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As filed with the Securities and Exchange Commission on February 3, 2000
File No. _______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
AMERICAN REALTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Nevada 75-2847135
(State of incorporation or organization) (I.R.S. Employer Identification No.)
10670 North Central Expressway, Suite 600 75231
Dallas, Texas (Zip Code)
(Address of principal executive offices)
If this Form relates to the registration of a class of debt securities and is
effective upon filing pursuant to General Instruction A.(c)(1), please check the
following box. [_]
If this Form relates to the registration of a class of debt securities and is to
become effective simultaneously with the effectiveness of a concurrent
registration statement under the Securities Act of 1933 pursuant to General
Instruction A.(c)(2), please check the following box. [_]
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Common Stock, $.01 par value per share New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
<PAGE>
Item 1. Description of Registrant's Securities to be Registered
The description of the registrant's securities to be registered hereby is
incorporated by reference from the description thereof set forth under the
heading "Description of Capital Stock" in the proxy statement/prospectus
contained in the registrant's Registration Statement on Form S-4, as amended,
initially filed with the Securities and Exchange Commission (Registration No.
333-93969) on December 30, 1999.
Item 2. Exhibits
I. Not applicable.
II. The following exhibits are filed herewith and made a part hereof:
Exhibit
Number
- ------
1.1 Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-93969)
as filed with the Securities and Exchange Commission on February 3, 2000.
4.1 Articles of Incorporation of the Registrant.
4.2 By-laws of the Registrant.
5.1* Specimen Common Stock Certificate
___________
*To be filed by amendment.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Company has duly caused this registration statement to be signed on
its behalf by the undersigned, thereto duly authorized.
AMERICAN REALTY INVESTORS, INC.
By: /s/ Thomas A. Holland
-----------------------------------
Thomas A. Holland, Executive Vice
President
Date: February 3, 2000
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Exhibit 1.1
<PAGE>
As filed with the Securities and Exchange Commission on February 3, 2000
Registration No. 333-93969
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AMERICAN REALTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Nevada 6510 75-2847135
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
10670 North Central Expressway, Suite 600
Dallas, Texas 75231
(214) 692-4700
(Address and telephone number of principal executive offices)
Robert A. Waldman, Esq.
10670 North Central Expressway, Suite 600
Dallas, Texas 75231
(214) 692-4700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Kenneth L. Betts, Esq.
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
(214) 740-8000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement and the satisfaction or waiver of
all other conditions to the mergers described in the enclosed joint proxy
statement and prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
NATIONAL REALTY, L.P. AMERICAN REALTY TRUST, INC.
YOUR VOTE ON OUR PROPOSED BUSINESS COMBINATION IS VERY IMPORTANT
To the shareholders of American Realty Trust, Inc. and the limited partners of
National Realty, L.P.:
American Realty Trust, Inc. (ART) and National Realty, L.P. (NRLP) have
agreed to combine to create a new company named American Realty Investors, Inc.
(Newco). If the ART merger and the NRLP merger are approved by our shareholders
and limited partners, as applicable, we will combine our businesses through two
separate mergers with wholly owned subsidiaries of Newco (the mergers and
related transactions are collectively referred to as the business combination).
After the mergers, NRLP and ART will be subsidiaries of Newco.
In order to complete the mergers, we must obtain the approval of our
shareholders and limited partners. We believe that the business combination will
benefit the security holders of both companies and we ask for your support in
voting for the merger proposals at the special meetings.
When the business combination is completed, NRLP's limited partners will
receive one share of common stock of Newco for each partnership unit of NRLP
they currently own and ART shareholders will receive 0.91 shares of common stock
of Newco for each share of ART common stock they currently own and one share of
preferred stock of Newco for each share of ART preferred stock they currently
own.
We anticipate that approximately 12.4 million shares of Newco common stock
will be issued to shareholders of ART and limited partners of NRLP in or as a
result of the mergers. We estimate that NRLP unitholders will own approximately
2.8 million shares, or 22.4%, of Newco common stock, while ART common
shareholders will own approximately 9.6 million shares, or 77.6%, of Newco
common stock following the mergers. More information about the business
combination is contained in the materials that accompany this letter.
The boards of directors of both ART and NRLP Management Corp., the general
partner of NRLP, have approved the mergers and recommend that their respective
security holders vote for the merger proposals as described in the attached
materials.
ART shareholders will vote at ART's special meeting on March 21, 2000, at
10:00 a.m., local time, at 10670 North Central Expressway, Suite 600, Dallas,
Texas. NRLP limited partners will vote at NRLP's special meeting on March 21,
2000, at 10:30 a.m., local time, at 10670 North Central Expressway, Suite 600,
Dallas, Texas.
