10-K405 1 d10k405.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- ------- Commission file Number 0-22741 CARRAMERICA REALTY, L.P. ------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 52-1976308 (State or other Jurisdiction or (I.R.S. Employer Identification No.) Incorporation or Organization) 1850 K Street, N.W. Washington, D.C. 20006 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (202) 729-1700 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Units of Partnership Interest 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 herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 1, 2002, assuming that each unit of partnership interest has the same value as a share of common stock of CarrAmerica Realty Corporation (into which such units may be redeemed under certain circumstances) the aggregate market value of the 1,308,411 units of partnership interest held by non-affiliates of the registrant was approximately $39.2 million, based upon the closing price of a share of common stock of CarrAmerica Realty Corporation of $29.96 on the New York Stock Exchange composite tape on such date. PART I Item 1. BUSINESS General CarrAmerica Realty, L.P. is a Delaware limited partnership organized in March 1996. We focus on the acquisition, development, ownership and operation of office properties, located primarily in selected markets across the United States. As of December 31, 2001, we owned a greater than 50% interest in a portfolio of 53 operating properties. The 53 operating properties contain a total of approximately 4.9 million square feet of net rentable area and as of December 31, 2001 were 92.2% leased. As of December 31, 2001, we also owned minority interests (ranging from 21.2% to 49.0%) in 29 operating properties and three properties under construction. The 29 operating properties contain a total of approximately 3.2 million square feet of net rentable area. The three properties under construction will contain approximately 237,000 square feet of net rentable area. The 29 operating properties in which we owned a minority interest as of December 31, 2001 were 93.8% leased. We are managed indirectly by CarrAmerica Realty Corporation ("CarrAmerica"). CarrAmerica indirectly serves as our sole general partner. CarrAmerica indirectly owned 90.7% of our partnership units ("Units") as of December 31, 2001. CarrAmerica is a fully integrated, self-administered and self-managed publicly traded real estate investment trust ("REIT"). CarrAmerica is listed on the New York Stock Exchange under the symbol "CRE." CarrAmerica focuses on the acquisition, development, ownership and operation of office properties, located primarily in selected markets across the United States. As of December 31, 2001, it owned a greater than 50% interest in a portfolio of 254 operating office properties and three properties under construction. The 254 operating properties contain a total of approximately 20.3 million square feet of net rentable area. Two of the properties under construction will contain approximately 184,000 square feet of net rentable area. The other property under construction is a residential property. The operating properties in which it owned a greater than 50% interest as of December 31, 2001 were 95.3% leased. These properties had approximately 1,000 tenants. As of December 31, 2001, CarrAmerica also owned minority interests (ranging from 15% to 50%) in 36 operating office properties and six properties under construction. The 36 operating properties contain a total of approximately 4.7 million square feet of net rentable area. The six properties under construction will contain approximately 1.2 million square feet of net rentable area. The operating properties in which they owned a minority interest as of December 31, 2001 were 95.7% leased. For more complete information regarding CarrAmerica, see CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 CarrAmerica 10-K"). CarrAmerica or its predecessor, The Oliver Carr Company ("OCCO"), have developed, owned and operated office buildings in the Washington, D.C. metropolitan area for more than 39 years. CarrAmerica organized and administers us as a means of acquiring, developing, owning and operating certain properties in its portfolio. All of our properties, along with our financial condition and results of operations, are reported as part of the consolidated financial statements of CarrAmerica. We are required to report separately in this Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission because we are a guarantor of some of the publicly held debt of CarrAmerica. As of December 31, 2001, approximately 25.8% of the total assets of CarrAmerica were owned by us or our subsidiary. We are capitalized by issuing units of partnership interest ("Units"). CarrAmerica, through its wholly owned subsidiary, CarrAmerica Realty GP Holdings, Inc. ("GP Holdings"), is our sole general partner and owned a 1% general partner interest (in the form of Units) as of December 31, 2001. In addition, CarrAmerica, through its wholly owned subsidiary, CarrAmerica Realty LP Holdings, Inc. ("LP Holdings"), owned an approximately 89.7% limited partnership interest (in the form of Units) as of December 31, 2001. Our remaining Units are owned by limited partners who received the Units in 2 connection with the contribution of interests in properties to us. As of December 31, 2001, we had 52 employees, including 12 on-site employees. Business Strategy Our primary business is real estate property operations. We are an integral part of CarrAmerica, and our operations and strategic direction are defined by CarrAmerica. CarrAmerica's primary business objectives are to achieve long-term sustainable per share cash flow growth and to maximize stockholder value by acquiring, developing, owning and operating office properties primarily in markets throughout the United States that exhibit strong, long-term growth characteristics. CarrAmerica believes that it utilizes its knowledge of its core markets to evaluate market conditions in order to maintain strategic flexibility and determine whether those conditions favor acquisition, development or capital recycling/disposition. During the last five years, CarrAmerica has actively deployed capital between acquisitions and development in order to create a portfolio with strong long-term growth prospects. CarrAmerica's financial strategy to meet its business objectives is primarily based on deriving the highest returns from capital invested in real estate by providing value-added services, including development, leasing and management of the properties. Local Market Focus ------------------ CarrAmerica focuses its acquisition and development activity in U.S. markets that possess long-term growth characteristics. It targets markets in which: . Long-term population and job growth are generally expected to exceed the national average; . Large, well educated employment pools exist; and . Entry barriers exist for new supplies of office space. CarrAmerica has established a local presence in each existing core market by acquiring or developing a critical mass of properties. This local presence is maintained through continuing investment activity and relationships established by its seasoned Market Managing Directors. CarrAmerica's Market Managing Director group consists of nine individuals who cover all of the markets in which CarrAmerica owns property. These Directors are responsible for maximizing the performance of their properties in their respective markets and ensuring that they are consistently meeting the needs of their customers. Because they meet with CarrAmerica's customers and local brokers on a regular basis, the Market Managing Directors have extensive knowledge of local conditions in their respective markets and are invaluable in identifying attractive investment opportunities in them. As of December 31, 2001, our real estate property operations were allocated among our market regions as follows: % of Property Operating % of Income for the Rentable Year Square Region Ended 12/31/01 Feet ------------ -------------- -------- Pacific 23.58 21.51 Mountain 36.05 38.05 Central 40.37 40.44 3 2001 Activity Joint Ventures and Development Activities In 1999, we entered into a joint venture with J.P. Morgan & Co. to purchase and develop 1201 F Street in downtown Washington, D.C. We are a 35% member in the joint venture. The 227,000 square foot building went into operation during 2000 and 2001. We entered into a joint venture with Rosewood Property Company in September 2000 to develop two, three-story office buildings at Custer Court in Richardson, Texas. We own a 49% interest in the joint venture. The office buildings will contain 275,000 square feet. Construction on the first building began in 2000 and the building was partially placed in operation in 2001. As of December 31, 2001, there were two office properties under development in Carr Office Park, L.L.C., a joint venture in which we own a 21.2% interest. The total investment in these projects is expected to be $28.2 million, of which $19.5 million had been expended as of December 31, 2001. Our total investment in these projects is expected to be $6.0 million. Dispositions/Acquisitions During 2001, we disposed of one operating property in connection with the sale of a group of properties by CarrAmerica. There was an overall gain on this transaction; however, we incurred a loss of $6.5 million on our property. We also recognized an impairment loss of $0.9 million on a parcel of land held for development. In April 2001, CarrAmerica exercised an option under a loan agreement to acquire two office buildings and related land located in the San Francisco Bay area. We purchased this property from CarrAmerica at its cost of approximately $51.0 million. Financing In June 2001, CarrAmerica entered into a new three-year, $500 million unsecured credit facility with J.P. Morgan Chase, as agent for a group of banks. It can extend the life of the line an additional year at its option. The line carries an interest rate of 70 basis points over 30-day LIBOR. The unsecured facility contains financial and other covenants with which CarrAmerica must comply and availability is limited to a specified percentage of the fair value of unmortgaged properties. We unconditionally guarantee this unsecured credit facility. On January 11, 2002, CarrAmerica issued $400 million of senior unsecured notes. The notes bear interest at 7.125% per annum, payable semi-annually beginning on July 15, 2002. The notes mature on January 15, 2012. We unconditionally guarantee these notes. Proceeds from the notes were used to pay down CarrAmerica's unsecured credit facility. Forward-Looking Statements Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our and our affiliates, or the industry's actual results, performance, achievements or transactions to be materially different from any future results, performance, achievements or transactions expressed or implied by such forward-looking statements. Such factors include, among others, the following: . National and local economic, business and real estate conditions that will, among other things affect: . Demand for office properties, 4 . The ability of the general economy to recover timely from the current economic downturn, . Availability and creditworthiness of tenants, . Level of lease rents, and . Availability of financing for both tenants and us; . Adverse changes in the real estate markets, including, among other things: . Competition with other companies, and . Risks of real estate acquisition and development (including the failure of pending developments to be completed on time and within budget; . Actions, strategies and performance of affiliates that we may not control or companies in which we have made investments; . The ability of CarrAmerica to maintain its status as a REIT for federal income tax purposes; . Governmental actions and initiatives; and . Environmental/safety requirements. Risk Factors For a discussion of risks associated with an investment in CarrAmerica and us, see "Item 1 - Business, The Company - Risk Factors" in the 2001 CarrAmerica 10-K, which information is hereby incorporated by reference. 5 Item 2. PROPERTIES General As of December 31, 2001, we owned interests (consisting of whole or partial ownership interests) in 82 operating properties located in 10 markets across the United States. As of December 31, 2001, we owned fee simple title or leasehold interest in 53 operating properties and non-controlling partial interests of 21.2% to 49.0% in 29 operating properties. In addition, as of December 31, 2001, we owned minority interests in three properties under development. Except as we disclose in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources", we have no immediate plans to renovate our operating properties other than for routine capital improvements. Although we believe our properties are adequately covered by insurance, we cannot predict at this time if we will be able to obtain full coverage at a reasonable cost in the future. Prior to September 11, 2001, insurance market conditions were gradually beginning to harden. Unlike the earlier hard market in the mid-1980's, the events of September 11, 2001 are expected to affect nearly all coverage lines. This, combined with the fluctuations in insurance companies' investment income, capacity and reinsurance treaty renewals, and a year of significant losses, is expected to impact premiums. Our current property insurance policy, which expires June 30, 2002, includes terrorism coverage, but we anticipate that when we renew the policy, acts of terrorism will not be included in coverage. We expect that some underwriters will offer terrorism coverage, but at a high cost. Overall, we anticipate that insurance coverage costs will be higher in the future. We believe that, as a result of CarrAmerica's national operating system, market research capabilities, access to capital and experience as an owner, operator and developer of properties, we will continue to be able to identify and consummate acquisition and development opportunities and to operate our portfolio more effectively than competitors without such capabilities. We compete in many of our markets with other real estate operators, some of which may have been active in those markets for a longer period of time than we have. The following table sets forth information about each operating property in which we own an interest as of December 31, 2001: 6
