-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SzN2ptMtHdOTMhqtAzN9QTwEzn1Ay31LzjJKYfsAXEQsQZyxSVAZab0I6lEDZFhx SYwJ70tOrEEp3m5XXEJY0Q== 0000903112-99-000219.txt : 19990330 0000903112-99-000219.hdr.sgml : 19990330 ACCESSION NUMBER: 0000903112-99-000219 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC REALTY TRUST CENTRAL INDEX KEY: 0000948975 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133849655 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27198 FILM NUMBER: 99576763 BUSINESS ADDRESS: STREET 1: 747 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2123551255 MAIL ADDRESS: STREET 1: 747 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ....................................................... OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from...............to......................... Commission file number 0-27562 .......................................... ATLANTIC REALTY TRUST ................................................................................ (Exact name of Registrant as specified in its charter) Maryland 13-3849655 .............................. .......................... State or other jurisdiction of (IRS Employer Incorporation or organization Identification No.) 747 Third Avenue, New York, NY 10017 ....................................... ......................... (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 212-702-8561 .............................. Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Shares of Beneficial Interest, NASDAQ Small Cap Market ..................................... ............................................ $0.01 Par Value Per Share .....................................
Securities registered pursuant to Section 12(g) of the Act: None ........................................................... (Title of class) 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. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Aggregate market value of the Shares of Beneficial Interest held by non-affiliates of the registrant as of March 16, 1999: approximately $21,441563. Approximately 3,561,553 Shares of Beneficial Interest of the Registrant were outstanding as of March 16, 1999. TABLE OF CONTENTS PART I........................................................................................................................1 1. - Business..............................................................................................................1 2. - Properties............................................................................................................5 3. - Legal Proceedings.....................................................................................................5 4. - Submission of Matters to a Vote of Security Holders...................................................................5 PART II.......................................................................................................................6 5. - Market for Registrant's Common Equity and Related Stockholder Matters.................................................6 6. - Selected Financial Data...............................................................................................7 7. - Management's Discussion and Analysis of Financial Condition and Liquidation Activities................................7 7A - Quantitative and Qualitative Disclosures About Market Risk............................................................10 8. - Financial Statements and Supplementary Data...........................................................................10 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................10 PART III......................................................................................................................11 10. - Directors and Executive Officers of the Registrant...................................................................11 11. - Executive Compensation...............................................................................................13 12. - Security Ownership of Certain Beneficial Owners and Management.......................................................15 13. - Certain Relationships and Related Transactions.......................................................................16 PART IV.......................................................................................................................17 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................................17
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING, WITHOUT LIMITATION, THOSE STATEMENTS RELATING TO THE "RPS TAX ISSUES" DISCUSSED IN ITEM 1 OF THIS ANNUAL REPORT ON FORM 10-K, STATEMENTS SET FORTH IN THE SECTION CAPTIONED "RISK FACTORS" IN THE TRUST'S REGISTRATION STATEMENT ON FORM 10 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1996 (FILE NO. 0-27562) AND STATEMENTS IN THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" OF THIS ANNUAL REPORT ON FORM 10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE TRUST UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. PART I Item 1. Business. Atlantic Realty Trust (together with its subsidiary, the "Trust"), a Maryland real estate investment trust, was organized pursuant to a Declaration of Trust dated July 27, 1995 (as amended, the "Declaration of Trust"). The principal office of the Trust is located at 747 Third Avenue, New York, New York 10017. The Trust commenced operations on May 10, 1996 as a result of a spinoff (the "Spin-Off Transaction") from RPS Realty Trust ("RPS"). The Spin-Off Transaction was consummated in order to permit RPS to complete an acquisition (the "Ramco Acquisition") of assets from Ramco Gershenson, Inc. and its affiliates ("Ramco"), which permitted RPS to become an equity shopping center real estate investment trust (a "REIT"). RPS undertook the Spin-Off Transaction because Ramco was unwilling to consummate the Ramco Acquisition if the assets that were contributed by RPS to the Trust (the "Trust Assets") remained in RPS. Pursuant to the Spin-Off Transaction, the board of trustees of RPS approved a distribution of one common share of beneficial interest (the "Shares") of the Trust for every eight shares of beneficial interest of RPS (the "Distribution"). Under the provisions of its Declaration of Trust, the Trust was to continue for a period of 18 months from May 10, 1996 (November 10, 1997), during which time it was to reduce to cash or cash equivalents the Trust Assets and either (i) make a liquidating distribution to its shareholders or (ii) agree to merge or combine operations with another real estate entity, in either case, as soon as practicable following the Distribution and within such 18-month period. Such 18-month period was subject to extension if (i) the Trust had not achieved its objective and the holders of at least two-thirds of the outstanding Shares approved the extension of such date or (ii) a contingent tax liability relating to RPS that has been assumed by the Trust had not been satisfactorily resolved. Because the RPS Tax Issues (as defined below) have not yet been satisfactorily resolved, the Trust has continued its business past November 10, 1997. The Trust cannot currently estimate the timing of the future satisfactory resolution of the RPS Tax Issues. Accordingly, the Trust will continue until there is a final determination of these issues. Upon obtaining a satisfactory resolution to the RPS Tax Issues and liquidating the Trust's remaining assets, any liquidating distribution effected by the Trust would be subject to the satisfaction of the Trust's liabilities to its creditors. In the event that at the end of this period, the Trust is unable to achieve its business objectives, the members of the Trust's board of trustees (the "Trustees") will appoint an independent third party to liquidate the Trust's remaining assets. As a result of the Spin-Off Transaction, the Trust acquired the Trust Assets. The Trust Assets which have not been disposed of by the Trust are described below under "--Description of Trust Assets." The Trust's principal investment objective is to maximize shareholder value from the reduction of the Trust Assets to cash or cash equivalents. As part of its plan to reduce to cash or cash equivalents the Trust Assets, the Trust intends, among other things, to continue to (i) contact strategic buyers of the Trust's remaining asset (the Hylan Plaza Shopping Center) regarding possible sales transactions and (ii) list the Hylan Plaza Shopping Center for sale with qualified real estate brokers. No assurance can be given, however, that such objective will be achieved. The Trust expects to continue to invest the net proceeds from sales of the Trust Assets in short-term or temporary investments, such as certificates of deposit, pass-through mortgage-backed certificates, mortgage participation certificates and mortgaged-backed securities (or similar investment products), all or some of which investments may be guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Unless otherwise approved by the shareholders, the Trust does not expect that it will make new permanent investments or raise additional capital. In addition, the Trust does not expect to acquire additional mortgage loans or properties. 1 In addition, the Trust may explore the possibility of merging or entering into a business combination with another real estate entity. The Trust expects that it will pursue such a transaction only if it represents an attractive alternative to the distribution to shareholders of the net proceeds from the orderly liquidation of the Trust Assets, as described above. The merger candidates that may be available to the Trust may be limited as a result of the amount of cash and the nature of the assets which the Trust will hold. Accordingly, there can be no assurance that the Trust will successfully merge or combine operations with another real estate entity. Because the Trust has adopted a policy not to re-invest sales proceeds in additional mortgage loans on real estate (except to the extent necessary to satisfy applicable REIT requirements), a merger or other business combination involving the Trust and another real estate entity may constitute a "roll-up transaction" under applicable securities laws. In such case, the Trust would be required to comply with the heightened disclosure rules as well as special rules relating to the proxy solicitation process and the listing of the securities of the surviving company on any exchange or the inclusion for quotation of such securities on the Nasdaq SmallCap Market. Application of the roll-up rules to a company merger or business combination could delay, defer or prevent such a transaction from occurring. The Trust was organized for the purpose of qualifying as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). The Trust will elect to qualify as a REIT for the years ended December 31, 1998, 1997 and 1996 and intends to operate so as to continue to qualify as a REIT. As of December 31, 1998, the Trust had six employees. Description of Trust Assets As of December 31, 1998, the Trust owned one real property, the Hylan Plaza Shopping Center and held short-term investments in the principal amount of approximately $20,000,000, consisting primarily of a certificate of deposit at a major New York bank. Mortgage Loan and Real Property Investments During the year ended December 31, 1998, the Trust received net proceeds of approximately $3,242,000 from the sale of