Your vote is important, regardless of the number of shares or units you
own. Please vote as soon as possible to make sure that your shares or units are
represented at the special meetings. You may vote your shares or units by
completing the enclosed proxy card, by telephoning the transfer agent, by faxing
it to the transfer agent or by voting on the Internet. You may also cast your
vote in person at the special meetings.
Very truly yours,
Karl L. Blaha, President Karl L. Blaha, President
American Realty Trust, Inc. NRLP Management Corp.
_______________________________ _______________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved the common stock and preferred stock to be issued under
this joint proxy statement and prospectus or determined if this joint proxy
statement and prospectus is accurate or incomplete. Any representation to the
contrary is a criminal offense.
This joint proxy statement and prospectus is dated February __, 2000, and
is first being mailed to shareholders and unitholders on or about February __,
2000.
<PAGE>
Forward Looking Statements
Certain statements, excluding those made under the captions "SUMMARY",
"RISK FACTORS", "BUSINESS OF ART", "BUSINESS OF NRLP" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ART"
and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF NRLP", constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the Reform Act). These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
ART, NRLP or Newco to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. These factors include, among others: general economic and business
conditions, which will, among other things, affect the supply and demand for
commercial real estate, availability and creditworthiness of prospective
tenants, lease rates and the availability of financing; adverse changes in the
real estate markets including, among other things, competition, risks associated
with real estate acquisitions; governmental actions and initiatives;
environmental/safety requirements; and other changes and factors referenced in
this joint proxy statement and prospectus.
Where You Can Find More Information
ART and NRLP file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document filed by
ART or NRLP at the SEC's public reference rooms in Washington, D.C., New York,
New York and Chicago, Illinois. The public reference room at the SEC's office
in Washington, D.C. is located at 450 Fifth Street, N.W. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. The
companies' SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http:\\www.sec.gov." In addition, because ART's common stock is listed on the
New York Stock Exchange, reports and other information concerning ART (symbol:
"ARB") can also be inspected at the office of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005. Because NRLP's units of limited
partner interest are traded on the American Stock Exchange (symbol: "NLP"),
reports and other information concerning NRLP can also be inspected at the
office of the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
Newco has filed a registration statement on Form S-4 to register with the
SEC the Newco common stock to be delivered to the ART shareholders and the NRLP
unitholders in the business combination. This joint proxy statement and
prospectus is a part of that registration statement and constitutes a prospectus
of Newco in addition to being a proxy statement of both ART and NRLP for the
special meetings. As allowed by SEC rules, this joint proxy statement and
prospectus does not contain all the information you can find in the registration
statement or the exhibits to the registration statement.
The federal securities laws allow ART and NRLP to "incorporate by
reference" information into this joint proxy statement and prospectus, which
means important information may be disclosed to you by referring you to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this joint proxy statement and prospectus,
except for any information superseded by information in, or incorporated by
reference in, this joint proxy statement and prospectus. This joint proxy
statement and prospectus incorporates by reference the
i
<PAGE>
documents set forth below that have been previously filed with the SEC. These
documents contain important information about our companies and their finances.
ART SEC Filings (File No. 001-09948) Period
Annual Report on Form 10-K Year ended December 31, 1998
Annual Report on Form 10-K/A Year ended December 31, 1998
Annual Report on Form 10-K/A Year ended December 31, 1998
Quarterly Report on Form 10-Q Quarter ended September 30, 1999
Quarterly Report on Form 10-Q/A Quarter ended September 30, 1999
Quarterly Report on Form 10-Q Quarter ended June 30, 1999
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
NRLP SEC Filings (File No. 001-09648) Period
Annual Report on Form 10-K Year ended December 31, 1998
Annual Report on Form 10-K/A Year ended December 31, 1998
Quarterly Report on Form 10-Q Quarter ended September 30,1999
Quarterly Report on Form 10-Q/A Quarter ended September 30, 1999
Quarterly Report on Form 10-Q Quarter ended June 30, 1999
Quarterly Report on Form 10-Q Quarter ended March 31, 1999
ART and NRLP are also incorporating by reference additional documents that
either company may file with the SEC between the date of this joint proxy
statement and prospectus and the date of the special meetings. If any document
ART or NRLP files with the SEC during that time period changes in any way a
statement made in any earlier document, including this document, you should
consider the most recently reported information to be the correct information
making the earlier statements invalid to the extent they are modified.
ART has supplied all information contained or incorporated by reference in
this joint proxy statement and prospectus relating to ART, and NRLP has supplied
all the information relating to NRLP.