Net Total Rentable Annualized # of Area in Percent Base Rent/3/ Property Buildings Sq. Feet/1/ Leased/2/ (in thousands) ------------------------------------------------ --------- ----------- --------- -------------- Consolidated Properties PACIFIC REGION -------------- Southern California: Orange County/Los Angeles: South Coast Executive Center 2 161,692 68.4% $ 2,858 2600 W. Olive 1 144,831 100.0% 3,704 Bay Technology Center 2 107,481 100.0% 1,699 Southern California: San Diego Jaycor 1 105,358 100.0% 1,896 Northern California, San Francisco Bay Area: San Mateo Center I 1 70,000 0.0% -- San Mateo II & III 2 141,731 61.5% 3,577 Mountain View Gateway Center 2 236,400 100.0% 5,201 Seattle, WA: Canyon Park Commons 1 95,290 100.0% 1,342 CENTRAL REGION -------------- Austin, TX: City View Centre 3 136,183 24.0% 531 City View Center 1 128,716 100.0% 2,073 Tower of the Hills 2 166,149 100.0% 2,992 Chicago, IL: Bannockburn I & II 2 209,969 93.2% 3,180 Bannockburn IV 1 105,330 96.2% 1,708 Dallas, TX: Cedar Maple Plaza 3 113,343 93.1% 2,433 Quorum North 1 116,178 93.3% 2,250 Quorum Place 1 178,296 90.9% 3,135 Two Mission Park 1 77,832 85.7% 1,178 Commons @ Las Colinas 1, 2, 3 3 604,234 100.0% 11,763 5000 Quorum 1 162,165 96.5% 3,214 MOUNTAIN REGION --------------- Denver, CO: Harlequin Plaza 2 329,273 94.9% 5,625 Quebec Court I 1 130,000 100.0% 2,144 Quebec Court II 1 157,294 100.0% 2,694 Quebec Centre 3 106,865 93.5% 1,871 Phoenix, AZ: Qwest Communications 4 532,506 100.0% 9,503 Average Base Rent /Leased Property Sq. Feet/4/ Significant Tenants/5/ ------------------------------------------------ ----------- ------------------------------------------------------------------- Consolidated Properties PACIFIC REGION -------------- Southern California: Orange County/Los Angeles: South Coast Executive Center $ 25.85 No tenant occupies 10% 2600 W. Olive 25.57 Walt Disney Company (89%) Bay Technology Center 15.81 Amresco Residential Mortgage (57%), Aqcess Technologies, Inc. (43%) Southern California: San Diego Jaycor 18.00 Gateway, Inc. (100%) Northern California, San Francisco Bay Area: San Mateo Center I -- Not applicable San Mateo II & III 41.06 Women.com Networks (31%) Mountain View Gateway Center 22.00 KPMG LLP (57%), Netscape Communications Corp. (43%) Seattle, WA: Canyon Park Commons 14.08 Safeco Insurance Co. (100%) CENTRAL REGION -------------- Austin, TX: City View Centre 16.22 Confiniti (21%) City View Center 16.10 Broadwing Telecommunication (100%) Tower of the Hills 18.01 Texas Guaranteed Student Loan (76%) Chicago, IL: Bannockburn I & II 16.26 IMC Global, Inc. (38%), Parexel (21%) Bannockburn IV 16.85 Open Text, Inc. (34%), Onepointe Communications (21%), Abbott Laboratories (12%) Dallas, TX: Cedar Maple Plaza 23.05 No tenant occupies 10% Quorum North 20.75 Digital Matrix Systems, Inc (20%), HQ Global (20%) Quorum Place 19.35 VHA Southwest, Inc. (22%), McCann-Erickson USA, Inc. (13%) Two Mission Park 17.66 Macromedia, Inc. (33%), Bland, Garvey & Taylor, Inc. (17%) Commons @ Las Colinas 1, 2, 3 19.47 Nokia, Inc. (100%) 5000 Quorum 20.54 Case Corporation (11%) MOUNTAIN REGION Denver, CO: Harlequin Plaza 18.00 Travelers Insurance Co. (24%), Bellco First Federal Credit (14%), Regis University (12%) Quebec Court I 16.50 Time Warner Communications (100%) Quebec Court II 17.13 Tele-Communications, Inc. (100%) Quebec Centre 18.73 Eonbusiness Corp. (12%), Walberg, Dagner & Tucker, P.C. (11%) Phoenix, AZ: Qwest Communications 17.85 Qwest Communications (100%)
7
Net Total Rentable Annualized # of Area in Percent Base Rent/3/ Property Buildings Sq. Feet/1/ Leased/2/ (in thousands) ------------------------------------------------ --------- ----------- --------- --------------- Salt Lake City, UT: Sorenson Research Park 5 282,944 97.7% 3,382 Wasatch Corporate Center 3 178,231 96.0% 2,365 Wasatch Corporate Center 17, 18 2 121,654 100.0% 1,838 Sorenson X 1 41,288 100.0% 780 --- --------- ------- Total Consolidated Properties 53 4,941,233 84,936 Weighted Average 92.2% Unconsolidated Properties ------------------------- Washington, D.C.: 1201 F Street/6/ 1 226,871 96.0% 6,636 Chicago, IL: Parkway 3, 4, 5, 6, 10/7/ 5 653,914 99.2% 11,069 Dallas, TX: Royal Ridge Phase II, A, B/7/ 4 503,733 88.9% 7,617 Custer Court/8/ 1 120,050 45.0% 1,167 Austin, TX: Riata Corporate and Riata Crossing/7/ 12 997,678 100.0% 16,717 Denver, CO: Panorama I, II, III, V, VIII, X/7/ 6 664,050 91.0% 11,718 -- --------- -------- Total Unconsolidated Properties 29 3,166,296 54,924 -- --------- -------- Weighted Average 93.8% Total All Operating Properties: 82 8,107,529 $139,860 == ========= ======== Weighted Average 92.9% Average Base Rent /Leased Property Sq. Feet/4/ Significant Tenants/5/ ------------------------------------------------ ----------- ------------------------------------------------------------------- Salt Lake City, UT: Sorenson Research Park 12.24 Convergys Customer Mgmt (47%), ITT Educations Services, Inc. (15%), Intel Corp. (15%) Wasatch Corporate Center 13.82 Advanta Bank Corp. (28%), Achieveglobal, Inc. (23%), Fonix Corp. (14%), Tenfold Corp. (14%), Musician's Friend, Inc. (12%) Wasatch Corporate Center 17, 18 15.11 Ebay, Inc. (59%), Citrix Systems (21%), Western Aggregates, Inc. (15%) Sorenson X 18.90 Electronic Data Systems (73%), Volvo Commercial Credit Corp. (13%), WFS Financial Lease (11%) Total Consolidated Properties Weighted Average 18.64 ------ Unconsolidated Properties ------------------------- Washington, D.C.: 1201 F Street/6/ 33.62 Charles River Assoc., Inc. (20%), Cadwalader Wickersham (18%), Health Insurance Association (18%), National Federation of Independent Business (17%) Chicago, IL: Parkway 3, 4, 5, 6, 10/7/ 17.94 Fujisawa USA, Inc. (22%), Associates Commerce Solutions (20%), Shand Morahan & Co. (13%), BT Office Products (10%) Dallas, TX: Royal Ridge Phase II, A, B/7/ 17.00 Capital One Services, Inc. (32%), Verizon (29%), American Honda Finance Corp. (13%) Custer Court/8/ 21.60 DGI Technologies (26%), Advanced Fibre Communication (16%) Austin, TX: Riata Corporate and Riata Crossing/7/ 16.96 Janus Capital Corp. (32%), Electronic Data Systems (27%) Denver, CO: Panorama I, II, III, V, VIII, X/7/ 17.65 Charles Schwab & Co., Inc. (41%), AT&T Corp. (13%) Total Unconsolidated Properties Weighted Average 18.49 ====== Total All Operating Properties: Weighted Average $18.57
/1/ Includes office, retail space and parking but excludes storage. /2/ Includes spaces for leases that have been executed and have commenced as of December 31, 2001. /3/ Total annualized base rent equals total original base rent, including historical contractual increases and excluding (i)percentage rents, (ii) additional rent payable by tenants such as common area maintenance, real estate taxes and other expense reimbursements, (iii) future contractual or contingent rent escalations and (iv) parking rents. /4/ Calculated as total annualized base rent divided by net rentable area leased. /5/ Includes tenants leasing 10% or more of rentable square footage (with the percentage of rentable square footage in parentheses). /6/ We own 35% through a joint venture. /7/ We own 21.2% through a joint venture. /8/ We own 49% through a joint venture. 8 Occupancy, Average Rentals and Lease Expirations As of December 31, 2001, 92.2% of our aggregate net rentable square footage in 53 consolidated operating properties was leased. The following table summarizes percent leased and average annualized rent per leased square foot (excluding storage space) for the past three years for the consolidated operating properties: Average Percent Annualized Leased at Rent/Leased Number of December 31, Year End Sq. Ft./1/ Properties ------------ --------- ----------- ---------- 2001 92.2% $ 21.52 53 2000 96.8% 21.76 51 1999 97.0% 20.76 66 /1/ Calculated as total annualized building operating revenue, including tenant reimbursements for operating expenses and excluding parking and storage revenue, divided by the total square feet, excluding storage, in the building under lease at year end. The following table is a schedule of our lease expirations for leases in place as of December 31, 2001 for the next ten years for the 53 consolidated operating properties, assuming no tenants exercise renewal options: Net Rentable Annual Base Percent of Total Year of Area Subject Rent Under Annual Base Rent Lease to Expiring Expiring Represented by Expiration Leases (sq. ft.) Leases (000's) Expiring Leases ---------- ---------------- -------------- ---------------- 2002 414,374 $ 9,589 10.8% 2003 573,583 11,191 12.6% 2004 859,890 15,568 17.6% 2005 405,789 7,992 9.0% 2006 218,521 4,034 4.6% 2007 729,073 12,674 14.3% 2008 227,867 4,188 4.7% 2009 476,054 9,455 10.7% 2010 223,470 4,324 4.9% 2011 87,302 1,362 1.5% 2012 and thereafter 341,758 8,233 9.3% Mortgage Financing As of December 31, 2001, some of our consolidated operating properties were subject to fixed rate mortgage indebtedness. The total of these mortgages was $128.7 million. Our fixed rate mortgage debt as of December 31, 2001, bore an effective weighted average interest rate of 7.81% and a weighted average maturity of 6.0 years (assuming loans callable before maturity are called as early as possible). The following table details information regarding the existing mortgage indebtedness for the consolidated operating properties as of December 31, 2001. 9
Estimated Balance Due Interest Principal Maturity Annual Debt at Maturity Property Rate Balance (000's) Date Service (000's) (000's) ----------------------------------- -------- --------------- --------- --------------- ----------- Jaycor 7.35% $ 10,861 2/1/03 $ 1,520 $10,114 Canyon Park Commons 9.13% 4,923 12/1/04 714 4,071 Qwest Communications 7.92% 16,613 12/1/05 4,111 -- Qwest Communications 7.92% 4,822 12/1/05 1,308 -- Qwest Communications 7.92% 7,233 12/1/05 1,962 -- Qwest Communications 7.92% 7,233 12/1/05 1,962 -- Harlequin Plaza/Quebec Court I & II 8.50% 27,523 5/31/11 2,899 19,856 Wasatch Corporate Center 8.15% 12,016 1/2/07 1,220 10,569 2600 West Olive 6.75% 18,913 1/1/09 1,524 16,738 South Coast 7.13% 14,871 6/10/09 1,287 12,660 Sorenson 7.75% 2,198 7/1/11 328 -- Sorenson 8.88% 1,523 5/1/17 182 -- Total 7.81% $128,729 $19,017 ==== ======== =======
For additional information regarding our proties and our operations, see "Item 1, Business." Item 3. LEGAL PROCEEDINGS We are party to a variety of legal proceedings arising in the ordinary course of our business. All of these matters, taken together, are not expected to have a material adverse impact on us. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for our Units. As of December 31, 2001, there were 27 holders of record of Units. As of December 31, 2001, there were no options or warrants to purchase Units outstanding. In addition, as of December 31, 2001, there were no Units that were being, or have been publicly proposed to be, publicly offered by us. Each Unit held by partners other than GP Holdings or LP Holdings is (subject to holding period limitations) redeemable for cash equal to the value of a share of CarrAmerica common stock or, at the option of GP Holdings, CarrAmerica common stock on a one-for-one basis. For the high and low trading prices of CarrAmerica's common stock for the last two years, see "Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters" in the 2001 CarrAmerica 10-K, which information is hereby incorporated by reference. We have made regular quarterly distributions of $0.4625 per Class A Unit throughout 2001, 2000 and 1999. The distributions are appropriately prorated to reflect ownership of Units for less than the full period to which the distribution relates. Our ability to make distributions depends on a number of factors, including net cash provided by operating activities, capital commitments and debt repayment schedules. Holders of Units are entitled to receive distributions when, as and if declared by the Board of Directors of GP Holdings, our sole general partner, out of any funds legally available for that purpose. 10 Item 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and operating information for us as of and for the years ended December 31, 2001, 2000, 1999, 1998 and 1997. The following selected financial and operating information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Year Year Year Year Year Ended Ended Ended Ended Ended (amount in thousands, except Other Data) 12/31/01 12/31/00 12/31/99 12/31/98 12/31/97 ---------- ---------- ---------- ---------- ---------- Operating Data: Real estate operating revenue $ 104,077 $ 124,785 $ 127,330 $ 104,614 $ 60,469 Real estate operating expenses: Property operating expenses 32,007 40,037 41,344 34,167 25,804 Interest expense 19,185 27,567 20,545 16,508 6,792 General and administrative expenses 7,978 6,518 6,239 6,365 3,473 Depreciation and amortization 30,180 31,517 32,820 23,877 13,146 Real estate operating income 14,727 19,146 26,382 23,697 11,254 Net income 12,525 46,871 31,814 32,869 16,693 Cash distributions paid to Unitholders 2,589 2,158 2,277 2,277 1,124 Balance Sheet Data (at period end): Real estate, before accumulated depreciation $ 718,574 $ 672,041 $ 815,967 $ 762,580 $ 624,085 Total assets 714,903 764,546 829,199 779,615 636,568 Mortgages and notes payable 128,729 169,616 325,875 328,945 241,715 Total Unitholders' (partners') capital 510,993 501,057 456,344 426,807 377,632 Other Data (at period end): Number of properties 53 51 66 59 53 Square footage 4,941,000 4,840,000 6,081,000 5,356,000 4,730,000
