 Press Release Dated April 30, 2002 Filed as Exhibit 99 to Registrant's Form
8-K dated April 30, 2002
99.1 Letter to shareholders dated December 15, 2003 announcing its Filed as Exhibit 99.1 to Registrant's Form
Board of Directors has begun considering the options for the 8-K dated December 15, 2003
Registrant's liquidation.
99.2 Letter to financial advisors dated December 15, 2003 announcing Filed as Exhibit 99.2 to Registrant's Form
its Board of Directors has begun considering the options for 8-K dated December 15, 2003
the Registrant's liquidation.
(b) Reports on Form 8-K
During the fourth quarter of 2003, the Registrant filed a Current
Report on Form 8-K, dated December 15, 2003, to announce that the
Registrant's Board of Directors had begun to review options with
respect to the liquidity options of the Company.
-47-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
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
3/19/04 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
3/19/04 BY: /s/ William Polk Carey
- -------------- ------------------------------------
Date William Polk Carey
Chairman of the Board, Co-Chief Executive
Officer and Director
(Principal Executive Officer)
3/19/04 BY: /s/ Gordon F. DuGan
- -------------- ------------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board, Co-Chief
Executive Officer, and
Senior Managing Director
3/19/04 BY: /s/ Edward V. LaPuma
- -------------- ------------------------------------
Date Edward V. LaPuma
President
3/19/04 BY: /s/ Francis X. Diebold
- -------------- ------------------------------------
Date Francis X. Diebold
Director
3/19/04 BY: /s/ William Ruder
- -------------- ------------------------------------
Date William Ruder
Director
3/19/04 BY: /s/ George E. Stoddard
- -------------- ------------------------------------
Date George E. Stoddard
Director
3/19/04 BY: /s/ Warren G. Wintrub
- -------------- ------------------------------------
Date Warren G. Wintrub
Director
3/19/04 BY: /s/ John J. Park
- -------------- ------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
(Principal Financial Officer)
3/19/04 BY: /s/ Claude Fernandez
- -------------- ------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting Officer
(Principal Accounting Officer)
-48-
REPORT of INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
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 10, 2004 appearing in the 2003 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 10, 2004
-49-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2003
Costs
Initial Cost to Company Capitalized Increase
------------------------- Subsequent to (Decrease) in Net
Description Encumbrances Land Buildings Acquisition (a) Investments (c)
----------- ------------ ----------- ------------ --------------- -----------------
Operating Method:
Manufacturing/distributing
facility leased to
Electronic Data Systems
Corporation $ 15,572,730 $ 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. 3,149,989 1,350,444 4,574,557 60,676
Warehouse leased to Lucent
Technologies, Inc. 5,050,000 1,290,631 15,937,368 232,870
Land leased to
Barnes & Noble, Inc. 3,446,075 4,759,017 47,962
Land leased to
Best Buy Co., Inc. 11,725,999 18,579,019 646
Technical training
institute leased to UTI
Holdings, Inc. 939,454 3,147,367 2,646,819
Office/warehouse leased to
Merit Medical Systems,
Inc. 9,015,977 380,000 10,505,349
Land leased to Q Clubs,
Inc. 1,562,118 2,073,578 1,026
Manufacturing/warehouse
facilities leased to
Humco Holding Group 3,902,836 1,240,000 6,604,324
Office/warehouse facility
leased to PSC Scanning,
Inc. 5,093,773 1,125,000 7,615,414 10,621 (109,998)
Industrial/manufacturing
facility formerly leased
to Bolder Technologies
Corporation 3,341,668 1,076,000 5,759,878 85,060
Warehouse facility leased
to Petsmart, Inc. 2,977,638 106,603 4,444,397 42,817
Manufacturing facility
leased to Plexus Corp. 5,349,777 125,340 9,124,660 5,744
Childcare centers leased
to Childtime Childcare,
Inc. 6,543,776 4,649,299 3,422,172
Office buildings leased to
Omnicom Group, Inc. 23,048,027 6,316,880 27,397,945 9,389,471
Retail stores leased to
Garden Ridge Corporation 12,902,223 2,197,500 4,112,500 5,054,412
Health club leased to
Q Clubs, Inc. 3,546,728 912,855 4,323,145
Warehouse/office leased to
Hibbett Sporting Goods,
Inc. 5,047,633 660,000 4,040,000 2,323,784
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (d) Statement of
--------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ----------- ------------ ------------ ---------------- ----------------- -------------
Operating Method:
Manufacturing/distributing
facility leased to
Electronic Data Systems October 1, 1992
Corporation $ 1,899,802 $ 19,698,123 $ 21,597,925 $ 3,679,536 and May 1, 2002 40 yrs.
Warehouse/manufacturing
facility leased to
Bell Sports, Inc. 283,793 8,388,477 8,672,270 2,222,341 November 6, 1992 40 yrs.
Warehouse leased to GATX
Logistics, Inc. 1,364,272 4,621,405 5,985,677 1,275,677 December 23, 1992 40 yrs.
Warehouse leased to Lucent
Technologies, Inc. 1,295,387 16,165,482 17,460,869 4,451,854 December 30, 1992 40 yrs.
February 23,
Land leased to 1993 and October
Barnes & Noble, Inc. 4,806,979 4,806,979 1, 1993 N/A
Land leased to
Best Buy Co., Inc. 18,579,665 18,579,665 April 15, 1993 N/A
Technical training May 3, 1993 and
institute leased to UTI September 29,
Holdings, Inc. 3,147,367 2,646,819 5,794,186 179,195 2000 N/A
Office/warehouse leased to
Merit Medical Systems,
Inc. 380,000 10,505,349 10,885,349 2,341,817 June 3, 1993 40 yrs.
Land leased to Q Clubs,
Inc. 2,074,604 2,074,604 July 16, 1993 N/A
Manufacturing/warehouse
facilities leased to
Humco Holding Group 1,240,000 6,604,324 7,844,324 804,902 February 5, 1999 40 yrs.
Office/warehouse facility
leased to PSC Scanning,
Inc. 1,125,000 7,516,037 8,641,037 875,259 May 12, 1999 40 yrs.
Industrial/manufacturing
facility formerly leased
to Bolder Technologies
Corporation 1,076,000 5,844,938 6,920,938 680,430 April 16, 1999 40 yrs.
Warehouse facility leased
to Petsmart, Inc. 107,606 4,486,211 4,593,817 1,144,918 October 26, 1993 40 yrs.
Manufacturing facility
leased to Plexus Corp. 125,417 9,130,327 9,255,744 2,139,921 August 11, 1994 40 yrs.
June 15, 1994
Childcare centers leased through November
to Childtime Childcare, 18, 1994 and May
Inc. 4,649,299 3,422,172 8,071,471 709,388 1, 2002 40 yrs.
Office buildings leased to
Omnicom Group, Inc. 6,319,147 36,785,149 43,104,296 7,498,451 October 14, 1994 11-40 yrs.
Retail stores leased to
Garden Ridge Corporation 2,197,998 9,166,414 11,364,412 1,765,275 May 29,1995 40 yrs.
Health club leased to
Q Clubs, Inc. 912,855 4,323,145 5,236,000 851,119 February 6, 1996 40 yrs.
Warehouse/office leased to
Hibbett Sporting Goods,
Inc. 660,000 6,363,784 7,023,784 1,015,650 February 12, 1996 40 yrs.
-50-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2003
Costs
Initial Cost to Company Capitalized Increase
------------------------- Subsequent to (Decrease) in Net
Description Encumbrances Land Buildings Acquisition (a) Investments (c)
----------- ------------ ----------- ------------ --------------- -----------------
Operating Method:
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 4,533,945 149,350 6,034,442 1,193,797
Hotel leased to Societe
Hoteliere Tourisme Grand
Noble 10,656,534 463,290 11,600,447 3,576,040
Office/repair facility
leased to US West
Communications, Inc. 1,565,542 509,550 1,687,006
Office buildings leased to
Information Resources,
Inc. 24,460,074 4,992,731 39,098,231
Retail stores leased to
Kmart Corporation 2,944,073 5,943,350
Office building leased to
Titan Corporation 3,910,146 20,426,386
Manufacturing/distribution
facility leased to
EnviroWorks, Inc. 4,110,291 1,045,856 13,752,114
Land leased to Kroger
Company 837,974
Warehouse/distribution
facility leased to
Gloystarne & Co. Ltd 4,624,100 813,400 6,348,060 33,553 (2,464,981)
------------ ----------- ------------ ----------- ----------
$172,166,907 $71,661,969 $207,462,805 $63,922,065 $ 1,409,984
============ =========== ============ =========== ==========
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (d) Statement of
--------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ----------- ------------ ------------ ---------------- ----------------- -------------
Operating Method:
Distribution/warehouse
leased to Detroit Diesel
Corporation. 2,782,860 6,542,140 9,325,000 1,151,689 December 17, 1996 40 yrs.
February 21,
Office building leased to 1992 and May 1,
Xerox Corporation 283,763 947,601 1,231,364 92,932 2002 40 yrs.
Supermarkets leased to February 21,
Affiliated Southwest, 1992 and May 1,
Inc. 765,578 2,326,719 3,092,297 274,417 2002 40 yrs.