Documents incorporated by reference are available from either company
without charge, excluding all exhibits unless specifically incorporated by
reference in this joint proxy statement and prospectus. Shareholders and
unitholders may obtain free copies of documents incorporated by reference in
this joint proxy statement and prospectus or those that are exhibits to the Form
S-4 by requesting them in writing or by telephone from the appropriate party at
the following address:
For ART Documents: For NRLP Documents:
Investor Relations Department Investor Relations Department
American Realty Trust, Inc. National Realty, L.P.
10670 North Central Expressway 10670 North Central Expressway
Suite 300 Suite 300
Dallas, Texas 75231 Dallas, Texas 75231
Tel: (214) 692-4800 Tel: (214) 692-4800
1-800-400-6407 1-800-400-6407
If you would like to request documents from either company, please do so by
March 10, 2000 to receive them before the special meeting.
ii
<PAGE>
You should rely only on the information contained or incorporated by
reference in this joint proxy statement and prospectus to vote on the approval
of the business combination. Neither ART nor NRLP has authorized anyone to
provide you with information that is different from what is contained in this
joint proxy statement and prospectus. This joint proxy statement and prospectus
is dated February __, 2000. You should not assume that the information
contained in the joint proxy statement and prospectus is accurate as of any date
other than that date, and neither the mailing of this joint proxy statement and
prospectus to shareholders and/or unitholders nor the delivery of Newco common
stock in the business combinations shall create any implication to the contrary.
We have authorized no one to give you any information or to make any
representation about either of the proposed mergers or the companies that
differs from or adds to the information contained in this document or in the
documents ART and NRLP have publicly filed with the SEC. Therefore, if anyone
should give you any different or additional information, you should not rely on
it.
If you live in a jurisdiction where it is unlawful to offer to exchange or
sell, or to ask for offers to exchange or buy, the securities offered by this
document, or to ask for proxies, or, if you are a person to whom it is unlawful
to direct these activities, then the offer presented by this document does not
extend to you.
iii
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE BUSINESS COMBINATION.............................................................. 1
SUMMARY........................................................................................................... 5
General...................................................................................................... 5
Proxy Statement for ART and NRLP......................................................................... 5
Purpose of the Business Combination...................................................................... 5
Summary of Risk Factors.................................................................................. 6
The Companies................................................................................................ 7
The Mergers.................................................................................................. 9
New York Stock Exchange Listing of Newco Common Stock........................................................ 10
The Special Meetings......................................................................................... 10
The Recommendation of the ART Board ......................................................................... 11
The Recommendation of the NRLP General Partner .............................................................. 12
Conflicts of Interest........................................................................................ 12
Opinions of Financial Advisors............................................................................... 12
Federal Income Tax Considerations............................................................................ 13
Accounting Treatment......................................................................................... 13
Comparison of Shareholder and Partner Rights................................................................. 13
Comparative Per Unit/Share Information....................................................................... 14
Market Prices and Dividend Information....................................................................... 15
RISK FACTORS...................................................................................................... 17
Possible Detrimental Effects of the Merger................................................................... 17
Tax Risks to NRLP Unitholders ........................................................................... 17
Dilution of Current Ownership Interest .................................................................. 17
Anti-Takeover Effect .................................................................................... 17
Conflicts of Interest Between ART and NRLP .............................................................. 17
Conflicts of Interest Between ART and BCM ............................................................... 17
Reliance on the Newco Board to Declare Dividends on the
Newco Common Stock ...................................................................................... 17
Application for the Listing and Trading of Newco Common Stock and
Possible Subsequent Delisting ........................................................................... 17
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Correlation Between the Value of the Newco Common Stock and the Success of
the Combined Business of ART and NRLP........................................................................ 18
Recent Operating History of ART ......................................................................... 18
Recent Operating History of NRLP......................................................................... 18
Changes in Policies Without Shareholder Approval ........................................................ 18
Nature of Investments Made by ART and NRLP May Involve High Risk ........................................ 18
Existing Debt Maturities ................................................................................ 19
Possible Inability to Meet Payments on Debt Financing ................................................... 19
Rising Interest Rates on Variable Rate Debt ............................................................. 19
Investments in Real Propety are Illiquid and Subject to Various Economic Risks .............................. 20
Potential Environmental Liability ........................................................................... 20
Difficulty of Locating Suitable Investments; Competition .................................................... 21
General Investment Risks Associated with Acquisition Activities ............................................. 21
Dependence on Rental Income from Real Property .............................................................. 21
Properties that Serve as Collateral for Mortgage Notes Receivable ........................................... 22
Property Operating Risks..................................................................................... 22
Apartment Properties .................................................................................... 22
Hotel Properties ........................................................................................ 22
Office and Retail Properties ............................................................................ 22
Investments in Non-Recourse Mortgage Loans .................................................................. 23
Possibility of Uninsured Loss on Uninsurable or Economically Uninsurable
Properties .................................................................................................. 23
Costs of Compliance with the Americans with Disabilities Act and Similar Laws ............................... 24
Noncompliance with Other Laws ............................................................................... 24
Changes in Laws ............................................................................................. 24
Lack of Control and Other Risks of Equity Investments in and with Third Parties ............................. 24
Limitations on Remedies...................................................................................... 25
RATIO OF EARNINGS TO FIXED CHARGES................................................................................ 25
USE OF PROCEEDS................................................................................................... 25
