<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended MARCH 31, 1999
of
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
CPA(R):10
A MARYLAND Corporation
IRS Employer Identification No. 13-3559213
SEC File Number 0-19156
50 ROCKEFELLER PLAZA,
NEW YORK, NEW YORK 10020
(212) 492-1100
CPA(R):10 has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CPA(R):10 is not registered on any exchanges.
CPA(R):10 does not have any Securities registered pursuant to Section 12(b) of
the Act.
CPA(R):10 is unaware of any delinquent filers pursuant to Item 405 of Regulation
S-K.
CPA(R):10 (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
CPA(R):10 has no active market for common stock at May 10, 1999. 7,621,656
shares of common stock, $.001 Par Value outstanding at May 10, 1999.
<PAGE> 2
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of December 31, 1998
and March 31, 1999 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 1998 and 1999 3
Condensed Consolidated Statements of Comprehensive Income for 3
the three months ended March 31, 1998 and 1999.
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1999 4
Notes to Condensed Consolidated Financial Statements 5-6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
PART II - Other Information
Item 3A.- Quantitative and Qualitative Disclosures About Market Risk 9
Item 4. - Submission of Matters to a Vote of Security Holders 9
Item 6. - Exhibits and Reports on Form 8-K 9
Signatures 10
</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
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------- -------------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land and buildings,
net of accumulated depreciation of
$13,541,345 at December 31, 1998 and
$14,030,214 at March 31, 1999 $ 87,557,617 $ 86,479,846
Net investment in direct financing leases 16,758,447 16,758,447
Assets held for sale 218,250
Equity investment 12,382,287 12,576,336
Cash and cash equivalents 1,770,478 1,954,726
Other assets 787,077 870,906
------------- -------------
Total assets $ 119,255,906 $ 118,858,511
============= =============
LIABILITIES:
Limited recourse mortgage notes payable $ 58,748,585 $ 58,408,610
Accrued interest 472,220 480,303
Accounts payable and accrued expenses 479,388 439,203
Accounts payable to affiliates 1,912,233 2,091,138
Dividends payable 1,348,268 1,349,797
Prepaid rental income 27,365 41,562
------------- -------------
Total liabilities 62,988,059 62,810,613
------------- -------------
Minority interest 3,665,708 3,622,492
------------- -------------
Commitment and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 40,000,000 shares
authorized; 7,633,558 shares issued and outstanding
at December 31, 1998 and March 31, 1999 7,633 7,633
Additional paid-in capital 66,530,408 66,530,408
Dividends in excess of accumulated
earnings (13,993,711) (14,141,271)
Accumulated other comprehensive income 155,589 126,416
------------- -------------
52,699,919 52,523,186
Less: common stock in treasury at cost, 11,902 shares
at December 31, 1998 and March 31, 1999 (97,780) (97,780)
------------- -------------
Total shareholders' equity 52,602,139 52,425,406
------------- -------------
Total liabilities and shareholders' equity $ 119,255,906 $ 118,858,511
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements at that date.
-2-
<PAGE> 4
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Revenues:
Rental income from operating leases $ 3,352,679 $ 3,358,447
Interest income from direct financing leases 549,477 547,520
Other interest income 29,942 22,492
----------- -----------
3,932,098 3,928,459
----------- -----------
Expenses:
Interest on mortgages 1,538,793 1,453,493
Depreciation and amortization 521,312 522,112
General and administrative 262,948 375,723
Property expense 474,286 557,075
Writedown to fair value 348,716
----------- -----------
2,797,339 3,257,119
----------- -----------
Income before minority interest and
income from equity investment 1,134,759 671,340
Minority interest in income (157,731) (162,330)
----------- -----------
Income before equity investment 977,028 509,010
Income from equity investment 661,916 692,259
----------- -----------
Net income $ 1,638,944 $ 1,201,269
=========== ===========
Basic income per share (7,206,642 shares
outstanding at March 31, 1998 and 1999): $ .23 $ .16
=========== ===========
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Net Income $ 1,638,944 $ 1,201,269
Other comprehensive income:
Change in unrealized gain in securities during
the period (29,173)
-----------
Other comprehensive income (29,173)
----------- -----------
$ 1,638,944 $ 1,172,096
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
<PAGE> 5
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,638,944 $ 1,201,269
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 521,312 522,112
Income from equity investment
in excess of dividends received (187,438) (194,049)
Minority interest in income 157,731 162,330
Straight-line rent adjustments 2,841 1,310
Provision for uncollected rents 27,581 28,095
Writedown to fair value 348,716
Net change in operating assets and liabilities (393,388) 7,286
----------- -----------
Net cash provided by operating activities 1,767,583 2,077,069
----------- -----------
Cash flows from financing activities:
Dividends paid (1,269,091) (1,347,300)
Distributions paid to minority interest (224,901) (205,546)
Payments of mortgage principal (316,085) (339,975)
----------- -----------
Net cash used in financing activities (1,810,077) (1,892,821)
----------- -----------
Net (decrease) increase in cash and cash equivalents (42,494) 184,248
Cash and cash equivalents, beginning of period 2,608,523 1,770,478
----------- -----------
Cash and cash equivalents, end of period $ 2,566,029 $ 1,954,726
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 1,493,292 $ 1,445,410
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
<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, 1998.