the Norgate Shopping Center. Hylan Plaza Shopping Center. At December 31, 1998, the Trust held an equity investment in one property, the Hylan Plaza Shopping Center ("Hylan"). Hylan is a one-story community shopping center located in Staten Island, New York which was acquired by the Trust in April, 1996. Hylan contains approximately 349,000 square feet of leasable space approximately 99% of which was leased and occupied as of December 31, 1998. Major tenants (i.e., tenants who accounted for 10% or more of the leasable space as of December 31, 1998) include K-Mart Corp., a department store chain ("K-Mart"), Supermarkets General Corp. d/b/a Pathmark, a supermarket chain ("Pathmark"), and the Toys "R" Us -- Nytex, Inc., a retail toy store chain ("Toys "R" Us"). These three tenants lease approximately 105,000, 55,000 and 42,000 square feet, respectively, which constitutes 30%, 16% and 12%, respectively, of the total leasable space. The K-Mart lease expires in January 2002 and provides for annual base rental payments of approximately $235,000; the Pathmark lease expires in January 2002 and provides for annual base rental payments of approximately $339,000; and the Toys "R" Us lease, which was due to expire in October 1995, was extended pursuant to the tenant's exercise of a renewal option and is due to expire in October 2005 and provides for annual base rental payments of approximately $90,000. The K-Mart lease contains three 5-year tenant renewal options; the Pathmark lease contains five 5-year tenant renewal options; and the Toys "R" Us lease contains one 10-year 2 tenant renewal option. Leases for approximately 1,483 square feet expired on or prior to December 31, 1998 and such space is currently leased on a month to month basis, and leases for approximately 3,847 square feet are due to expire on or prior to December 31, 1999. The approximate base rental revenue as of December 31, 1998 was $3,547,512. The average base rental revenue per leased square foot as of December 31, 1998 was $10.23, excluding percentage rent and similar provisions. The Trust believes the property is adequately covered by insurance. On May 31, 1996 the Trust's independent real estate appraisers appraised the value of the property at $27,300,000. As of December 31, 1998, the estimated net realizable value of Hylan was $38,625,000, including estimated cash flows using a disposition period of 12 months. Realized values may differ depending on actual disposition results and time periods. Under various federal, state, and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In connection with the ownership, operation and management of Hylan, the Trust may be potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property. Certain environmental laws and common law principles could also be used to impose liability for release of an exposure to hazardous substances, including asbestos-containing materials ("ACMs") into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances, including ACMs. As the owner of Hylan, the Trust may be potentially liable for any such costs. Qualification as a REIT The Trust intends to qualify as a REIT for federal income tax purposes. If the Trust so qualifies, amounts paid by the Trust as distributions to its shareholders will not be subject to corporate income taxes. For any year in which the Trust does not meet the requirements for electing to be taxed as a REIT, it will be taxed as a corporation. The requirements for qualification as a REIT are contained in Sections 856-860 of the Code and the regulations promulgated thereunder. The following discussion is a brief summary of some of those requirements. Such requirements include certain provisions relating to the nature of a REIT's assets, the sources of its income, the ownership of its stock, and the distribution of its income. Among other things, at the end of each fiscal quarter, at least 75% of the value of the total assets of the Company must consist of real estate assets (including interests in mortgage loans secured by real property and interests in other REITs, as well as cash, cash items and government securities) (the "75% Asset Test"). There are also certain limitations on the amount of other types of securities which can be held by a REIT. Additionally, at least 75% of the gross income of the Company for the taxable year must be derived from certain sources, which include "rents from real property," and interest secured by mortgages on real property. An additional 20% of the gross income of the Company must be derived from these same sources or from dividends, interest from any source, or gains from the sale or other disposition of stock or securities or any combination of the foregoing. Furthermore, less than 30% of the annual gross income of a REIT must be derived from the sale or other distribution of real property or obligations secured by a mortgage on real property which has been held for less than four years (the "30% Income Test"). 3 The Trust may invest the proceeds derived from the sale or other disposition of the Trust Assets in pass-through, mortgage-backed certificates, mortgage participation certificates and mortgage-backed securities, all or some of which instruments may be guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Such instruments produce qualifying income for REIT qualification purposes and also satisfy the requirements of the 75% Asset Test. A REIT is also required to distribute at least 95% of its REIT Taxable Income (as defined in the Code) to its shareholders. Tax Contingency During the third quarter of 1994, RPS held more than 25% of the value of its gross assets in overnight Treasury Bill reverse repurchase transactions which the Internal Revenue Service ("IRS") may view as non-qualifying assets for the purposes of satisfying an asset qualification test applicable to REITs, based on a Revenue Ruling published in 1977 (the "Asset Issue"). RPS requested that the IRS enter into a closing agreement with RPS that the Asset Issue would not impact RPS' status as a REIT. The IRS declined such request. In February 1995, the IRS initiated an examination of the 1991-1995 income tax returns of RPS (the "RPS Audit" and, together with the Asset Issue, the "RPS Tax Issues"). Based on developments in the law which occurred since 1977, RPS' tax counsel, Battle Fowler LLP, rendered an opinion that RPS' investment in Treasury Bill repurchase obligations would not adversely affect its REIT status. However, such opinion is not binding upon the IRS. In connection with the Spin-Off Transaction, the Trust assumed all tax liability arising out of the RPS Tax Issues (other than liability that relates to events occurring or actions taken by RPS following the date of the Spin-Off Transaction) pursuant to a tax agreement, dated May 10, 1996, by and between RPS and the Trust, which provides that RPS (now named Ramco-Gershenson Properties Trust) under the direction of four trustees, each of whom are trustees of both RPS and the Trust (the "Continuing Trustees") and not the Trust, will control, conduct and effect the settlement of any tax claims against RPS relating to the RPS Tax Issues. Accordingly, the Trust does not have any control as to the timing of the resolution or disposition of any such claims and no assurance can be given that the resolution or disposition of any such claims will be on terms or conditions as favorable to the Trust as if they were resolved or disposed of by the Trust. RPS and the Trust also have received an opinion from Wolf, Block, Schorr and Solis-Cohen LLP (the "Special Tax Counsel") that, to the extent there is a deficiency in RPS distributions arising out of the IRS examination, and provided RPS timely makes a deficiency dividend (i.e. declares and pays a distribution which is permitted to relate back to the year for which each deficiency was determined to satisfy the requirement that a REIT distribute 95 percent of its taxable income), the classification of RPS as a REIT for the taxable years under examination would not be affected. As of December 31, 1998, the Trust has not been required to perform its indemnity with respect to the RPS Tax Issues other than with respect to legal fees and expenses paid in connection with the IRS' ongoing examination. On March 1, 1999, the IRS revenue agent conducting the examination issued his examination report (the "Revenue Agent's Report") with respect to the tax issues in the RPS Tax Audit, including the RPS Tax Issues. The Revenue Agent's Report sets forth a number of positions which the IRS examining agent has taken with respect to the RPS Tax Issues for the years that are subject to the RPS Audit, which Special Tax Counsel to the Continuing Trustees believes are not consistent with applicable law and regulations of the IRS. One of the positions, the acquisition of assets by RPS that could be viewed as nonqualifying assets for REIT purposes, has been addressed in the opinion letter of counsel referred to above. In addition, the IRS revenue agent has proposed to disallow the deductions for bad debts and certain other items claimed by RPS in the years under examination. In reaching his conclusion with respect to the deduction for bad debts, the IRS revenue agent has disregarded the fact that the values actually obtained for the assets corresponded to the values used by RPS in determining its bad debt deductions. If all of the positions taken in the Revenue 4 Agent's Report were to be sustained, RPS, with funds supplied by the Trust, would have to distribute up to approximately $16.5 million to its shareholders, in accordance with the procedures for deficiency dividends, in order to preserve its status as a REIT and could, in addition, be subject to taxes, interest and penalties up to approximately $24 million through March 15, 1999. The issuance of the Revenue Agent's Report constitutes only the first step in the IRS administrative process for determining whether there is any deficiency in RPS' tax liability for the years at issue and any adverse determination by the IRS revenue agent is subject to administrative appeal with the IRS and, thereafter, to judicial review. As noted above, the Revenue Agent's Report sets forth a number of positions which Special Tax Counsel to RPS and the Trust believe are not consistent with applicable law and regulations of the IRS. The Trust has been informed that RPS intends to file an administrative appeal challenging the findings contained in the Revenue Agent's Report. Item 2. Properties. The Trust leases approximately 4,800 square feet of office space at 747 Third Avenue, New York, New York at an annual base rent of approximately $185,000. This lease will expire on October 31, 1999. The Trust has extended the term of the lease for an additional twelve months at an annual base rent of $195,000. In addition, the Trust owns the Hylan Plaza Shopping Center property described under Item 1. Item 3. Legal Proceedings. There are no material pending legal proceedings other than ordinary routine litigation incidental to the business (including without limitation, foreclosure proceedings), against or involving the Trust or its properties Item 4. Submission of Matters to a Vote of Security Holders. The Trust did not submit any matter to a vote of its shareholders during the fourth quarter of 1998. 