THE SPECIAL MEETINGS.............................................................................................. 26
Introduction................................................................................................. 26
ART Special Meeting.......................................................................................... 26
NRLP Special Meeting......................................................................................... 26
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Voting Instructions.......................................................................................... 26
Voting by Written Proxy Card............................................................................. 26
Voting by Telephone, Fax or the Internet................................................................. 27
Record Date; Votes Required.................................................................................. 27
Dissenter's Rights........................................................................................... 27
Proxy .................................................................................................... 28
Solicitation of Proxies...................................................................................... 28
Other Matters................................................................................................ 28
THE PROPOSED BUSINESS COMBINATION AND RELATED MATTERS............................................................. 29
General...................................................................................................... 29
Background of the Business Combination....................................................................... 29
Effects of the Mergers....................................................................................... 31
Effective Time of the Mergers................................................................................ 31
Exchange of Securities....................................................................................... 31
Cash in Lieu of Fractional Shares of Newco Common Stock...................................................... 32
Conditions to the Business Combination; Termination; Waiver and Amendment.................................... 32
Reasons for the Business Combination......................................................................... 34
The Recommendation of the ART Board.......................................................................... 34
The Recommendation of the NRLP General Partner .............................................................. 36
Opinion of Financial Advisors ............................................................................... 39
Opinion of ART's Financial Advisor ...................................................................... 39
Opinion of NRLP's Financial Advisor ..................................................................... 45
Federal Income Tax Consequences.............................................................................. 52
Litigation................................................................................................... 59
THE REORGANIZATION AGREEMENT...................................................................................... 59
Exchange of Certificates..................................................................................... 61
Accounting Treatment......................................................................................... 62
Consequences Under Federal Securities Laws; Resale of Newco Stock............................................ 62
Dissenters' Rights........................................................................................... 62
Interests of Certain Persons in the Mergers ................................................................. 64
Management and Board of Directors after the Merger........................................................... 65
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Stock Options................................................................................................ 65
Expenses of the Mergers ..................................................................................... 65
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION............................................................ 65
BUSINESS OF NEWCO................................................................................................. 73
MANAGEMENT OF NEWCO............................................................................................... 73
Directors.................................................................................................... 73
Executive Officers........................................................................................... 74
Officers..................................................................................................... 75
EXECUTIVE COMPENSATION OF NEWCO................................................................................... 75
BUSINESS OF ART................................................................................................... 75
General...................................................................................................... 75
The Manager.................................................................................................. 77
Geographic Regions........................................................................................... 80
Real Estate.................................................................................................. 80
Mortgage Loans............................................................................................... 89
Related Party................................................................................................ 91
Investments in Real Estate Investment Trusts and Real Estate Partnerships.................................... 92
Legal Proceedings............................................................................................ 97
Competition.................................................................................................. 97
Employees.................................................................................................... 97
SELECTED FINANCIAL DATA OF ART.................................................................................... 97
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF ART........................................................................ 98
Introduction................................................................................................. 98
Liquidity and Capital Resources.............................................................................. 98
Results of Operations........................................................................................107
Environmental Matters........................................................................................113
Inflation....................................................................................................114
Year 2000....................................................................................................114
Quantitative and Qualitative Disclosure About Market Risk of ART ............................................114
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BUSINESS OF NRLP..................................................................................................115
General......................................................................................................115
The Manager..................................................................................................116
Geographic Regions...........................................................................................117
Real Estate..................................................................................................117
Mortgage Loans...............................................................................................122
Investment in Marketable Equity Securities of ART............................................................126
Legal Proceedings............................................................................................126
Competition..................................................................................................126
Employees....................................................................................................127
SELECTED FINANCIAL DATA OF NRLP...................................................................................127
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF NRLP.......................................................................128
