10-Q 1 y54850e10-q.txt CAREY INSTITUTIONAL PROPERTIES INCORPORATED SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q For the quarterly period ended SEPTEMBER 30, 2001 of CAREY INSTITUTIONAL PROPERTIES INCORPORATED CIP(R) A MARYLAND Corporation IRS Employer Identification No. 13-3602400 SEC File Number 0-20016 50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020 (212) 492-1100 CIP(R) has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the Act. CIP(R) HAS NO SECURITIES registered on any exchanges. CIP(R) does not have any Securities registered pursuant to Section 12(b) of the Act. CIP(R) (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. CIP(R) has no active market for common stock at November 12, 2001. CIP(R) has 22,112,101 shares of common stock, $.001 par value outstanding at November 12, 2001. CAREY INSTITUTIONAL PROPERTIES INCORPORATED INDEX

* The summarized financial information contained herein is unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of such financial information have been included. -1- CAREY INSTITUTIONAL PROPERTIES INCORPORATED PART I Item 1. - FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the condensed consolidated financial statements. Note: The condensed consolidated balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. -2- CAREY INSTITUTIONAL PROPERTIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. -3- CAREY INSTITUTIONAL PROPERTIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. -4- CAREY INSTITUTIONAL PROPERTIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. All significant intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. For further information refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Note 2. Earnings Per Share: Basic and diluted earnings per common share for the Company for the three-month and nine-month periods ended September 30, 2000 and 2001 were calculated as follows:

Note 3. Transactions with Related Parties: The Company incurred asset management fees, payable to its Advisor, Carey Asset Management Corp., of $681,981 and $691,601 for the three-month periods ended September 30, 2000 and 2001, respectively, and $2,045,806 and $2,075,446 for the nine-month periods ended September 30, 2000 and 2001, respectively, with performance fees in like amounts. General and administrative expense reimbursements were $275,767 and $270,165 for the three-month periods ended September 30, 2000 and 2001, respectively, and $835,076 and $859,258 for the nine-month periods ended September 30, 2000 and 2001, respectively. -5- CAREY INSTITUTIONAL PROPERTIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) Note 4. Lease Revenues: The Company's operations consist of the direct and indirect investment in and the leasing of industrial and commercial real estate. The financial reporting sources of the lease revenues are as follows:

For the nine-month periods ended September 30, 2000 and 2001, the Company earned its net lease revenues from its investments as follows:

(a) Represents the Company's proportionate share of lease revenues from its equity investments. (b) Net of amounts applicable to minority interests owned by Corporate Property Associates 12 Incorporated. -6- CAREY INSTITUTIONAL PROPERTIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) Note 5. Equity Investments: The Company holds interests in five investments in which its ownership interest is 50% or less and has the ability to exercise significant influence. All of the underlying investments are entities that were formed solely for the purpose of entering into a long-term net lease with a single tenant. The Company owns (i) an approximate 23.7% interest in a real estate investment trust that net leases 13 Courtyard by Marriott hotels to a wholly-owned subsidiary of Marriott International, Inc., (ii) 50% interests in entities that net lease properties to Sicor, Inc. and the Upper Deck Company and (iii) 33.33% interests in entities that net lease property to Advanced Micro Devices, Inc. and Compucom Systems, Inc. Summarized combined financial information of the Company's equity investees is as follows:

