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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-19156
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED, A MARYLAND CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 13-3559213
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
(212) 492-1100
(Registrant's telephone number, including area code)
(Former name, former address and former
fiscal year, if changed since last report)
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. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
7,621,638 shares of common stock; $.001 Par
Value outstanding at November 9, 1998.
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CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
INDEX
Page No.
PART I
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II - Other Information
Signatures 13
* The summarized financial information contained herein is unaudited; however,
in the opinion of management, all adjustments necessary for a fair presentation
of such financial information have been included.
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CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
condensed consolidated financial statements and notes thereto as of September
30, 1998 included in this quarterly report and the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. This quarterly report contains
forward looking statements. Such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievement of the Company to be materially different from the results of
operations or plan expressed or implied by such forward looking statements.
Accordingly, such information should not be regarded as representations by the
Company that the results or conditions described in such statements or the
objectives and plans of the Company will be achieved.
RESULTS OF OPERATIONS:
Net income for the three-month and nine-month periods ended September 30,
1998 is not fully comparable to net income for the three-month and nine-month
periods ended September 30, 1997 as a result of several nonrecurring items that
occurred in the prior year. The nonrecurring items in 1997 consisted of
extraordinary gains on the extinguishment of a limited recourse mortgage loan of
$427,000 and recognition of a gain of $3,423,000 that had been deferred in a
prior period, a gain of $141,000 on the sales of properties that had previously
been leased to Harvest Foods, Inc. and other income of $112,000. The results of
operations for the three-month and nine-month periods ended September 30, 1998,
as adjusted for nonrecurring items, reflect decreases of $53,000 and $86,000,
respectively, as compared with the prior periods.
The decreases in income, as adjusted for the nonrecurring items, were
primarily due to an increase in property expenses, and, for the nine-month
period only, a decrease in other interest income. This was partially offset by
a decrease in interest expense. Lease revenues (rental income and interest
income on direct financing leases) were stable. The increase in property
expenses was due to certain unanticipated carrying costs for unleased
properties, an increase in the Company's provision for uncollected rents and a
moderate increase in asset management and performance fees. The decrease in
interest expense was due to the satisfaction in 1997 of the first priority
limited recourse mortgage loan on the properties formerly leased to Harvest
Foods, of a limited recourse loan on a property leased to Kmart Corporation as
well as the continuing principal amortization of the Company's limited recourse
loans. The decrease in other interest income was due to lower average cash
balances resulting from the use of $5,450,000 of its cash reserves in 1997 to
pay off the loans on the Harvest and Kmart properties.
Lease revenues were stable because of rent increases on the Company's
leases with The Titan Corporation and EnviroWorks, Inc. in August 1997 and
April 1998, respectively, increased percentage rents on the Company's leases for
retail stores with Kmart and Wal-Mart Stores, Inc. in 1998 and leases entered
into with Affiliated Foods Southwest, Inc. and The Kroger Co. at former Harvest
Foods properties, and offset the reduction in lease revenues that resulted from
the March 1997 termination of the Harvest Foods master lease. The Company
continues to re-market six vacant properties formerly leased to Harvest. If any
of the six currently vacant properties are leased, lease revenues will increase
and some or all of the carrying costs for those properties may be absorbed by
the lessees.
FINANCIAL CONDITION:
There has been no material change in the Company's financial condition
since December 31, 1997. Cash flow from operations of $4,847,000 was sufficient
to fund dividends of $3,884,000 and scheduled mortgage principal installments
of $953,000.
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CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
FINANCIAL CONDITION (continued):
During 1998, the shareholders of the Company approved a proposal to allow
the Company, subject to the consent of the Advisor, to pay all or a portion of
its asset management and performance fees in common stock rather than cash. As
a result of this amendment to the Advisory Agreement, the Company converted
liabilities for unpaid performance fees of $4,371,000 to equity. This has
allowed the Company to enhance its liquidity by settling obligations in stock
and strengthen its balance sheet with the effect of more strongly aligning the
interests of the Advisor with those of the Company's shareholders by increasing
the Advisor's common stock ownership to more than 5% of the Company.