Assets held for sale are accounted for at the lower of cost or fair value, less
costs to dispose.
Note 2. Transactions with Related Parties:
For the three-month periods ended March 31, 1998 and 1999, the Company incurred
asset management fees of $194,702 and $200,563, respectively, performance fees
in like amount and general and administrative expense reimbursements of $125,298
and $144,749, respectively, payable to an affiliate.
Note 3. Lease Revenues:
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, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Per Statements of Income:
Rental income from operating leases $ 3,352,679 $ 3,358,447
Interest from direct financing leases 549,477 547,520
Adjustments:
Rental income attributable to
minority interests (485,718) (485,718)
Share of interest income from equity
investment's direct financing lease 1,284,897 1,321,695
----------- -----------
$ 4,701,335 $ 4,741,944
=========== ===========
</TABLE>
For the three-month periods ended March 31, 1998 and 1999, the Company earned
its proportionate net lease revenues from its investments as follows:
<TABLE>
<CAPTION>
1998 % 1999 %
---------- --- ---------- ---
<S> <C> <C> <C> <C>
Marriott International, Inc. (a) $1,284,897 27% $1,321,695 28%
Information Resources Incorporated (b) 729,003 16 729,003 15
The Titan Corporation (b) 532,834 11 532,834 11
Wal-Mart Stores, Inc. 444,226 9 501,067 11
Kmart Corporation 376,032 8 386,612 8
EnviroWorks, Inc. 346,939 8 361,572 8
New WAI, L.P./Warehouse Associates 363,403 8 361,446 8
Childtime Childcare Inc. 201,364 4 201,364 4
Neodata Corporation 146,932 3 147,433 3
Other 275,705 6 198,918 4
---------- --- ---------- ---
$4,701,335 100% $4,741,944 100%
========== === ========== ===
</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.
-5-
<PAGE> 7
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 4. 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, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Assets (primarily real estate) $149,150 $149,067
Liabilities (primarily mortgage notes payable) 99,315 98,368
Shareholders' equity 49,835 50,699
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Revenue (primarily interest from
direct financing lease) $ 5,431 $ 5,536
Interest and other expenses 2,589 2,566
-------- --------
Net income $ 2,842 $ 2,970
======== ========
</TABLE>
Note 5. Writedown to Fair Value:
On April 15, 1999, the Company and Carey Institutional Properties Incorporated,
an affiliate, the owners as tenants in common of a property in Ruston, Louisiana
entered into an agreement to sell the property for $450,000. The property has
been vacant since the termination of the Harvest Foods, Inc. ("Harvest Foods")
lease in March 1997. Based on the proposed sales price less estimated
transaction costs, the Company's 50% interest in the property has been written
down to $218,250. As a result of this writedown, the Company has recognized an
impairment loss of $348,716. Because it satisfied the subordinated mortgage loan
on the former Harvest Foods properties in December 1998, the Company will retain
the entire amount of its share of net proceeds from the proposed sale of the
Ruston property.
-6-
<PAGE> 8
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,
1999 included in this quarterly report and the Company's Annual Report on Form
10-K for the year ended December 31, 1998. 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, 1999 decreased by
$438,000 as compared with the three-month period ended March 31, 1998. Net
income for the current three-month period includes the effect of a property
writedown of $349,000. Excluding the noncash charge for the writedown, income
would have reflected a decrease of $89,000.
The decrease in income was due primarily to higher general and
administrative and property expenses offset by a decrease in interest expense.
Revenues for the comparable periods were substantially unchanged. The increase
in general and administrative expenses resulted from higher consulting costs,
including costs for Year 2000 remediation, and the Company's share of costs
relating to the upgrade and installation of integrated asset management and
accounting systems software that were lower than annual costs. The increase in
property expenses was due to estimates of appraisal costs in the first quarter
of 1998 that were lower than annual costs. Based on overall appraisal costs in
1998, the Company has accrued an increase in such costs for the valuation of the
Company's real estate portfolio as of December 31, 1999. The decrease in
interest expense was due to the satisfaction of the Harvest Foods, Inc. mortgage
loan in December 1998 and decreasing principal balances on the Company's
existing mortgage debt.