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) Market Information The Shares of the Trust have been included for quotation on the Nasdaq Small Cap Market under the symbol ATLRS since May 10, 1996. Set forth below is the range of high and low bid prices for the shares for each of the quarters during the period from May 10, 1996 through December 31, 1998. High Low ---- --- Inception (May 10, 1996) through June 30, 1996 $9.000 $7.500 Third Quarter 1996 $9.500 $8.375 Fourth Quarter 1996 $10.875 $9.250 First Quarter 1997 $11.750 $10.125 Second Quarter 1997 $12.000 $10.500 Third Quarter 1997 $12.500 $11.750 Fourth Quarter 1997 $12.750 $11.875 First Quarter 1998 $12.750 $11.500 Second Quarter 1998 $12.000 $6.750 Third Quarter 1998 $9.625 $6.750 Fourth Quarter 1998 $9.000 $7.250 (b) Approximate Number of Equity Security Holders Approximate Number of Record Holders Title of Class (As of February 19, 1999) - -------------- ------------------------- Shares of beneficial interest, $.01 par value 3,272 (c) Dividend Information Under the Code, a REIT must meet certain qualifications including a requirement that it distribute annually to its shareholders at least 95% of its REIT Taxable Income. The Trust has continued the cash distribution policy of the predecessor programs by making quarterly distributions to its shareholders in amounts such that annual distributions equal 100% of REIT Taxable Income, thereby complying with the distribution requirements of the federal income tax laws applicable to REITs. See "Qualification as a REIT" in Item 1 above. The Trust did not pay a distribution for the fiscal years ended December 31, 1997 and 1998. 6 Item 6. Selected Financial Data. The following tables set forth certain selected historical information for the Trust and for the net assets to be transferred to the Trust pursuant to the Spin-Off Transaction. The financial information should be read in conjunction with the financial statements and notes thereto included herein. ATLANTIC REALTY TRUST 12/31/98 12/31/97 12/31/96 5/10/96 -------- -------- -------- ------- Statement of Net Assets In Liquidation Data: Total Assets $ 60,376,057 $ 56,962,910 $ 51,175,032 $ 54,445,060 Total Liabilities 4,164,168 2,914,206 3,559,268 9,580,845 Net Assets in Liquidation 56,211,889 54,048,704 47,615,764 44,864,215 Statement of Changes in Net Assets in Liquidation Data: Increase (Decrease) Assets Transferred to the Trust Adjustments for RPS Transaction Distributions Payable - - (1,389,006) - Adjustments to Reflect Liquidation Basis of Accounting 2,163,185 6,432,940 4,140,555 Net Change in net assets in Liquidation 2,163,185 6,432,940 2,751,549
Net Assets to Be Transferred to Atlantic Realty Trust
For the period 1/1/96-5/10/96 1995 1994 -------------- ---- ---- Total Revenues $ 1,255,607 4,573,011 4,423,519 Total Assets 51,297,578 54,230,032 56,087,512 Income (Loss) 595,587 (1,682,764) 722,058
Item 7. Management's Discussion and Analysis of Financial Condition and Liquidation Activities. Capital Resources and Liquidity -- Atlantic Realty Trust Upon consummation of the Spin-Off Transaction, the Trust owned seven mortgage loans and three retail properties (Hylan, located in Staten Island, New York, the Norgate Shopping Center located in Indianapolis, Indiana and the 9 North Wabash Avenue Building, located in Chicago, Illinois), as well as cash and certain other assets, which include furniture, fixtures and equipment, formerly held by RPS. In addition, upon consummation of the Spin-Off Transaction, the Trust assumed the repayment obligation in respect of $5,550,000 in indebtedness from RPS. This indebtedness was evidenced by a promissory note which bore interest at a rate of 8.25% and matured on November 9, 1997 (the "Promissory Note"). The Promissory Note was secured by a collateral assignment of the Trust's interest in the Hylan Shopping Center. On July 10, 1996, the Trust repaid $3,500,000 of the principal balance of the Promissory Note. On December 16, 1996 the Trust prepaid the remaining balance of $2,050,000. The Trust does not intend to make new loans or actively engage in either the mortgage lending or the property acquisition business. 7 The Trust's primary objective has been to liquidate its assets in an eighteen-month period from the date of the Spin-Off Transaction while realizing the maximum values for such assets; however because the RPS Tax Issues have not been satisfactorily resolved, the Trust has continued its business beyond such period. Although the Trust considers its assumptions and estimates as to the values and timing of such liquidations to be reasonable, the period of time to liquidate the assets and distribute the proceeds of such assets is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Trust's control. There can be no assurance that the net values ultimately realized and costs actually incurred for such assets will not materially differ from the Trust's estimate. The Trust believes that cash and cash equivalents on hand, proceeds generated by the real estate property that continues to operate (Hylan) and proceeds from the eventual sale of such property will be sufficient to support the Trust and meet its obligations. As of December 31, 1998, the Trust had approximately $21,000,000 in cash and short-term investments. During the first quarter of 1998, the Trust received net proceeds of approximately $3,242,000 from the sale of the Norgate Shopping Center. At December 31, 1998 the Trust's remaining real property asset was the Hylan. During the third quarter of 1997, the Trust received proceeds in the aggregate of approximately $2,934,500 in connection with the disposition of the 9 North Wabash Building ($1,045,000) and the Mt. Morris Commons mortgage loan ($1,889,500). During the second quarter of 1997, the Trust received proceeds of approximately $5,284,000 in connection with the disposition of the Rector mortgage loan ($2,422,000) and the Copps Hill Plaza mortgage loan ($2,862,000). At December 31, 1997 the Trust owned two retail properties, Hylan and the Norgate Shopping Center, which was sold by the Trust on February 25, 1998. During the period ended December 31, 1996, the Trust received proceeds of approximately $8,715,000 from the prepayment of four mortgage loans. At December 31, 1996, the Trust owned three mortgage loans and the three retail properties discussed above. As of December 31, 1997, the Trust had disposed of all of its mortgage loans. The Trust intends to reduce to cash or cash equivalents its remaining asset in an orderly manner as soon as practicable and make a liquidating distribution or distributions to its shareholders, or merge or combine operations with another real estate entity. Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to determine the applicable year. Any programs that have time sensitive software may recognize a date using "00" as the Year 1900 rather than the Year 2000. The Trust has purchased new computer hardware and software that is Year 2000 compliant for its corporate operations and has ordered computer hardware and software that is Year 2000 compliant at its Hylan management office. Management estimates that the total costs incurred, or to be incurred in 1999, in connection with such improvements to be approximately $20,000. The Trust also depends upon the proper functioning of third-party computer and non-information technology systems. These third parties include tenants, commercial banks and other lenders, construction contractors and vendors. The Trust has initiated communications with third parties with whom it has important financial or operational relationships to determine the extent to which they are vulnerable to the Year 2000 issue. The Trust has received written notification from two of its three significant outside service providers that their systems correctly identify and process date 8 data relating to the year 2000 issue. The third significant outside service provider has indicated to the Trust that it has designed a plan to achieve Year 2000 compliance and that such plan is substantially in place and expected to be complete ahead of schedule. The Trust plans to contact its major tenants in the second quarter of 1999 to inquire about such tenant's Year 2000 readiness. If third parties with whom the Trust interacts have Year 2000 problems that are not remedied, the following problems could result: (i) In the case of vendors, disruption of important services upon which the Trust depends, such as professional services, including accounting and legal services, telecommunications and electrical power; and (ii) In the case of banks and other lenders, the disruption of capital flows potentially resulting in liquidity stress. The Trust does not believe the Year 2000 issue will materially impact its tenant's ability to pay rent. However, financial difficulties of significant tenants as a result of the Year 2000 issues could have a material adverse effect on the Trust's results of operations or financial position. Though the Trust does not expect the Year 2000 issue to have a material adverse effect on its result of operations or financial position, there can be no assurances of that position. Net Assets to Be Transferred to Atlantic Realty Trust The following information is based upon the consolidated financial statements of the Net Assets to be transferred to the Trust, which were derived from RPS' historical financial statements to reflect the transfer of the assets to the Trust as a result of the Distribution. The financial information, and the discussion that follows, assumes that the assets were transferred to the Trust at the beginning of the periods indicated, and that the Trust and RPS were separate companies with separate operations as of such dates. The allocation of certain expenses between the Trust and RPS was determined by using the weighted average of the Trust's total assets to RPS' total assets and the Trust's total revenues to RPS' total revenues and reflects management's best estimate of the appropriate allocation of such expenses between the two companies. As described below, the Trust has utilized a weighted average of approximately 30%, 29%, and 24% for the purpose of allocating such expenses for the period January 1, 1996 through May 10, 1996 (Date of Transfer) and for the years ended December 31, 1995 and 1994, respectively. Results of Operations Period from January 1, 1996 to May 10, 1996 Compared to Period from January 1, 1995 to May 10, 1995 Interest income on mortgage loans for the period ended May 10, 1996 decreased by approximately $192,799 or 16% as compared to the period ended May 10, 1995. During the 1995 period, the Trust received contingent interest of $43,862 as compared to none during the comparable 1996 period. The Trust also received $19,166 in extension fee income during the 1995 period. For the period of 1996 the Trust received rental income of $241,502 as compared to $369,755 for the 1995 period or a reduction of $128,253 or 35%. This is the result of the tenant at the 9 No. Wabash property vacating at the end of 1995. During the period ended May 10, 1995, the Trust provided additional allowance for possible loan losses of $3,000,000 based on an offer for the sale of the Hylan Mortgage received in the first quarter of 1995 which was $3,000,000 less than the Trust's net carrying amount of the loan at such date. During the period ending May 10, 1996, the Trust recognized a loss of $128,866 as a result of 9 the disposition of the Simmons Mortgage loan. General and administrative expenses amounted to $321,197 for the period ended May 10, 1996. This reflects the use of a weighted average of approximately 30% during the period ended May 10, 1996 for the purpose of allocating expenses between the Trust and RPS. