FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer
Incorporation or organization) Identification No.)
747 Third Avenue, New York, N.Y.
10017
........................................
(Address of principal executive offices)
(Zip Code)
212-702-8561
..................................................
(Registrant's telephone number, including area code)
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 ......
Number of shares of beneficial interest ($.01 par value) of the Registrant
outstanding as of August 1, 1998: 3,561,553
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INDEX
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause the Trust's actual results in future periods to
be materially different from any future performance suggested herein. In the
context of forward-looking information provided in this Form 10-Q and in other
reports, please refer to the discussion of risk factors detailed in, as well as
the other information contained in, the Trust's Form 10 filed with the
Securities and Exchange Commission on March 28, 1996 as well as the Trust's
filings with the Securities and Exchange Commission since that date.
PAGE NO.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................................3
Consolidated Statements of Net Assets in Liquidation
June 30, 1998 and December 31, 1997..................................................................3
Consolidated Statements of Changes in Net Assets in Liquidation Periods
April 1, 1998 through June 30, 1998, January 1, 1998 through June 30,
1998 and Periods April 1, 1997 through June 30, 1997,
January 1, 1997 through June 30, 1997................................................................4
Notes to Financial Statements........................................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Liquidation
Activities...........................................................................................9
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders..................................................10
Item 5. Other Information...................................................................................10
Item 6. Exhibits and Reports on Form 8-K....................................................................11
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ATLANTIC REALTY TRUST AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(Liquidation Basis of Accounting)
June 30, 1998 December 31, 1997
--------------------- ----------------------
ASSETS
Investments in Real Estate.............................. $38,125,000 $41,327,000
Cash and Short Term Investments......................... 19,516,232 15,635,910
----------------- ----------------
Total Assets................................... $57,641,232 $56,962,910
================= ================
LIABILITIES
Estimated Costs of Liquidation.......................... 3,108,501 2,914,206
----------------- ----------------
Total Liabilities.............................. $3,108,501 $2,914,206
----------------- ----------------
Net Assets in Liquidation............................... $54,532,731 $54,048,704
================= ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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ATLANTIC REALTY TRUST AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(Liquidation Basis of Accounting)
For the Period For the Period
4/1/98 to 6/30/98 1/1/98 to 6/30/98
----------------- -----------------
Net Assets in Liquidation
Beginning of Period...................................... $54,508,375 $54,048,704
Adjustments to Reflect
Liquidation Basis of Accounting.......................... 24,356 484,027
------------ ------------
Net Assets in Liquidation End of Period................... $54,532,731 $54,532,731
============ ============
For the Period For the Period
4/1/97 to 6/30/97 1/1/97 to 6/30/97
----------------- -----------------
Net Assets in Liquidation
Beginning of Period...................................... $47,916,316 $47,615,764
Adjustments to Reflect
Liquidation Basis of Accounting.......................... 2,726,918 3,027,470
------------ ------------
Net Assets in Liquidation End of Period................... $50,643,234 $50,643,234
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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ATLANTIC REALTY TRUST AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, a 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 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.
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 Statement 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 costs 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 (November 10, 1997), subject to, among certain other
things, satisfactory resolution of the RPS Tax Issues (as such term is defined
in footnote 5 below). 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.
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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.
2. Investments in Real Estate (a)
Estimated Net
Realizable Value
Property Location 6/30/98(b)
-------- -------- ----------
Hylan Shopping Center Staten Island, NY $38,125,000
- -------------
(a) On February 25, 1998, the Trust sold the Norgate Shopping Center for
approximately $3,850,000 and received net proceeds of $3,242,000.
(b) Includes estimated cash flows using a disposition period of 12 months.
Realized values may differ depending on actual disposition results and
time period.
3. Shares Outstanding
The weighted average number of common shares outstanding for the
periods ending June 30, 1998 and March 31, 1998 was 3,561,553.
4. Short-Term Investments
Short-term investments at June 30, 1998 consist primarily of
Certificates of Deposit at a major New York bank of $19,000,000 bearing interest
at a fixed rate of 4.80%.
5. 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 has
requested that the IRS enter into a closing agreement with RPS that the Asset
Issue will not impact RPS' status as a REIT. The IRS has deferred any action
relating to the Asset Issue pending the further examination of RPS' 1991-1995
tax returns (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
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
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Trust) under the direction of its "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 Special Tax Counsel, Wolf, Block, Schorr and Solis-Cohen LLP, that,
to the extent there is a deficiency in RPS' taxable income 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. If,
notwithstanding the above-described opinions of legal counsel, the IRS
successfully challenged the status of RPS as a REIT, the REIT status of the
Trust could be adversely affected. Management estimates that this would have an
effect of approximately $415,000 for 1997, $0 for 1996, $600,000 for 1995 and
$400,000 for 1994 for state taxes in prior years as well as $145,000 for 1997
for federal taxes which have not been provided in the financial statements of
RPS or the Trust. Such amounts do not include potential penalties and interest.