A limited recourse mortgage loan collateralized by properties leased to
Wal-Mart Stores, Inc. that currently has a balance of $6,942,000 is scheduled
to mature in January 1999 at which time a balloon payment of $6,910,000 will be
due. The Company is currently assessing various refinancing alternatives
including, but not limited to, seeking an extension of the existing loan, and
securing new limited recourse mortgage financing for the properties and for
other properties in the portfolio that are currently unencumbered. In the
unlikely event that the Company were not able to extend or repay the limited
recourse mortgage loan on the Wal-Mart properties, the holder of the loan
would have recourse only to the properties collateralizing such debt.
The so-called "Year 2000 issue" is the name that has been given to the
series of problems that have resulted or may result from computer programs
having been written using two digits rather than four to define a year. For
example, any program that has time-software may recognize a date using "00" as
the year 1900 rather than 2000. This shortcoming could result in the failure of
major systems or miscalculations causing major disruptions to business
operations. The Company has no computer systems of its own, but is dependent
upon the systems maintained by an affiliate of its Advisor and certain other
third parties including its bank and transfer agent.
The Company and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. In 1998, the Company, its Advisor, and
affiliates commenced an assessment of their local area network of personal
computers and related equipment and are in the process of replacing or upgrading
the equipment that has been identified as not being Year 2000 compliant. The
program is expected to be completed in the first or second quarter of 1999. The
Company and its affiliates have also engaged outside consultants experienced in
detecting and addressing Year 2000 issues, and they will continue to research
and test the affiliate's applications and systems.
At the same time, the Company, its Advisor, and affiliates are evaluating
all of their applications software, all of which are commercial "off the shelf"
programs that have not been customized. During 1998, the Company commenced a
project to select a comprehensive integrated real estate accounting and asset
management software package to replace its existing applications. A commercial
Windows-based integrated accounting and asset management based application is
being tested and is scheduled to be installed during the second or third quarter
of 1999. This software has been designed to use four digits to define a year.
Because the Company's primary operations consist of investing in and receiving
rents on long-term net leases of real estate, while the failure of the Advisor
and its affiliates to correct fully Year 2000 issues could disrupt its
administrative operations, the resulting disruptions would not likely have a
material impact on the Company's results of operations, financial condition or
liquidity. Contingency plans to address potential disruptions are in the process
of being developed. The Company's share of costs associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. The Company's share of the estimated total
cost of the Year 2000 project is expected to be approximately $65,000.
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CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
FINANCIAL CONDITION (continued):
Although the Company believes that it will address its internal Year 2000
issues in a timely manner, there is a risk that the inability of third-party
suppliers and lessees to meet Year 2000 readiness issues could have an adverse
impact on the Company. The Company and its affiliates have identified their
critical suppliers and are requiring that these suppliers communicate their
plans and progress in addressing Year 2000 readiness. The most critical
processes provided by third-party suppliers are the Company's bank and transfer
agent. The Company's operations may be significantly affected if such providers
are ineffective or untimely in addressing Year 2000 issues.
The Company contacted each of its lessees regarding Year 2000 readiness
and has emphasized the need to address Year 2000 issues. Generally, lessees are
contractually required to maintain their leased properties in good working order
and to make necessary alterations, foreseen or unforeseen, to meet their
contractual obligations. Because of those obligations, the Company believes that
the risks and costs of upgrading systems related to operations of the buildings
and that contain technology affected by Year 2000 issues will generally be
absorbed by lessees rather than the Company. The major risk to the Company is
that Year 2000 issues have such an adverse effect on the financial condition of
a lessee that its ability to meet its lease obligations, including the timely
payment of rent, is impaired. In such an event, the Company may ultimately incur
the costs for Year 2000 readiness at the affected properties. The potential
materiality of any impact is not known at this time.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
accounting standards for the way that public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products, geographic area and major customers. The statement is effective
for financial periods beginning after December 15, 1997, however, SFAS No. 131
does not need to be applied to interim financial statements in 1998. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for all quarters of fiscal years beginning after June 15, 1999. The Company is
currently evaluating the impact, if any, of SFAS No. 131 and SFAS No. 133.
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CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
11/17/98 By: /s/ Steven M. Berzin
-------- ----------------------------------
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/17/98 By: /s/ Claude Fernandez
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Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
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