Distribution/warehouse
leased to ISA
International plc 177,850 7,199,739 7,377,589 721,948 March 7, 2000 40 yrs.
Hotel leased to Societe
Hoteliere Tourisme Grand
Noble 656,606 14,983,171 15,639,777 511,463 October 21, 2000 40 yrs
Office/repair facility
leased to US West
Communications, Inc. 509,550 1,687,006 2,196,556 68,535 May 1, 2002 40 yrs
Office buildings leased to
Information Resources,
Inc. 4,992,731 39,098,231 44,090,962 1,589,547 May 1, 2002 40 yrs
Retail stores leased to
Kmart Corporation 2,944,073 5,943,350 8,887,423 242,239 May 1, 2002 40 yrs
Office building leased to
Titan Corporation 3,910,146 20,426,386 24,336,532 830,622 May 1, 2002 40 yrs
Manufacturing/distribution
facility leased to
EnviroWorks, Inc. 1,045,856 13,752,114 14,797,970 558,680 May 1, 2002 40 yrs
Land leased to Kroger
Company 837,974 837,974 March 5, 2003 40 yrs
Warehouse/distribution
facility leased to
Gloystarne & Co. Ltd 889,250 3,840,782 4,730,032 28,067 May 1, 2002 40 yrs
----------- ------------ ------------ -----------
$72,041,428 $272,415,395 $344,456,823 $37,705,872
=========== ============ ============ ===========
See accompanying notes to Schedule.
-51-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2003
Costs
Initial Cost to Company Capitalized
-------------------------- Subsequent to
Description Encumbrances Land Buildings Acquisition (a)
----------- ------------ ---- --------- ---------------
Direct Financing Method:
Retail store leased to
Oshman Sporting Goods,
Inc. $ 700,356 $ 2,494,843 $ 37,695
Office buildings leased to
Michigan Mutual
Insurance Company $ 9,500,000 1,965,093 11,884,907 5,919
Supermarkets leased to
ShopRite Supermarkets,
Inc. 15,291,805 4,882,183 21,653,570 3,657,931
Retail stores leased to
Barnes & Noble, Inc. 5,133,523 5,525,983 49,806
Retail stores leased to
Best Buy Co., Inc. 16,058,385 27,653,981 4,617
Technical training
institute leased to UTI
Holdings, Inc. 2,271,002 6,083,329 2,059
Health club leased to
Q Clubs, Inc. 2,645,310 3,511,422 1,737
Manufacturing facility
leased to Superior
Telecommunications, Inc. 4,465,826 295,032 4,704,968 1,885
Food processing/warehouse
facility leased to
Custom Food Products,
Inc. 172,090 27,000 5,536,384
Office buildings and
supermarkets leased to
Kroger Company 503,520 2,833,549
Office/warehouse facility
leased to New Wai L.P./
Warehouse Associates 8,608,809 307,775 14,983,073
Daycare centers leased to
Childtime Childcare, Inc. 4,817,248 6,688,301
----------- ----------- ------------ ----------
$68,963,998 $ 8,680,959 $108,017,926 $9,298,033
=========== =========== ============ ==========
Gross Amount at which
Carried
Increase at Close of Period (d)
(Decrease) in Net ----------------------
Description Investments (c) Total Date Acquired
----------- --------------- ----- -------------
Direct Financing Method:
Retail store leased to
Oshman Sporting Goods,
Inc. $ 422,527 $ 3,655,421 December 10, 1992
Office buildings leased to
Michigan Mutual
Insurance Company 104,057 13,959,976 December 21, 1993
Supermarkets leased to December 23,
ShopRite Supermarkets, 1993 and
Inc. (2,962,583) 27,231,101 October 8, 1993
February 23,
Retail stores leased to 1993 and
Barnes & Noble, Inc. 1,585,035 7,160,824 October 1, 1993
Retail stores leased to
Best Buy Co., Inc. (2,214,334) 25,444,264 April 15, 1993
Technical training
institute leased to UTI
Holdings, Inc. (937,798) 5,147,590 May 3, 1993
Health club leased to
Q Clubs, Inc. 3,513,159 July 16, 1999
Manufacturing facility
leased to Superior
Telecommunications, Inc. (161,794) 4,840,091 December 16, 1993
Food processing/warehouse
facility leased to
Custom Food Products,
Inc. (477,911) 5,085,473 December 31, 1994
Office buildings and February 21,
supermarkets leased to 1992 and May 1,
Kroger Company 3,337,069 2002
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
----------- ------------
$(4,642,801) $121,354,117
=========== ============
-52-
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, 2003, the aggregate cost of real estate owned by
Registrant and its subsidiaries for Federal income tax purposes is
$309,860,468.
(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,
-------------------------------------------
2003 2002
---- ----
Balance at beginning of year $331,747,345 $222,202,821
Additions 1,551,175 108,312,336
Impairment loss (3,800,000) (1,090,347)
Dispositions (2,419,602) (292,348)
Foreign currency translation adjustment 3,826,390 1,684,889
Reclassification from real estate under
construction 5,564,898 5,035,398
Reclassification to assets held for sale - (4,105,404)
Reclassification from financing lease 7,986,617 -
------------ ------------
Balance at close of year $344,456,823 $331,747,345
============ ============
Reconciliation of Accumulated Depreciation
December 31,
------------------------------------------
2003 2002
---- ----
Balance at beginning of year $30,938,834 $26,240,326
Depreciation expense 6,943,867 5,931,695
Depreciation expense from discontinued
operations - 317,945
Dispositions (306,403) -
Foreign currency translation adjustment 129,574 54,273
Reclassification to asset held for sale - (1,605,405)
----------- -----------
Balance at close of year $37,705,872 $30,938,834
=========== ===========
-53-
APPENDIX A TO FORM 10-K
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
2003 ANNUAL REPORT
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
OPERATING DATA:
Revenues $ 55,852 $ 48,306 $ 40,157 $ 39,660 $ 38,585
Income from continuing operations (1) 17,928 15,825 17,246 15,276 14,269
Basic earnings from continuing
operations per share .64 .61 .78 .70 .65
Diluted earnings from continuing
operations per share .63 .60 .76 .69 .64
Net income 18,585 13,479 15,366 15,377 14,836
Basic earnings per share .66 .52 .70 .70 .68
Diluted earnings per share .65 .51 .68 .69 .67
Dividends paid 23,891 20,877 18,550 18,187 17,715
Dividends paid per share .85 .85 .84 .83 .83
Payments of mortgage principal(2) 5,994 5,242 4,642 4,322 4,355
BALANCE SHEET DATA:
Total consolidated assets 544,946 550,227 369,307 380,209 381,711
Long-term obligations 231,302 236,129 131,659 149,023 147,715
(1) Includes (loss) gain from sales of real estate.
(2) Represents scheduled mortgage principal amortization paid.
-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, 2003. 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).
Forward-looking statements discuss matters that are not historical facts.
Because they discuss future events or conditions, forward-looking statements may
include words such as "anticipate", "believe", "estimate", "intend", "could",
"should", "would", "may", or similar expressions. Do not unduly rely on forward
looking statements. They give our expectations about the future and are not
guarantees, and speak only as of the date they are made. 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 a significant aggregate appreciation in property
values.
CIP(R) is advised by W. P. Carey & Co. LLC ("WPC") 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, WPC 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. The
portfolio valuation is used to determine the asset base for calculating asset
management and performance fees.
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, 2003 and 2002, CIP(R) owned real estate in the
United States, the United Kingdom and France.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Management evaluates the results of CIP(R) with a primary focus on the ability
to generate cash flow necessary to meet its investment objectives of overall
property appreciation and increasing its distribution rate to its shareholders.
As a result, Management's assessment of operating results gives less emphasis to
the effect of unrealized gains and losses which may cause fluctuations in net
income for comparable periods but has no impact on cash flow and to other
noncash charges such as depreciation and impairment charges. While impairment
charges are intended to reflect an actual or potential decrease in the value of
an asset, accounting principles do not permit increasing an asset to fair value
when such fair value exceeds the asset's carrying value (historical costs less
accumulated depreciation). Based on annual independent valuations, Management
believes that there has been a substantial increase in the value of the
portfolio and that this increase is not reflected in its financial statements.
In evaluating cash flow from operations, Management includes equity
distributions that are included in investing activities to the extent that the
distributions in excess of equity income is the result of noncash charges such
as depreciation. For the year ended December 31, 2003, cash flow generated from
operations was substantially greater than dividends paid.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
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 and its 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. The
increase in net income for the year ended December 31, 2003 is to a large extent
due to the effect of the acquisition; however, net income on a per share basis
also increased. Net income for the year ended December 31, 2003 increased by
$5,106,000 as compared with net income for the year ended December 31, 2002.
Income from continuing operations before gains and losses increased by $889,000
and included noncash impairment charges of $5,412,000 and a charge on the
extinguishment of debt of $481,000 in 2003 and a charge on the extinguishment of
debt of $4,156,000 in 2002. The increase in income from continuing operations
before gains and losses was due to increases in lease revenues (rental income
and interest income from direct financing leases), interest and other income and
equity income, and to a lesser extent, a decrease in general and administrative
expenses. This was partially offset by increases in interest and property
expenses and depreciation.