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. See pages F-1 through F-17, which are included herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 10 PART III Item 10. Directors and Executive Officers of the Registrant. The Trust's Board of Trustees is composed of eight Trustees, each of whom will serve until the respective successors are elected and qualified. The trustees and executive officers of the Trust are as follows: Name Age Offices and Positions - ---- --- --------------------- Joel M. Pashcow* 56 Chairman and President of the Trust effective as of February 29, 1996. He has been a member of the Bar of the State of New York since 1968. Chairman of RPS from inception (December 1988) through May 1996. He is a graduate of Cornell University and the Harvard Law School. Mr. Pashcow is also a trustee of Ramco-Gershenson Properties Trust and Chairman of its Executive Committee (formerly named RPS Realty Trust). Herbert Liechtung* 68 Private investor. President of RPS from December, 1988 to February 1996. Mr. Liechtung is also a trustee of Ramco-Gershenson Properties Trust (formerly named RPS Realty Trust). Edwin J. Glickman 66 Private investor. Executive Vice President of Capital Lease Funding Corp. from January 1995 to December 1997, which is a company engaged in commercial real estate lending. Prior to that, Mr. Glickman was President of the Glickman Organization, Inc. ("Glickman") from January 1992 to December 1994. Glickman conducted real estate investment consulting services and real estate financial services, including mortgage brokerage, arranging joint ventures and equity financing. Prior to that, Mr. Glickman was Chairman of the Executive Committee of Schoenfeld Glickman Maloy Inc. from May 1989, which is a company that conducted real estate financial services, including mortgage brokerage, arranging joint ventures and equity financing. Also served successively as Executive Vice President, President and Vice Chairman of Sybedon Corporation from 1977 to 1993, which is a company that conducted real estate financial services, including mortgage brokerage, arranging joint ventures and equity financing. In all positions, Mr. Glickman has been engaged in real estate financial services, including mortgage brokerage, arranging joint ventures and equity financing. Stephen R. Blank* 53 Senior Fellow, Finance of the Urban Land Institute ("ULI"). Prior to joining the ULI in December of 1998, Mr. Blank was a Managing Director of CIBC Oppenheimer Corp. ("Oppenheimer") since November 1, 1993. Prior to joining Oppenheimer, Mr. Blank was a Managing Director, Real 11 Estate Corporate Finance, of Cushman & Wakefield, Inc. for four years. Prior to that, Mr. Blank was associated for ten years with Kidder, Peabody & Co. Incorporated as a Managing Director of the firm's Real Estate Group. Mr. Blank graduated from Syracuse University in 1967 and was awarded a Masters Degree in Business Administration (Finance Concentration) by Adelphi University in 1971. He is a member of the Urban Land Institute and the American Society of Real Estate Counselors. He has lectured before the Practising Law Institute, the New York University Real Estate Institute, the Urban Land Institute and the International Council of Shopping Centers. He is a Trustee of the Crohn's & Colitis Foundation of America, Inc. and a Trustee of RPS since 1990. Mr. Blank is also a trustee of Ramco-Gershenson Properties Trust (formerly named RPS Realty Trust). Edward Blumenfeld 58 A principal of Blumenfeld Development Group, Ltd., a real estate development firm principally engaged in the development of commercial properties since 1978. Samuel M. Eisenstat 59 Engaged in the private practice of law for more than five years. Mr. Eisenstat serves as a director of various mutual funds managed by Sun America Asset Management and of the North European Oil Royalty Trust. Mr. Eisenstat received a B.S. degree from New York University School of Commerce in 1961 and graduated from New York University School of Law. Arthur H. Goldberg* 56 President of Manhattan Associates, LLC, a merchant and investment banking firm since February 1994. Prior to that, Mr. Goldberg was Chairman of Reich & Company, Inc., (formerly Vantage Services, Inc.), a securities brokerage and investment brokerage firm, from January 1990 to December 1993. Mr. Goldberg was employed by Integrated Resources, Inc. from its inception in December 1968, as President and Chief Operating Officer from May 1973 and as Chief Executive Officer from February 1989 until January 1990. On February 13, 1990, Integrated Resources, Inc. filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Mr. Goldberg has been a member of the Bar of the State of New York since 1967. He is a graduate of New York University School of Commerce and its School of Law. Trustee of RPS since 1988. Mr. Goldberg is also a trustee of Ramco-Gershenson Properties Trust (formerly named RPS Realty Trust). William A. Rosoff 55 Vice-Chairman of Advanta Corporation, a financial services company, since January 1996. Prior thereto, Mr. Rosoff was associated with the law firm of Wolf, Block, Schorr 12 and Solis-Cohen since 1969, a partner since 1975. Mr. Rosoff is a past chairman of that firm's Executive Committee and is a past chairman of its tax department. Mr. Rosoff serves on the Legal Activities Policy Board of Tax Analysts, the Advisory Board for Warren, Gorham and Lamont's Journal of Partnership Taxation, and has served on the Tax Advisory Boards of Commerce Clearing House and Little, Brown and Company. Mr. Rosoff also serves on the Advisory Group for the American Law Institute's ("ALI") ongoing Federal Income Tax Project; as a consultant for the ALI's current study of the Taxation of Pass-Through Entities. He is a fellow of the American College of Tax Counsel. Mr. Rosoff serves as a member of the Board of Directors of the Philadelphia Chapter of the American Jewish Congress and is a member of the Board of Regents of the Philadelphia chapter of the American Society for Technician. Mr. Rosoff earned a B.S. degree with honors from Temple University in 1964, and earned an L.L.B. magna cum laude from the University of Pennsylvania Law School in 1967. Edwin R. Frankel 53 Since the inception of the Trust in May 1996, Mr. Frankel has served as its Executive Vice President, Chief Financial Officer, Secretary and Principal Financial and Accounting Officer. From 1988 to 1992, Mr. Frankel served as Vice President and Chief Financial Officer of RPS and from 1992 to 1996 as Senior Vice President, Chief Financial Officer and Treasurer of RPS.
- ------------------------------- * Designates status as a Continuing Trustee. The Audit Committee, established on October 22, 1997, consists of two trustees, Messrs. Blank and Goldberg. The Audit Committee meets with management and the Trust's independent accountants to determine the adequacy of internal controls and other financial reporting matters. In addition, the Disposition Committee, established in July 1996, consists of three trustees, Messrs. Blumenfeld, Glickman and Blank. The Disposition Committee works with management in connection with the orderly disposition of the Trust's assets. Item 11. Executive Compensation. Executive Officers Mr. Pashcow receives no cash compensation for serving as an executive officer of the Trust. Mr. Frankel receives compensation of approximately $158,000 per annum pursuant to an employment contract entered into between the Trust and Mr. Frankel on June 11, 1998. 13 SUMMARY COMPENSATION TABLE
Annual Compensation ------------------- Awards Name and Principal Other Annual Restricted Stock Position Year Salary ($) Bonus ($) Compensation ($) Awards($) - -------------------------- ---- ---------- --------- ---------------- ---------------- Edwin R. Frankel* 1996 54,067 -- -- -- Executive Vice President, 1997 100,672** -- 7,122 -- Chief Financial Officer 1998 146,634 -- 3,762*** -- and Secretary Long Term Compensation ---------------------- Name and Principal Securities Underlying Payout LTIP Position Year Options/SARs ($) Payouts ($) - -------------------------- ---- -------------------- ----------- Edwin R. Frankel* 1996 -- -- Executive Vice President, 1997 -- -- Chief Financial Officer 1998 -- -- and Secretary
- ------------------------------ * No other executive officer received compensation in excess of $100,000. ** Compensation was $79,040 per annum based on working two days per week, plus an amount on a per diem basis at the same rate, for any additional time spent working on Trust matters. *** Includes approximately $1,000 in imputed interest under the Frankel Note (as defined below). The Trust had no compensation committee, however all of the Trustees participated in deliberations of the registrant's board of trustees concerning executive officer compensation. On June 11, 1998, the Trust entered into an employment agreement with Mr. Frankel (the "Frankel Employment Agreement"), which provided Mr. Frankel with a base salary of $158,000 (as adjusted from time to time, the "Base Salary") per annum. The term of the Frankel Employment Agreement is from June 11, 1998 until the date of a "change of control" of the Trust (as defined in the Frankel Employment Agreement) unless earlier terminated by either Mr. Frankel or the Trust upon written notice. The Frankel Employment Agreement also provides that Mr. Frankel will be entitled to a one-time payment upon the liquidation of the Trust or a Change in Control of 150% of Mr. Frankel's Base Salary as in effect at such time. In addition, the Frankel Employment Agreement provides for a loan from the Trust to Mr. Frankel in the principal amount of $37,500, which loan is evidenced by a promissory note, dated June 11, 1998, made by Mr. Frankel in favor of the Trust (the "Frankel Note"). The Frankel Note will be canceled upon the occurrence of certain conditions, including a Change of Control or liquidation of the Trust. Trustees The Trustees do not receive any compensation for serving as trustees and likewise will not receive any compensation for attending meetings or for serving on any committees of the Board of Trustees; however, Trustees will receive reimbursement of travel and other expenses and other out-of-pocket disbursements incurred in connection with attending any meetings. During 1998, Messrs. Edwin Glickman and Edward Blumenfeld each received fees of $64,000 in connection with services they provided to the Trust as members of the Disposition Committee. During 1997, Messrs. Edwin Glickman and Edward Blumenfeld each received fees of $56,250 in connection with services they provided to the Trust as members of the Disposition Committee. During 1996, Mr. Glickman received fees of $80,000 and Mr. Blumenfeld received fees of $45,000, in each case, in connection with services provided to the Trust as members of the Disposition Committee. 14 Item 12. Security Ownership of Certain Beneficial Owners and Management. As of March 9, 1999, each of the following persons were known by the Trust to be the beneficial owners of more than five percent of the Shares of the Trust. AMOUNT AND NATURE OF BENEFICIAL PERCENT OF TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS - -------------- ------------------------------------ ---------- --------- Shares of beneficial interest Private Management Group, Inc., an investment 692,055(1) 19.43% $.01 par value advisor in a fiduciary capacity, 20 Corporate Park, Suite 400 Irvine, CA 92606 Shares of beneficial interest Kimco Realty Corporation 314,098(2) 8.8% $.01 par value 3333 New Hyde Park Rd. New Hyde Park, NY 11042 Shares of beneficial interest Milton Cooper 496,979(3) 14.0% $.01 par value c/o Kimco Realty Corporation 3333 New Hyde Park Rd. New Hyde Park, NY 11042 Shares of beneficial interest Gotham Partners, L.P., et al. 224,011(4) 6.33% $.01 par value 110 East 42nd Street, 18th Floor New York, NY 10017 Shares of beneficial interest Magten Asset Management Corp. 205,100(5) 5.8% $.01 per share 35 East 21st Street New York, NY 10010