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion that follows is based primarily on our consolidated financial statements as of December 31, 2001 and 2000, and for the years ended December 31, 2001, 2000 and 1999 and should be read along with the consolidated financial statements and related notes. The ability to compare one period to another may be significantly affected by acquisitions completed, development properties placed in service and dispositions made during those years. The number of properties that we owned and were consolidated for the financial statements were 53 in 2001, 51 in 2000 and 66 in 1999. Critical Accounting Policies Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex or subjective judgments. Our critical accounting policies relate to the evaluation of impairment of long-lived assets and the evaluation of the collectibility of accounts and notes receivable. If events or changes in circumstances indicate that the carrying value of a rental property to be held and used or land held for development may be impaired, we perform a recoverability analysis based on estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to 11 estimated fair value and an impairment loss is recognized. If we decide to sell rental properties or land held for development, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and an impairment loss is recognized within income from continuing operations. Our estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Our estimates are subject to revision as market conditions and our assessments of them change. Our allowance for doubtful accounts and notes receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant and our assessment of its ability to meet its lease obligations, the basis for any disputes and the status of related negotiations, etc. Our estimate of the required allowance, which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on our tenants. Results of Operations Operating results and assets are summarized as follows: ================================================================================ Variance For the year ended ----------------- December 31, 2001 vs. 2000 vs. --------------------------- (in millions) 2001 2000 1999 2000 1999 ------- ------- ------- ------- ------- Operating revenues $ 104.1 $ 124.8 $ 127.3 $ (20.7) $ (2.5) Property operating expenses 32.0 40.0 41.3 (8.0) (1.3) General and administrative 8.0 6.5 6.2 1.5 0.3 Depreciation and amortization 30.2 31.5 32.8 (1.3) (1.3) Interest expense 19.2 27.6 20.5 (8.4) 7.1 Other (loss) income, net (2.2) 27.7 5.4 (29.9) 22.3 As of December 31, --------------------------- 2001 2000 1999 ------- ------- ------- Total assets $ 714.9 $ 764.5 $ 829.2 $ (49.6) $ (64.7) ================================================================================ Operating revenues decreased $20.7 million (16.6%) in 2001 as compared to 2000 and $2.5 million (2.0%) in 2000 as compared to 1999. These decreases resulted primarily from the contribution of properties to Carr Office Park, L.L.C., a joint venture in which we have a 21.2% interest, in August 2000. The decrease in operating revenues in 2001 was partially offset by the acquisition of two buildings in April 2001. Same store rental revenues decreased by 2.3% (approximately $2.0 million) from 2000 to 2001. The decrease was primarily the result of vacancies in our California markets. Same store rental revenues grew by approximately 3.7% (approximately $3.1 million) from 1999 to 2000. This increase was due primarily to an increase in average rental rates. The average occupancy rate, when compared on a same store basis, was 93.4% in 2001, 97.0% in 2000 and 96.3% in 1999. On August 17, 2000, we closed on a joint venture transaction with New York State Teachers Retirement System ("NYSTRS"). At closing, we and some affiliates contributed properties to the joint venture, Carr Office Park, L.L.C., and NYSTRS contributed cash of approximately $255.1 million. The joint venture encompasses five suburban office parks (including 26 rental properties and land held for development of additional properties) in four markets. We contributed 21 properties and land held for development. We received approximately $107.0 million in cash, including payment on an intercompany obligation, and a 21.2% interest in the joint venture in exchange for the properties contributed and recognized a gain on the partial sale of $18.9 million. 12 Real estate operating expenses decreased $8.0 million (20%) in 2001 as compared to 2000 and $1.3 million (3.1%) in 2000 as compared to 1999. These decreases were due to dispositions of interests in properties, including the properties contributed to Carr Office Park, L.L.C. in August 2000. General and administrative expenses increased $1.5 million (23.1%) from 2000 to 2001 and $0.3 million (4.8%) from 1999 to 2000. The increases resulted primarily from costs associated with CarrAmerica's internal process improvement efforts. Depreciation and amortization expense decreased approximately $1.3 million in both 2001 and 2000. These decreases were due primarily to dispositions of interests in properties, including properties contributed to Carr Office Park, L.L.C., partially offset by the acquisition of two properties in April 2001. Interest expense decreased $8.4 million (30.4%) in 2001 as compared to 2000. This decrease was the result of the retirement of mortgages, declining interest expense as loans are paid down and lower working capital borrowings. Interest expense increased $7.1 million (34.6%) in 2000 as compared to 1999 as a result of increased working capital borrowings which were substantially repaid with proceeds from the Carr Office Park, L.L.C. transaction. Other income decreased $29.9 million in 2001 as compared to 2000. This decrease was due primarily to gains of $24.9 million recognized in 2000 on the Carr Office Park, L.L.C. transaction and dispositions of three other properties. In addition, we disposed of a property in 2001 that resulted in a $6.5 million loss and recognized an impairment loss of $0.9 million on a parcel of land held for development. Increased equity in earnings of unconsolidated entities (primarily Carr Office Park, L.L.C.) of $2.4 million partially offset the decrease in other income in 2001. Other income increased $22.3 million in 2000 as compared to 1999 due primarily to the gain recognized in 2000 on the Carr Office Park, L.L.C. transaction mentioned above. The decrease in assets from 2000 to 2001 was due to primarily to a distribution from Carr Office Park, L.L.C. from proceeds of a third party financing of property ($47.2 million) in 2001. This distribution was applied to reduce our investment in Carr Office Park, L.L.C. and was used primarily to repay mortgages and notes payable. The decrease in assets from 1999 to 2000 was due the Carr Office Park, L.L.C. transaction. In response to a deteriorating economic climate, the real estate markets have materially softened in 2001. Demand for office space has declined significantly and vacancy rates have increased in each of our markets. As a result, occupancy in our portfolio of operating properties decreased to 92.2% at December 31, 2001 as compared to 96.8% at December 31, 2000. We expect that the softening of the real estate markets we experienced in the later half of 2001 will continue throughout 2002. As a result of the soft market, we anticipate that occupancy levels will be lower in 2002. Consolidated Cash Flows Consolidated cash flow information is summarized as follows:
================================================================================================ Variance For the year ended ------------------ December 31, 2001 vs. 2000 vs. ------------------------- (in millions) 2001 2000 1999 2000 1999 ------ ------- ------ ------ ------- Cash provided by operating activities $ 25.0 $ 99.4 $ 71.8 $(74.4) $ 27.6 Cash provided by (used in) investing activities 13.5 56.5 (61.4) (43.0) 117.9 Cash used in financing activities (43.1) (158.4) (5.3) 115.3 (153.1) ================================================================================================
Operations generated $25.0 million of net cash in 2001 as compared to $99.4 million in 2000 and $71.8 million in 1999. The changes in cash flow from operating activities were primarily the result of factors discussed above in the analysis of operating results. The level of net cash provided by operating 13 activities is also affected by the timing of receipt of revenues and payment of expenses and amounts due to affiliates. Our investing activities provided net cash of $13.5 million in 2001 and $56.5 million in 2000 and used net cash of $61.4 million in 1999. We received cash of $107.0 million in 2000 for properties contributed to Carr Office Park, L.L.C. The acquisition of two operating properties ($51.6 million) in 2001 also contributed to the decrease in cash from investing activities compared to 2000. Partially offsetting these decreases were a receipt of the financing proceeds distribution from Carr Office Park, L.L.C. ($47.2 million), release of restricted deposits ($23.3 million) and reduced development activity ($40.1 million). Cash from investing activities increased from 1999 to 2000 primarily as a result of cash received for properties contributed to Carr Office Park, L.L.C. and a decrease in property development activity ($48.9 million). Partially offsetting these factors was an increase in restricted deposits ($22.2 million). Financing activities used net cash of $43.1 million, $158.4 million and $5.3 million in 2001, 2000 and 1999, respectively. In 2001, we repaid several maturing mortgages. In 2000, we decreased our debt significantly, paying down our portion of the unsecured credit facility ($140.3 million). Liquidity and Capital Resources As of December 31, 2001, we had approximately $1.2 million in available cash and cash equivalents. Our liquidity and capital resources are dependent upon CarrAmerica and its affiliates. CarrAmerica, as a REIT, is required to distribute at least 90% of their taxable income to their stockholders on an annual basis. We and CarrAmerica require capital to invest in our existing portfolio of operating assets for capital projects. These capital projects can include such things as large-scale renovations, routine capital expenditures, deferred maintenance on properties we have recently acquired and tenant related matters, including tenant improvements, allowances and leasing commissions. Therefore, as a general matter, it is unlikely our cash balances would satisfy our liquidity needs. Instead, these needs must be met from cash generated from rental revenue and external sources of capital. We derive substantially all of our revenue from tenants under existing leases at our properties. Our operating cash flow therefore depends materially on the rents that we are able to charge to our tenants, and the ability of these tenants to make their rental payments. We believe that the diversity of our tenant base helps insulate us from the negative impact of tenant defaults and bankruptcies. However, general economic downturns, or economic downturns in one or more of our markets, still may adversely impact the ability of our tenants to make lease payments and our ability to re-lease space on favorable terms as leases expire. In either of these cases, our cash flow and therefore our ability to meet our capital needs would be adversely affected. As a result of the recent economic downturn, the real estate markets materially softened during 2001. Demand for office space has declined significantly and vacancy rates have increased in each of our markets. As a result, occupancy in our portfolio of operating properties decreased to 92.2% at December 31, 2001, as compared to 96.8% at December 31, 2000. We expect that real estate markets will remain soft throughout 2002. As a result of the soft market, we anticipate that occupancy levels will be lower in 2002. CarrAmerica's primary external source of liquidity is its credit facility. In June 2001, it closed on a new three-year $500.0 million unsecured credit facility with J.P. Morgan Chase, as agent for a group of banks. This replaces the previous $450 million credit facility, under which we were a co-borrower, which would have matured in August 2001. CarrAmerica can extend the life of the line an additional year at its option. The line carries an interest rate of 70 basis points over 30-day LIBOR. The unsecured facility contains financial and other covenants with which CarrAmerica must comply and availability is limited to a specified percentage of the fair value of unmortgaged properties. We unconditionally guarantee this credit facility. As of December 31, 2001, $457.0 million was drawn on the credit facility, $2.2 million in letters of credit were outstanding and $40.8 million was available for borrowing. As of February 28, 2002, $70.0 million was drawn on the credit facility, $2.2 million in letters of credit were outstanding and $427.8 million was available for borrowing. 