Lease revenues increased by $6,267,000 of which $943,000 was due to rent
increases which occurred throughout 2003 and 2002. Properties acquired in the
merger contributed $14,511,000 of lease revenues as compared with $9,716,000 in
2002. Interest and other income reflected a full year's interest income from
participation in the mortgage securitization as compared with its initial
four-month period in 2002, an increase of $905,000. The increase in interest
expense was due to the $83,667,000 of new limited recourse financing that was
obtained in connection with the securitization transaction. The increase in
equity income was due to the increase in ownership in the Courtyard by Marriott
net lease properties in connection with acquiring CPA(R):10's interest as well
as an increase in the net income of the equity investee. The Courtyard
properties are encumbered by a rapidly amortizing mortgage resulting in lower
interest charges and increasing equity in the properties.
The decrease in general and administrative expenses was primarily due to a
decrease in investor related costs and state and local taxes. Certain
efficiencies have been achieved in connection with the CPA(R):10 acquisition and
there was no significant increase in reimbursements for personnel costs
necessary to the administration of the company even though the asset base
increased substantially.
The increase in interest expense was due to the refinancing of $83,667,000 of
mortgage debt in 2002 in connection with the mortgage securitization transaction
and the assumption of mortgages from the CPA(R):10 acquisition. The increase in
depreciation is due to the acquisition of the CPA(R):10 property interests in
2002. The increase in property expenses was due to (i) an increase in asset
management fees which resulted from an increase in CIP(R)'s asset base primarily
because of the CPA(R):10 acquisition, legal fees relating to protecting CIP(R)'s
interests in bankruptcy proceedings, (ii) an increase in the provision for
uncollected rents, (iii) costs related to a voluntary environmental remediation
at CIP(R)'s property in Golden, Colorado formerly leased to Bolder Technologies
Inc. and (iv) payment of real estate taxes for the pre-petition period of Garden
Ridge Corporation which has filed for reorganization in bankruptcy.
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
CIP(R) leases with Sears Logistics, Inc. and Lucent Corporation expire in March
2004 and March 2005, respectively. Sears has been seeking a larger facility and
is expected to renew its lease only on a short-term basis. Sears' current annual
rent is $933,000 and annual carrying costs on the property if vacant are
estimated to be $276,000. CIP(R) has not received any indication from Lucent as
to whether it intends to extend its lease which was previously extended in 2002
for a three-year term. Annual rent from the Lucent lease is $2,035,000. Fifteen
leases have rent increases scheduled in 2004. Most of the increases are
CPI-based with increases scheduled in intervals which range between one and five
years. The annual increase in the CPI has generally ranged between 1.5% and 3%
percent.
CIP(R) continues to monitor the financial condition of Kmart Corporation, a
lessee of two rental properties in California and Michigan. The lease on a third
Kmart property, in Denton, Texas, was terminated under Kmart's plan of
reorganization and which provided annual revenues of $215,000. The Denton
property is currently vacant and, in January 2004, CIP(R) entered into an
agreement to sell the property. The sale is subject to certain due diligence by
the buyer. The two remaining Kmart leases have combined annual base rents of
$390,000 and paid $381,000 of percentage of sales rent in 2003.
CIP(R)'s 15,000 sq. ft. property in Golden, Colorado has been partially vacant
since the termination of a lease in February 2002. A lease for approximately
23,000 sq. ft. which provided annual rent of $126,000 expired in December 2003.
A new lease for 42,000 sq. ft. commenced in January 2004 for an initial term of
10.5 years at an annual rent of $206,000. Garden Ridge is in the process of
submitting its plan of reorganization to the bankruptcy court and it is
uncertain whether it will reaffirm its leases which provide $1,607,000 of annual
rents. CIP(R) owns a property in the United Kingdom which was leased to
Gloystarne & Co., Ltd at an annual rent of (pound)379,000 ($674,000 based on the
exchange rate of 1.7785 at December 31, 2003). In 2003, Gloystarne entered into
receivership and is selling its business. The current occupant of the property
entered into a six-month lease but has not agreed to enter into a long-term
lease. Any new lease is not expected to reach the rent level of the prior lease.
Impairment charges in 2003 included a writedown of $4,038,000 on the Gloystarne
property with other writedowns primarily due to changes in the estimated
residual value of properties accounted for as direct financing leases. Residual
values are evaluated at least annually.
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.
Year Ended December 31, 2002 Compared to 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.
Gains and losses, charges on the early extinguishment of debt and noncash
impairment charges, in 2002 and 2001 totaled $6,955,000 and $952,000,
respectively. Income from lease revenues and equity investments increased 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 $7,924,000 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. 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.
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
CIP(R) renewed leases in 2002 on properties leased to Lucent Technologies, Inc.,
Sears Logistics, Inc., US West Communications, Inc. and Hobby Lobby Stores, Inc.
at an aggregate rent of approximately $3,500,000. Other than the Sears and
Lucent leases, which current terms expire in 2004 and 2005, respectively, and
the Hobby Lobby property which was sold in 2003, no single-tenant property lease
will expire until 2007. 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.
Income from equity investments increased $3,454,000 for the year ended December
31, 2002, primarily because CIP(R)'s ownership interest in a lease for 13
Courtyard by Marriott hotels, increased from 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.
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 $2,346,000 loss from discontinued operations in connection
with a vacant property in Austin, Texas which is held for sale as of December
31, 2002, the sale in May 2002 of a property in Little Rock, Arkansas formerly
leased to Affiliated Southwest, Inc. and the Nicholson Warehouse L.P. property
held for sale as of December 31, 2003. Of this loss, $2,640,000 was due to
impairment charges on the writedown of the Austin and Nicholson properties to
their fair value.
In 2002, CIP(R) incurred 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.
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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 instrument. The value of the Merit Medical warrants was determined
using Black-Scholes and Binomial Tree option pricing methods.
Financial Condition
The liquidity and financial condition of CIP(R) has remained stable and it has
sufficient cash balances and cash flow from its operations (including equity
investments) to meet its investment objectives. Since December 31, 2002,
CIP(R)'s cash and cash equivalents have increased by $1,633,000 to $27,415,000.
Cash flow from operations and equity investments of $33,792,000 was sufficient
to fund dividends to shareholders of $23,891,000, fund distributions to minority
partners of $3,250,000 and pay mortgage principal installments of $5,994,000.
During 2003, CIP(R)'s investing activities included receiving proceeds from the
sale of a property in Broken Arrow, Oklahoma for $4,840,000 and using $1,553,000
for capitalized costs, including $723,000 to complete an additional expansion of
the Toulouse, France Holiday Inn property and $830,000 to purchase the land on a
property in Little Rock, Arkansas that is leased to Kroger Co. Kroger had
previously paid the land lease obligations on behalf of CIP(R). As a result of
acquiring the land, annual rent from Kroger has increased by $62,000. CIP(R)
currently has no commitments for additional purchases or to fund tenant
improvements, however, it may be necessary to fund improvements at the Golden,
Colorado property in the course of negotiating leases.
In addition to the payment of dividends and scheduled principal mortgage
payments, CIP(R)'s financing activities for the year ended December 31, 2003
included obtaining $15,565,000 from limited recourse mortgage financing of which
$565,000 was an advance on an existing loan on the Toulouse property and
$15,000,000 was from refinancing the Electronic Data Systems Corporation
property. CIP(R) used $10,492,000 to pay off the Electronic Data Systems loan
which had matured. The matured loan had an annual interest rate of 10% and was
replaced with a loan with an annual interest rate of 6.08%, and as a result
annual debt service decreased by $265,000.
CIP(R) also used $8,010,000 and $1,265,000 to pay off loans on the Titan
Corporation and Oshman's Sporting Goods, Inc. properties, respectively. In
connection with paying off the Titan mortgage, the 18.54% minority partner, an
affiliate, provided approximately $1,496,000 to fund its share of the payment.
Titan has filed a proxy statement in connection with its proposed acquisition by
Lockheed Martin Corporation; however Lockheed and Titan have been informed that
the United States Securities and Exchange Commission (the "SEC") has commenced
an investigation into whether certain payments made by Titan were in violation
of the law. Titan has indicated that it intends to cooperate fully with Lockheed
and the SEC in the investigation. If the acquisition of Titan by Lockheed is
completed, CIP(R) may be able to benefit from Lockheed's credit rating and
obtain a lower annual interest rate in the event that CIP(R) seeks to refinance
the property. CIP(R) also issued $1,908,000 of common stock and used $1,453,000
to purchase treasury stock.
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.
Balloon payments of approximately $8,045,000 and $2,897,000 are scheduled in
2004 and 2005, respectively. CIP(R) expects to refinance one loan maturing in
2005 and expects to pay off a second loan of $2,995,000. A balloon payment of
$9,500,000 is scheduled in 2007. The balloon payment which is scheduled in 2004
is on a property held for sale and CIP(R) is seeking an extension so that the
loan may be paid off with sales proceeds. CIP(R) has sufficient cash to meet
scheduled balloon payments in 2004 and 2005.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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.
Two lessees have purchase options which are exercisable over 2004 and 2005. In
the event that the options are exercised, annual revenues and cash flow would
decrease by $2,360,000 and $1,523,000, 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 amounts based on appraisals on the properties which would
be performed as part of any due diligence process.