Due to its rapidly amortizing debt, Marcourt's taxable income exceeds its distributable cash flow and such excess is projected to increase in the coming years. The projected inability to distribute 90% of its taxable income may impair Marcourt's ability to retain its REIT status in future years and result in the payment of federal income taxes by Marcourt. Management and the other Marcourt shareholders are evaluating the situation for potential resolutions including, but not limited to, a potential sale, refinancing or restructuring in order to enable Marcourt to retain its REIT status. Note 6. Unrealized Gain on Warrants: Statement of Financial Accounting Standards No. 133 ("SFAS No. 133") Accounting for Derivative Instruments and Hedging Activities became effective in 2001 and established accounting and reporting standards for derivative instruments. Certain stock warrants which were granted to the Company by lessees in connection with structuring the initial lease transactions are defined as derivative instruments because such stock warrants are readily convertible to cash. Pursuant to SFAS No. 133, changes in the fair value of such derivative instruments as determined using an option pricing model are recognized currently in earnings as gains or losses. As of September 30, 2001, the Company recognized an unrealized gain on warrants of $2,178,000. 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. Note 7. Gain on Sale of Real Estate: On September 29, 2001, the Company and Corporate Property Associates 10 Incorporated, an affiliate, each with 50% ownership interests as tenants-in-common, sold six retail properties leased to Wal-Mart Stores, Inc. for $14,891,154, net of costs, of which the Company's shares was $7,445,577. The Company used $5,984,881 to satisfy its share of the outstanding balance of the mortgage loan. In connection with the sale, the Company recognized a gain of $1,082,400. Note 8. Accounting Pronouncement: In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the accounting and reporting for the impairment and disposal of long-lived assets and supersedes SFAS No. 121. SFAS No. 144 is effective January 1, 2002 and is not expected to have a significant impact on the Company. -7- CAREY INSTITUTIONAL PROPERTIES INCORPORATED Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with Carey Institutional Properties Incorporated's ("CIP(R)") condensed consolidated financial statements and notes thereto as of September 30, 2001 included in this quarterly report and CIP(R)'s Annual Report on Form 10-K for the year ended December 31, 2000. This quarterly report contains forward looking statements. Such statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievement of CIP(R) to be materially different from the results of operations or plan expressed or implied by such forward looking statements. Accordingly, such information should not be regarded as representations by CIP(R) that the results or conditions described in such statements or the objectives and plans of CIP(R) will be achieved. RESULTS OF OPERATIONS: Net income for the three-month and nine-month periods ended September 30, 2001 reflects increases of $2,628,000 and $1,233,000, respectively, as compared with the three-month and nine-month periods ended September 30, 2000. Included in the results for 2000 and 2001 are realized gains on the sale of properties, and impairment losses and unrealized gains on warrants, both of which are noncash items. Excluding the effect of realized and unrealized gains and impairment losses, income would have reflected an increase of $22,000 and $191,000 for the comparable three-month and nine-month periods, respectively. The increase in income, as adjusted, was due to increases in lease revenues, and to a lesser extent, an increase in income from equity investments and a decrease in interest expense. These benefits were offset, in part, by an increase in property expense. The increases in lease revenues were due to scheduled rent increases in 2000 and 2001 on several leases and the completion of a build-to-suit facility for UTI Holdings, Inc., which was placed in service in April 2001 and which currently provides annual rents of approximately $392,000. A new lease with Xerox Corporation for a formerly vacant property in Hot Springs, Arkansas commenced in June 2001 and will provide annual rent of $78,000. Income from equity investments increased primarily as a result of CIP(R)'s 23.7% ownership interest in Marcourt Investments Inc., a real estate investment trust, which net leases 13 Courtyard by Marriott hotels to Marriott International, Inc. The decrease in interest expense was due to the continuing amortization of mortgage debt on several loans and lower interest rates on variable rate mortgage loans as a result of the overall decrease in benchmark interest rates during 2001. The increase in property expenses was due to an increase in the provision for uncollected rents which was primarily due to rent arrearages on CIP(R)'s lease with Nicholson Warehouse L.P. The lease with Marriott includes a provision for additional rents based on a percentage of sales, including room revenues, in excess of a specified amount at the hotel properties. Since the inception of the lease in 1992, the percentage of sales rents have increased each year. CIP(R) received a distribution in 2001 of $326,000 from Marcourt as its share of percentage of sales rents. Due to current economic conditions, there is no assurance that such rents will continue to increase. None of CIP(R)'s other current leases provide percentage of sales rents. The impairment losses in 2000 and 2001 were the result of the writedown of properties in Texarkana, Arkansas and Farmingdale, New York, respectively, in connection with Management's commitment to sell the properties. The writedowns were to an amount that approximates expected sales proceeds, less estimated costs. The Texarkana property was sold in June 2001 for $605,000, and the Farmingdale property is currently held for