14 We have significant capital requirements for development projects currently underway and in the future. As of December 31, 2001, we had 237,000 square feet of office space under construction in three projects in which we own minority interests. These projects are expected to cost $36.9 million of which, our total investment is expected to be approximately $7.8 million. Through December 31, 2001, approximately $26.7 million or 72.3% of the total project costs had been expended. We have funded our investment in projects under construction at December 31, 2001, primarily from the proceeds of asset dispositions and loans from CarrAmerica. We expect that these sources and project-specific financing of selected assets will provide additional funds required to complete the development and to finance the costs of additional projects. We also regularly incur significant expenditures in connection with the re-leasing of office space, principally in the form of tenant improvements and leasing commissions. The amounts of these expenditures can vary significantly, depending on negotiations with tenants and the willingness of tenants to pay higher base rents over the life of the leases. We expect to pay for these capital expenditures out of excess cash from operations or, to the extent necessary, borrowings from CarrAmerica. We believe that a significant portion of these expenditures are recouped in the form of continuing lease payments. Our long-term liquidity requirements consist primarily of funds necessary to pay for the principal amount of our long-term debt as it matures, significant non-recurring capital expenditures that need to be made periodically at our properties, development projects that we undertake and the costs associated with acquisitions of properties. In the future, if, as a result of general economic downturns, our or CarrAmerica's properties do not perform as expected, or we cannot raise the expected funds from the sale of properties and/or if we are unable to obtain capital from other sources, such as CarrAmerica, we may not be able to make required principal and interest payments or make necessary routine capital improvements with respect to our existing portfolio of operating assets. While we believe that we would continue to have sufficient funds to pay our operating expenses and debt service and our regular quarterly distributions, our ability to perform development activity or to fund additional development in our joint ventures could be adversely affected. In addition, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the holder of the mortgage or lender could foreclose on the property, resulting in loss of income and asset value. An unsecured lender could also attempt to foreclose on some of our assets in order to receive payment. In almost every case, very little of the principal amount that we borrow is repaid prior to the maturity of the loan. We generally expect to refinance that debt when it matures, although in some cases we may pay off the loan. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing (such as possible reluctance of lenders to make commercial real estate loans) may result in higher interest rates and increased interest expense. We have unconditionally guaranteed unsecured notes issued by CarrAmerica to institutional investors. The aggregate principal amount of the unsecured notes was $475.0 million as of December 31, 2001. These notes are in the form of $150 million of 7.20% notes due in 2004, $100 million of 6.625% notes due in 2005, $125 million of 7.375% notes due in 2007 and $100 million of 6.875% notes due in 2008. CarrAmerica's senior unsecured notes contain various covenants with which CarrAmerica must comply. The covenants include: . Limits on CarrAmerica's total indebtedness on a consolidated basis; . Limits on CarrAmerica's secured indebtedness on a consolidated basis; and . Limits on CarrAmerica's required debt service payments. On January 11, 2002, CarrAmerica issued $400 million of senior unsecured notes. The notes bear interest at 7.125% per annum, payable semi-annually beginning on July 15, 2002. The notes mature on January 15, 2012. We unconditionally guarantee these notes. Proceeds from the notes were used to pay down CarrAmerica's unsecured credit facility. 15 Although we believe our properties are adequately covered by insurance, we cannot predict at this time if we will be able to obtain full coverage at a reasonable cost in the future. Prior to September 11, 2001, insurance market conditions were gradually beginning to harden. Unlike the earlier hard market in the mid-1980's, the events of September 11, 2001 are expected to affect nearly all coverage lines. This, combined with the fluctuations in insurance companies' investment income, capacity and reinsurance treaty renewals, and a year of significant losses, is expected to impact premiums. Our current property insurance policy, which expires June 30, 2002 includes terrorism coverage, but we anticipate that when we renew the policy, acts of terrorism will not be included in coverage. We expect that some underwriters will offer terrorism coverage, but at a high cost. Overall, we anticipate that insurance coverage costs will be higher in the future. We have investments in real estate joint ventures in which we hold an interest of 21.2% to 49.0%. These investments are accounted for by using the equity method, and therefore, the assets and liabilities of the joint ventures are not included in our financial statements. Summarized information relating to the financial condition and results of operations of these joint ventures is presented in note 5 of the notes to the consolidated financial statements. These joint ventures own and operate office buildings financed by non-recourse debt obligations. The obligations aggregated $271.1 at December 31, 2001, and are secured only by the real estate and other assets of the joint ventures. We have no obligation to repay this debt and the lenders have no recourse to our other assets. We expect that the cash flows from operations of the joint ventures and/or the proceeds from sales of their assets, will satisfy their obligations under those debt agreements. However, our investments in these joint ventures are subject to risks not inherent in our majority owned properties, including: . Absence of exclusive control over the development, financing, leasing, management and other aspects of the project; . Possibility that our co-venturer or partner might: . become bankrupt; . have interests or goals that are inconsistent with ours; . take action contrary to our instructions, requests or interests (including those related to CarrAmerica's qualification as a REIT for tax purposes); or . otherwise impede our objectives. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 2001. SFAS No. 142 changes the accounting for goodwill and intangible assets with indefinite lives from an amortization approach to an impairment-only approach. Adoption of SFAS No. 142 on January 1, 2002 will not have an effect on our financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assts and for Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Statement does not change the fundamental provisions of SFAS No. 121; however, it resolves various implementation issues of SFAS No. 121 and establishes a single accounting model for long-lived assets to be disposed of by sale. It retains the requirement of Opinion No. 30 to report separately discontinued operations but extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in distribution to owners) or is classified as held for sale. We do not believe that adoption of SFAS No. 144 in 2002 will have a material effect on our financial statements. In July 2001, the Emerging Issues Task Force (EITF) released EITF D-98: "Classification and Measurement of Redeemable Securities," which clarifies Rule 5-02.28 of Regulation S-X. This Rule 16 requires securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date; (2) at the option of the holder; or (3) upon the occurrence of an event that is not solely within the control of the issuer. This announcement is to be applied retroactively beginning in the first quarter of 2002. As discussed in note 3, each holder of Class A Units, Class D Units and Class E Units may require us to redeem their Units. In addition, Class C Units may be converted to Class A Units over time at the holder's option. Since these Units are redeemable at the option of the holders, they are to be classified outside of partners' capital on our balance sheet. If we had applied this accounting in 2001, $38.5 million and $39.9 million of partners' capital as of December 31, 2001 and 2000, respectively, would be classified outside of partners' capital on our balance sheet. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Increases in interest rates would increase our interest expense and adversely affect our cash flow. As of December 31, 2001, we had $128.7 million of fixed rate debt. The mortgage loans mature at various times through 2017. This amount includes a $27.5 million note due to CarrAmerica that matures in 2011. Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevailing market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. We manage our risk by matching projected cash inflows from operating activities, financing activities and investing activities with projected cash outflows to fund debt payments, acquisitions, capital expenditures, distributions and other cash requirements. We do not use derivative financial instruments for hedging purposes nor for speculation or trading purposes. A change in interest rates generally does not impact future earnings and cash flows for fixed rate debt instruments. As fixed rate debt matures, and additional debt is incurred to fund the repayments of maturing facilities, future earnings and cash flows may be impacted by changes in interest rates. This impact would be realized in the periods subsequent to debt maturities. The following is a summary of debt maturities at December 31, 2001: 2002 $ 10,115 2003 20,602 2004 15,714 2005 12,137 2006 2,062 2007 and thereafter 68,099 -------- $128,729 ======== If we assume the repayments of fixed rate borrowings are made in accordance with the terms and conditions of the respective credit arrangements, a 10 percent change in the market interest rate for the respective fixed rate debt instruments would change the fair market value of our fixed rate debt by approximately $3.6 million. The estimated fair market value of the fixed rate debt instruments at December 31, 2001 was $133.2 million. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data included in this Annual Report on Form 10-K are listed in Part IV, Item 14(a). Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 PART II Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We have no directors or executive officers. We are managed by GP Holdings, as the sole general partner. The directors and executive officers of GP Holdings are listed in the following table:
Name Age Position and Offices Held ---- --- ------------------------- Thomas A. Carr 43 President and Director Philip L. Hawkins 46 Executive Vice President and Director Richard F. Katchuk 55 Executive Vice President, CFO and Treasurer, and Director
CarrAmerica is the sole stockholder of GP Holdings. The additional information required by this item concerning directors and executive officers of CarrAmerica and GP Holdings is incorporated by reference to the material appearing under the heading "Election of Directors (Proposal 1)," in CarrAmerica's definitive proxy statement for the annual meeting of its stockholders to be held on May 2, 2002 (the "CarrAmerica Proxy Statement') and under the headings "Item 1. Business-The Company-Our Directors" and "- Our Executive Officers and Certain Key Employees," in the 2001 CarrAmerica 10-K, which is incorporated by reference. Item 11. EXECUTIVE COMPENSATION We have no directors or executive officers. We are managed by GP Holdings, as the sole general partner. GP Holdings has not paid any compensation to its directors and officers. CarrAmerica is the sole stockholder of GP Holdings. The information required by this item with respect to CarrAmerica's executive officers is incorporated by reference to the material appearing in the 2001 CarrAmerica Proxy Statement under the heading "Executive Compensation", which information is incorporated by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, as of February 28, 2002, regarding the beneficial ownership of Units by each person we know to be the beneficial owner of more than five percent of our outstanding Units. As of February 28, 2002, no director or executive officer of GP Holdings or CarrAmerica beneficially owned any Units. Each entity named in the table has sole voting and investment power with respect to all Units shown as beneficially owned by that person, except as otherwise set forth in the notes to the table.
