10-Q 1 y42595e10-q.txt CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q For the quarterly period ended SEPTEMBER 30, 2000 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 November 10, 2000. CPA(R):10 has 7,621,656 shares of common stock, $.001 Par Value outstanding at November 10, 2000. 2 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES INDEX

*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 - 3 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES PART I Item 1. - FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the condensed consolidated financial statements. Note: The condensed consolidated balance sheet at December 31, 1999 has been derived from the audited financial statements at that date. - 2 - 4 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. - 3 - 5 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. - 4 - 6 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. - 5 - 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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, 1999. The Company has adopted the provisions of Staff Accounting Bulletin No. 101 - Revenue Recognition ("SAB 101"). The adoption of SAB 101 has not had a material effect on the Company's financial position and results of operations. Note 2. Transactions with Related Parties: The Company incurred asset management fees of $198,354 and $193,175 for the three-months ended September 30, 1999 and 2000, respectively, and $599,479 and $579,500 for the nine-months ended September 30, 1999 and 2000, respectively, with performance fees in like amount. General and administrative expense reimbursements were $126,422 and $189,817 for the three-months ended September 30, 1999 and 2000, respectively, and $443,779 and $580,586 for the nine-months ended September 30, 1999 and 2000, respectively. 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 nine-month periods ended September 30, 1999 and 2000 are as follows:

For the nine-month periods ended September 30, 1999 and 2000, the Company earned its proportionate net lease revenues from its investments as follows: 1999 % 2000 % ---- ---- Marriott International, Inc. (a) $ 3,413,630 27% $3,421,006 27% Information Resources Incorporated (b) 2,187,010 17 2,187,010 17 The Titan Corporation (b) 1,598,502 13 1,614,391 13 EnviroWorks, Inc. 1,084,717 9 1,111,238 9 New WAI, L.P./Warehouse Associates 1,084,277 9 1,093,559 9 Wal-Mart Stores, Inc. 880,511 7 849,543 7 Kmart Corporation 775,978 6 737,200 6 Childtime Childcare Inc. 604,091 5 637,025 5 Centrobe, Inc. 442,299 3 442,299 3 Other 596,753 4 620,303 4 -------------------- --------- -------------------- --------- $12,667,768 100% $12,713,574 100% ==================== ========= ==================== =========

(a) Represents the Company's proportionate share of lease revenues from an equity investment. (b) Net of Corporate Property Associates 9's minority interest. - 6 - 8 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES 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)

