<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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)
<TABLE>
<S> <C>
MARYLAND 13-3559213
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
</TABLE>
(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
7,206,642 shares of common stock; $.001 Par Value
outstanding at May 14, 1998
<PAGE> 2
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
INDEX
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<CAPTION>
Page No.
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<S> <C>
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 1997
and March 31, 1998 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 1997 and 1998 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1998 4
Notes to condensed consolidated financial statements 5-7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 10
Item 6. - Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
*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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<PAGE> 3
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
(Note) (Unaudited)
------------- --------------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land and buildings,
net of accumulated depreciation of
$11,498,122 at December 31, 1997 and
$12,008,128 at March 31, 1998 $ 89,600,840 $ 89,090,834
Net investment in direct financing leases 16,758,447 16,758,447
Equity investment 11,657,088 11,844,526
Cash and cash equivalents 2,608,523 2,566,029
Other assets 414,332 705,261
------------- -------------
Total assets $ 121,039,230 $ 120,965,097
============= =============
LIABILITIES:
Mortgage notes payable $ 61,536,571 $ 61,220,486
Accrued interest payable 678,446 723,947
Accounts payable and accrued expenses 245,126 197,687
Accounts payable to affiliates 5,523,241 5,669,663
Prepaid rental income 19,497
------------- -------------
Total liabilities 67,983,384 67,831,280
------------- -------------
Minority interest 3,870,416 3,803,246
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 40,000,000 shares
authorized; 7,217,294 shares, issued and outstanding
at December 31, 1997 and March 31, 1998 7,217 7,217
Additional paid-in capital 62,160,058 62,160,058
Dividends in excess of accumulated
earnings (12,893,753) (12,748,612)
------------- -------------
49,273,522 49,418,663
Less common stock in treasury at cost, 10,652 shares
at December 31, 1997 and March 31, 1998 (88,092) (88,092)
------------- -------------
Total shareholders' equity 49,185,430 49,330,571
------------- -------------
Total liabilities and shareholders' equity $ 121,039,230 $ 120,965,097
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 1997 has been derived from the
audited condensed consolidated financial statements at that date.
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<PAGE> 4
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997 March 31, 1998
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<S> <C> <C>
Revenues:
Rental income from operating leases $ 3,255,359 $ 3,127,967
Interest income from direct financing leases 749,952 549,477
Other interest income 86,139 29,942
----------- -----------
4,091,450 3,707,386
----------- -----------
Expenses:
Interest on mortgages 1,710,961 1,538,793
Depreciation 484,078 510,006
General and administrative 329,601 262,948
Property expense 405,062 474,286
Amortization 19,203 11,306
----------- -----------
2,948,905 2,797,339
----------- -----------
Income before minority interest and
income from equity investment 1,142,545 910,047
Minority interest in income (148,726) (157,731)
----------- -----------
Income before equity investment 993,819 752,316
Income from equity investment 591,265 661,916
----------- -----------
Net income $ 1,585,084 $ 1,414,232
=========== ===========
Basic income per share (7,206,642 shares
outstanding): $ .22 $ .20
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 5
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,585,084 $ 1,414,232
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 503,281 521,312
Income from equity investment
in excess of dividends received (147,731) (187,438)
Distributions to minority interest in excess of
minority interest in income (50,265) (67,170)
Straight-line rent adjustments and other noncash
rent adjustments 66,054 2,841
Provision for uncollected rents 27,581
Net change in operating assets and liabilities (159,682) (168,676)
----------- -----------
Net cash provided by operating activities 1,796,741 1,542,682
----------- -----------
Cash flows from investing activities:
Proceeds from repayment of note receivable 110,750
-----------
Net cash provided by investing activities 110,750
-----------
Cash flows from financing activities:
Dividends paid (1,495,378) (1,269,091)
Proceeds from note payable 1,600,000
Payments of mortgage payable (1,600,000)
Payments of mortgage principal (297,904) (316,085)
----------- -----------
Net cash used in financing activities (1,793,282) (1,585,176)
----------- -----------
Net increase (decrease) in cash and cash equivalents 114,209 (42,494)
Cash and cash equivalents, beginning of period 6,452,554 2,608,523
----------- -----------
Cash and cash equivalents, end of period $ 6,566,763 $ 2,566,029
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 1,668,561 $ 1,493,292
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 6
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. All significant
intercompany balances and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the results of the interim periods
presented have been included. The results of operations for the interim periods
are not necessarily indicative of results for the full year. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in full set general purpose
financial statements. For the three months ended March 31, 1997 and 1998, there
were no differences between net income and comprehensive income.