Name and Business Address of Beneficial Owner Number of Units/1/ Percent of Unit/2/ --------------------------------------------- ------------------ ------------------ CarrAmerica Realty Corporation 13,054,561 90.9% CarrAmerica Realty LP Holdings, Inc. 12,910,939 89.9% 1850 K Street, NW Washington, DC 20006
---------- /1/ Includes 12,910,939 Units held by LP Holdings and 143,622 Units held by GP Holdings, each of which is a wholly owned subsidiary of CarrAmerica /2/ Based on 14,362,972 Units outstanding as of February 28, 2002. 18 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CarrAmerica Realty Services, Inc. ("CARSI"), a wholly owned subsidiary of CarrAmerica, provides management and leasing services to all of our office properties. During 2001, 2000, and 1999, respectively, we incurred management fees of $2.5 million, $2.7 million and $3.8 million, respectively, for CARSI services. In 2000 and 1999, CARSI reimbursed us for services our personnel provide to CARSI. The reimbursements amounted to $3.4 million, and $3.5 million in 2000 and 1999, respectively. In 2001, no such reimbursements were made. In April 2001, CarrAmerica exercised an option under a loan agreement to acquire two office buildings and related land located in the San Francisco Bay area. We purchased this property from CarrAmerica at its cost of approximately $51.0 million. Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 14(a)(1) Financial Statements Reference is made to the Index to Financial Statements and Schedule on page 23. 14(a)(2) Financial Statement Schedule Reference is made to the Index to Financial Statements and Schedule on page 23. 14(a)(3) Exhibits 4.1 Second Amended and Restated Agreement of Limited Partnership of the Partnership, dated May 9, 1997 (incorporated by reference to Exhibit 10.1 to CarrAmerica's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 4.2 First Amendment to Second Amended and Restated Agreement of Limited Partnership, dated October 6, 1997 (incorporated by reference to Exhibit 10.2 to CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 1997). 4.3 Second Amendment to Second Amended and Restated Agreement of Limited Partnership, dated October 6, 1997 (incorporated by reference to Exhibit 10.3 to CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 1997). 4.4 Third Amendment to Second Amended and Restated Agreement of Limited Partnership, dated October 6, 1997 (incorporated by reference to Exhibit 10.3 to CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 1997). 4.5 Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated December 31, 1998 (incorporated by reference to Exhibit 10.5 to CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 1998). 4.6 Indenture, dated as of July 1, 1997, by and among CarrAmerica, as Issuer, the Partnership, as Guarantor, and Bankers Trust Company, as Trustee, relating to CarrAmerica's 7.20% Notes due 2004 and 7.375% Notes due 2007 (incorporated by reference to Exhibit 4.1 to CarrAmerica's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 4.7 Indenture, dated as of February 23, 1998, by and among CarrAmerica, as Issuer, the Partnership, as Guarantor, and Bankers Trust Company, as Trustee, relating to CarrAmerica's 6.625% Notes due 2005 and 6.875% Notes due 2008 (incorporated by reference to Exhibit 4.2 to CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 1997). 19 4.8 Indenture, dated as of October 1, 1998, by and among CarrAmerica, as Issuer, the Partnership, as Guarantor, and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to CarrAmerica's Current Report on Form 8-K filed on October 2, 1998). 4.9 Indenture, dated as of January 11, 2002, by and among CarrAmerica Realty Corporation, CarrAmerica Realty, L.P., as Guarantor, and U.S. National Association as Trustee (incorporated by reference to Exhibit 4.1 to CarrAmerica's Current Report on Form 8-K filed on January 11, 2002) 10.1 Contribution and Purchase/Sale Agreement, dated as of August 15, 2000, among CarrAmerica Realty Corporation, CarrAmerica Realty, L.P., CarrAmerica Development, Inc., Carr Development & Construction, L.P., Carr Parkway North I Corporation and New York State Teachers' Retirement System (incorporated by reference to Exhibit 10.2 to CarrAmerica's Current Report filed on Form 8-K filed September 1, 2000). 10.2 Supplemental Agreement (Amending and Supplementing the Contribution Agreement and the LLC Agreement), dated as of August 15, 2000, among CarrAmerica Realty Corporation, CarrAmerica Realty, L.P., CarrAmerica Development, Inc., Carr Development & Construction, L.P., Carr Parkway North I Corporation and New York State Teachers' Retirement System (incorporated by reference to Exhibit 10.3 to CarrAmerica's Current Report filed on Form 8-K filed September 1, 2000). 10.3 Revolving Credit Agreement dated June 28, 2001 among CarrAmerica Realty Corporation, as Borrower, The Chase Manhattan Bank, as Bank and Administrative Agent for the Banks, J.P. Morgan Securities Inc., as Lead Arranger, Exclusive Advisor and Sole Bookrunner, Bank of America, N.A. as Syndication Agent, PNC Bank, National Association, as Documentation Agent, Commerzbank AG, New York Branch, as Documentation Agent, First Union National Bank, as Documentation Agent, and the Banks Listed in the Revolving Credit Agreement (incorporated by reference to Exhibit 10.1 to CarrAmerica's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). 10.4 Guaranty of Payment dated June 28, 2001 by CarrAmerica Realty L.P. in favor of Chase Manhattan Bank (incorporated by reference to Exhibit 10.2 to CarrAmerica's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). 21.1 List of Subsidiary 23.1 Consent of KPMG LLP, dated March 22, 2002 99.1 Certificate of Incorporation of CarrAmerica GP Holdings, Inc. (incorporated by reference to Exhibit 99.1 to the Partnership's Registration Statement on Form 10/A, filed on October 1, 1997 (File No. 0-22741)). 99.2 Bylaws of CarrAmerica GP Holdings, Inc. (incorporated by reference to Exhibit 99.2 to the Partnership's Registration Statement on Form 10/A, filed on October 1, 1997 (File No. 0-22741). 99.3 "Item 1-Business-The Company-Risk Factors," from CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 2001. 99.4 "Item 5-Market for Registrant's Common Equity & Related Stockholder Matters," from CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 2001. 99.5 "Election of Directors (Proposal 1)," from CarrAmerica's Proxy Statement on Schedule related to CarrAmerica's stockholders in connection with CarrAmerica's 2002 Annual Meeting of Stockholders. 20 99.6 "Item 1-Business-The Company-Directors of the Company," from CarrAmerica's Annual Report on Form 10-K for the year ended December 31, 2001. 99.7 "Item 1-Business-The Company-Executive Officers and Certain Key Employees of the Company," from CarrAmerica's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 99.8 "Executive Compensation," from CarrAmerica's Proxy Statement on Schedule 14A related CarrAmerica's 2002 Annual Meeting of Stockholders. 14(b) Reports on Form 8-K Form 8-K filed on December 21, 2001, regarding Security Capital Group Incorporated's consummation of public offering of 19,403,417 shares of CarrAmerica's common stock. 14(c) Exhibits The list of exhibits filed with this report is set forth in response to Item 14(a)(3). The required exhibit index has been filed with the exhibits. 14(d) Financial Statements None. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the District of Columbia on March 22, 2002. CARRAMERICA REALTY, L.P. a Delaware limited partnership By: CarrAmerica Realty GP Holdings, Inc. General Partner By: /s/ THOMAS A. CARR ------------------------ Thomas A. Carr President Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following person on behalf of the registrant and in the capacities indicated on March 22, 2002. Signature Title --------- ----- /s/ THOMAS A. CARR President and Director --------------------------------------- Thomas A. Carr /s/ PHILIP L. HAWKINS Executive Vice President and --------------------------------------- Director Philip L. Hawkins /s/ RICHARD F. KATCHUK Executive Vice President, CFO and --------------------------------------- Treasurer, and Director Richard F. Katchuk 22 CARRAMERICA REALTY, L.P. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE The following Consolidated Financial Statements and Schedule of CarrAmerica Realty, L.P. and Subsidiary and the Independent Auditors' Report thereon are attached hereto: CARRAMERICA REALTY, L.P. AND SUBSIDIARY Independent Auditors' Report..................................................................... 24 Consolidated Balance Sheets as of December 31, 2001 and 2000..................................... 25 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999............................................................................................. 26 Consolidated Statements of Partners' Capital for the Years Ended December 31, 2001, 2000 and 1999......................................................................................... 27 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999............................................................................................. 28 Notes to Consolidated Financial Statements....................................................... 29 Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2001................... 36
All other schedules are omitted because they are not applicable, or because the required information is included in the financial statements or notes thereto. 23 INDEPENDENT AUDITORS' REPORT The Partners CarrAmerica Realty, L.P. We have audited the consolidated financial statements of CarrAmerica Realty, L.P. and subsidiary as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CarrAmerica Realty, L.P. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. /s/ KPMG LLP Washington, D.C. January 31, 2002 24 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Consolidated Balance Sheets as of December 31, 2001 and 2000 2001 2000 --------- --------- (In thousands) Assets Rental property: Land $ 113,583 $ 103,294 Buildings 533,132 505,043 Tenant improvements 64,856 56,089 Furniture, fixtures, and equipment 591 909 --------- --------- 712,162 665,335 Less - accumulated depreciation (92,025) (66,100) --------- --------- Total rental property 620,137 599,235 Land held for development or sale 6,412 6,706 Cash and cash equivalents 1,226 5,819 Restricted deposits 1,015 24,332 Accounts and notes receivable, net 12,665 13,795 Investments in unconsolidated entities 47,970 89,616 Accrued straight-line rents 12,340 10,810 Tenant leasing costs, net 11,918 12,578 Deferred financing costs, net 167 231 Prepaid expenses and other assets, net 1,053 1,424 --------- --------- $ 714,903 $ 764,546 ========= ========= Liabilities and Partners' Capital Liabilities: Mortgages and notes payable $ 128,729 $ 169,616 Accounts payable and accrued expenses 12,119 15,768 Due to affiliates 56,785 73,495 Rent received in advance and security deposits 6,277 4,610 --------- --------- Total liabilities 203,910 263,489 Partners' capital: General partner 5,214 5,089 Limited partners 505,779 495,968 --------- --------- Total partners' capital 510,993 501,057 Commitments and contingencies --------- --------- $ 714,903 $ 764,546 ========= ========= See accompanying notes to consolidated financial statements. 25 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999