Note 5. Writedown to Fair Value: The Company and Carey Institutional Properties Incorporated, an affiliate, which own a property in Texarkana, Arkansas as tenants-in-common, have entered into an agreement-in-principle to sell the property to an unaffiliated third party. The Company's share of proceeds, net of costs, is anticipated to be $625,000. In connection with the proposed sale, the Company has written down its carrying value in the Texarkana property to an amount equal to its share of the anticipated net sales proceeds, and has recognized an impairment loss of $225,798. There is no assurance that the proposed sale will be completed. The Texarkana property has been vacant since the termination of the Harvest Foods, Inc. lease in March 1997. - 7 - 9 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 Corporate Property Associates 10 Incorporated's ("CPA(R):10") condensed consolidated financial statements and notes thereto as of September 30, 2000, included in this quarterly report, and CPA(R):10's Annual Report on Form 10-K for the year ended December 31, 1999. 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 CPA(R):10 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 CPA(R):10 that the results or conditions described in such statements or the objectives and plans of CPA(R):10 will be achieved. RESULTS OF OPERATIONS: Net income for the three-month and nine-month periods ended September 30, 2000 reflected decreases of $980,000 and $536,000, respectively, as compared with the three-month and nine-month periods ended September 30, 1999. Excluding the effects of lease termination income of $1,250,000 in 1999 and noncash writedowns of properties to fair value and gains on sales in both 1999 and 2000, income for the comparable three-month and nine-month periods would have reflected increases of $90,000 and $241,000, respectively. The increase in income as adjusted for the lease termination and noncash writedowns was primarily due to decreases in interest expense. This decrease was the result of the paydown of the mortgage loan on the former Calcomp Technology, Inc. property in Austin, Texas in October 1999 and its subsequent payoff in August 2000, as well as the continuing amortization of CPA(R):10's other mortgage debt. Lease revenues (rental income and interest from direct financing leases) were stable for the comparable three-month and nine-month periods, respectively. Property expense decreased due to lower asset management fees and lower property carrying costs, with the decrease in property carrying costs due to the sale of vacant properties in 1999 and 2000. Prior to sale, the costs for maintenance, insurance and taxes were absorbed by CPA(R):10. FINANCIAL CONDITION: During the nine-month period ended September 30, 2000, CPA(R):10's cash balances decreased by $829,000. Cash flows from operations of $5,527,000 were not sufficient to fully fund dividends paid to shareholders of $4,070,000, scheduled mortgage principal payments of $1,056,000 and distributions of $638,000 to the minority interest in two properties, based on the cash flow of the underlying partnerships which own the properties. As a result of the uses of cash and amounts currently provided from operations, management is evaluating various alternatives to improve CPA(R):10's liquidity. To enhance liquidity, management is currently assessing potential refinancing and property disposition possibilities which could enable CPA(R):10 to sustain its current dividend rate. CPA(R):10 is continuing its efforts to remarket vacant properties in Hot Springs, Arkansas and Austin, Texas. Cash flow from operations will benefit if these properties are re-let. CPA(R):10 has had no significant investing activities during 2000. Sales proceeds of approximately $625,000 will be realized if the anticipated sale of a vacant property in Texarkana, Arkansas is completed. There is no assurance that this proposed sale will be completed. In addition to paying dividends, scheduled mortgage principal payments and minority interest distributions, CPA(R):10 made a scheduled balloon payment of $315,000 to satisfy the outstanding mortgage balance on the former CalComp property in Austin. CPA(R):10 and Carey Institutional Properties, Incorporated ("CIP(R)"), an affiliate, own six Wal-Mart Stores, Inc. retail properties which are encumbered by a mortgage loan which initially matured in January 1999. CPA(R):10 and CIP(R) are in the process of finalizing an agreement with the lender which would extend the maturity through December 31, 2002. Under the terms of the agreement, the annual interest rate would increase from 9.42% to 10.42% over the remaining extended term. Monthly debt service installments of interest and principal will not change from the current amount. - 8 - 10 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) However, CPA(R):10 and CIP(R) will be required to direct Wal-Mart's annual percentage rents to the lender in lieu of an increase in monthly debt service. If CPA(R):10's share of percentage rents from the Wal-Mart leases is less than $200,000, CPA(R):10 will be required to pay the difference between its share of percentage rent and $200,000 annually. In addition, CPA(R):10 and CIP(R) used $280,000, an amount equal to percentage rents received from the Wal-Mart properties in 2000, to reduce the outstanding principal balance on the Wal-Mart loan. As of September 30, 2000, CPA(R):10's share of the outstanding balance on the Wal-Mart properties mortgage loan was $6,383,000. CPA(R):10's limited recourse mortgage loan on its properties leased to Information Resources, Inc. had been scheduled to mature on October 1, 2000. The lender has agreed to extend the maturity until January 1, 2001 to provide CPA(R):10 additional time to seek refinancing. As of September 30, 2000, the outstanding balance on the Information Resources properties mortgage loan was $21,618,000. - 9 - 11 CORPORATE PROPERTY ASSOCIATES 10 INCORPORATED AND SUBSIDIARIES PART II Item 3. - Quantitative and Qualitative Disclosures about Market Risk Approximately $53,573,000 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 September 30, 2000 was the lender's prime rate plus 1%. There has been no material change since December 31, 1999. (in thousands)

As of September 30, 2000, 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 September 30, 2000, 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, 2000 the Company was not required to file any reports on Form 8-K. - 10 - 12 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 11/10/00 By: /s/ John J. Park -------------- ----------------------------------------- Date John J. Park Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) 11/10/00 By: /s/ Claude Fernandez -------------- ----------------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Accounting Officer) - 11 -

CORPORATE PROPERTY ASSOCIATES 10 INC 10-Q