In 2002, CIP(R) purchased a participation in a mortgage pool consisting of
$172,335,000 of newly-issued mortgage debt collateralized by properties and
lease assignments on properties owned by CIP(R) and three affiliates. CIP(R) and
the affiliates also purchased subordinated interests of $24,129,000 of which
CIP(R) owns a 44% interest. The subordinated interests are payable only after
all other classes of ownership receive their stated interest and related
principal payments. The subordinated interests, therefore, will be affected by
any defaults or nonpayments by lessees. As of December 31, 2003, there have been
no defaults. Three Garden Ridge properties are included in the mortgage pool and
in the event the leases are terminated, cash flow from this investment might be
adversely affected.
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 2003 and 2002; however, it affects the amount
of taxable income that CIP(R) reports to its shareholders. In 2003, Marcourt
declared a consent dividend of $1,969,000.
One of CIP(R)'s objectives is to provide liquidity for its shareholders
beginning eight to twelve years after the net proceeds of its public offerings
were substantially invested. CIP(R) is within that period and the Board of
Directors is evaluating liquidity options. CIP(R) is working to present a
liquidity plan to shareholders before the end of the second quarter; however,
there is no assurance that the Board of Directors will approve any liquidity
options within such period.
If any proposed transaction becomes probable and which would result in the
anticipated sale of properties, those properties will be reclassified as held
for sale. Under accounting principles generally accepted in the United States of
America, assets held for sale are assessed for potential impairment charges
differently than assets held for use. Therefore, any reclassification may result
in the recognition of significant impairment charges in 2004. The proposed price
per share in any liquidation is being based on an independent valuation of
CIP(R)'s portfolio and Management expects overall appreciation as compared with
the issuance price of shares from the public offering even if there are
writedowns of individual assets for financial reporting purposes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Off-Balance Sheet and Aggregate Contractual Agreements
A summary of CIP(R)'s obligations under contractual arrangements is as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
Limited recourse
mortgage notes
payable $244,106 $ 12,803 $ 8,178 $ 5,555 $ 15,529 $10,256 $191,785
Subordinated disposition
fees 1,164 1,164
Ground lease obligations 434 126 100 100 100 8 -
Share of minimum rents
payable under office
cost-sharing
agreement 493 179 179 135
-------- -------- -------- -------- -------- ------- --------
$246,197 $ 13,108 $ 8,457 $ 5,790 $ 15,629 $10,264 $192,949
======== ======== ======== ======== ======== ======= ========
In connection with extending a mortgage loan with a variable interest rate,
CIP(R) was required to enter into a separate interest rate cap agreement with a
notional amount of $6,750,000 and a strike of 8%. An interest rate cap agreement
is a derivative financial instrument designed to hedge interest risk on variable
interest debt. Approximately 7% of CIP(R)'s outstanding debt is variable rate
and the use of derivative financial instruments to hedge interest rate risk is
not currently significant to CIP(R)'s risk management. 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.
Critical Accounting Estimates
CIP(R) makes certain judgments and uses certain estimates and assumptions when
applying accounting principles generally accepted in the United States of
America in the preparation of its consolidated financial statements that affect
the reported amount of assets, liabilities, revenues and expenses. CIP(R)
believes its most critical accounting estimates relate to its provision for
uncollected amounts from lessees, potential impairment of assets, identification
of discontinued operations, classification of real estate assets, determining
the fair value of assets and liabilities which are "marked to market" but not
actively traded in a public market and determining the interest to be
capitalized in connection with real estate under construction. CIP(R)`s
significant accounting policies are described in the notes to the consolidated
financial statements. Certain policies while significant, may not require the
use of estimates.
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 the collectibility of these
receivables based on the facts and circumstances of each situation 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
financing leases) and will measure its allowance against actual rent arrearages
and adjust the percentage applied. For amounts in arrears, Management makes
subjective judgments based on its knowledge of a lessee's circumstances and may
reserve for the entire receivable amount from a lessee because there has been
significant or continuing deterioration in the lessee's ability to meet its
lease obligations. Under net leases, lessees are obligated to pay real estate
taxes on behalf of CIP(R); however, when a lessee is in bankruptcy, CIP(R) may
pay the tax obligation in order to preserve its interest in the property. If
such a payment relates to a pre-petition period, CIP(R) may record such payment
as an expense rather than as a receivable when it assumes the chance of
reimbursement by the lessee is unlikely. Based on its actual experience in 2003,
CIP(R) recorded a provision equal to approximately 1.5% of lease revenues.
Operating real estate is stated at cost less accumulated depreciation. 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 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) does not have a credit facility and determines an interest rate to be
applied for capitalizing interest based on an average rate on its outstanding
limited recourse mortgage debt.
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 contractual 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. Assets
classified as direct financing leases are not depreciated and, therefore, the
classification of assets, may have a significant impact on net income even
though it has no effect on cash flows.
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 a property accounted for under the operating method may not
be recoverable, Management must first determine if the property will be held for
use or held for sale. Management then performs projections of 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 generally 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. The risk of
vacancy for single tenant properties is different from 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 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. While
an evaluation of potential impairment of real estate accounted for under the
operating
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
method is determined by a change in circumstances, the evaluation of a direct
financing lease can be affected by changes in long-term market conditions even
though the obligations of the lessee are being met. Changes in circumstances
include, but are not limited to, vacancy of a property not subject to a lease
and termination of a lease. CIP(R) may also assess properties for impairment
because it expects a lease not to be renewed and the lease is within one year of
its expiration, a lessee is experiencing financial difficulty and Management
expects that there is a reasonable probability that the lease will be terminated
in a bankruptcy organization or a property remains vacant for a period that
exceeds the period anticipated in a prior impairment evaluation.
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. To the extent that a purchase and sale agreement has been entered
into, the allowance is based on the negotiated sales price. To the extent that
CIP(R) has adopted a plan to sell an asset but has not entered into a sales
agreement, it will make judgments of the net sales price based on current market
information. Accordingly, the initial assessment may be greater or less than the
purchase price subsequently committed to and may result in a further adjustment
to the fair value of the property. 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, (b) the fair
value at the date of the subsequent decision not to sell, or (c) the current
carrying value.
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. To determine the value of warrants for common stock which are classified
as derivatives, various estimates are included in the options pricing model used
to determine the value of a warrant.
In connection with the acquisition of properties, purchase costs will be
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values. The value of the tangible assets, consisting of
land, buildings and tenant improvements, will be determined as if vacant.
Intangible assets including the above-market or below-market value of leases,
the value of in-place leases and the value of tenant relationships will be
recorded at their relative fair values.
The value attributed to tangible assets will be determined in part using a
discounted cash flow model which is intended to approximate what a third party
would pay to purchase the property as vacant and rent at "market" rates. In
applying the model CIP(R) assumes that the disinterested party would sell the
property at the end of a market lease term. Assumptions used in the model are
property-specific as it is available; however, when certain necessary
information isn't available, CIP(R) will use available regional and
property-type information. Assumptions and estimates include a discount rate or
internal rate of return, marketing period necessary to put a lease in place,
carrying costs during the marketing period, leasing commissions and tenant
improvements allowances, market rents and growth factors of such rents, market
lease term and a cap rate to be applied to an estimate of market rent at the end
of the market lease term.
Above-market and below-market leases intangibles will be based on the difference
between the market rent and the contractual rents and will be discounted to a
present value using an interest rate reflecting CIP(R)`s assessment of the
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
risk associated with the lease acquired. CIP(R) acquires properties subject to
net leases and considers the credit of the lessee in negotiating the initial
rent.
The total amount of other intangible assets will be allocated to in-place lease
values and tenant relationship intangible values based on our evaluation of the
specific characteristics of each tenant's lease and our overall relationship
with each tenant. Characteristics we will consider in allocating these values
include the nature and extent of the existing relationship with the tenant,
prospects for developing new business with the tenant, the tenant's credit
quality and the expectation of lease renewals among other factors. The aggregate
value of other intangible assets acquired will be measured based on the
difference between (i) the property valued with an in-place lease adjusted to
market rental rates and (ii) the property valued as if vacant. Independent
appraisals or our estimates will be used to determine these values.
Factors to be considered in valuing other intangible assets include the
estimated carrying costs of the property during a hypothetical expected lease-up
period, current market conditions and costs to execute similar leases. Estimated
carrying costs will include real estate taxes, insurance, other property
operating costs and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, based on assessments of specific market
conditions. Estimated costs to execute leases include commissions and legal
costs to the extent that such costs are not already incurred with a new lease
that has been negotiated in connection with the purchase of the property.
Accounting Pronouncements
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 for valuing stock-based compensation 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"). In December 2003, the FASB issued a revised FIN 46
which modifies and clarifies various aspects of the original Interpretation. FIN
46 applies when either (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest, (2) the equity
investment at risk is insufficient to finance that entity's activities without
additional subordinated financial support or (3) the equity investors have
voting rights that are not proportionate to their economic interest. In addition
FIN 46 requires additional disclosures.