- ----------------- (1) Based upon Schedule 13G/A filing with the Securities and Exchange Commission, filed on January 20, 1999. (2) Based upon Schedule 13D/A filing with the Securities and Exchange Commission, filed on May 1, 1998. (2) Based upon a Schedule 13D/A filing with the Securities and Exchange Commission, filed on May 1, 1998, and information provided to the Trust by Kimco Realty Corporation. Includes 29,824 shares owned by Mr. Cooper, which are beneficially owned with sole voting and disposition power and 464,028 shares for which Kimco Realty Services, Inc., of which Mr. Cooper owns 60% of the outstanding voting common stock, has shared voting and disposition power. (3) Based upon Schedule 13G filing with the Securities and Exchange Commission, filed on January 20, 1999. Of the 224,011 shares beneficially owned by this group, 191,069 shares are solely owned by Gotham Partners, L.P., 30,300 shares are solely owned by Gotham International Advisors, L.L.C. ("Gotham L.L.C.") and 2,642 are solely owned by Gotham Partners III, L.P. Gotham L.L.C. serves as the investment manager to Gotham Partners International, Ltd. which has an address c/o Goldman Sachs (Cayman) Trust, Limited, Harbour Centre, 2nd Floor, P.O. Box 896, George Town, Grand Cayman, Cayman Islands, British West Indies. (5) Based upon Schedule 13G filing with the Securities and Exchange Commission, filed on January 12, 1999. Of the 205,100 shares beneficially owned, 100,500 shares are owned with shared power to vote or direct the vote of such shares and all 205,100 shares are owned with shared power to dispose or direct the disposition of such shares. 15 Item 13. Certain Relationships and Related Transactions. Set forth below is information as to the Shares beneficially owned as of March 10, 1997 by each of the Trustees, each of the executive officers included in the Summary Compensation Table set forth in Item 11 and all Trustees and executive officers as a group, based on information furnished by each Trustee and executive officer. Name of Trustee/ Shares Owned Executive Officer Beneficially(1) Percent of Class - ----------------- --------------- ---------------- Joel M. Pashcow ..................... 94,154(2) 2.62% Herbert Liechtung ..................... 11,906(3) * Arthur H. Goldberg ..................... 24,487(4) * William A. Rosoff ..................... 125(5) * Stephen R. Blank ..................... 981(6) * Edward Blumenfeld ..................... 125 * Samuel M. Eisenstat ..................... 1,125(7) * Edwin J. Glickman ..................... 0 * Edwin R. Frankel ..................... 0 * All Trustees and Executive Officers as a group (9 persons) 130,903 3.68% - --------------------- * Less than 1% of class. (1) All amounts are directly owned unless stated otherwise. (2) Includes 25,890 shares held in an IRA account for the benefit of Mr. Pashcow, a retirement savings plan, a pension and profit sharing account and a money purchase plan, 47,662 shares owned by an irrevocable trust of which Mr. Pashcow is a trustee, an irrevocable trust for his daughter and a foundation of which Mr. Pashcow is trustee (for all of which trusts Mr. Pashcow has shared voting and investment powers). Mr. Pashcow disclaims beneficial ownership of the Shares owned by the foundation and each of the trusts. (3) Includes 11,906 shares held in an IRA account for the benefit of Mr. Liechtung and a retirement savings plan. (4) Includes 19,563 shares owned by Mr. Goldberg's wife, 1,875 shares owned by trusts for his daughters and 3,050 shares owned by a pension trust. Mr. Goldberg disclaims beneficial ownership of the shares owned by his wife and the trusts for his daughters. (5) Includes 125 shares held by Mr. Rosoff as a trustee for his sister, Barbara Rosoff, pursuant to a trust indenture dated December 30, 1991. (6) Includes 706 shares owned by trusts for Mr. Blank's daughters and 275 shares held in an IRA account for the benefit of Mr. Blank. Mr. Blank disclaims beneficial ownership of the shares owned by the trusts for his daughters. (7) Includes 125 shares held in an IRA account for which Mr. Eisenstat has sole voting and investment power. 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Financial Statements, Schedules and Exhibits (a)(1) Financial Statements See pages F-1 through F-17, which are included herein. (a)(2) Financial Statement Schedules All schedules have been omitted because they are inapplicable, not required, or the information is included in the financial statements or notes thereto. (a)(3) Exhibits The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as a part of this Annual Report on Form 10-K. (b) No Current Reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. 17 INDEX TO FINANCIAL STATEMENTS Page ---- Financial Statements - Atlantic Realty Trust and Subsidiary (Liquidation Basis) Independent Auditors' Report........................................................................................ F-2 Consolidated Statements of Net Assets in Liquidation at December 31, 1998 and 1997.................................. F-3 Consolidated Statements of Changes in Net Assets in Liquidation for the Years Ended December 31, 1998, 1997 and the Period May 11, 1996 through December 31, 1996..................................... F-4 Notes to Consolidated Financial Statements.......................................................................... F-5-8 Financial Statements - Net Assets to be Transferred to Atlantic Realty Trust (Going Concern Basis) Independent Auditors' Report........................................................................................ F-9 Combined Statements of Operations for the Period January 1, 1996 through May 10, 1996 (Date of Transfer)................................................................................... F-10 Combined Statement of Shareholders' Equity for the Period January 1, 1996 through May 10, 1996 (Date of Transfer)........................................................................... F-11 Combined Statement of Cash Flows for the Period January 1, 1996 through May 10, 1996 (Date of Transfer)................................................................................... F-12 Notes to Combined Financial Statements for the Period January 1, 1996 through May 10, 1996 (Date of Transfer)................................................................................... F-13-17
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Trustees of ATLANTIC REALTY TRUST We have audited the accompanying consolidated statements of net assets in liquidation of Atlantic Realty Trust and subsidiaries (the "Trust") at December 31, 1998 and 1997, and the related consolidated statements of changes in net assets in liquidation for the years ended December 31, 1998, 1997 and the period May 11, 1996 through December 31, 1996. These consolidated financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Trust was formed for the purpose of liquidating the mortgage loan portfolio and certain other assets and liabilities which were transferred to the Trust from RPS Realty Trust on May 10, 1996 (Date of Transfer) and liquidating and distributing capital to the Trust's shareholders. As a result, the Trust adopted the liquidation basis of accounting effective May 10, 1996 (Date of Transfer). In our opinion, such consolidated financial statements present fairly, in all material respects, the net assets in liquidation of the Trust at December 31, 1998 and 1997 and the changes in its net assets in liquidation for the years ended December 31, 1998, 1997 and the period May 11, 1996 through December 31, 1996 in conformity with generally accepted accounting principles on the basis described in the preceding paragraph. As discussed in Notes 1 and 6 to the consolidated financial statements, because of the inherent uncertainty of valuation when an entity is in liquidation, the amounts ultimately realized from assets disposed and costs incurred to settle liabilities may differ materially from amounts presented in the accompanying financial statements. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP New York, New York March 11, 1999 F-2 REALTY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (Liquidation Basis of Accounting)
December 31, 1998 December 31, 1997 ----------------- ----------------- ASSETS: Investments in real estate.................. $ 38,625,000 $ 41,327,000 Cash and short-term investments............ 21,751,057 15,635,910 ---------------- ----------------- Total assets........................... 60,376,057 56,962,910 ---------------- ----------------- LIABILITIES: Estimated costs of liquidation.............. 4,164,168 2,914,206 ---------------- ----------------- Total liabilities...................... 4,164,168 2,914,206 ---------------- ----------------- Net assets in liquidation................... $ 56,211,889 $ 54,048,704 ================ =================
See notes to consolidated financial statements. F-3 ATLANTIC REALTY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (Liquidation Basis of Accounting)
For the Year Ended For the Year Ended For the Period December 31, December 31, May 11, 1996 to 1998 1997 December 31, 1996 ---------------------- ---------------------- ----------------- Net assets in liquidation, beginning of Period........................................... $ 54,048,704 $ 47,615,764 $ 44,864,215 Distributions payable - - (1,389,006) Adjustments to reflect liquidation basis of Accounting....................................... 2,163,185 6,432,940 4,140,555 ---------------- ---------------------- --------------------- Net assets in liquidation........................ $ 56,211,889 $ 54,048,704 $ 47,615,764 ======================== ====================== =====================