The possible effect on the Trust for subsequent periods could be significant
depending on the taxable income of either RPS or the Trust in such periods.
As of June 30, 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. Although
the agent conducting the examination has not issued his final examination report
with respect to the RPS Tax Issues, RPS has received a preliminary draft of the
examining agent's report, and a copy of that draft report has been furnished by
RPS to the Trust. Although the examining agent's draft report proposes to
disallow RPS' status as a REIT for the taxable years 1991-1995 and to assess
deficiencies in income tax, plus interest and penalties for such years, the
"continuing trustees" are engaged in ongoing discussions with the examining
agent and his supervisors with regard to the positions set forth in the draft
report. Special Tax Counsel, referred to above, has reviewed the examining
agent's draft report and the positions set forth therein. One of the positions,
dealing with the failure of RPS to send certain shareholder demand letters, is
the subject of a Closing Agreement previously entered into by RPS and the IRS
pursuant to which the IRS agreed that the status of RPS as a REIT will not be
lost solely because of its failure to satisfy certain shareholder demand notice
requirements for RPS' taxable years 1988-1992. Another position, 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. Finally,
the 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 examining agent has
disregarded transactions with third parties involving either the loans, or the
subject properties, in which the values of the assets corresponded to the values
used by RPS in determining its bad debt deductions. Special Tax Counsel,
referred to above, has advised that, to the extent that there is a deficiency in
RPS' taxable income arising out of the RPS Audit and provided that RPS timely
makes a deficiency dividend distribution, the classification of RPS as a REIT
for the taxable years under examination should not be affected adversely. There
can be no assurance that the examining agent will not issue the proposed report
in the form previously delivered to RPS (or another form). 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 the RPS tax liability
for the years at issue and any adverse determination by the
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examining agent is subject to administrative appeal within the IRS and,
thereafter, to judicial review. If the examining agent were to issue his report
in its current form and if the determinations made in the draft report were
sustained following the exhaustion by RPS of its rights to contest such IRS
determinations, the Trust's indemnification liability to RPS could be
substantial and could exceed the assets of the Trust.
740267.1
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Item 2. Management's Discussion and Analysis of Financial Condition and
Liquidation Activities.
Capital Resources and Liquidity
At June 30, 1998, the Trust owned one retail property (Hylan Plaza
Shopping Center, located in Staten Island, New York) as well as cash and certain
other assets, which include furniture, fixtures and equipment. The Trust does
not intend to make new loans or actively engage in either the mortgage lending
or the property acquisition business.
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 remaining property and the proceeds from the eventual sale of
such property will be sufficient to support the Trust and meet its obligations.
As of June 30, 1998, the Trust had approximately $19,516,000 in cash and
short-term investments.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Trust was held on May 20,
1998 (i) to elect eight trustees to sit on the Board of Trustees of the Trust
(the "Board") until the next Annual Meeting of Shareholders and until their
successors are duly elected and qualified; and (ii) to ratify the selection by
the Board of Deloitte & Touche LLP as the independent auditors of the Trust for
the fiscal year commencing January 1, 1998.
On the first proposal relating to the election of trustees, the votes
of the Shareholders were as follows:
FOR WITHHOLD AUTHORITY ABSTAIN
--- ------------------- -------
Stephen R. Blank 2,783,981 17,308 00
Edward Blumenfeld 2,790,521 10,768 00
Samuel M. Eisenstat 2,790,564 10,729 00
Edwin J. Glickman 2,790,526 10,763 00
Arthur H. Goldberg 2,790,381 10,908 00
Herbert Liechtung 2,790,076 11,213 00
Joel M. Pashcow 2,790,402 10,887 00
William A. Rosoff 2,790,521 10,768 00
For the second proposal, the Shareholders voted to ratify the selection
of Deloitte & Touche LLP as the independent auditors. There were 2,782,521 votes
for, 8,541 votes against, and 10,227 votes abstained.
Item 5. Other Information.
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 (November 10, 1997), subject to, among other things,
satisfactory resolution of the RPS Tax Issues. Because the RPS Tax Issues have
not yet been satisfactorily resolved, the Trust has continued 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.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement, entered into June 11, 1998, between
Atlantic Realty Trust and Edwin R. Frankel
27.1 Financial Data Schedule
(b) The registrant has not filed any current reports on Form 8-K for the
three month period ended June 30, 1998.
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SIGNATURES
Pursuant to the requirements 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.
ATLANTIC REALTY TRUST
Date: August 6, 1998 /s/Joel M. Pashcow
------------------
Joel M. Pashcow
Chairman and President
(Principal Executive Officer)
Date: August 6, 1998 /s/Edwin R. Frankel
-------------------
Edwin R. Frankel
Executive Vice President,
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
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Exhibit Index
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description
10.1 Employment Agreement, entered into June 11, 1998 between
Atlantic Realty Trust and Edwin R. Frankel
27.1 Financial Data Schedule
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