(In thousands) 2001 2000 1999 --------- -------- -------- Operating revenues: Rental revenues: Minimum base rent $ 87,160 $100,647 $101,830 Recoveries from tenants 13,124 17,220 16,450 Other tenant charges 2,821 3,116 5,220 -------- -------- -------- Total rental revenues 103,105 120,983 123,500 Cost reimbursements 972 3,802 3,830 -------- -------- -------- Total operating revenues 104,077 124,785 127,330 -------- -------- -------- Operating expenses: Property expenses: Operating expenses 24,316 28,597 29,427 Real estate taxes 7,691 11,440 11,917 Interest expense 19,185 27,567 20,545 General and administrative 7,978 6,518 6,239 Depreciation and amortization 30,180 31,517 32,820 -------- -------- -------- Total operating expenses 89,350 105,639 100,948 -------- -------- -------- Real estate operating income 14,727 19,146 26,382 Other (expense) income: Interest income 1,580 1,553 1,620 Equity in earnings of unconsolidated entities 3,653 1,251 8 (Loss) gain on sales of assets and other provisions (7,435) 24,921 3,804 -------- -------- -------- Total other (expense) income (2,202) 27,725 5,432 -------- -------- -------- Net income $ 12,525 $ 46,871 $ 31,814 ======== ======== ======== Net income attributable to general partner $ 125 $ 469 $ 318 ======== ======== ======== Net income attributable to limited partners $ 12,400 $ 46,402 $ 31,496 ======== ======== ========
See accompanying notes to consolidated financial statements. 26 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Consolidated Statements of Partners' Capital for the Years Ended December 31, 2001, 2000 and 1999
General Partner Limited Partners -------------- ------------------------- CarrAmerica CarrAmerica Other Realty GP Realty LP Limited (In thousands) Holdings, Inc. Holdings, Inc. Partners Total -------------- -------------- -------- --------- Partners' capital at December 31, 1998 $4,302 $375,500 $47,005 $ 426,807 Capital contributions -- 2,213 (2,213) -- Capital distributions -- -- (2,277) (2,277) Net income 318 27,558 3,938 31,814 ------ -------- ------- --------- Partners' capital at December 31, 1999 4,620 405,271 46,453 456,344 Capital contributions -- 8,437 (8,437) -- Capital distributions -- -- (2,158) (2,158) Net income 469 42,324 4,078 46,871 ------ -------- ------- --------- Partners' capital at December 31, 2000 5,089 456,032 39,936 501,057 Capital contributions -- -- -- -- Capital distributions -- -- (2,589) (2,589) Net income 125 11,235 1,165 12,525 ------ -------- ------- --------- Partners' capital at December 31, 2001 $5,214 $467,267 $38,512 $ 510,993 ====== ======== ======= =========
See accompanying notes to consolidated financial statements. 27 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
(In thousands) 2001 2000 1999 -------- --------- -------- Cash flows from operating activities: Net income $ 12,525 $ 46,871 $ 31,814 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,180 31,517 32,820 Loss (gain) on sale of assets and other provisions 7,435 (24,921) (3,804) Equity in earnings of unconsolidated entities (3,653) (1,251) (8) Other 109 (1,211) 38 Change in assets and liabilities: Decrease (increase) in accounts and notes receivable 1,201 7,719 (10,978) (Increase) decrease in accrued straight-line rents (1,530) 1,139 (3,769) Additions to tenant leasing costs (2,219) (3,546) (2,614) Decrease (increase) in prepaid expenses and other assets 230 (760) 660 Decrease in accounts payable and accrued expenses (3,514) (3,367) (2,345) (Decrease) increase in due to affiliates (17,108) 48,880 29,171 Increase (decrease) in rent received in advance and security deposits 1,719 (1,624) 847 -------- --------- -------- Total adjustments 12,850 52,575 40,018 -------- --------- -------- Net cash provided by operating activities 25,375 99,446 71,832 -------- --------- -------- Cash flows from investing activities: Acquisition and development of rental property (67,944) (18,663) (8,042) Additions to land held for development or sale (598) (3,480) (6,431) Additions to construction in progress -- (37,175) (83,138) Distributions from unconsolidated entities 51,210 -- -- Contributions to unconsolidated entities (5,680) (7,622) (1,296) Decrease (increase) in restricted deposits 23,317 (22,152) (944) Proceeds from sales of properties 13,203 145,573 38,409 -------- --------- -------- Net cash provided (used) by investing activities 13,508 56,481 (61,442) -------- --------- -------- Cash flows from financing activities: Capital distributions (2,589) (2,158) (2,277) Deferred financing costs -- -- (2) Payments on unsecured line of credit -- (140,250) -- Proceeds from refinancing of existing mortgages -- -- 4,905 Repayments on mortgages and notes payable (40,887) (16,009) (7,975) -------- --------- -------- Net cash used by financing activities (43,476) (158,417) (5,349) -------- --------- -------- (Decrease) increase in cash and cash equivalents (4,593) (2,490) 5,041 Cash and cash equivalents, beginning of the period 5,819 8,309 3,268 -------- --------- -------- Cash and cash equivalents, end of the period $ 1,226 $ 5,819 $ 8,309 ======== ========= ======== Supplemental disclosure of cash flow information: Cash paid for interest (net of capitalized interest of $762 in 2001, $2,341 in 2000 and $5,177 in 1999) $ 19,253 $ 30,085 $ 19,642 ======== ========= ========
Supplemental disclosure of noncash investing activities: (a) During 2000, we contributed $152.6 million of assets to an unconsolidated joint venture. See accompanying notes to consolidated financial statements. 28 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Description of Business and Summary of Significant Accounting Policies (a) Business We are a Delaware limited partnership formed on March 6, 1996 for the purpose of owning, acquiring developing and operating office buildings across the United States. At December 31, 2001, we owned 53 operating properties with no properties under development. The properties are located in Austin, Chicago, Dallas, Denver, Orange County/Los Angeles, Phoenix, San Francisco Bay Area, Salt Lake City, San Diego and Seattle. Our general partner is CarrAmerica Realty GP Holdings, Inc. (the "General Partner"), a wholly owned subsidiary of CarrAmerica Realty Corporation ("CarrAmerica"), a self-administered and self-managed real estate investment trust. Our General Partner owned a 1% interest in us at December 31, 2001. Our limited partners are CarrAmerica Realty LP Holdings, Inc., a wholly owned subsidiary of CarrAmerica, which owned approximately 89.7% interest in us at December 31, 2001, and various other individuals and entities, which owned an approximate 9.3% aggregate interest in us at December 31, 2001. (b) Basis of Presentation Our accounts and those of our wholly owned subsidiary are consolidated in the accompanying financial statements. We use the equity method to account for our investments in and our share of earnings or losses of unconsolidated entities. These entities are not majority-owned or controlled by us. Management has made a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements, and the disclosure of contingent assets and liabilities. Estimates are required in order for us to prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Significant estimates are required in a number of areas, including the evaluation of impairment of long-lived assets and evaluation of the collectibility of accounts and notes receivable. Actual results could differ from these estimates. (c) Rental Property Properties to be developed or held and used in rental operations are carried at cost less accumulated depreciation and impairment losses, where appropriate. Properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and impairment losses, where appropriate) or estimated fair value less costs to sell. Properties are considered held for sale when they are subject to a contract of sale meeting criteria specified by senior management (e.g., contingencies are met or waived, a nonrefundable deposit is paid, etc.). Depreciation on these properties is discontinued at that time, but operating revenues, other operating expenses and interest continue to be recognized until the date of sale. Depreciation of rental properties is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets by class are as follows: Base building.......................... 30 to 50 years Building components.................... 7 to 20 years Tenant improvements.................... Lesser of the terms of the leases or useful lives of the assets Furniture, fixtures and equipment ..... 5 to 15 years Specifically identifiable costs associated with properties and land in development are capitalized. Capitalized costs may include salaries and related costs, real estate taxes, interest, pre-construction costs essential to the development of a property, development costs, construction costs and external acquisition costs. Costs of significant improvements, renovations and replacements to rental properties are capitalized. Expenditures for maintenance and repairs are charged to operations as they are incurred. 29 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Notes to Consolidated Financial Statements If events or changes in circumstances indicate that the carrying value of a rental property or land held for development may be impaired, we perform a recoverability analysis based on estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. We recognize gains from sales of rental properties and land at the time of sale using the full accrual method, provided that various criteria related to the terms of the transactions and any subsequent involvement by us with the properties sold are met. If the criteria are not met, we defer the gains and recognize them when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. (d) Tenant Leasing Costs We defer fees and initial direct costs incurred in the negotiation of completed leases. They are amortized on a straight-line basis over the term of the lease to which they apply. (e) Deferred Financing Costs We defer fees and costs incurred to obtain financing. They are amortized using the interest method over the term of the loan to which they apply. (f) Real Estate Service Contracts and Other Intangibles The costs of real estate service contracts and other identified intangible assets are amortized on a straight-line basis over the expected lives of the assets. (g) Fair Values of Financial Instruments The carrying amounts of cash and cash equivalents, accounts and notes receivable and accounts payable and accrued expenses approximate their fair values because of their short-term maturities. Fair value information relating to mortgages and notes payable is provided in note 2. (h) Revenue Recognition We recognize minimum base rental revenue under tenant leases on a straight-line basis over the terms of the related leases. Accrued straight-line rents represent the rental revenue recognized in excess of rents due under the lease agreements at the balance sheet date. We recognize revenues for recoveries from tenants of real estate taxes, insurance and other costs in the period in which the related expenses are incurred. We recognize revenues for rents that are based on a percentage of a tenant's sales in excess of levels specified in the lease agreement when the tenant's sales actually exceed the specified minimum level. We provide for potentially uncollectible accounts and notes receivable and accrued straight-line rents based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant and our assessment of its ability to meet its lease obligations, the basis for any disputes and the status of related negotiations, etc. (i) Income and Other Taxes We make no provision for federal and state income taxes because the partners report their share of our taxable income or loss and any available tax credits on their income tax returns. 