Introduction.................................................................................................128
Liquidity and Capital Resources..............................................................................128
Results of Operations........................................................................................133
Environmental Matters........................................................................................136
Inflation....................................................................................................136
Taxes ....................................................................................................137
Year 2000....................................................................................................137
Quantitative and Qualitative Disclosure About Market Risk of NRLP ...........................................137
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF ART.................................................................................................139
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF NRLP................................................................................................140
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ART.............................................................141
Policies with Respect to Certain Activities..................................................................141
Certain Business Relationships...............................................................................141
Related Party Transactions...................................................................................142
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF NRLP............................................................143
Certain Business Relationships...............................................................................143
Related Party Transactions...................................................................................144
Indebtedness of Management...................................................................................146
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INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON .......................................................... 146
CONFLICTS OF INTEREST............................................................................................. 146
MARKET FOR ART'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.................................................... 147
MARKET FOR NRLP'S UNITS OF LIMITED PARTNER INTEREST AND
RELATED SECURITY HOLDER MATTERS................................................................................... 150
DESCRIPTION OF THE CAPITAL STOCK OF NEWCO......................................................................... 152
Description of Common Stock.................................................................................. 152
Voting Rights............................................................................................ 152
Dividends................................................................................................ 152
Description of Preferred Stock.............................................................................. 152
Series A ................................................................................................ 152
Series B ................................................................................................ 154
Series C................................................................................................. 155
Series D................................................................................................. 157
CHARTER AND BYLAWS OF NEWCO....................................................................................... 158
Authorized Stock............................................................................................. 158
Directors.................................................................................................... 158
Stockholder Meetings and Special Voting Requirements......................................................... 159
Amendment of the Charter and Bylaws.......................................................................... 159
Transactions with Interested Officers or Directors........................................................... 159
Anti-Takeover Effect of Authorized but Undesignated Preferred Stock.......................................... 159
Liability for Monetary Damages............................................................................... 160
Indemnification and Advancement of Expenses.................................................................. 160
ANTI-TAKEOVER PROVISIONS OF THE ORGANIZATIONAL
DOCUMENTS OF NEWCO................................................................................................ 161
Number of Directors; Removal; Filling Vacancies.............................................................. 161
Advance Notice Provisions for Director Nominations and Stockholder Proposals................................. 161
Business Combinations Under Nevada Law....................................................................... 162
DESCRIPTION OF THE CAPITAL STOCK OF ART........................................................................... 162
General...................................................................................................... 162
Common Stock................................................................................................. 162
Special Stock................................................................................................ 163
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DESCRIPTION OF THE PARTNERSHIP UNITS OF NRLP...................................................................... 169
General...................................................................................................... 169
Participation in Net Income, Net Loss and Distributions...................................................... 170
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES....................................................................... 170
COMPARISON OF OWNERSHIP OF UNITS AND SHARES....................................................................... 171
LEGAL MATTERS..................................................................................................... 184
EXPERTS........................................................................................................... 184
INDEX TO FINANCIAL STATEMENTS..................................................................................... F-1
APPENDICES:
APPENDIX A - Agreement and Plan of Reorganization
APPENDIX B - Opinion of Fieldstone, Inc.
APPENDIX C - Opinion of Houlihan Lokey Howard & Zukin
APPENDIX D - Georgia Dissenters' Rights
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QUESTIONS AND ANSWERS ABOUT THE BUSINESS COMBINATION
1.Q: What is being proposed?
A: We are asking you to approve the combination of National Realty, L.P.
(NRLP) and American Realty Trust, Inc. (ART) as separate subsidiaries of newly
formed American Realty Investors, Inc. (Newco). To accomplish this, we, the
board of directors of ART and the general partner of NRLP, are proposing the
mergers of two separate newly created subsidiary corporations of Newco with and
into NRLP and ART, respectively.
As a result of the combination, Newco will acquire the public minority
interest of NRLP and the limited partners of NRLP, other than ART and its
subsidiaries, and the common shareholders of ART will receive shares of common
stock of Newco in exchange for each unit and/or share they now hold. After the
business combination is complete, your shares of Newco common stock is expected
to trade on the New York Stock Exchange (NYSE) under the symbol "____".
After the business combination, ART and NRLP will continue to exist but
will be subsidiaries of Newco. NRLP will be the surviving entity in its merger
and will have two limited partners, a subsidiary of ART and Newco. NRLP
Management Corp., a wholly owned subsidiary of ART, will continue to act as the
general partner of NRLP. ART will be the surviving entity in its merger and
will be a wholly-owned subsidiary of Newco.
2.Q: Why is the business combination being proposed?
A: The board of directors of ART and of the general partner of NRLP have each
determined that the business combination is likely to benefit the security
holders of ART and NRLP in several ways. The combined entity will be larger,
with a greater number of shareholders and greater equity capitalization than
either NRLP or ART.
We believe that investors, especially institutional investors, are more
likely to invest in the combined entity due to its larger market capitalization.
