<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 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)
<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
7,621,638 shares of common stock; $.001 Par Value
outstanding at November 9, 1998
<PAGE> 2
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I
<S> <C>
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 1997
and September 30, 1998 2
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 1997 and 1998 3
Condensed Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 12
Item 6. - Exhibits and Reports on Form 8-K 12
Signatures 13
</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.
-1-
<PAGE> 3
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
(Note) (Unaudited)
ASSETS:
<S> <C> <C>
Land and buildings ,
net of accumulated depreciation of
$11,498,122 at December 31, 1997 and
$13,030,541 at September 30, 1998 $ 89,600,840 $ 88,068,421
Net investment in direct financing leases 16,758,447 16,758,447
Equity investment 11,657,088 12,195,941
Cash and cash equivalents 2,608,523 2,322,709
Other assets 414,332 809,167
------------- -------------
Total assets $ 121,039,230 $ 120,154,685
============= =============
LIABILITIES:
Limited recourse mortgage notes payable $ 61,536,571 $ 60,582,850
Accrued interest payable 678,446 813,846
Accounts payable and accrued expenses 245,126 281,316
Accounts payable to affiliates 5,523,241 1,752,458
Prepaid rental income 22,497
Dividends payable 1,346,743
------------- -------------
Total liabilities 67,983,384 64,799,710
------------- -------------
Minority interest 3,870,416 3,710,980
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 40,000,000 shares authorized; 7,217,294 and
7,633,558 shares, issued and outstanding at
December 31, 1997 and September 30, 1998 7,217 7,634
Additional paid-in capital 62,160,058 66,530,408
Unrealized appreciation, marketable securities 136,140
Dividends in excess of accumulated
earnings (12,893,753) (14,932,407)
------------- -------------
49,273,522 51,741,775
Less, common stock in treasury, at cost, 10,652
and 11,920 shares at December 31, 1997
and September 30, 1998 (88,092) (97,780)
------------- -------------
Total shareholders' equity 49,185,430 51,643,995
------------- -------------
Total liabilities and shareholders' equity $ 121,039,230 $ 120,154,685
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date.
-2-
<PAGE> 4
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases $ 2,933,662 $ 2,986,162 $ 9,026,191 $ 9,234,678
Interest from direct
financing leases 549,572 549,253 1,858,063 1,648,021
Other interest income 33,765 25,612 202,138 87,529
Other income 112,313
------------ ------------ ------------ ------------
3,516,999 3,561,027 11,198,705 10,970,228
------------ ------------ ------------ ------------
Expenses:
Interest 1,595,379 1,533,356 4,896,585 4,609,546
Depreciation 514,464 510,807 1,513,885 1,532,419
General and administrative 309,742 291,107 924,732 923,704
Property expenses 443,791 600,943 1,393,543 1,686,823
Amortization 15,505 11,307 58,408 33,921
------------ ------------ ------------ ------------
2,878,881 2,947,520 8,787,153 8,786,413
------------ ------------ ------------ ------------
Income before minority
interest, income from
equity investment, net
gain on sales and
extraordinary items 638,118 613,507 2,411,552 2,183,815
Minority interest in income (153,451) (159,884) (450,731) (476,368)
------------ ------------ ------------ ------------
Income before income from
equity investment, net
gain on sales and
extraordinary items 484,667 453,623 1,960,821 1,707,447
Income from equity investment 446,903 424,684 1,430,073 1,484,988
------------ ------------ ------------ ------------
Income before net
gain on sales and
extraordinary items 931,570 878,307 3,390,894 3,192,435
Net gain on sales 141,131 141,131
------------ ------------ ------------ ------------
Income before
extraordinary items 1,072,701 878,307 3,532,025 3,192,435
Extraordinary gains 3,423,043 3,850,490
------------ ------------ ------------ ------------
Net income $ 4,495,744 $ 878,307 $ 7,382,515 $ 3,192,435
============ ============ ============ ============
Basic and diluted earnings per share:
Income before extraordinary
items $ .15 $ .12 $ .49 $ .43
Extraordinary items .47 .53
------------- ------------- ------------- -------------
$ .62 $ .12 $ 1.02 $ .43
============= ============= ============= =============
Weighted average shares outstanding
- basic and diluted 7,206,642 7,633,558 7,206,642 7,378,452
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE> 5
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATE
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income $ 4,495,744 $ 878,307 $ 7,382,515 $ 3,192,435