FIN 46 is effective immediately for VIEs created after January 31, 2003, and to
VIEs in which an enterprise obtains an interest after that date. For variable
interests in a VIE created or obtained prior to February 1, 2003, FIN 46 is
effective for periods ending after March 15, 2004.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
CIP(R) has evaluated the potential impact and believes this interpretation will
not have a material impact on its accounting for its investments in
unconsolidated joint ventures as none of these investments are VIEs. CIP(R)'s
maximum loss exposure is the carrying value of its equity investments.
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
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 adoption of SFAS No.
149 did not have a material effect on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). In particular, it requires
that mandatorily redeemable financial instruments be classified as liabilities
and reported at fair value and that changes in their fair values be reported as
interest cost.
This statement was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for CIP(R) as of July 1, 2003. On
November 7, 2003, the FASB indefinitely deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatorily
redeemable non-controlling interests. This deferral is expected to remain in
effect while these provisions are further evaluated by the FASB. The Company has
interests in four limited partnerships that are consolidated and that are
considered mandatorily redeemable controlling interests with finite lives. In
accordance with the deferral noted above, these minority interests have not been
reflected as liabilities. The carrying value and fair value of these minority
interests are approximately $15,280,000 and $34,731,000, respectively at
December 31, 2003. Based on the FASB's deferral of this provision, the adoption
of SFAS No. 150 did not have a material effect on CIP(R)'s financial statements.
-12-
REPORT of INDEPENDENT AUDITORS
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, 2003 and 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of W. P. Carey & Co. LLC (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 15 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 10, 2004
-13-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2003 2002
------------- -------------
ASSETS:
Real estate leased to others:
Accounted for under the operating method:
Land $ 72,041,428 $ 70,868,892
Buildings 272,415,395 260,878,453
------------- -------------
344,456,823 331,747,345
Less, accumulated depreciation 37,705,872 30,938,834
------------- -------------
306,750,951 300,808,511
Net investment in direct financing leases 121,354,117 133,955,555
Real estate under construction - 5,725,416
Assets held for sale 3,092,633 2,500,000
Equity investments 62,381,384 58,578,685
cash and cash equivalents 27,414,928 25,782,304
Marketable securities 11,954,011 11,014,711
Other assets, net of accumulated amortization of $1,557,545 and
$1,119,325 in 2003 and 2002, and net of allowance for uncollected
rents of $1,090,582 and $2,825,000 in 2003 and 2002 11,998,129 11,861,713
------------- -------------
Total assets $ 544,946,153 $ 550,226,895
============= =============
LIABILITIES, MINORITY INTEREST
AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 241,130,905 $ 248,519,101
Limited recourse mortgage notes payable on assets held for sale 2,975,189 3,060,478
Accrued interest 2,325,763 1,550,184
Accounts payable and accrued expenses 2,343,509 1,832,633
Due to affiliates 2,528,398 2,552,528
Dividends payable 6,034,786 5,938,632
Prepaid rental income and security deposits 2,404,450 2,418,930
Other liabilities 3,391,175 3,840,777
------------- -------------
Total liabilities 263,134,175 269,713,263
------------- -------------
Minority interest 15,279,835 13,703,146
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares;
29,237,375 and 28,833,385 shares issued and outstanding at
December 31, 2003 and 2002 29,237 28,833
Additional paid-in capital 314,143,508 308,659,610
Dividends in excess of accumulated earnings (36,920,900) (31,519,364)
Accumulated other comprehensive income 2,048,243 956,456
------------- -------------
279,300,088 278,125,535
Less, common stock in treasury at cost, 1,097,399 and 984,755
shares at December 31, 2003 and 2002 (12,767,945) (11,315,049)
------------- -------------
Total shareholders' equity 266,532,143 266,810,486
------------- -------------
Total liabilities, minority interest and shareholders' equity $ 544,946,153 $ 550,226,895
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
-14-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of INCOME
For the years ended December 31,
--------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues:
Rental income $ 38,442,172 $ 33,706,049 $ 28,058,006
Interest income from direct financing leases 15,371,617 13,840,285 11,563,950
Interest and other income 2,038,229 759,309 535,450
------------ ------------ ------------
55,852,018 48,305,643 40,157,406
------------ ------------ ------------
Expenses:
Interest 18,973,319 16,622,316 13,490,736
Depreciation 6,943,867 5,894,437 4,782,713
Property expenses 10,731,211 9,156,904 7,078,118
General and administrative 3,844,444 4,166,381 2,971,751
Impairment charge on real estate 5,412,168 - 2,300,000
Charge on early extinguishment of debt 481,356 4,156,442 -
------------ ------------ ------------
46,386,365 39,996,480 30,623,318
------------ ------------ ------------
Income from continuing operations before minority
interest, income from equity investments and
gains and losses 9,465,653 8,309,163 9,534,088
Minority interest in income, net of charge on early
extinguishment of debt of $1,011,353 in 2002 (3,059,355) (1,058,267) (875,599)
Income from equity investments 10,599,285 8,865,740 5,411,560
------------ ------------ ------------
Income from continuing operations before gains and
losses 17,005,583 16,116,636 14,070,049
Unrealized gains (loss) on foreign currency
transactions and warrants 922,512 (2,128,000) 2,128,000
Realized gain on sale of warrants - 2,003,629 -
------------ ------------ ------------
Income from continuing operations before gain and
loss on real estate 17,928,095 15,992,265 16,198,049
Discontinued operations:
Income from operations of discontinued properties 421,782 285,612 119,744
Gain on sales of real estate, net 235,404 8,874 -
Impairment charge on real estate - (2,640,347) (2,000,000)
------------ ------------ ------------
Income (loss) from discontinued operations 657,186 (2,345,861) (1,880,256)
------------ ------------ ------------
(Loss) gain on sale of real estate - (167,403) 1,048,335
------------ ------------ ------------
Net income $ 18,585,281 $ 13,479,001 $ 15,366,128
============ ============ ============
- Continued -
-15-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of INCOME (Continued)
Basic earnings per common share:
Income from continuing operations $ .64 $ .61 $ .78
Income (loss) from discontinued operations .02 (.09) (.08)
-------------- -------------- --------------
Net income $ .66 $ .52 $ .70
============== ============== ==============
Diluted earnings per common share:
Income from continuing operations $ .63 $ .60 $ .76
Income (loss) from discontinued operations .02 (.09) (.08)
-------------- -------------- --------------
Net income $ .65 $ .51 $ .68
============== ============== ==============
Weighted average shares outstanding-basic 28,026,525 26,032,753 22,105,243
============== ============== ==============
Weighted average shares outstanding-diluted 28,514,811 26,596,434 22,460,138
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
-16-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2002 and 2003
Accumulated
Dividends in Other
Excess of Comprehen-
Common Additional Comprehensive Accumulated sive Income Treasury
Stock Paid-in Capital Income Earnings (Loss) Stock Total
January 1, 2001 $ 22,597 $ 225,722,640 $(19,577,430) $ (230,841) $ (6,915,730) $ 199,021,236
396,245 shares
issued, $.001 par,
net of costs 397 5,157,780 5,158,177
Dividends declared (18,685,729) (18,685,729)
Repurchase of 174,943
shares (2,226,143) (2,226,143)
Comprehensive income:
Net income $15,366,128 15,366,128 15,366,128
Other comprehensive
income:
Foreign currency
translation
adjustment (180,579) (180,579) (180,579)
-----------
$15,185,549
===========
Balance at
-------- ------------- ------------ ---------- ------------ -------------
December 31, 2001 22,994 230,880,420 (22,897,031) (411,420) (9,141,873) 198,453,090
-------- ------------- ------------ ---------- ------------ -------------
5,829,010 shares
issued, $.001 par,
net of costs 5,839 77,779,190 77,785,029
Dividends declared (22,101,334) (22,101,334)
Repurchase of 174,518
shares (2,173,176) (2,173,176)
Comprehensive income:
Net income $13,479,001 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 1,367,876 1,367,876
-----------
$14,846,877
===========
Balance at
-------- ------------- ------------ ---------- ------------ -------------
December 31, 2002 28,833 308,659,610 (31,519,364) 956,456 (11,315,049) 266,810,486
-------- ------------- ------------ ---------- ------------ -------------
403,990 shares
issued, $.001 par,
net of costs 404 5,483,898 5,484,302
Dividends declared (23,986,817) (23,986,817)
Repurchase of 112,644
shares (1,452,896) (1,452,896)
Comprehensive income:
Net income $18,585,281 18,585,281 18,585,281
Other comprehensive
income:
Foreign currency
translation
adjustment (37,553)
Unrealized gain on
marketable
securities 1,129,340
-----------
1,091,787 1,091,787 1,091,787
-----------
$19,677,068
===========
Balance at
-------- ------------- ------------ ---------- ------------ -------------
December 31, 2003 $29,237 $314,143,508 $(36,920,900) $2,048,243 $(12,767,945) $ 266,532,143
======== ============= ============ ========== ============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
-17-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31,
--------------------------------
2003 2002 2001
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 18,585,281 $ 13,479,001 $ 15,366,128
Adjustments to reconcile net income to net cash provided by continuing
operations:
(Income) loss from discontinued operations, including gain on sale of
real estate and impairment loss (657,186) 2,345,861 1,880,256
Depreciation and amortization 7,438,472 6,386,553 4,782,713
Straight-line adjustments (178,382) (459,654) (207,229)
Minority interest in income 3,059,355 2,069,620 875,599
Income from equity investments in excess of distributions received (4,397,082) (3,182,381) (1,430,181)
Charge on extinguishment of debt, net of minority interest 481,356 3,145,089 -
Prepayment premiums paid on extinguishment of debt (500,000) (3,439,379) -
Gain on sale of real estate and securities, net - (1,836,226) (1,048,335)
Impairment charges on real estate and net investment in direct
financing leases 5,412,168 1,550,000 4,300,000
Issuance of stock in satisfaction of performance fee 3,575,936 3,122,939 2,767,451
Unrealized loss (gain) on foreign currency transactions and warrants (922,512) 2,128,000 (2,128,000)
Net change in operating assets and liabilities 869,683 1,225,189 (15,740)
------------- ------------- -------------