See notes to consolidated financial statements. F-4 ATLANTIC REALTY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Liquidation Basis of Accounting) 1. Organization and Significant Accounting Policies Atlantic Realty Trust (the "Trust"), a Maryland real estate investment trust, was formed on July 27, 1995 for the purpose of liquidating its interests in real properties, the mortgage loan portfolio and certain other assets and liabilities which were transferred to the Trust from RPS Realty Trust ("RPS") on May 10, 1996 (the "Spin-Off Transaction"). The Trust had no operations from the date of formation to the date of the Spin-Off Transaction. The Trust adopted the liquidation basis of accounting as of the date of the Spin-Off Transaction based on its intention to liquidate its assets or merge or combine operations with another real estate entity within eighteen months from the date of the Spin-Off Transaction. The Trust intends to conduct its operations with the intent of meeting the requirements applicable to a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). RPS conducts its operations with the intent of meeting the requirements applicable to a REIT under Sections 856 through 860 of the Code. As a result, the Trust will have no current and deferred tax liabilities. See Note 5 for current developments. Liquidation Basis of Accounting - As a result of the Spin-Off Transaction, the Trust has adopted the liquidation basis of accounting. The liquidation basis of accounting is appropriate when liquidation appears imminent and the Trust is no longer viewed as a going concern. Under this method of accounting, assets are stated at their estimated net realizable values and liabilities are stated at the anticipated settlement amounts. The valuations presented in the accompanying Statements of Net Assets in Liquidation represent the estimates at the dates shown, based on current facts and circumstances, of the estimated net realizable value of assets and estimated costs of liquidating the Trust. In determining the net realizable values of the assets, the Trust considered each asset's ability to generate future cash flows, offers to purchase received from third parties, if any, and other general market information. Such information was considered in conjunction with operating the Trust's plan for disposition of assets. The estimated costs of liquidation represent the estimated cost of operating the Trust through its anticipated termination. These costs primarily include payroll, consulting and related costs, rent, shareholder relations, legal and auditing. Computations of net realizable value necessitate the use of certain assumptions and estimates. Future events, including economic conditions that relate to real estate markets in general, may differ from those assumed or estimated at the time such computations are made. Because of inherent uncertainty of valuation when an entity is in liquidation, the amounts ultimately realized from assets disposed and costs incurred to settle liabilities may materially differ from amounts presented. Pursuant to the terms of the Trust's Amended and Restated Declaration of Trust, the Trust was to continue for a period of 18 months from the date of the Spin-Off Transaction, subject to, among certain other things, satisfactory resolution of the RPS Tax Issues (See Note 6). Because the RPS Tax Issues have not yet been satisfactorily resolved, the Trust will continue its business past that date. The Trust cannot currently estimate the timing of the future satisfactory resolution of the RPS Tax Issues. Accordingly, the Trust will continue until there is a final determination of these issues. Consolidation - The consolidated financial statements include the accounts of the Trust and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. F-5 2. Investments in Real Estate
Estimated Net Realized Value December 31, December 31, Property Location 1998 1997 ------------------- --------------- Hylan Shopping Center Staten Island, NY $ 38,625,000 $ 37,725,000 Norgate Shopping Center Indianapolis, IN - 3,602,000 ------------- -------------- $ 38,625,000 $ 41,327,000 ============= ==============
(a) Includes estimated cash flows using a disposition period of twelve months. Realized values may differ depending on actual disposition results and time periods. (b) On February 25, 1998, the Trust sold the Norgate Shopping Center for $3,850,000 and received net proceeds of approximately $3,242,000. (c) On July 1, 1997, the Trust received net proceeds of $1,045,000 for the sale of the 9 North Wabash Building. 3. Shares Outstanding The weighted average number of common shares outstanding for the periods ended December 31, 1998, 1997, and 1996 was 3,561,553, respectively. 4. Short-Term Investments Short-term investments at December 31, 1998 and 1997, consist primarily of Certificates of Deposit at a major New York bank of $20,000,000 and $14,750,000, respectively, bearing interest at a fixed rate of 4.50% and 5.00%, respectively. 5. Income Taxes Even though the Trust will not be subject to income taxes as discussed in Note 1, since the Trust is a public enterprise it is required to reconcile the net difference between the assets and liabilities for tax purposes and financial reporting, in accordance with the Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes," such differences in basis are not material. During the third quarter of 1994, RPS held more than 25% of the value of its gross assets in overnight Treasury Bill reverse repurchase transactions which the Internal Revenue Service ("IRS") may view as non-qualifying assets for the purposes of satisfying an asset qualification test applicable to REITs, based on a Revenue Ruling published in 1977 (the "Asset Issue"). RPS requested that the IRS enter into a closing agreement with RPS that the Asset Issue would not impact RPS' status as a REIT. The IRS declined such request. In February 1995, the IRS initiated an examination of the 1991-1995 income tax returns of RPS (the "RPS Audit" and, together with the Asset Issue, the "RPS Tax Issues"). Based on developments in the law which occurred since 1977, RPS' tax counsel, Battle Fowler LLP, rendered an opinion that RPS' investment in Treasury Bill repurchase obligations would not adversely affect its REIT status. However, such opinion is not binding upon the IRS. In connection with the Spin-Off Transaction, the Trust assumed all tax liability arising out of the RPS Tax Issues (other than liability that relates to events occurring or actions taken by RPS following the date of the Spin-Off Transaction) pursuant to a tax agreement, dated May 10, 1996, by F-6 and between RPS and the Trust, which provides that RPS (now named Ramco-Gershenson Properties Trust) under the direction of four trustees, each of whom are trustees of both RPS and the Trust (the "Continuing Trustees") and not the Trust, will control, conduct and effect the settlement of any tax claims against RPS relating to the RPS Tax Issues. Accordingly, the Trust does not have any control as to the timing of the resolution or disposition of any such claims and no assurance can be given that the resolution or disposition of any such claims will be on terms or conditions as favorable to the Trust as if they were resolved or disposed of by the Trust. RPS and the Trust also have received an opinion from Wolf, Block, Schorr and Solis-Cohen LLP (the "Special Tax Counsel") that, to the extent there is a deficiency in RPS distributions arising out of the IRS examination, and provided RPS timely makes a deficiency dividend (i.e. declares and pays a distribution which is permitted to relate back to the year for which each deficiency was determined to satisfy the requirement that a REIT distribute 95 percent of its taxable income), the classification of RPS as a REIT for the taxable years under examination would not be affected. As of December 31, 1998, the Trust has not been required to perform its indemnity with respect to the RPS Tax Issues other than with respect to legal fees and expenses paid in connection with the IRS' ongoing examination. On March 1, 1999, the IRS revenue agent conducting the examination issued his examination report (the "Revenue Agent's Report") with respect to the tax issues in the RPS Tax Audit, including the RPS Tax Issues. The Revenue Agent's Report sets forth a number of positions which the IRS examining agent has taken with respect to the RPS Tax Issues for the years that are subject to the RPS Audit, which Special Tax Counsel to the Continuing Trustees believes are not consistent with applicable law and regulations of the IRS. One of the positions, the acquisition of assets by RPS that could be viewed as nonqualifying assets for REIT purposes, has been addressed in the opinion letter of counsel referred to above. In addition, the IRS revenue agent has proposed to disallow the deductions for bad debts and certain other items claimed by RPS in the years under examination. In reaching his conclusion with respect to the deduction for bad debts, the IRS revenue agent has disregarded the fact that the values actually obtained for assets corresponded to the values used by RPS in determining its bad debt deductions. If all of the positions taken in the Revenue Agent's Report were to be sustained, RPS, with funds supplied by the Trust, would have to distribute up to approximately $16.5 million to its shareholders, in accordance with the procedures for deficiency dividends, in order to preserve its status as a REIT and could, in addition, be subject to taxes, interest and penalties up to approximately $24 million through March 15, 1999. The issuance of the Revenue Agent's Report constitutes only the first step in the IRS administrative process for determining whether there is any deficiency in RPS' tax liability for the years at issue and any adverse determination by the IRS revenue agent is subject to administrative appeal with the IRS and, thereafter, to judicial review. As noted above, the Revenue Agent's Report sets forth a number of positions which Special Tax Counsel to RPS and the Trust believe are not consistent with applicable law and regulations of the IRS. The Trust has been informed that RPS intends to file an administrative appeal challenging the findings contained in the Revenue Agent's Report. 6. Dividends/Distributions to Shareholders Under the Internal Revenue Code, a REIT must meet certain qualifications, including a requirement that it distribute annually to its shareholders at least 95 percent of its taxable income. The Trust's policy is to distribute to shareholders all taxable income. There were no dividends in 1998 and 1997. Dividend distributions for the year ended December 31, 1996 are summarized as follows: F-7 Record Date Distribution Payment - ----------- ------------ ------- December 26, 1996 $.39 per share January 21, 1997 7. Commitments The Trust leases approximately 4,800 square feet of office space at 747 Third Avenue, New York, New York at an annual base rent of approximately $185,000. This lease will expire on October 31, 1999. Subsequent to year-end, the Trust extended the lease for an additional twelve months at an annual base rental of approximately $195,000. F-8 INDEPENDENT AUDITORS' REPORT To the Board of Trustees of RPS REALTY TRUST AND ATLANTIC REALTY TRUST We have audited the accompanying combined statements of shareholders' equity of the Net Assets to be Transferred to Atlantic Realty Trust and the related combined statements of operations and cash flows for the period January 1, 1996 through May 10, 1996 (Date of Transfer). These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly in all material respects, the results of operations and cash flows for the period January 1, 1996 through May 10, 1996 (Date of Transfer) in conformity with generally accepted accounting principles. As more fully described in Note 1, Atlantic Realty Trust was obligated to adopt the liquidation basis of accounting upon completion of the Transaction. The accompanying combined financial statements do not give effect to the adjustments if any, to be recorded at such time. /s/Deloitte & Touche LLP New York, New York March 28, 1997 (March 11, 1999 as to Note 3) F-9 NET ASSETS TO BE TRANSFERRED TO ATLANTIC REALTY TRUST COMBINED STATEMENTS OF OPERATIONS For the Period January 1, 1996 Through May 10, 1996 (Date of Transfer) ------------------ REVENUES: Interest income.................................. $ 1,014,205 Contingent interest and fee income.............. - Rental income.................................... 241,402 --------------- Total revenues.......................... 1,255,607 --------------- EXPENSES: Loss on disposition of mortgage loan............. 128,886 General and administrative expenses.............. 321,197 Property operating............................... 63,285 Real estate tax.................................. 110,161 Depreciation..................................... 36,491 --------------- Total expenses.......................... 660,020 --------------- Net Income ........................................ $ 595,587 =============== See notes to combined financial statements. F-10 NET ASSETS TO BE TRANSFERRED TO ATLANTIC REALTY TRUST COMBINED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD JANUARY 1, 1996 THROUGH MAY 10, 1996 (DATE OF TRANSFER)