Other comprehensive income:
Change in appreciation,
marketable securities
during the period (53,484) 136,140
----------- ----------- ----------- -----------
Comprehensive income $ 4,495,744 $ 824,823 $ 7,382,515 $ 3,328,575
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<PAGE> 6
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,382,515 $ 3,192,435
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,572,293 1,566,340
Income from equity investment
in excess of dividends received (523,869) (538,853)
Distributions to minority interest in excess of
minority interest in income (149,763) (159,436)
Straight-line rent adjustments 71,736 5,744
Extraordinary gain on extinguishment of debt (3,850,490)
Net gain on sales of real estate (141,131)
Provision for uncollected rents 81,620
Net change in operating assets and liabilities 620,160 699,201
----------- -----------
Net cash provided by operating activities 4,981,451 4,847,051
----------- -----------
Cash flows from investing activities:
Proceeds from repayment of note receivable 110,750
Purchases of marketable securities (285,110)
Proceeds from sale of real estate 1,194,273
----------- -----------
Net cash provided by (used in) investing activities 1,305,023 (285,110)
----------- -----------
Cash flows from financing activities:
Dividends paid (4,026,351) (3,884,346)
Proceeds from note payable 1,600,000
Purchases of treasury stock (9,688)
Prepayment of mortgages payable (5,450,000)
Payments of mortgage principal (868,633) (953,721)
Deferred refinancing costs (4,500)
----------- -----------
Net cash used in financing activities (8,749,484) (4,847,755)
----------- -----------
Net decrease in cash and cash equivalents (2,463,010) (285,814)
Cash and cash equivalents, beginning of period 6,452,554 2,608,523
----------- -----------
Cash and cash equivalents, end of period $ 3,989,544 $ 2,322,709
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 4,810,513 $ 4,474,146
=========== ===========
</TABLE>
Noncash operating and financing activities:
In June 1998, the Company issued 416,264 shares of common stock to the
Advisor in settlement of $4,370,767 of performance fees that had been
voluntarily deferred by the Advisor.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
<PAGE> 7
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
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.
Note 2. Transactions with Related Parties:
For the three-month and nine-month periods ended September 30, 1997, the Company
incurred asset management fees of $166,950 and $560,849, respectively,
performance fees in like amount and general and administrative expense
reimbursements of $153,089 and $452,402, respectively, payable to an affiliate.
For the three-month and nine-month periods ended September 30, 1998, the Company
incurred asset management fees of $201,763 and $605,288, respectively,
performance fees in like amount and general and administrative expense
reimbursements of $159,537 and $424,125, respectively, payable to an affiliate.
On June 10, 1998, the Company's shareholders approved a proposal to allow the
Company, subject to the consent of the Advisor, to pay fees to the Advisor in
Company stock rather than cash. In connection with such approval, the Company
issued 416,264 shares of common stock to the Advisor in settlement of accrued
performance fees of $4,370,767 which collection had previously been voluntarily
deferred by the Advisor. The stock is subject to certain restrictions and will
vest ratably over a five year period. In issuing the shares, the Company used a
share value of $10.50. This per share value was based on an independent
valuation of the Company's real estate assets at December 31, 1997. The Advisor
currently owns approximately 5.7% of the Company's outstanding shares of common
stock.
Pursuant to the Advisory Agreement, asset management and performance fees,
respectively, are equal to .5% of Average Invested Assets, as defined. Payment
of the performance fee is subordinated to achievement of a cumulative dividend
return of 8% (based on an initial issuance of common stock at $10 per share).
For the quarterly periods subsequent to September 30, 1997, the cumulative
dividend return criterion of 8% is no longer being met, and performance fees
aggregating $790,689 are not currently payable until such time as this criterion
is achieved again. This accrued performance fee is included in accounts payable
to affiliates in the accompanying condensed consolidated financial statements.
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 nine-month periods ended September
30, 1997 and 1998 were $86,318 and $67,109, respectively.