This, together with the listing of Newco common stock on the NYSE, should result
in greater liquidity for existing investors. For the same reasons, we believe
that the combined entity will be better able than either NRLP or ART alone to
attract new investors and, therefore, to obtain financing to pursue additional
real estate acquisition and development projects. Finally, the combined entity
will eliminate duplicative record keeping and reporting and thereby reduce
ongoing expenses.
We also believe that the business combination will provide investors
increased opportunity for growth of their investment.
3.Q: What will I receive in the merger?
A: Each partnership unit in NRLP (other than those owned by ART and its
wholly owned subsidiaries) will be converted into one share of Newco common
stock. For example, if you own 100 units, you will receive 100 shares of Newco
common stock.
Each share of common stock in ART will be converted into .91 shares of
Newco common stock. For example, if you own 100 shares of common stock in ART,
you will receive 91 shares of Newco common stock. Newco will not issue
fractional shares of common or preferred stock. Instead, a holder of ART common
stock will receive cash instead of any resulting fraction of a share in an
amount reflecting the market value of the fraction of a share.
Each outstanding share of preferred stock of ART will be converted into
one share of Newco preferred stock with substantially the same rights and
preferences as the applicable ART preferred stock.
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After the business combination, current holders of partnership units of
NRLP, other than ART and its subsidiaries, will own 22.1% of the Newco common
stock, and current shareholders of ART common stock will own 77.9% of the Newco
common stock. After the merger, current holders of ART preferred stock will own
all of the outstanding Newco preferred stock.
4.Q: What vote is required to approve my merger?
A: In order to approve your merger, the holders of the majority of
partnership units of NRLP or shares of ART common stock and ART preferred stock,
as applicable, must vote in favor of your merger.
ART currently owns 3,551,569 NRLP partnership units, representing
approximately 56.2% of the outstanding partnership units of NRLP.
Basic Capital Management, Inc., the advisor to and majority shareholder of
ART, currently owns 6,008,872 shares of ART common stock, representing
approximately 56.9% of the outstanding shares of ART common stock.
Although not required by either (1) Delaware law or the terms of the NRLP
partnership agreement or (2) Georgia law or the terms of ART's charter, the
boards of the general partner of NRLP and ART have agreed to condition the
effectiveness of the business combination upon receipt of the approval of a
majority of NRLP partnership units, other than those held by ART and its
subsidiaries, and a majority of shares of ART common stock, other than those
held by Basic Capital, that are voted at the applicable meeting, either in
person or by proxy.
5.Q: What do I need to do now?
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible so that your units of NRLP or shares of ART stock may be represented
at the appropriate meeting.
6.Q: Where and at what time will the meetings be held?
A: The ART special meeting will be held on March 21, 2000, at the offices of
ART at 10670 North Central Expressway, Suite 600, Dallas, Texas, 75231, at 10:00
a.m., Central Standard Time. The NRLP special meeting will be held on March 21,
2000, at the offices of NRLP at 10670 North Central Expressway, Suite 600,
Dallas, Texas, 75231, at 10:30 a.m., Central Standard Time.
7.Q: If my units or shares are held by my broker, will my broker vote my units
or shares for me?
A: Your broker may vote your units or shares on the merger only if you
instruct your broker how to vote. You should follow the directions provided by
your broker regarding how to instruct your broker to vote your units or shares.
If you do not tell your broker how to vote, your units or shares will not be
voted on the merger. If you hold your shares or units in a brokerage account,
you cannot vote in person at your meeting.
8.Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You may change your vote at any time before your proxy is voted at
your meeting. You may do this by sending a written notice stating that you would
like to revoke your proxy or by completing and submitting a new proxy card
bearing a later date than the proxy relating to the same units or shares to
American Stock Transfer and Trust Company, attention Joe Alicia. You may also
attend your meeting and vote in person. Simply attending the meeting, however,
will not revoke your proxy. If you hold your shares or units in a brokerage
account and you have instructed your broker to vote, you must follow your
broker's instructions regarding how to change your vote.
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9. Q: Should I send in my certificates now?
A: No. After the mergers are completed, you will receive written instructions
for exchanging units of NRLP and shares in ART for Newco stock.
10.Q: I've lost my certificate. What should I do?
A: After the close of the business combination, you will receive a letter of
transmittal with complete instructions.
11.Q: What are the tax consequences of the merger?
A: If you own shares of stock of ART, the exchange of your ART stock for
stock of Newco should be treated as a transfer of your ART stock to Newco.