30 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Notes to Consolidated Financial Statements (j) Cash Equivalents We consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents except that any such investments purchased with funds on deposit in escrow or similar accounts are classified as restricted deposits. (k) Stock Option Plan We are a participant in CarrAmerica's 1997 stock option and incentive plan. We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations to account for our stock/unit compensation plans. Under this method, we record compensation expense for awards of stock, options or units to employees only if the market price of the unit or stock on the grant date exceeds the amount the employee is required to pay to acquire the unit or stock. (l) New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 2001. SFAS No. 142 changes the accounting for goodwill and intangible assets with indefinite lives from an amortization approach to an impairment-only approach. Adoption of SFAS No. 142 on January 1, 2002 will not have an effect on our financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assts and for Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Statement does not change the fundamental provisions of SFAS No. 121; however, it resolves various implementation issues of SFAS No. 121 and establishes a single accounting model for long-lived assets to be disposed of by sale. It retains the requirement of Opinion No. 30 to report separately discontinued operations but extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in distribution to owners) or is classified as held for sale. We do not believe that adoption of SFAS No. 144 in 2002 will have a material effect on our financial statements. In July 2001, the Emerging Issues Task Force (EITF) released EITF D-98: "Classification and Measurement of Redeemable Securities," which clarifies Rule 5-02.28 of Regulation S-X. This Rule requires securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date; (2) at the option of the holder; or (3) upon the occurrence of an event that is not solely within the control of the issuer. This announcement is to be applied retroactively beginning in the first quarter of 2002. As discussed in note 3, each holder of Class A Units, Class D Units and Class E Units may require us to redeem their Units. In addition, Class C Units may be converted to Class A Units over time at the holder's option. Since these Units are redeemable at the option of the holders, they are to be classified outside of partners' capital on our balance sheet. If we had applied this accounting in 2001, $38.5 million and $39.9 million of partners' capital as of December 31, 2001 and 2000, respectively, would be classified outside of partners' capital on our balance sheet. (2) Mortgages and Notes Payable Our mortgages and notes payable are summarized as follows: 31 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Notes to Consolidated Financial Statements (In thousands) December 31, 2001 December 31, 2000 ----------------- ----------------- Fixed rate mortgages $101,206 $141,062 Unsecured credit facility -- 500 Fixed rate note payable to affiliate 27,523 28,054 -------- -------- $128,729 $169,616 ======== ======== Mortgages payable are collateralized by properties and generally require monthly principal and/or interest payments. Mortgages payable mature at various dates from February 2003 through May 2017. The weighted average interest rate of mortgages payable was 7.81% at December 31, 2001 and 7.99% at December 31, 2000. In June 2001, CarrAmerica closed on a new three-year $500 million unsecured credit facility with J.P. Morgan Chase, as agent for a group of banks. We are an unconditional guarantor of borrowings under this facility. CarrAmerica can extend the life of the facility for one year at its option. The interest rate on the unsecured credit facility is 70 basis points over 30-day LIBOR. We have a $30.0 million loan agreement with CarrAmerica. The note payable bears interest at 8.5% and requires monthly principal and interest payments of $242,000. The loan matures on May 31, 2011. The note is secured by certain office properties and other assets. The outstanding balance of the note payable to CarrAmerica was $27.5 million and $28.1 million at December 31, 2001 and 2000, respectively. Debt maturities at December 31, 2001 are as follows: (In thousands) 2002 $ 10,115 2003 20,602 2004 15,714 2005 12,137 2006 2,062 2007 and thereafter 68,099 --------- $ 128,729 ========= Restricted deposits consist primarily of escrow deposits and, at December 31, 2000, a deposit on for a property acquisition. The escrow deposits are required by lenders to be used for future building renovations or tenant improvements or as collateral for letters of credit. The estimated fair value of our mortgages payable and note payable to affiliate at December 31, 2001 and 2000 was approximately $133.2 million and $174.3 million, respectively. The estimated fair value is based on the borrowing rates available to us for fixed rate mortgages payable with similar terms and average maturities. (3) Partners' Capital Contributions, Distributions and Participation Percentages Our Second Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement") details the rights of our owners. Our ownership is expressed in partnership units ("Units"). Units currently are designated as Class A, B, C, D or E Units. Class D Units have first preference. Class A and Class E Units together have second preference and Class B Units have third preference as to the allocation of available cash (defined in the Partnership Agreement). Class C Units do not share in the allocation of available cash. Class C Units may be converted to Class A Units over time based on a conversion factor described in the Partnership Agreement. Class E Units have a special allocation of our losses. 32 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Notes to Consolidated Financial Statements Each holder of Class A Units, Class D Units or Class E Units may require us to redeem their Units. Redemption is subject to certain limitations. Upon redemption of a Unit, the holder will receive, at CarrAmerica's option, either (i) cash in the amount equal to the market value of one share of CarrAmerica common stock (subject to certain anti-dilution adjustments) or (ii) one share of CarrAmerica common stock. In lieu of us redeeming Class A, Class D or Class E Units for cash, CarrAmerica has the right to assume directly and satisfy the redemption right of a Unit holder. Holders of Class B Units and Class C Units are not entitled to exercise this redemption right. Units outstanding were as follows: December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------- Class A Units 891,726 842,743 959,684 Class B Units 13,029,052 12,976,269 12,683,731 Class C Units 178,720 268,077 431,674 Class D Units 246,954 259,363 271,363 Class E Units 16,520 16,520 16,520 ---------- ---------- ---------- 14,362,972 14,362,972 14,362,972 ========== ========== ========== (4) Lease Agreements Space in our rental properties is leased to approximately 300 tenants. In addition to minimum rents, the leases typically provide for other rents which reimburse us for specific property operating expenses. The future minimum base rent to be received under noncancellable tenant leases and the percentage of total rentable space under leases expiring each year, as of December 31, 2001 are summarized as follows: (Dollars in thousands) Percentage of Future Total Space Minimum Under Lease Rent Expiring --------- ------------- 2002 $ 82,300 9.1 2003 73,909 12.6 2004 63,094 18.9 2005 50,200 8.9 2006 46,177 4.8 2007 & thereafter 124,960 45.7 --------- $ 440,640 ========= Leases also provide for additional rent based on increases in the Consumer Price Index (CPI) and increases in operating expenses. Increases are generally payable in equal installments throughout the year. (5) Investments in Unconsolidated Entities and Affiliate Transactions CarrAmerica utilizes joint venture arrangements on projects characterized by large dollar-per-square foot costs and/or when it desires to limit capital deployment in certain of its markets. We own interests ranging from 21.2% to 49.0% in real estate properties and development properties through unconsolidated entities. We had three investments in 2001 and 2000 and one investment in 1999 these entities. The combined condensed financial information for the unconsolidated entities accounted for under the equity method is as follows: 33 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Notes to Consolidated Financial Statements (In thousands) December 31, Balance Sheets 2001 2000 -------- -------- Assets ------ Rental property, net $456,079 $409,516 Land and construction in progess 45,537 71,124 Cash and cash equivalents 13,773 14,680 Other assets 25,535 4,092 -------- -------- $540,924 $499,412 ======== ======== Liabilities and Partners' Capital --------------------------------- Liabilities: Notes payable $271,089 $ 26,835 Other liabilities 20,612 13,058 -------- -------- Total liabilities 291,701 39,893 Partners' capital 249,223 459,519 -------- -------- $540,924 $499,412 ======== ======== Statements of Operations 2001 2000 1999* ------- ------- ----- Revenue $75,260 $24,025 $-- Depreciation and amortization expense 20,748 7,512 -- Interest expense 10,606 113 -- Other expenses 27,160 9,570 -- ------- ------- --- Net income $16,746 $ 6,830 $-- ======= ======= === * Our only investment, 1201 F St., LLC, was in development in 1999; therefore there was no operating activity. CarrAmerica Realty Services, Inc. ("CARSI"), a wholly owned subsidiary of CarrAmerica, provides management and leasing services to all our office properties. During 2001, 2000 and 1999, respectively, we incurred management