Net cash provided by continuing operations 32,767,089 26,534,612 25,142,662
Net cash provided by (used in) discontinued operations 430,839 (935,201) (1,226,574)
------------- ------------- -------------
Net cash provided by operating activities 33,197,928 25,599,411 23,916,088
------------- ------------- -------------
Cash flows from investing activities:
Distributions received from equity investments in excess of
equity income 594,383 658,737 426,120
Capital distributions from equity investments - - 5,839,315
Capitalized costs and purchases of real estate and equity investments (1,552,639) (2,743,054) (7,838,388)
Proceeds from sales of real estate and securities 4,839,545 13,208,838 8,055,093
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 provided by (used in) investing activities 3,881,289 (5,499,793) 6,482,140
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from mortgages 15,565,185 120,139,853 6,262,563
Prepayments of mortgages (19,766,562) (74,137,547) (13,788,316)
Payments of mortgage principal (5,994,021) (5,241,873) (4,641,965)
Deferred financing costs (202,260) (4,630,624) (50,000)
Prepayment of notes payable - (11,738,888) -
Dividends paid (23,890,663) (20,876,834) (18,550,352)
Proceeds from issuance of shares, net of costs 1,908,366 1,506,612 2,390,726
Purchase of treasury stock (1,452,896) (2,173,176) (2,226,143)
Capital contributions from (distributions to) minority partners 1,496,328 (2,734,951) 902,220
Distributions paid to minority partners (3,249,552) (1,829,770) (488,294)
------------- ------------- -------------
Net cash used in financing activities (35,586,075) (1,717,198) (30,189,561)
------------- ------------- -------------
- Continued -
-18-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS (Continued)
Effect of exchange rate changes on cash 139,482 11,404 (1,386)
----------- ----------- -----------
Net increase in cash and cash equivalents 1,632,624 18,393,824 207,281
Cash and cash equivalents, beginning of year 25,782,304 7,388,480 7,181,199
----------- ----------- -----------
Cash and cash equivalents, end of year $27,414,928 $25,782,304 $ 7,388,480
=========== =========== ===========
Noncash investing and financing activities:
The purchase of Corporate Property Associates 10 Incorporated in 2002 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 in which the
Company has controlling interests in 2002, 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.
-19-
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"). The Company is not a
primary beneficiary of any variable interest entity. 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, allowances for uncollected rent,
classification of real estate leased to others and identification
of any intangible assets identified in connection with asset
acquisitions. 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, 2003, lessees were responsible for direct
payments of real estate taxes of approximately $6,630,166.
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 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 5). 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 the net investment in 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.
In connection with the Company's acquisition of properties,
purchase costs are allocated to the tangible and intangible assets
and liabilities acquired based on their estimated fair values. The
value of the tangible assets, consisting of land, buildings and
tenant improvements, are determined as if vacant. Intangible
assets including the above-market or below-market value of leases,
the value of in-place leases and the value of tenant relationships
are recorded at their relative fair values.
-20-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Above-market and below-market in-place lease values for owned
properties are recorded based on the present value (using an
interest rate reflecting the risks associated with the leases
acquired) of the difference between (i) the contractual amounts to
be paid pursuant to the leases negotiated and in-place at the time
of acquisition of the properties and (ii) management's estimate of
fair market lease rates for the property or equivalent property,
measured over a period equal to the remaining non-cancelable term
of the lease. The capitalized above-market lease value is
amortized as a reduction of rental income over the remaining
non-cancelable term of each lease. The capitalized below-market
lease value is amortized as an increase to rental income over the
initial term and any fixed rate renewal periods in the respective
leases.
The total amount of other intangible assets are allocated to
in-place lease values and tenant relationship intangible values
based on management's evaluation of the specific characteristics
of each tenant's lease and the Company's overall relationship with
each tenant. Characteristics considered in allocating these values
include the nature and extent of the existing relationship with
the tenant, prospects for developing new business with the tenant,
the tenant's credit quality and the expectation of lease renewals
among other factors. The aggregate value of other intangible
assets acquired will be measured based on the difference between
(i) the property valued with an in-place lease adjusted to market
rental rates and (ii) the property valued as if vacant.
Independent appraisals or management's estimates are used to
determine these values.
Factors considered in the analysis include the estimated carrying
costs of the property during a hypothetical expected lease-up
period, current market conditions and costs to execute similar
leases. The Company also considers information obtained about a
property in connection with its pre-acquisition due diligence.
Estimated carrying costs include real estate taxes, insurance,
other property operating costs and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods,
based on management's assessment of specific market conditions.
Estimated costs to execute leases including commissions and legal
costs to the extent that such costs are not already incurred with
a new lease that has been negotiated in connection with the
purchase of the property are also considered.
The value of in-place leases will be amortized to expense over the
remaining initial term of each lease. The value of tenant
relationship intangibles will be amortized to expense over the
initial and renewal terms of the leases but no amortization period
for intangible assets will exceed the remaining depreciable life
of the building.
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.
The Company is committed under long-term ground leases for certain
properties through 2008. Future ground lease rental commitments
aggregate $434,179.
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 results of operations and the
related gain or loss on sale of properties classified as held for
sale by the Company after December 31, 2001, are included in
discontinued operations.
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, (b) the fair value at the date of the subsequent
decision not to sell, or (c) the current carrying value.
-21-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 interests in entities in which the entity is not
considered to be a VIE, or the Company is not deemed to be the
primary beneficiary, and the Company's ownership is 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.
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, 2003 and 2002
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.
Foreign Currency Translation:
The Company consolidates its real estate investments in France and
the United Kingdom. The functional currency for these investments
are 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.
The cumulative foreign currency translation adjustment was
$467,171 at December 31, 2003.
Foreign currency transactions may produce receivables or payables
that are fixed in terms of the amount of foreign currency that
will be received or paid. A change in the exchange rates between
the functional currency and the currency in which a transaction is
denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that
transaction. That increase or decrease in the expected functional
currency cash flows is a foreign currency transaction gain or loss
that generally will be included in determining net income for the
period in which the exchange rate changes. Likewise, a transaction
gain or loss (measured from the transaction date or the most
recent intervening balance sheet date) whichever is later,
realized upon settlement of a foreign currency transaction
generally will be included in net income for the period in which
the transaction is settled. Foreign currency transactions that are
(i) designated as, and are effective as, economic hedges of a net
investment and (ii) intercompany foreign currency transactions
that are of a long-term nature (that is, settlement is not planned
or anticipated in the foreseeable future), when the entities to
the transactions are consolidated or accounted for by the equity
method in the Company's financial statements will not be included
in determining net income but will be accounted for in the same
manner as foreign currency translation adjustments and reported as
a component of other comprehensive income as part of shareholders'
equity.
Foreign currency intercompany transactions that are scheduled for
settlement, consisting primarily of accrued interest and the
translation to the reporting currency of intercompany subordinated
debt with scheduled principal repayments, are included in the
determination of net income, and, for the year ended December 31,
2003, the Company recognized unrealized gains of $922,512 from
such transactions. In 2003, the Company
-22-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
did not recognize any realized gains on foreign currency
transactions, in connection with the transfer of cash from foreign
operations of subsidiaries to the parent company.
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 until realized. Such
marketable securities had a cost basis of $10,372,939 and
$10,562,979 and reflected a fair value of $11,954,011 and
$11,014,711 at December 31, 2003 and 2002, respectively.
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 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:
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 Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", 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 entered 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 estimated fair value of the interest rate cap at
December 31, 2003 and 2002 was $16 and $1,389, respectively. The
change in the fair value of the interest rate cap, net of
accumulated amortization, was an increase of $3,684 and a decrease
of $34,611 for the years ended December 31, 2003 and 2002,
respectively, and is included in the determination of net income.
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, 2003 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. The Company and
subsidiaries are subject to state and local and foreign taxes,
which aggregate $58,820 in 2003 and $140,432 in 2002, and are
included in general and administrative expenses.