Additional Total Number of Paid-in Cumulative Cumulative Shareholders' Shares Amount Capital Earnings Distributions Equity ------ ------ ------- -------- ------------- ------ BALANCE: January 1, 1996 28,492,421 $ 2,849,242 $ 195,591,125 $ 49,641,307 $ (194,914,998) $ 53,166,676 Net Income 595,587 595,587 Distributions (9,994,955) (9,994,955) Net Assets Transferred (28,492,421) (2,849,242) (195,591,125) (50,236,894) 204,909,953 43,767,308 ------------- -------------- ----------------- ------------ ---------------- ---------------- BALANCE: May 10, 1996 (Date of Transfer) $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ============= =============== ================= ============= ================ ================
See notes to combined financial statements. F-11 NET ASSETS TO BE TRANSFERRED TO ATLANTIC REALTY TRUST COMBINED STATEMENTS OF CASH FLOWS
For the Period January 1, 1996 Through May 10, 1996 (Date of Transfer) ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 595,587 Adjustments to reconcile net income to net cash provided by operating activities Loss on disposition of mortgage loan.................................... 128,886 Depreciation............................................................ 36,491 Changes in operating assets and liabilities: Interest and accounts receivable...................................... 352,813 Accounts payable and deferred commitment fees.................................................... 1,149,735 -------------- Net cash provided by operating activities............................ 2,263,512 -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Satisfaction of mortgage loans receivable..................................... 3,416,564 Investment in real estate..................................................... (1,933,762) -------------- Net cash provided by investing activities............................ 1,482,802 -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of financing......................................................... 5,550,000 Distribution to RPS Realty Trust.............................................. (9,994,955) --------------- Net cash used in financing activities................................ (4,444,955) --------------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................................................. (698,641) CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD........................................................... 3,356,995 -------------- CASH AND CASH EQUIVALENTS END OF PERIOD......................................... $ 2,658,354 ============== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Investment in real estate..................................................... $ 25,455,310 Interest and accounts receivable.............................................. (6,275,000) Use (recovery) of provision for possible loan losses.......................... 5,819,690 Gross mortgage receivable exchanged for real estate........................... (25,000,000)
See notes to combined financial statements. F-12 NET ASSETS TO BE TRANSFERRED TO ATLANTIC REALTY TRUST NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE PERIOD JANUARY 1, 1996 THROUGH MAY 10, 1996 (DATE OF TRANSFER) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Atlantic Realty Trust (the "Trust") is a newly formed Maryland real estate investment trust formed as a condition of the Spin-Off Transaction described in Note 4 for the transfer from RPS Realty Trust ("RPS") of the remaining mortgage loan portfolio, as well as certain other assets and liabilities ("Net Assets"). The combined financial statements reflect the Net Assets and the related results of their operations for the period presented. Historical performance of the Net Assets is presented as if those assets were separately managed. Under the provisions of its Declaration of Trust, the Trust is obligated to make a final liquidating distribution of the net cash proceeds attributable to the sale or other disposition of the Trust's assets within 18 months, or to merge or combine operations with another real estate entity during such 18-month period, unless on or before such date the holders of at least two-thirds of the Trust's outstanding shares approve the extension of such date or such date is automatically extended without a shareholder vote because a contingent tax liability relating to RPS that has been assumed by the Trust has not been satisfactorily resolved. In the event that at the end of such 18-month period, the Trust is unable to dispose of all of its assets, and the shareholders of the Company have not approved an extension of such date, the Trust will appoint an independent third party to liquidate the Trust's remaining assets. On May 10, 1996, the Transaction was consummated. As a result, the Trust was obligated to adopt the liquidation basis of accounting. Under this method of accounting, assets are stated at the amounts to be realized in liquidation and liabilities are stated at anticipated settlement amounts. The accompanying financial statements do not give effect to the adjustments, if any, to be recorded upon adoption of the liquidation basis of accounting. Certain common payroll and other general and administrative expenses have been allocated to the Net Assets based on the average of the weighted average of the Trust's total revenue to the total revenue of RPS. Such average was 9 percent for the period January 1, 1996 through May 10, 1996 (Date of Transfer). The following is a summary of significant accounting policies followed in the preparation of the historical financial statements of the Net Assets: a. Income Tax Status - The Trust intends to conduct its operations with the intent of meeting the requirements applicable to a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). RPS conducts its operations with the intent of meeting the requirements applicable to a REIT under Sections 856 through 860 of the Code. As a result, the Trust will have no current and deferred tax liabilities. See Note 3 for current developments. b. Principles of Combination - The combined financial statements include the accounts of the Net Assets. F-13 c. Investment in Real Estate - Investment in real estate is depreciated using the straight-line method over the estimated useful life of the property. Repairs and maintenance are expensed. In the event that it appears that the cost less accumulated depreciation cannot be recovered through operations and/or a sale over a reasonable future period, then it will be considered probable that an impairment that is other than temporary has occurred and the net cost less accumulated depreciation will be written down to market value and a new cost basis will be established. In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of" which requires that long lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of the Statement is required for years beginning after December 15, 1995. The provisions of this Statement were adopted as of January 1, 1996 and the adoption of this Statement did not have a significant impact on the carrying value of the real estate. d. Income Recognition - Current interest income on mortgage loans is recognized on the accrual method during the periods in which the mortgage loans are outstanding. Deferred interest, due at the maturity of the mortgage loan, is recognized as income based on the interest method using the implicit rate of interest on the mortgage loan. Income from operating leases held in connection with the investments in real estate is recognized when earned. Contingent and additional contingent income and prepayment premium income are recognized as cash is received. Certain leases at one of the Trust's real estate properties may have percentage rent features and such amounts are recognized upon receipt. e. Impairment of Loans - In May 1993, the Financial Accounting Standards Board issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan," which requires creditors to account for impaired loans at the present value of their future cash flows or at the fair value of the collateral, if the loan is collateral dependent. The provisions of this statement were adopted as of January 1, 1995 and the adoption of this statement did not have a significant impact on the carrying value of the loans. An allowance for possible loan losses is established based upon a review of each of the loans in the portfolio. In performing the review, management considers the estimated net realizable value of the property or collateral as well as other factors, such as the current occupancy, the amount and status of senior debt, if any, the prospects for the property, the credit worthiness and current financial position of the borrower and the economic situation in the region where the property is located. f. Allocation of Distributions - Net Cash flows from operating, financing and investing activities are those amounts which would have been distributed to RPS or received from RPS to the extent required to fulfill the cash contributions of RPS to the Operating Partnership, as described in Note 7. g. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-14 2. INVESTMENT IN REAL ESTATE Properties are depreciated over an estimated life of 39 years using the straight-line method. 