Note 2. Transactions with Related Parties:
For the three-month periods ended March 31, 1997 and 1998, the Company incurred
asset management fees of $186,950 and $194,702, respectively, performance fees
in like amount and general and administrative expense reimbursements of $162,916
and $125,298, respectively, payable to an affiliate.
The Company, in conjunction with certain affiliates, is a participant in a cost
sharing agreement for the purpose of renting and occupying office space. Under
the agreement, the Company pays its proportionate share of rent and other costs
of occupancy. Net expenses incurred for the three-month periods ended March 31,
1997 and 1998 were $38,166 and $36,795, respectively.
Note 3. Dividends:
Dividends declared and paid to shareholders during the three months ended March
31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Paid Per Share
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<S> <C> <C>
December 31, 1997 $1,269,091 $ .1761
========== =========
</TABLE>
A dividend of $.1763 per share was declared and paid in April 1998 for the
quarter ended March 31, 1998.
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<PAGE> 7
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 4. Industry Segment Information:
The Company's operations consist of the direct and indirect investment in and
leasing of industrial and commercial real estate. The financial reporting
sources of leasing revenues for the three-month periods ended March 31, 1997 and
1998 are as follows:
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<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Per Statements of Income:
Rental income from operating leases $ 3,255,359 $ 3,127,967
Interest from direct financing leases 749,952 549,477
Adjustments:
Rental income attributable to
minority interests (479,329) (485,718)
Share of interest income from equity
investment's direct financing lease 1,243,574 1,284,897
----------- -----------
$ 4,769,556 $ 4,476,623
=========== ===========
</TABLE>
For the three-month periods ended March 31, 1997 and 1998, the Company earned
its proportionate net lease revenues from its investments from the following
lease obligors:
<TABLE>
<CAPTION>
1997 % 1998 %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marriott International, Inc. (a) $1,243,574 26% $1,284,897 29%
Information Resources Incorporated (b) 729,003 15 729,003 16
The Titan Corporation (b) 504,758 11 532,834 12
Wal-Mart Stores, Inc. 419,432 9 444,226 10
New WAI, L.P./Warehouse Associates 362,629 8 363,403 8
EnviroWorks, Inc. 346,939 7 346,939 8
Childtime Childcare Inc. 196,114 4 201,364 5
Kmart Corporation (c) 351,359 7 151,320 3
Neodata Corporation 146,932 3 146,932 3
CalComp Technology, Inc. 110,077 2 111,249 2
US West Communications, Inc. 55,650 1 55,650 1
The Kroger Co. 9,451 51,701 1
Safeway Stores Incorporated 35,438 1 35,438 1
Affiliated Foods Southwest, Inc. 21,667 1
Harvest Foods, Inc. 258,200 6
---------- --- ---------- ---
$4,769,556 100% $4,476,623 100%
========== === ========== ===
</TABLE>
(a) Represents the Company's proportionate share of lease revenues from an
equity investment.
(b) Net of Corporate Property Associates 9's minority interest.
(c) 1997 includes percentage of sales rents reported to the Company of
$200,039. Percentage of sales rent has not yet been reported for 1998.
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CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Equity Investment:
The Company owns an approximate 23.7% interest in Marcourt Investments
Incorporated ("Marcourt") which net leases 13 Courtyard by Marriott hotels to a
wholly-owned subsidiary of Marriott International, Inc. Summarized financial
information of Marcourt is as follows:
(in thousands)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
Assets $149,413 $149,334
Liabilities 102,826 101,911
Shareholders' equity 46,587 47,423
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenue $5,256 $5,431
Interest and other expense 2,712 2,589
------ ------
Net income $2,544 $2,842
====== ======
</TABLE>
Note 6. Affiliated Foods Southwest, Inc.:
In February 1992, the Company and Carey Institutional Properties, Incorporated
("CIP(TM)"), an affiliate, purchased, as tenants-in-common, each with 50%
ownership interests, 13 supermarkets and two office buildings and entered into a
master lease with Harvest Foods, Inc. ("Harvest"), as lessee. In March 1997, the
Bankruptcy Court, pursuant to Harvest's voluntary bankruptcy petition, approved
Harvest's motion to terminate the master lease. During 1997, the Company sold
three properties, including the office buildings and net leased five
supermarkets; two to the Kroger Co. and three to Affiliated Foods Southwest,
Inc. ("Affiliated").
On April 13, 1998, the Company and CIP(TM) entered into another net lease with
Affiliated for a property in Little Rock, Arkansas previously leased to Harvest.
The lease provides for an initial term through January 2009 with three five-year
renewal options at an initial annual rent of $257,432 (of which the Company's
share will be $128,716) commencing subsequent to a three-month free rent period.
