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 September 30, 1999 ------------------------------------------------- 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, New York 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 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of beneficial interest, par value $.01 per share, outstanding on November 2, 1999 was 3,561,553. I N D E X 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 during the past 12 months. Part I -- FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements. Consolidated Statements of Net Assets in Liquidation -- September 30, 1999 and December 31, 1998..... ........................1 Consolidated Statements of Changes in Net Assets in Liquidation -- Periods July 1, 1999 through September 30, 1999 and January 1,1999 through September 30, 1999 and Periods July 1, 1998 through September 30, 1998 and January 1, 1998 through September 30, 1998....................................................2 Notes to Consolidated Financial Statements............................3 Item 2. Management's Discussion and Analysis of Financial Condition and Liquidation Activities............................................6 Item 3. Quantitative and Qualitative Disclosure About Market Risk.............6 Part II -- OTHER INFORMATION Item 1. Legal Proceedings.....................................................7 Item 2. Changes in Securities and Use of Proceeds.............................7 Item 3. Defaults Upon Senior Securities.......................................7 Item 4. Submission of Matters to a Vote of Security Holders...................7 Item 5. Other Information.....................................................7 Item 6. Exhibits and Reports on Form 8-K......................................7 Signatures.....................................................................8 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ATLANTIC REALTY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (Liquidation Basis of Accounting) September 30, 1999 December 31, 1998 ------------------ ----------------- ASSETS Investments in Real Estate................ $ 37,775,000 $ 38,625,000 Cash and Short Term Investments........... 24,236,816 21,751,057 ------------- ------------ Total Assets......................... $ 62,011,816 $ 60,376,057 ============= ============ LIABILITIES Estimated Costs of Liquidation............ $ 4,802,918 $ 4,164,168 ------------- ------------ Total Liabilities......................... $ 4,802,918 $ 4,164,168 ------------- ------------ Net Assets in Liquidation............ $ 57,208,898 $ 56,211,889 ============= ============ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 ATLANTIC REALTY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (Liquidation Basis of Accounting) For the Period For the Period July 1, 1999 to January 1, 1999 to September 30, 1999 September 30, 1999 ------------------ ------------------ Net Assets in Liquidation Beginning of Period.................... $56,572,842 $56,211,889 Adjustments to Reflect Liquidation Basis of Accounting........ 636,056 997,009 ----------- ----------- Net Assets in Liquidation End of Period... $57,208,898 $57,208,898 =========== =========== For the Period For the Period July 1, 1998 to January 1, 1998 to September 30, 1998 September 30, 1998 ------------------ ------------------ Net Assets in Liquidation Beginning of Period.................... $54,532,731 $54,048,704 Adjustments to Reflect Liquidation Basis of Accounting........ 915,631 1,399,658 ----------- ----------- Net Assets in Liquidation End of Period... $55,448,362 $55,448,362 =========== =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 ATLANTIC REALTY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Significant Accounting Policies: Atlantic Realty Trust, a Maryland real estate investment trust (the "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 Ramco-Gershenson Properties Trust (formerly named 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. 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 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, 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 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. 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: Estimated Net Property Location Realizable Value 9/30/99(a) - -------- -------- --------------------------- Hylan Shopping Center Staten Island, NY $37,775,000 - ---------- (a) Includes estimated cash flows using a disposition period of 9 months. Realized values may differ depending on actual disposition results and time period. 3 ATLANTIC REALTY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Shares Outstanding: The weighted average number of shares of beneficial interest outstanding for the period ending September 30, 1999 was 3,561,553. 4. Short-Term Investments: Short-term investments at September 30, 1999 consist primarily of a Certificate of Deposit at a major New York bank of $23,000,000 bearing interest at a fixed rate of 4.15%. 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 real estate investment trusts (each, a "REIT"), 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. Such agreement provides that RPS (now named Ramco-Gershenson Properties Trust) under the direction of four trustees, three of whom are also trustees of 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. During the third quarter of 1999, the number of Continuing Trustees decreased from four to three upon Herbert Liechtung's resignation as a trustee of both RPS and the Trust. Subsequent to Mr. Liechtung's resignation, Robert A. Meister was named as a Continuing Trustee to fill the vacancy on the board of trustees of RPS caused by Mr. Liechtung's resignation. RPS and the Trust have also 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 ninety five percent (95%) of its taxable income), the classification of RPS as a REIT for the taxable years under examination would not be affected. As of September 30, 1999, the Trust has not been required to perform its indemnity obligation 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 4 ATLANTIC REALTY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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 $26 million through September 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 has filed an administrative appeal challenging the findings contained in the Revenue Agent's Report. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Liquidation Activities. Capital Resources and Liquidity At September 30, 1999, 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 estimates. 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 September 30, 1999, the Trust had approximately $23,591,000 in cash and short-term investments. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Not applicable. 6 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 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 (which 18-month period ended on November 10, 1997), subject to, among certain 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. Item 6. Exhibits and Reports on Form 8-K. 1. Exhibits: The registrant has filed the following exhibit as a part of this Quarterly Report on Form 10-Q: Exhibit Number Description -------------- ----------- 27.1 Financial Data Schedule 2. The registrant has not filed any reports on Form 8-K for the three month period ended September 30, 1999. 7 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 (Registrant) Date: November 4, 1999 /s/ Joel M. Pashcow ------------------------------ Name: Joel M. Pashcow Title: Chairman and President (Principal Executive Officer) Date: November 4, 1999 /s/ Edwin R. Frankel ------------------------------ Name: Edwin R. Frankel Title: Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)