fees of $2.5 million, $2.7 million and $3.8 million, respectively, for services performed by CARSI. In 2000 and 1999, CARSI reimbursed us for services our personnel provided to CARSI. These reimbursements amounted to $3.4 million and $3.5 million in 2000 and 1999, respectively. In 2001, no such reimbursements were made. In April 2001, CarrAmerica exercised an option under a loan agreement to acquire two office buildings and related land located in the San Francisco Bay area. We purchased this property from CarrAmerica at its cost of approximately $51.0 million. (6) (Loss) Gain on Sales of Assets and Other Provisions We dispose of assets (sometimes using tax-deferred exchanges) that are inconsistent with our long-term strategic or return objectives or where market conditions for sale are favorable. In 2001, we disposed of one property in connection with the sale of a group of properties by CarrAmerica. There was a net gain on this transaction; however, we incurred a loss of $6.5 million on our property. We also recognized an impairment loss of $0.9 million on land held for development. During 2000, we disposed of three properties. We recognized a gain of $6.0 million on these transactions. On August 17, 2000, we closed on a joint venture transaction with New York State Teachers Retirement System ("NYSTRS"). At closing, we and some affiliates contributed properties to the joint venture, Carr Office Park, L.L.C., and NYSTRS contributed cash of approximately $255.1 million. The joint venture encompasses five suburban office parks (including 26 rental properties and land held for development of additional properties) in four markets. We contributed 21 properties and land held for development. We received approximately $107.0 million in cash, including payment on an intercompany obligation, and a 21.2% interest in 34 CARRAMERICA REALTY, L.P. AND SUBSIDIARY Notes to Consolidated Financial Statements the joint venture in exchange for the properties contributed and recognized a gain on the partial sale of $18.9 million. During 1999, we disposed of three rental properties and recognized a gain of $3.8 million. (7) Commitments and Contingencies We participate in CarrAmerica's 401(k) plan for employees under which we match 75% of employee contributions up to the first 6% of pay. We also make a base contribution of 3% of pay for participants who remain employed on December 31 (end of the plan year). Our contributions to the plan are subject to four-year vesting, 25% per year. Prior to 2001, the vesting schedule was a five-year graduated vesting schedule, and our contribution was 50% of employee contributions up to the first 4% of pay. Our contributions to the plan were $306,000 in 2001, $216,000 in 2000 and $201,000 in 1999. In the course of our normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against us. Based on currently available facts, we believe that the disposition of matters that are pending or asserted will not have a material adverse effect on our consolidated financial position, result of operations or liquidity. During 2001 and 2000, we have unconditionally guaranteed unsecured notes issued by CarrAmerica to institutional investors. The aggregate principal amount of the unsecured notes was $475.0 million as of December 31, 2001. These notes are in the form of $150 million of 7.20% notes due in 2004, $100 million of 6.625% notes due in 2005, $125 million of 7.375% notes due in 2007 and $100 million of 6.875% notes due in 2008. CarrAmerica's senior unsecured notes contain various covenants with which CarrAmerica must comply. The covenants include: . Limits on CarrAmerica's total indebtedness on a consolidated basis; . Limits on CarrAmerica's secured indebtedness on a consolidated basis; and . Limits on CarrAmerica's required debt service payments. On January 11, 2002, CarrAmerica issued $400 million of senior unsecured notes. The notes bear interest at 7.125% per annum, payable semi-annually beginning on July 15, 2002. The notes mature on January 15, 2012. We unconditionally guarantee these notes. Proceeds from the notes were used to pay down CarrAmerica's unsecured credit facility. (8) Quarterly Financial Information (unaudited) The following is a summary of quarterly results of operations for 2001 and 2000: (In thousands) First Second Third Fourth 2001 Quarter Quarter Quarter Quarter ---- -------- ------- ------- ------- Real estate operating revenue $ 25,671 $26,258 $25,750 $26,398 Real estate operating income 2,852 2,486 4,193 5,196 Net (loss) income (3,292) 5,192 4,955 5,670 2000 ---- Real estate operating revenue $ 33,753 $35,787 $30,785 $24,460 Real estate operating income 7,514 7,053 3,792 787 Net income 7,712 8,624 15,833 14,702 Note: Net loss for the first quarter of 2001 includes a loss on the sale of assets and impairment loss of $7,566. Net income for the second, third and fourth quarter of 2000 includes gains on sales of assets of $978, $11,352 and $12,591, respectively. 35 CarrAmerica Realty Corporation and Subsidiaries Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2001
(In thousands) Initial Costs Costs ---------------------- Capitalized Buildings and Subsequent to Properties Encumbrances Land Improvements Acquisition/1/ ------------------------------------ ------------ ------ ------------- -------------- Orange County/Los Angeles: South Coast Executive Center 14,871 3,324 17,212 3,746 2600 W. Olive 18,913 3,855 25,054 3,092 Bay Technology Center -- 2,442 11,164 753 San Diego: Jaycor 10,861 5,123 11,754 4,416 San Francisco Bay Area: San Mateo Center I -- 5,703 9,126 899 San Mateo II & III -- 9,723 15,556 1,922 Mountain View Gateway Center -- 13,637 37,946 -- Denver, CO: Harlequin Plaza -- 4,746 21,344 8,742 Quebec Court I & II -- 2,368 19,819 10,414 Quebec Centre -- 1,423 5,659 1,489 Seattle, WA: Canyon Park Commons 4,923 2,375 9,958 1,530 Salt Lake City, UT: Sorenson Research Park 3,721 4,389 25,304 3,553 Sorenson XI -- 1,490 -- 4,884 Wasatch Corporate Center 12,016 3,318 15,495 509 Wasatch Corporate Center 17, 18 -- 2,636 -- 11,611 Wasatch Corporate Center 16 -- 1,172 -- 1,213 Chicago, IL: Bannockburn I & II -- 3,448 22,928 4,764 Bannockburn IV -- 1,914 12,729 701 Austin, TX: City View Centre -- 1,718 13,854 1,706 City View Center -- 1,890 -- 13,713 Tower of the Hills -- 1,633 13,625 1,355 Dallas, TX: Cedar Maple Plaza -- 1,220 10,982 1,856 Quorum North -- 1,357 9,078 1,699 Quorum Place -- 1,941 14,234 1,937 Two Mission Park -- 823 4,326 1,120 Royal Ridge -- 1,960 -- 514 Commons @ Las Colinas 1, 3 -- 9,990 -- 95,402 5000 Quorum -- 1,774 15,616 1,507 Gross Amount at Which (In thousands) Carried at Close of Period -------------------------- Building and Accumulated Date of Year of Properties Land Improvements Total Depreciation Construction Acquisition ------------------------------------ ------ ------------ ------- ------------ ------------ ----------- Orange County/Los Angeles: South Coast Executive Center 3,388 20,894 24,282 4,097 1987 1996 2600 W. Olive 3,904 28,097 32,001 5,046 1986 1997 Bay Technology Center 2,462 11,897 14,359 1,679 1985 1997 San Diego: Jaycor 5,154 16,139 21,293 1,645 1989 1998 San Francisco Bay Area: San Mateo Center I 5,710 10,018 15,728 1,341 1986 1997 San Mateo II & III 9,817 17,384 27,201 2,725 1985 1997 Mountain View Gateway Center 13,637 37,946 51,583 895 1998 2001 Denver, CO: Harlequin Plaza 4,747 30,085 34,832 7,026 1981 1996 Quebec Court I & II 2,371 30,230 32,601 6,845 1979-1980 1996 Quebec Centre 1,423 7,148 8,571 1,832 1985 1996 Seattle, WA: Canyon Park Commons 2,380 11,483 13,863 1,626 1988 1997 Salt Lake City, UT: Sorenson Research Park 5,017 28,229 33,246 4,795 1988-1997 1997 Sorenson XI 2,312 4,062 6,374 710 1999 1997 Wasatch Corporate Center 3,587 15,735 19,322 2,382 1996 1997 Wasatch Corporate Center 17, 18 2,537 11,710 14,247 2,228 1998-1999 1997 Wasatch Corporate Center 16 2,385 -- 2,385 -- N/A 1999 Chicago, IL: Bannockburn I & II 3,472 27,668 31,140 5,265 1980 1997 Bannockburn IV 1,924 13,420 15,344 2,177 1988 1997 Austin, TX: City View Centre 1,720 15,558 17,278 3,848 1985 1996 City View Center 2,106 13,497 15,603 2,980 1998 1996 Tower of the Hills 1,634 14,979 16,613 2,161 1986 1997 Dallas, TX: Cedar Maple Plaza 1,225 12,833 14,058 2,215 1985 1997 Quorum North 1,368 10,766 12,134 2,059 1983 1997 Quorum Place 1,954 16,158 18,112 3,270 1981 1997 Two Mission Park 831 5,438 6,269 1,120 1983 1997 Royal Ridge 2,474 -- 2,474 -- N/A 2000 Commons @ Las Colinas 1, 3 10,033 95,359 105,392 9,514 1999 1998 5000 Quorum 1,782 17,115 18,897 2,476 1984 1998
36 CarrAmerica Realty Corporation and Subsidiaries Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2001
(In thousands) Initial Costs Costs ------------------------ Capitalized Buildings and Subsequent to Properties Encumbrances Land Improvements Acquisition/1/ ------------------------- ------------ -------- ------------- ------------- Phoenix, AZ: Qwest Communications 35,901 18,517 74,069 786 -------- -------- -------- -------- PROPERTY TOTALS $101,206 $115,909 $416,832 $185,833 ======== ======== ======== ======== Gross Amount at Which Carried at Close of Period --------------------------------- Building and Accumulated Date of Year of Properties Land Improvements Total Depreciation Construction Acquisition ------------------------ -------- ------------ -------- ------------ ------------ ----------- Phoenix, AZ: Qwest Communications 18,641 74,731 93,372 10,068 1988 1997 -------- -------- -------- ------- PROPERTY TOTALS $119,995 $598,579 $718,574 $92,025 ======== ======== ======== =======
Depreciation of rental properties is computed on a straight-line basis over the estimated useful lives of the assets. The estimated lives of our assets by class are as follows:
Base building 30 to 50 years Building components 7 to 20 years Tenant improvements Lesser of the terms of the leases or useful lives of the assets Furniture, fixtures and equipment 5 to 15 years
The aggregate cost for federal income tax purposes was approximately $508,041 at December 31, 2001. The changes in total real estate assets and accumulated depreciation for the three years ended December 31, 2001, 2000 and 1999 are as follows: Real Estate Assets --------------------------------- (In thousands) 2001 2000 1999 -------------------------------------- --------- --------- --------- Balance, beginning of period $ 672,041 $ 815,967 $ 762,580 Acquisitions 51,583 -- -- Improvements 16,067 59,318 90,537 Sales, retirements and write-offs (21,117) (203,244) (37,150) --------- --------- --------- Balance, end of period $ 718,574 $ 672,041 $ 815,967 ========= ========= ========= Accumulated Depreciation --------------------------------- 2001 2000 1999 --------- --------- --------- Balance, beginning of period $ 66,100 $ 57,733 $ 32,546 Depreciation for the period 27,391 28,252 28,742 Sales, retirements and write-offs (1,466) (19,885) (3,555) -------- -------- -------- Balance, end of period $ 92,025 $ 66,100 $ 57,733 ======== ======== ======== /1/ Costs capitalized are offset by retirements and writeoffs. 37