3. TAX CONTINGENCY During the third quarter of 1994, RPS held more than 25% of the value of its gross assets in overnight Treasury Bill reverse repurchase transactions which the Internal Revenue Service ("IRS") may view as non-qualifying assets for the purposes of satisfying an asset qualification test applicable to REITs, based on a Revenue Ruling published in 1977 (the "Asset Issue"). RPS requested that the IRS enter into a closing agreement with RPS that the Asset Issue would not impact RPS' status as a REIT. The IRS declined such request. In February 1995, the IRS initiated an examination of the 1991-1995 income tax returns of RPS (the "RPS Audit" and, together with the Asset Issue, the "RPS Tax Issues"). Based on developments in the law which occurred since 1977, RPS' tax counsel, Battle Fowler LLP, rendered an opinion that RPS' investment in Treasury Bill repurchase obligations would not adversely affect its REIT status. However, such opinion is not binding upon the IRS. In connection with the Spin-Off Transaction, the Trust assumed all tax liability arising out of the RPS Tax Issues (other than liability that relates to events occurring or actions taken by RPS following the date of the Spin-Off Transaction) pursuant to a tax agreement, dated May 10, 1996, by and between RPS and the Trust, which provides that RPS (now named Ramco-Gershenson Properties Trust) under the direction of four trustees, each of whom are trustees of both RPS and the Trust (the "Continuing Trustees") and not the Trust, will control, conduct and effect the settlement of any tax claims against RPS relating to the RPS Tax Issues. Accordingly, the Trust does not have any control as to the timing of the resolution or disposition of any such claims and no assurance can be given that the resolution or disposition of any such claims will be on terms or conditions as favorable to the Trust as if they were resolved or disposed of by the Trust. RPS and the Trust also have received an opinion from Wolf, Block, Schorr and Solis-Cohen LLP (the "Special Tax Counsel") that, to the extent there is a deficiency in RPS distributions arising out of the IRS examination, and provided RPS timely makes a deficiency dividend (i.e. declares and pays a distribution which is permitted to relate back to the year for which each deficiency was determined to satisfy the requirement that a REIT distribute 95 percent of its taxable income), the classification of RPS as a REIT for the taxable years under examination would not be affected. As of December 31, 1998, the Trust has not been required to perform its indemnity with respect to the RPS Tax Issues other than with respect to legal fees and expenses paid in connection with the IRS' ongoing examination. On March 1, 1999, the IRS revenue agent conducting the examination issued his examination report (the "Revenue Agent's Report") with respect to the tax issues in the RPS Tax Audit, including the RPS Tax Issues. The Revenue Agent's Report sets forth a number of positions which the IRS examining agent has taken with respect to the RPS Tax Issues for the years that are subject to the RPS Audit, which Special Tax Counsel to the Continuing Trustees believes are not consistent with applicable law and regulations of the IRS. One of the positions, the acquisition of assets by RPS that could be viewed as nonqualifying assets for REIT purposes, has been addressed in the opinion letter of counsel referred to above. In addition, the IRS revenue agent has proposed to disallow the deductions for bad debts and certain other items claimed by RPS in the years under examination. In reaching his conclusion with respect to the deduction for bad debts, the IRS revenue agent has disregarded the fact that the values actually obtained for the assets corresponded to the values used by RPS in determining its bad debt deductions. If all of the positions taken in the Revenue Agent's Report were to be sustained, RPS, with funds supplied by the Trust, would have to distribute up to approximately $16.5 million to its shareholders, in accordance with the procedures for deficiency dividends, in order to preserve its status as a REIT and could, in addition, be subject to taxes, interest and penalties up to approximately $24 million through March 15, 1999. The issuance of the Revenue F-15 Agent's Report constitutes only the first step in the IRS administrative process for determining whether there is any deficiency in RPS' tax liability for the years at issue and any adverse determination by the IRS revenue agent is subject to administrative appeal with the IRS and, thereafter, to judicial review. As noted above, the Revenue Agent's Report sets forth a number of positions which Special Tax Counsel to the RPS and the Trust believe are not consistent with applicable law and regulations of the IRS. The Trust has been informed that RPS intends to file an administrative appeal challenging the findings contained in the Revenue Agent's Report. 4. RAMCO TRANSACTION On December 27, 1995, RPS and Ramco-Gershenson, Inc. ("Ramco") and its affiliates (the "Ramco Group") entered into an agreement relating to the acquisition through an operating partnership (the "Operating Partnership") controlled by RPS of substantially all of the real estate assets as well as the business operations of Ramco (the "Transaction"). As part of the Transaction, the Operating Partnership will succeed to the ownership of interests in 22 shopping center and retail properties (the "Ramco Properties"), as well as 100% of the nonvoting stock and 5% of the voting stock of Ramco (representing in excess of 95% of the economic interests of Ramco). Under the proposed revised structure to the Transaction, RPS will contribute to the Operating Partnership six retail properties ("RPS Properties") and $68,000,000 in cash and will be liable for approximately $7,000,000 of Transaction expenses. Following the closing of the Transaction, Ramco will manage the Ramco Properties, the RPS Properties and properties of certain third parties and other Ramco affiliates. Upon consummation of the Transaction, RPS will be the sole general partner of and a limited partner in the Operating Partnership and under the proposed revised structure to the Transaction will initially hold approximately 75% of the interests therein. The members of the Ramco Group will be limited partners in the Operating Partnership and will initially hold, in the aggregate, approximately 25% of the interests therein. The Ramco Group could also increase its interest in the Operating Partnership based on the future performance of certain of the Ramco properties; such performance incentives could increase the Ramco Group's interest in the Operating Partnership to approximately 29% in the aggregate. The Ramco Group's units in the Operating Partnership will be exchangeable for shares of RPS Realty Trust commencing one year after consummation of the Transaction, subject to purchase of such OP Units for cash by RPS Realty Trust, at RPS' option. As part of the Transaction, it is anticipated that RPS will change its name to Ramco-Gershenson Properties Trust and will implement a one-for-four reverse share split. Upon consummation of the Transaction, it is contemplated that four of the nine current members of the Board of Trustees of RPS will resign and will be replaced by four individuals designated by the Ramco Group, two of whom will be independent of RPS, Ramco and their respective affiliates. In addition, the five current principal executive officers of Ramco will become executive officers of RPS and will be responsible for the management of the RPS' real estate operations. In connection with the Transaction, and as a condition thereto, RPS will transfer its remaining mortgage loan portfolio, as well as certain other assets, to the Trust and thereafter will distribute the shares after taking into account the reverse stock split referred to above, to the RPS shareholders. Additionally, pursuant to the terms of the Transaction, the Trust will incur approximately $6,500,000 in indebtedness, the proceeds of which, together with existing resources of RPS to be used primarily for the payment of severance benefits of approximately $4,500,000, distributions to shareholders of $2,279,000 and directors' and officers' insurance premiums of approximately $1,150,000 and approximately $750,000 in working capital. F-16 It is anticipated that such indebtedness will accrue interest at 10% per annum (approximately $650,000 per year) and mature on the date which is 18 months after the Transaction. Such interest will be included as a decrease in the Statement of Changes in Net Assets following the consummation of the Transaction. Upon consummation of the Transaction, the Trust will assume this indebtedness. The actual amount of such indebtedness may be less than $6,500,000 to the extent that RPS effects the sale of the assets to be distributed to the Trust or is prepaid by any of the borrowers under its mortgage loans. 5. COMMITMENTS In March 1995, a lease was entered into for approximately 4,863 square feet of office space at 747 Third Avenue, New York, New York. The term of the lease commenced on April 1, 1995. The lease was extended in January 1997 at an annual base rental of approximately $172,000. The lease will expire on April 30, 1998. The Trust and the landlord each have options to terminate the lease as of November 20, 1997 or as of February 28, 1998 upon 90 days' prior written notice to the other. F-17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of March, 1999. ATLANTIC REALTY TRUST Date: March 29, 1999 By: /s/ Joel M. Pashcow ------------------------------------------- Name: Joel M. Pashcow Title: President and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Joel M. Pashcow President and Chairman of the March 29, 1999 ------------------- Board Joel M. Pashcow /s/ Edwin R. Frankel Executive Vice President, March 29, 1999 -------------------- Chief Financial Officer, Edwin R. Frankel Secretary and Principal Financial and Accounting Officer /s/ Herbert Liechtung Trustee March 29, 1999 -------------------- Herbert Liechtung /s/ Edwin J. Glickman Trustee March 29, 1999 -------------------- Edwin J. Glickman /s/ Stephen R. Blank Trustee March 29, 1999 -------------------- Stephen R. Blank /s/ Edward Blumenfeld Trustee March 29, 1999 -------------------- Edward Blumenfeld Trustee March 29, 1999 /s/ Samuel M. Eisenstat ----------------------- Samuel M. Eisenstat /s/ Arthur H. Goldberg Trustee March 29, 1999 ---------------------- Arthur H. Goldberg /s/ William A. Rosoff Trustee March 29, 1999 ---------------------- William A. Rosoff
Exhibit Index The following exhibits are filed as part of this Annual Report on Form 10-K. Description 3.1 Amended and Restated Declaration of Trust of the Trust (Incorporated by reference to the Trust's definitive registration statement on Form 10, dated March 28, 1996, File No. 0-27562, Exhibit 3.1). 3.2 Amended and Restated By-Laws of the Trust (Incorporated by reference to the Turst's definitive registration statement on Form 10, dated March 28, 1996, File No. 0-27562, Exhibit 3.2). 3.3 First Amendment to Amended and Restated Declaration of Trust of the Trust (Incorporated by reference to the Trust's definitive registration statement on Form 10, dated March 28, 1996, File No. 0-27562, Exhibit 3.3). 4.1 Form of Share Certificate (Incorporated by reference to the Trust's definitive registration statement on Form 10, dated March 28, 1996, File No. 0-27562, Exhibit 4.1). 10.1 Lease Agreement, dated as of January 16, 1997, by and between Sage Realty Corporation, as the lessor, and the Trust, as the lessee (Incorporated by reference to the Trust's annual report on Form 10-K for the year ended December 31, 1996, Exhibit 10.1.) 10.2 Form of Assignment, Assumption and Indemnification Agreement between RPS Realty Trust and the Trust (Incorporated by reference to the Trust's definitive registration statement on Form 10, dated March 28, 1997, File No. 0-27562, Exhibit 10.1.) 10.3 Form of Tax Agreement between RPS Realty Trust and the Trust (Incorporated by reference to the Trust's definitive registration statement on Form 10, dated March 28, 1996, File No. 0-27562, Exhibit 10.2). 10.4 Form of Information Statement (Incorporated by reference to the Trust's definitive registration statement on Form 10, dated March 28, 1996, File No. 0-27562, Exhibit 20.1). 10.5 Employment Agreement, dated June 11, 1998, by and between the Trust and Edwin R. Frankel (Incorporated by reference to the Trust's quarterly report on Form 10-Q for the three months ended June 30, 1998, File No. 000-27198, Exhibit 10.1) 21.1 Subsidiary of the Registrant. 27.1 Financial Data Schedule. EX-21.1 2 SUBSIDIARY OF THE REGISTRANT SUBSIDIARY OF THE REGISTRANT Name of Subsidiary State of Organization - -------------------------- ---------------------------- Atlantic Hylan Corp. Delaware EX-27 3 FDS
5 YEAR DEC-31-1998 JAN-1-1998 DEC-31-1998 21,751,057 0 0 0 0 21,751,057 38,625,000 0 60,376,057 4,164,168 0 0 0 0 56,211,889 60,376,057 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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