Subject to certain limited exceptions, you should not recognize any gain or loss
as a result of the merger other than gain or loss attributable to receipt of
cash in lieu of fractional shares, cash received upon the exercise of
dissenters' rights or the receipt of nonqualified preferred stock. If you own
NRLP units, the exchange of your units for stock of Newco should be treated as a
transfer of your NRLP units to Newco and should, in almost all cases, be tax-
free to you. In those infrequent cases where your share of NRLP's liabilities
exceeds your basis in your units, you will recognize gain to the extent of that
excess. This gain should be treated, for the most part, as capital gain. After
the consolidation, you will be a stockholder rather than a limited partner, so
you will no longer receive the pass-through tax treatment accorded to partners
and you will no longer receive a Schedule K-1.
The aggregate tax basis of the Newco common stock received by an ART
shareholder will be equal to the aggregate tax basis of the ART common stock
converted into Newco stock, reduced by any amounts allocable to a fractional
share interest for which cash is received. The tax basis of the Newco common
stock received by an NRLP unitholder who recognizes no gain or loss pursuant to
the merger will be equal to the tax basis of the NRLP units converted into Newco
stock, reduced by the amount of the partnership liabilities attributable to
these units.
It is a condition to the consummation of the mergers that Newco, ART and
NRLP receive an opinion of Locke Liddell & Sapp LLP to the effect that the
mergers will be treated for federal income tax purposes as transfers of property
governed by Section 351 of the Internal Revenue Code. We will not waive this
condition unless we amend this document and resolicit your proxy.
12.Q: When do the companies expect to complete the business combination?
A: If the mergers are approved by the unitholders of NRLP and the
shareholders of ART, the business combination will occur as soon as possible
after approval. We expect this to occur during the first quarter of 2000.
13.Q: Will I have dissenters' rights in the merger?
A: No. Under applicable law dissenters rights are not available to the
holders of ART common stock or NRLP partnership units. Dissenters' rights are
available to the holders of ART preferred stock, as described in the section
entitled "THE REORGANIZATION AGREEMENT - Dissenters' Rights" on page ___.
14.Q: When will shares of Newco begin trading?
A: Application has been made to list the shares of Newco common stock on
the New York Stock Exchange. We anticipate that the shares of Newco common stock
will begin trading on the New York Stock Exchange on the day after the business
combination is completed.
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15.Q: How can I tell how many NRLP units or shares of ART I own?
A: The number of units or shares that you own is given on your proxy card.
16.Q: Who can I contact for more information?
A: ART shareholders who have questions about the ART merger or the business
combination may call Investor Relations at (214) 692-4800 or 1-800-400-6407.
NRLP unitholders who have questions about the NRLP merger or the business
combination may call Investor Relations at (214) 692-4800 or (800) 400-6407.
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SUMMARY
This summary highlights selected information from this proxy statement and
may not contain all information that is important to you. To understand the
business combination more fully and for a more complete description of the terms
of your mergers, you should read carefully this entire proxy statement and the
documents to which we have referred you. The following summary is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this proxy statement.
General
Proxy Statement for ART and NRLP. This proxy statement describes the
--------------------------------
proposed business combination of ART and NRLP through the mergers of ART and
NRLP with separate subsidiaries of Newco. Through this proxy statement, ART's
board of directors and NRLP Management Corp., the general partner of NRLP (NMC),
are asking the shareholders of ART and the unitholders of NRLP, respectively, to
approve the merger of their companies with the subsidiaries of Newco.
The ART merger proposal will require the affirmative vote of holders
representing a majority of the shares of ART common stock and of ART preferred
stock, voting as separate classes, then outstanding. Basic Capital Management,
Inc., the advisor and affiliate of ART (BCM), currently owns 56.9% of the shares
of ART common stock. BCM plans to vote all of its shares in favor of the ART
merger. Although not required by Georgia law or ART's charter, the ART board
has agreed to condition the effectiveness of the ART merger upon the receipt of
the approval of a majority of the shares of ART common stock, not owned by BCM,
represented at the ART special meeting, whether in person or by proxy. The ART
merger will not take effect unless the NRLP merger is approved.
The NRLP merger proposal will require the affirmative vote of NRLP
unitholders representing a majority of the total votes authorized to be cast by
the holders of NRLP partnership units then outstanding. ART and a subsidiary of
ART currently own 56.2% of the outstanding NRLP units, and ART is the 100% owner
of its general partner, NMC. ART plans to vote all of its partnership units in
favor of the NRLP merger. Although not required by Delaware law or the NRLP
partnership agreement, NMC has agreed to condition the effectiveness of the NRLP
merger upon the receipt of the approval of a majority of NRLP partnership units,
not owned by ART or its subsidiaries represented at the NRLP special meeting,
whether in person or by proxy. The NRLP merger will not take effect unless the
ART merger is approved.