-23-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
Basic and diluted earnings per share were calculated as follows:
Year ended December 31,
-----------------------
2003 2002 2001
------------ ------------ ------------
Income from continuing operations before
(loss) gain on sale of real estate, net $ 17,928,095 $ 15,992,265 $ 16,198,049
(Loss) gain on sale of real estate, net - (167,403) 1,048,335
------------ ------------ ------------
Income from continuing operations 17,928,095 15,824,862 17,246,384
Income (loss) from discontinued operations 657,186 (2,345,861) (1,880,256)
------------ ------------ ------------
Net income $ 18,585,281 $ 13,479,001 $ 15,366,128
============ ============ ============
Weighted average shares - basic 28,026,525 26,032,753 22,105,243
Effect of dilutive securities: Stock warrants 488,286 563,681 354,895
------------ ------------ ------------
Weighted average shares - diluted 28,514,811 26,596,434 22,460,138
============ ============ ============
Basic earnings per share:
Income from continuing operations $ .64 $ .61 $ .78
Income (loss) from discontinued operations .02 (.09) (.08)
------------ ------------ ------------
Net income $ .66 $ .52 $ .70
============ ============ ============
Diluted earnings per share:
Income from continuing operations $ .63 $ .60 $ .76
Income (loss) from discontinued operations .02 (.09) (.08)
------------ ------------ ------------
Net income $ .65 $ .51 $ .68
============ ============ ============
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 11).
Reclassifications:
Certain prior year amounts have been reclassified to conform to
the current year's financial statement presentation.
Accounting Pronouncements:
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
-24-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 for
valuing stock-based compensation 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"). In December 2003,
the FASB issued a revised FIN 46 which modifies and clarifies
various aspects of the original Interpretation. FIN 46 applies
when either (1) the equity investors (if any) lack one or more of
the essential characteristics of controlling financial interest,
(2) the equity investment at risk is insufficient to finance that
entity's activities without additional subordinated financial
support or (3) the equity investors have voting rights that are
not proportionate to their economic interest. In addition FIN 46
requires additional disclosures.
FIN 46 is effective immediately for VIEs created after January 31,
2003, and to VIEs in which an enterprise obtains an interest after
that date. For variable interests in a VIE created or obtained
prior to February 1, 2003, FIN 46 is effective for periods ending
after March 15, 2004.
The Company has evaluated the potential impact and believes this
interpretation will not have a material impact on its accounting
for its investments in unconsolidated joint ventures as none of
these investments are VIEs. The Company's maximum loss exposure is
the carrying value of its equity investments.
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 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 adoption of SFAS
No. 149 did not have a material effect on the financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for the classification
and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). In particular,
it requires that mandatorily redeemable financial instruments be
classified as liabilities and reported at fair value and that
changes in their fair values be reported as interest cost.
This statement was effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective
for the Company as of July 1, 2003. On November 7, 2003, the FASB
indefinitely deferred the classification and measurement
provisions of SFAS No. 150 as they apply to certain mandatorily
redeemable non-controlling interests. This deferral is expected to
remain in effect while these provisions are further evaluated by
the FASB. The Company has interests in four limited partnerships
that are consolidated and that are considered mandatorily
redeemable controlling interests with finite lives. In accordance
with the deferral noted above, these minority interests have not
been reflected as liabilities. The carrying value and fair value
of these minority interests are approximately $15,280,000 and
$34,731,000, respectively at
-25-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
December 31, 2003. Based on the FASB's deferral of this provision,
the adoption of SFAS No. 150 did not have a material effect on the
Company's financial statements.
2. 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 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. In December 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 Consolidated Statements of Cash Flows in the
accompanying consolidated financial statements). The purchase price was
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 promissory notes issued to
former CPA(R):10 shareholders who elected not to receive shares of the
Company. The promissory notes were paid off in 2002. Differences
between the fair value of mortgages 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.
3. 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 $3,563,820, $3,343,870 and
$2,753,759 in 2003, 2002, and 2001, respectively, with performance fees
in like amount. The Company incurred personnel reimbursements of
$1,533,165, $1,509,832 and $1,161,996 in 2003, 2002, and 2001,
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 and 2001 fees were
$654,632 and $60,625, respectively. There were no transaction and
refinancing fees in 2003.
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
-26-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 $1,163,865 and $1,001,865
as of December 31, 2003 and 2002, respectively. 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 affiliates.
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 2003, 2002 and 2001 were $278,567, $286,796, and $205,366
respectively. The Company's current share of future minimum lease
payments is $493,355 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.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable operating leases are approximately as follows:
Year Ending December 31,
- ------------------------
2004 $ 35,507,000
2005 33,737,000
2006 32,991,000
2007 31,140,000
2008 29,720,000
Thereafter 175,818,000
------------
Total $338,913,000
------------
Contingent rents (including percentage rents and CPI-based increases)
were approximately $1,727,000, $1,573,000, and $1,731,000 in 2003, 2002
and 2001, respectively.
-27-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
------------
2003 2002
---- ----
Minimum lease payments receivable $191,410,472 $230,082,139
Unguaranteed residual value 118,086,088 131,359,885
------------ ------------
309,496,560 361,442,024
Less: unearned income 188,142,443 227,486,469
------------ ------------
$121,354,117 $133,955,555
============ ============
Scheduled future minimum rents, exclusive of renewals, under
non-cancelable direct financing leases are approximately as follows:
Year Ending December 31,
- ------------------------
2004 $ 14,187,000
2005 14,205,000
2006 14,194,000
2007 24,194,000
2008 12,498,000
Thereafter 112,132,000
------------
Total $191,410,000
------------
Contingent rents (including CPI-based increases) were approximately
$894,000, $752,000, and $473,000 in 2003, 2002 and 2001, respectively.
6. Equity Investments:
The Company owns a 47.3% interest in Marcourt Investments, Inc.
("Marcourt"), a real estate investment trust which net leases 13 hotel
properties to a wholly-owned subsidiary of Marriott International, Inc.
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.
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:
December 31,
------------
(In thousands) 2003 2002
---- ----
Assets (primarily real estate) $340,805 $343,846
Liabilities (primarily limited recourse mortgage
notes payable) 204,550 212,820
Capital 136,255 131,026
Year Ended December 31,
-----------------------
(In thousands) 2003 2002 2001
---- ---- ----
Revenues (primarily rental revenues) $ 41,610 $ 42,026 $ 38,667
Expenses (primarily interest on mortgages and
depreciation) (20,506) (21,285) (21,031)
-------- -------- --------
Net income $ 21,104 $ 20,741 $ 17,636
======== ======== ========
-28-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. Mortgage Financing Through Loan Securitization:
In September 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 acquired 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 initial Offered Interests consisted 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 are
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 ($10,616,645). For financial reporting purposes, the effect
of such amortization is reflected in interest income. Interest income,
including all related amortization, is 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. The fair
value of the Company's CPA(R) Interests was $11,954,011 and $11,014,711
reflecting a cumulative unrealized gain of $1,581,072 and $451,732 and
net accumulated amortization of $243,706 and $53,666 at December 31,
2003 and 2002, respectively. 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 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:
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Fair value of CPA(R) Interests $11,954,011 $11,371,747 $10,828,397
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.
-29-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
In connection with the initial transaction, the Company obtained new
mortgage financing of $83,666,787 in 2002 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%.
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 $369,544,000. As of
December 31, 2003, mortgage notes payable had fixed interest rates
ranging from 6.08% to 10.00% per annum and variable interest rates
ranging from 3.97% to 5.625%.
Scheduled principal payments during each of the five years following
December 31, 2003 and thereafter are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
- ------------------------ ---------- --------------- ------------------
2004 $ 12,803,775 $ 4,594,311 $ 8,209,464
2005 8,177,876 7,962,888 214,988
2006 5,554,606 5,308,906 245,700
2007 15,529,467 15,222,342 307,125
2008 10,256,498 9,949,373 307,125
Thereafter 191,783,872 182,386,551 9,397,321
------------ ------------ -----------
Total $244,106,094 $225,424,371 $18,681,723
============ ============ ===========
Interest paid, excluding capitalized interest, was $17,820,136,
$15,769,528 and $13,875,312 in 2003, 2002 and 2001, respectively.
Capitalized interest was $327,477 and $235,515 in 2002 and 2001,
respectively. There was no capitalized interest in 2003.
9. Dividends:
Dividends paid to shareholders consist of ordinary income, capital
gains, return of capital or a combination thereof for income tax
purposes. Dividends paid per share were reported as follows for tax
purposes:
2003 2002 2001
---- ---- ----
Ordinary income $.55 $.48 $.59
Capital gains - - .05
Return of capital .30 .37 .20
---- ---- ----
$.85 $.85 $.84
==== ==== ====
A dividend of $.2142 per share for the quarter ended December 31, 2003
($6,034,786) was declared in December 2003 and paid in January 2004.