FINANCIAL CONDITION:
Cash flow from operations of $2,077,000 was sufficient to fund dividends
of $1,347,000 to shareholders and to pay $206,000 in distributions to minority
interest partners and $340,000 of scheduled mortgage principal installments.
Cash flow from operations has been affected by the failure of CalComp
Technology, Inc. to pay rent since January 1999. CalComp, a tenant of a property
in Austin, Texas stopped paying its rent when it announced its intention to
liquidate. The Company has filed a complaint against CalComp and is seeking a
judgment for all unpaid and future rents plus associated costs. The Company has
also entered into negotiations with CalComp in an attempt to reach a settlement.
Because of the expectation that the Company will no longer receive rents from
CalComp, no rental income from the CalComp lease was recorded during the current
three-month period. The mortgage loan on the CalComp property is scheduled to
mature in August 1999 when a balloon payment of $1,574,000 is due. Because of
the CalComp lease default, the mortgage loan is in default and is subject to
acceleration. The lender has not exercised its remedies, and the Company has
continued to pay monthly debt service based on management's conclusion that the
value of the property is in excess of the loan balance. The ability to pay the
balloon payment may depend on the amount of any lease termination settlement
received from CalComp or the ability to releverage other of the Company's
properties. Because the loan is a limited recourse mortgage loan, the lender
would have recourse only to the CalComp property in the event the loan is not
satisfied.
-7-
<PAGE> 9
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
Continued
A mortgage loan on the Wal-Mart Stores, Inc. properties that had been
scheduled to mature in January 1999 has been extended through May 1999. The
lender has proposed to extend the maturity of the loan for several years. The
Company is currently evaluating the lender's proposal.
The Company was formed in 1990 with the expectation that shareholders'
interests would be liquidated beginning eight to twelve years after the net
proceeds of the Company's offering were substantially invested. The Advisor is
beginning to evaluate liquidity alternatives.
The Company and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. The Year 2000 issue refers to the series of
problems that have resulted or may result from the inability of certain computer
software and embedded processes to process dates properly. The Company and its
affiliates are completing a program of replacing or upgrading equipment that has
been identified as not being Year 2000 compliant. The Company and its affiliates
have also completed remediating certain software applications. Contingency plans
are in the process of being developed and should be completed during the second
quarter.
The Company believes it is addressing its internal Year 2000 issues in a
timely manner. There is, however, a risk that the inability of third-party
suppliers and tenants to meet Year 2000 readiness issues could have an adverse
effect on the Company. The Company and its affiliates have identified their
critical suppliers and are requiring that suppliers communicate their plans and
progress in identifying Year 2000 readiness.
The Company has contacted its tenants regarding Year 2000 readiness and
emphasized the need to address Year 2000 issues. Generally, tenants 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 tenants rather than the Company. The major risk is that Year 2000
issues have such an adverse effect on the financial condition of a tenant 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.
-8-
<PAGE> 10
CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED
AND SUBSIDIARIES
PART II
Item 3A. - Quantitative and Qualitative Disclosures about Market Risk:
Approximately $53,930,000 of the Company's long-term debt bears interest
at fixed rates, and therefore the fair value of these instruments is affected by
changes in the market interest rates. The following table presents principal
cash flows based upon expected maturity dates of the debt obligations and the
related weighted-average interest rates by expected maturity dates for the fixed
rate debt. The interest rate on the variable rate debt as of March 31, 1999
ranged from the lenders prime rate plus 1% to LIBOR plus 4%. There has been no
material change since December 31, 1998.
(in thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $7,775 $22,847 $7,356 $996 $8,829 $8,127 $55,930 $59,323
Weighted
average
interest
rate 9.89% 10.65% 8.89% 9.89% 9.77% 9.94%
Variable rate 44 805 - - - 2,479 2,479
</TABLE>
As of March 31, 1999, the Company had no other material exposure to
market risk.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1999, 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, 1999, the Company was not
required to file any reports on Form 8-K.
-9-
<PAGE> 11
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
5/10/99 By: /s/ Steven M. Berzin
--------- --------------------------------------
Date Steven M. Berzin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
5/10/99 By: /s/ Claude Fernandez
--------- --------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE-MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,954,726
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 218,250
<CURRENT-ASSETS> 2,172,976
<PP&E> 117,268,507
<DEPRECIATION> 14,030,214
<TOTAL-ASSETS> 118,858,511
<CURRENT-LIABILITIES> 4,402,003
<BONDS> 58,408,610
0
0
<COMMON> 7,633
<OTHER-SE> 52,417,773
<TOTAL-LIABILITY-AND-EQUITY> 118,858,511
<SALES> 0
<TOTAL-REVENUES> 3,928,459
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,775,531
<LOSS-PROVISION> 376,811
<INTEREST-EXPENSE> 1,104,777
<INCOME-PRETAX> 1,201,269
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,201,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,201,269
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