sale. The proposed sale of the Farmingdale property is subject to the potential purchaser's due diligence review and ability to obtain a zoning variance. The Farmingdale property is leased to Waban's Inc., which lease will expire in January 2002. Annual rents from the Waban's lease are $1,184,000. In April 2001, Bolder Technologies, Inc., a lessee of CIP(R)'s property in Golden, Colorado filed a voluntary petition of bankruptcy. In the event that Bolder terminates its lease in connection with the bankruptcy petition, annual rent would decrease by $561,000 and CIP(R) would need to incur carrying costs on the property. In September 2001, CIP(R) sold six retail stores leased to Wal-Mart Stores, Inc., resulting in a gain of $1,082,400. As a result of the sale of the six Wal-Mart properties, CIP(R)'s annual lease revenues will decrease by approximately -8- CAREY INSTITUTIONAL PROPERTIES INCORPORATED Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) $1,040,000 (including percentage of sales rents of $280,000 in 2000). Annual debt service on the Wal-Mart properties was $781,000, and, as a result, annual cash flow (lease revenues less mortgage debt service) contributed by the Wal-Mart properties was approximately $259,000. The initial terms of the Wal-Mart leases were scheduled to expire in 2008. FINANCIAL CONDITION: Management believes that CIP(R) will generate sufficient cash from operations and, if necessary, from the proceeds of mortgage financings, to meet its short-term and long-term liquidity needs. Cash flows from operations of $17,271,000 were not sufficient to fully fund dividends to shareholders of $13,857,000, scheduled mortgage principal installments of $3,476,000 and distributions to minority partners of $274,000. CIP(R)'s investing activities for the nine months ended September 30, 2001 include $8,051,000 of proceeds from the sale of a vacant property in Texarkana, Arkansas and the sale of six retail stores leased to Wal-Mart Stores, Inc. CIP(R) has used $4,225,000 to fund construction of a build-to-suit Holiday Inn in Toulouse, France which was completed in October 2001, the completion of a property net leased to UTI Holdings, Inc. and placed into service in April 2001 and costs toward the retrofit of a 96,000 sq. ft. vacant property in Austin, Texas. Costs to complete the retrofit of the Austin property and possible tenant improvement allowances are being evaluated and are estimated to be in excess of $750,000. A final funding for completion of the Holiday Inn Toulouse, France property is estimated to amount to approximately $3,584,000. Annual rent from the Toulouse Holiday Inn net lease will be $612,000. In addition to the payment of dividends and scheduled principal mortgage payments, CIP(R)'s financing activities include a $5,985,000 prepayment of a mortgage loan in connection with the sale of the six Wal-Mart stores. CIP(R)'s cash generated from financing activities include obtaining $3,062,000 of mortgage proceeds and a $453,000 contribution from its minority partner, used to fund the construction at the Holiday Inn in Toulouse, France and $1,776,000 from the issuance of stock. CIP(R) is continuing to seek refinancing on limited recourse mortgage loans collateralized by properties leased to Superior Telecommunications, Inc. and Plexus Corp. that matured in 2001 and for which CIP(R) continues to pay monthly debt service. As of September 30, 2001, the two loans have a combined principal balance of $6,219,000. In October 2001, CIP(R) refinanced the limited recourse mortgage loan collateralized by properties leased to Del Monte Corporation which had matured with a $6,062,500 limited recourse loan. As of September 30, 2001, the Del Monte mortgage loan balance was $5,471,000. The refinanced loan has a ten-year term. Due to its rapidly amortizing debt, Marcourt's taxable income exceeds its distributable cash flow and such excess is projected to increase substantially in the coming years. The projected inability to distribute 90% of its taxable income may impair Marcourt's ability to retain REIT status in future years and result in the payment of federal income taxes by Marcourt. Management and the other Marcourt shareholders are evaluating the situation for potential resolutions including, but not limited to, a potential sale, refinancing or restructuring to enable Marcourt to retain its REIT status. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the accounting and reporting for the impairment and disposal of long-lived assets and supersedes SFAS No. 121. SFAS No. 144 is effective January 1, 2002 and is not expected to have a significant impact on CIP(R). -9- CAREY INSTITUTIONAL PROPERTIES INCORPORATED PART II Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (in thousands) Approximately $127,374,000 of CIP(R)'s long-term debt bears interest at fixed rates, and the fair value of these instruments is affected by changes in market interest rates. The following table presents principal cash flows based upon expected maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the fixed rate debt. The interest rate on the variable rate debt as of September 30, 2001 ranged from 5.206% to 11.5%. There has been no material change since December 31, 2000.

Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended September 30, 2001, no matters were submitted to a vote of Security Holders. Item 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K: During the quarter ended September 30, 2001, the Company was not required to file any reports on Form 8-K. -10- CAREY INSTITUTIONAL PROPERTIES INCORPORATED SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAREY INSTITUTIONAL PROPERTIES INCORPORATED 11/12/01 By: /s/ John J. Park ---------- ------------------------------------ Date John J. Park Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) 11/12/01 By: /s/ Claude Fernandez ---------- ------------------------------------ Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) -11-

CAREY INSTITUTIONAL PROPERTIES INC /MD/ 10-Q