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:
2003 2002 2001
---- ---- ----
Per Statements of Income:
Rental income from operating leases $38,442,172 $33,706,049 $28,058,006
Interest income from direct financing leases 15,371,617 13,840,285 11,563,950
Adjustments:
Share of leasing revenues applicable to minority
interest (5,459,567) (4,040,861) (1,760,787)
Share of leasing revenues from equity investments 17,888,659 16,185,418 12,076,852
----------- ----------- -----------
$66,242,881 $59,690,891 $49,938,021
=========== =========== ===========
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company earned its share of net leasing revenues in 2003, 2002 and
2001 from its direct and indirect ownership of real estate from the
following lease obligors:
2003 % 2002 % 2001 %
---- ---- ---- ---- ---- ---
Marriott International, Inc.(1) $ 8,819,008 13% $ 7,237,343 12% $ 4,510,253 9%
Omnicom Group, Inc. 4,448,420 7 4,290,542 7 4,265,378 8
Information Resources, Inc.(3) 3,483,309 5 2,278,701 4 - -
Advanced Micro Devices, Inc.(1) 3,258,938 5 3,258,938 5 3,048,500 6
Electronic Data Systems Corporation 3,006,929 5 2,872,979 5 2,466,762 5
Best Buy Co., Inc.(2) 2,956,619 4 2,979,273 5 2,998,098 6
Titan Corporation(3) 2,270,326 3 1,484,449 3 - -
Big V Holding Corp.(2) 2,106,976 3 2,086,778 4 2,068,860 4
Lucent Technologies, Inc. 2,035,304 3 1,989,685 3 1,852,829 4
UTI Holdings, Inc. 1,807,204 3 1,767,869 3 1,615,056 3
Environworks, Inc. 1,741,911 3 1,161,274 2 - -
New Wai, L.P. / Warehouse Associates 1,720,063 3 1,146,709 2 - -
Garden Ridge Corporation 1,607,205 2 1,581,820 3 1,546,281 3
Q Clubs, Inc. 1,483,213 2 1,448,279 2 1,407,393 3
Del Monte Corporation(1,4) 1,477,714 2 1,381,982 2 1,286,250 3
Sicor, Inc.(1) 1,472,736 2 1,472,736 2 1,472,736 3
Barnes & Noble, Inc. 1,467,386 2 1,450,536 2 1,431,117 3
Merit Medical Systems, Inc. 1,465,404 2 1,465,404 2 1,465,404 3
The Upper Deck Company(1) 1,452,220 2 1,452,220 2 1,419,134 3
Compucom Systems, Inc.(1) 1,408,043 2 1,382,199 2 1,304,666 2
Michigan Mutual Insurance Company 1,362,013 2 1,363,031 2 1,362,959 3
Plexus Corp. 1,298,431 2 1,268,693 2 1,268,693 2
Bell Sports, Inc. 1,192,222 2 1,175,071 2 1,146,221 2
Childtime Childcare, Inc.(3) 1,465,641 2 1,137,763 2 648,892 1
Other(5) 11,435,646 19 10,556,617 20 11,352,539 24
----------- --- ----------- --- ----------- ---
$66,242,881 100% $59,690,891 100% $49,938,021 100%
=========== === =========== === =========== ===
(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 $160,000, $133,000 and
$80,000 in 2003, 2002 and 2001, respectively.
11. Segment Information:
The Company operates in one business segment, real estate operations
with domestic and foreign investments. The Company's foreign operations
are in the United Kingdom and France.
For 2003, geographic information for the real estate operations segment
is as follows:
Amounts in thousands
Domestic Foreign Total Company
-------- ------- -------------
Revenues $ 53,625 $ 2,227 $ 55,852
Expenses 39,474 6,912 46,386
Income from equity investments 10,599 - 10,599
Net operating income(1) 21,690 (4,684) 17,006
Total assets 515,304 29,642 544,946
Total long-lived assets 467,093 26,486 493,579
-31-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
For 2002, geographic information for the real estate operations segment
is as follows:
Domestic Foreign Total Company
-------- ------- -------------
Revenues $ 46,289 $ 2,017 $ 48,306
Expenses 38,699 1,297 39,996
Income from equity investments 8,866 - 8,866
Net operating income(1) 15,538 578 16,116
Total assets 522,419 27,808 550,227
Total long-lived assets 475,917 25,651 501,568
For 2001, geographic information for the real estate operations segment
is as follows:
Domestic Foreign Total Company
-------- ------- -------------
Revenues $ 38,741 $ 1,416 $ 40,157
Expenses 29,341 1,282 30,623
Income from equity investments 5,412 - 5,412
Net operating income(1) 13,932 138 14,070
Total assets 346,944 22,362 369,306
Total long-lived assets 329,060 20,147 349,207
(1) Net operating income excludes gains and losses and discontinued operations.
12. Impairment Charges:
In 2003, the Company determined that an other than temporary decline in
estimated residual value had occurred at three properties which were classified
as 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 Food Products, Inc., (ii) $237,539 on
its property in the United Kingdom leased to Gloystarne, Inc. ("Gloystarne")
and (iii) $937,798 on its property in Glendale Heights, Illinois. In 2003,
Gloystarne entered into receivership and management has concluded that the
existing lease will be terminated. As a result, the property has been
reclassified to real estate accounted for under the operating method. In
connection with the reclassification, the property was written down to its
estimated fair value and an impairment charge of $3,800,000 has been
recognized.
13. 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 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.
-32-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
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.
14. Charge on Early Extinguishment of Debt:
2003
In November 2003, the Company paid off a mortgage loan of $10,491,738
on the property leased to Electronic Data Systems Corporation ("EDS")
and incurred a charge on the early extinguishment of debt consisting of
a prepayment premium of $481,356. The Company subsequently obtained new
limited recourse mortgage financing on the EDS property of $15,000,000.
The new loan provides for monthly payments of $108,158 at an annual
interest rate of 6.08% based on a 20-year amortization schedule and
matures in December 2023. The retired loan provided for monthly debt
service payments of $136,398.
2002
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 a
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 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 2).
15. Discontinued Operations:
The Company owned a property in Austin, Texas which was held for sale
with a carrying value of $2,500,000 at December 31, 2002 and
subsequently was sold in October 2003 at which time the Company
received $2,477,804, net of costs, and recognized a loss of $22,196. In
connection with an evaluation of the fair value of the property at the
time the property was reclassified as held for sale and a discontinued
operation in 2002, the Company recognized an impairment charge of
$1,090,347 in 2002, included in discontinued operations in the
accompanying consolidated financial statements.
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
-33-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
statements of operations as "Discontinued Operations" for all periods
presented. The provisions of SFAS No. 144 was effective for disposal
activities initiated by the Company's commitment to a plan of
disposition after the date it was 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, 2003, the operations of a property in Maple Heights,
Ohio which is held for sale, the operations of a property in Broken
Arrow, Oklahoma which was sold in April 2003, the operations of a
vacant property in Austin, Texas which was sold in October 2003 and a
property in Little Rock, Arkansas which was sold in June 2002 are
included as "Discontinued Operations." The Company sold the Broken
Arrow property for $2,361,741, net of cost and recognized a gain of
$257,599, and sold the Little Rock, Arkansas property for $297,452 and
recognized a gain of $8,874. A summary of Discontinued Operations for
the years ended December 31, 2003, 2002 and 2001 is as follows:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues (primarily rental revenues and miscellaneous
income) $939,205 $ 1,051,939 $ 964,819
Expenses (primarily interest on mortgages,
depreciation and property expenses) (517,423) (766,327) (845,075)
Impairment charge on real estate - (2,640,347) (2,000,000)
Gain on sale of real estate 235,404 8,874 -
-------- ----------- -----------
Income (loss) from discontinued operations $657,186 $(2,345,861) $(1,880,256)
======== =========== ===========
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 $206,016 and $92,316 in
2003 and 2002 respectively. There was no effect in 2001.
16. Disclosures About Fair Value of Financial Instruments:
The Company estimates that the fair value of mortgage notes payable at
December 31, 2003 and 2002 was approximately $245,111,000 and
$257,293,000 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.
17. Selected Quarterly Financial Data (unaudited):
Three Months Ended
------------------
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-------------- ------------- ------------------ -----------------
Revenues $13,881,118 $13,990,507 $13,823,257 $14,157,136
Expenses 10,508,419 10,090,765 13,861,476 11,925,705
Income from continuing operations 5,621,131 5,674,136 1,820,308 4,812,520
Income from continuing operations per
share -
Basic .20 .21 .07 .16
Diluted .19 .20 .07 .17
Net income 5,776,781 6,031,106 1,927,058 4,850,336
Net income per share -
Basic .21 .22 .07 .16
Diluted .20 .21 .07 .17
Dividends declared per share .2135 .2137 .2139 .2142
-34-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Three Months Ended
------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-------------- ------------- ------------------ -----------------
Revenues $9,481,926 $11,793,533 $13,291,979 $13,738,205
Expenses 8,451,526 8,281,599 11,707,066 11,556,289
Income from continuing operations 3,319,088 5,096,466 3,559,165 3,850,143
Income from continuing operations per
share -
Basic .15 .20 .13 .13
Diluted .15 .19 .13 .13
Net income 3,345,634 5,157,576 2,564,760 2,411,031
Net income per share -
Basic .15 .20 .08 .09
Diluted .15 .19 .09 .08
Dividends declared per share .2127 .2129 .2131 .2133
(1) Includes (loss) gain on sale of real estate for 2002.
-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, 2003 there were 12,164 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, 2000 are as follows:
Cash Dividends Paid Per Share
-----------------------------
2003 2002 2001
----------- ----------- -----------
First quarter $ .21330 $ .21250 $ .20840
Second quarter .21350 .21270 .20860
Third quarter .21370 .21290 .21200
Fourth quarter .21390 .21310 .21220
----------- ----------- -----------
$ .85440 $ .85120 $ .84120
=========== =========== ===========
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, 2003 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-