-6-
<PAGE> 8
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 3. Dividends:
Dividends declared and paid to shareholders during the nine months ended
September 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Paid Per Share
------------- ---- ---------
<S> <C> <C>
December 31, 1997 $1,269,091 $0.17610
========== ========
March 31, 1998 $1,270,532 $0.17630
========== ========
June 30, 1998 $1,344,723 $0.17650
========== ========
</TABLE>
A dividend of $.1767 per share declared on September 24, 1998 and was paid in
October 1998 and has been recorded in the accompanying condensed consolidated
financial statements as dividends payable.
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 nine-month periods ended September 30, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Per Statements of Income:
Rental income from operating leases $ 9,026,191 $ 9,234,678
Interest from direct financing leases 1,858,063 1,648,021
Adjustments:
Rental income attributable to
minority interests (1,442,244) (1,457,154)
Share of interest income from equity
investment's direct financing lease 3,341,474 3,387,233
------------ ------------
$ 12,783,484 $ 12,812,778
============ ============
</TABLE>
-7-
<PAGE> 9
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
For the nine-month periods ended September 30, 1997 and 1998, the Company earned
its lease revenues on its investments from the following lease obligors:
<TABLE>
<CAPTION>
1997 % 1998 %
----------- --- ----------- ---
<S> <C> <C> <C> <C>
Marriott International, Inc. (a) $ 3,341,474 26% $ 3,387,233 26%
Information Resources Incorporated (b) 2,187,010 17 2,187,010 17
The Titan Corporation (b) 1,532,993 12 1,598,502 13
New WAI, L.P./Warehouse Associates 1,089,141 9 1,089,799 9
EnviroWorks, Inc. 1,040,818 8 1,070,084 8
Wal-Mart Stores, Inc. 798,876 6 823,668 6
Kmart Corporation 709,145 6 746,757 6
Childtime Childcare Inc. 598,841 5 604,091 5
Other 420,853 3 530,308 4
Neodata Corporation 440,796 3 440,796 3
CalComp Technology, Inc. 331,775 3 334,530 3
Harvest Foods, Inc. 291,762 2
----------- ---- ----------- ---
$12,783,484 100% $12,812,778 100%
=========== === =========== ===
</TABLE>
(a) Represents the Company's proportionate share of lease revenues attributable
to its equity investment.
(b) Net of Corporate Property Associates 9's minority interest.
Note 5. Equity Investment:
The Company owns an approximate 23.7% interest in Marcourt Investments
Incorporated ("Marcourt"), a real estate investment trust that 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 September 30, 1998
----------------- ------------------
<S> <C> <C>
Assets $149,413 $149,225
Liabilities 102,826 100,224
Shareholders' equity 46,587 49,001
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue $ 14,223 $ 14,321
Interest and other expenses (8,134) (7,909)
-------- --------
Net income $ 6,089 $ 6,412
======== ========
</TABLE>
-8-
<PAGE> 10
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 five vacant properties formerly leased to Harvest. In
September 1998, the Company entered into a new lease for a former Harvest Foods
property that had been vacant since the termination of that lease. The new lease
has a term of five years that will initially provide annual rent of $66,000. The
lessee will assume the obligation for all utilities and maintenance and repairs.
If any of the five 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.
-9-
<PAGE> 11
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.
-10-
<PAGE> 12
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.
-11-
<PAGE> 13
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 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 September 30, 1998, the
Company was not required to file any report on Form
8-K.
-12-
<PAGE> 14
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
11/9/98 By: /s/ Steven M Berzin
- ------- ------------------------------------
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/9/98 By: /s/ Claude Fernandez
- ------- ------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCES TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,322,709
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,322,709
<PP&E> 117,857,409
<DEPRECIATION> 13,030,541
<TOTAL-ASSETS> 120,154,685
<CURRENT-LIABILITIES> 4,216,860
<BONDS> 60,582,850
0
0
<COMMON> 7,634
<OTHER-SE> 51,636,361
<TOTAL-LIABILITY-AND-EQUITY> 120,154,685
<SALES> 0
<TOTAL-REVENUES> 10,970,228
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,176,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,609,546
<INCOME-PRETAX> 3,192,435
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,192,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,192,435
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