During the initial term, stated rent increases are scheduled in February 2004
and 2006.
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<PAGE> 9
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
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 March 31,
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 period ended March 31, 1998 decreased by
$171,000 as compared with net income for the three-month period ended March 31,
1997. The decrease was due to a decrease in lease revenues (rental income and
interest income from direct financing leases) and lower interest income. These
revenue decreases were partially offset by decreases in interest and general and
administrative expenses and an increase in equity income.
The decrease in lease revenues was due to the March 1997 termination of
the Company's lease with Harvest Foods, Inc. and the recognition of $200,000 of
percentage of sales rent on the Kmart Corporation leases in the first quarter of
1997. Kmart has not yet reported percentage of sales rents to the Company for
1998, and the Company expects to receive and report such percentage of sales
rents during the second quarter. If these Kmart rents approximate the prior year
amounts and had already been reported to the Company, net income for the current
three-month period would have reflected an increase. The decrease in interest
income was due to lower cash balances. Subsequent to the first quarter of 1997,
the Company used $3,850,000 to pay off the first priority loan on the Harvest
properties. As a result, average cash balances decreased. The payoff of the
Harvest loan contributed $119,000 of the $172,000 decrease in interest expense
for the comparable periods with the remainder of the decrease primarily due to
the payoff of other loans and lower principal balances on the Company's
remaining limited recourse mortgage debt. The decrease in general and
administrative expenses resulted from lower expense reimbursements to the
Advisor. The increase in equity income from the Company's investment in the
Courtyard by Marriott real estate investment trust resulted from higher
percentage rents in 1998 and lower interest expenses on the limited recourse
mortgage loans which are amortizing over 16-3/4 years and are collateralized by
the Courtyard by Marriott properties.
FINANCIAL CONDITION:
There has been no material change in the Company's financial condition
since December 31, 1997. The Company's cash balances decreased by $42,000 with
cash flow from operations of $1,543,000 used to pay dividends of $1,269,000 and
mortgage principal payments of $316,000. This moderate change in cash balances
is consistent with the decision of the Board of Directors in April 1997 to
establish dividend rates that more closely reflect the Company's operating cash
flow.
Operating cash flow will benefit from the Company's new lease
with Affiliated Foods Southwest, Inc. for a property in Little Rock, Arkansas.
When rental payments commence in July 1998, the lease will contribute
approximately $129,000 to annual cash flow. The lease will also reduce property
expenses because Affiliated has assumed the obligations for paying insurance,
real estate taxes and maintenance costs at the leased property. To the extent
the Company is able to re-lease the six former Harvest properties that are
vacant, cash flow will increase. Accordingly, the Company has the potential for
increased cash flow from its existing portfolio. The Company continues its
remarketing efforts to lease or sell the former Harvest properties.
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<PAGE> 10
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
Continued
As of March 31, 1998, the Company had unpaid asset management and
performance fees of $4,754,000. A substantial portion of that amount has been
voluntarily deferred by the Advisor. The Independent Directors of the Company
have determined that it would be in the best interests of the Company and
shareholders to permit the Company to pay the fees to the Advisor in either cash
or common stock of the Company. The Independent Directors have approved an
amendment to the Company's Advisory Agreement that would permit the Company to
pay all or any portion of the asset management and performance fees in common
stock and have submitted a proposal to the shareholders to approve such an
amendment. The Independent Directors and the Company believe that the use of
common stock to pay such fees would (i) reduce the cash required by the Company
to pay expenses, thereby strengthening the Company's balance sheet, and (ii)
increase equity ownership of the Advisor and align further the interests of the
Advisor and the Shareholders of the Company.
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<PAGE> 11
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1998 no matters were
submitted to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the quarter ended March 31, 1998, the Company
was not required to file any reports on Form 8-K.
- 10 -
<PAGE> 12
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
05/18/98 By: /s/ Steven M. Berzin
---------- ----------------------------------
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
05/18/98 By: /s/ Claude Fernandez
---------- ----------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE THREE-MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS ARE STATED AT HISTORICAL
COST.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,566,029
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 705,261
<PP&E> 105,849,281
<DEPRECIATION> 12,008,128
<TOTAL-ASSETS> 120,965,097
<CURRENT-LIABILITIES> 6,610,794
<BONDS> 61,220,486
0
0
<COMMON> 7,217
<OTHER-SE> 49,323,354
<TOTAL-LIABILITY-AND-EQUITY> 120,965,097
<SALES> 0
<TOTAL-REVENUES> 3,707,386
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 737,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,538,793
<INCOME-PRETAX> 1,414,232
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,414,232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,414,232
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