Purpose of the Business Combination. The purpose of the business
-----------------------------------
combination is (a) to combine ART and NRLP, (b) to create a new company,
American Realty Investors, Inc. (Newco), which will operate as the parent
corporation of NRLP and ART, and (c) to distribute the shares of Newco common
stock to the current shareholders of ART and the unitholders of NRLP (other than
ART). ART and NRLP are engaged in substantially the same business and have
substantially similar operating concepts and philosophies. Combining the
operations of the two companies under the ownership of Newco should enable Newco
to (1) attract financing at more competitive rates than are available to either
NRLP or ART separately and (2) compete more effectively for investments.
As a result of the business combination, ART and NRLP will each (directly
and/or indirectly) become subsidiaries of Newco, a recently formed Nevada
corporation, and the capital stock of Newco will be distributed to the former
shareholders of ART and unitholders of NRLP (other than ART and its
subsidiaries). Former shareholders of ART and former unitholders of NRLP will
5
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become shareholders of Newco. In the ART merger, (a) each outstanding share of
ART common stock will be converted into .91 shares of Newco common stock, and
(b) each outstanding share of ART preferred stock will be converted into one
share of Newco preferred stock with similar rights and privileges. In the NRLP
merger, each outstanding partnership unit of NRLP (other than those owned by ART
or its subsidiaries) will be converted into one share of Newco common stock.
The diagrams set forth below illustrate the ownership of ART, NRLP and
Newco after consummation of the mergers.
[DIAGRAM APPEARS HERE]
Summary of Risk Factors. In considering whether or not to vote in favor of
-----------------------
your merger, ART shareholders and NRLP unitholders should carefully consider all
of the information set forth in this joint proxy statement and prospectus and,
in particular, should evaluate the factors set forth under the caption "RISK
FACTORS" herein. These factors include, among other things:
. Dilution of current ownership interest. If the business combination is
--------------------------------------
consummated, the percentage ownership of the ART shareholders and the NRLP
unitholders in the assets of their respective companies will be diluted.
. Application for the listing and trading of Newco common stock. While
-------------------------------------------------------------
the listing of the Newco common stock on the NYSE is a condition precedent to
ART's and NRLP's obligation to consummate the mergers, there can be no assurance
that an active market for the Newco common stock will develop or be sustained in
the future on the NYSE if the listing is approved.
. Reliance on the Newco board of directors to declare dividends on the
--------------------------------------------------------------------
Newco common stock. Dividends will not be paid on shares of Newco common stock
- ------------------
unless and until they are declared by the Newco board. Holders of Newco common
stock will not have the authority to direct or compel the board to declare
dividends with respect to the Newco common stock.
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. Anti-takeover effect. If the mergers are consummated, BCM will acquire
--------------------
an aggregate of 6,165,048 shares of Newco common stock, or approximately 49.8%
of the Newco shares outstanding after the merger. As a result of the foregoing,
third party attempts to acquire control of Newco may not be practicable.
Accordingly, if the mergers are approved, it is unlikely that an attempted take-
over of Newco, which might result in an increase in the price at which Newco
shares could be sold, will occur.
. Newco's dependence on operations of ART and NRLP. The value of the
------------------------------------------------
Newco common stock is substantially related to the success of the businesses of
ART and NRLP which are subject to a number of risks as generally described
herein under "RISK FACTORS" on page __.
The Companies
American Realty
Investors, Inc.
(Newco) A newly formed Nevada corporation that has not, to
date, conducted any activities other than those
incident to its formation, the execution of the
reorganization agreement and the preparation of this
joint proxy statement and prospectus. As a result of
the business combination, ART and NRLP will become
wholly owned subsidiaries of Newco. The business of
Newco will be the businesses currently conducted by ART
and NRLP. We anticipate that approximately 12.4 million
shares of Newco common stock will be issued to
shareholders of ART and unitholders of NRLP in the
mergers. We estimate that former shareholders of ART
will own approximately 9.6 million shares, or 77.9%, of
Newco common stock and the former NRLP unitholders
(other than ART) will own approximately 2.8 million
shares, or 22.1%, of Newco common stock.
American Realty Trust,
Inc. (ART) A publicly traded Georgia corporation engaged primarily
in the business of investing in equity interests in
real estate (including equity securities of real
estate-related entities), leases, joint venture
development projects and partnerships and financing
real estate and real estate activities through
investments in mortgage loans, including first,
wraparound and junior mortgage loans. The day-to-day
operations of ART are performed by BCM. BCM is a
contractual advisor under the supervision of the board
of directors of ART. The duties of BCM include, among
other things, locating, investigating, evaluating and
recommending real estate and mortgage note investment
and sales opportunities, as well as financing and
refinancing sources for ART. BCM also serves as a
consultant in connection with ART's business plan and
investment policy decisions made by the ART board of
directors. As of November 12, 1999, ART owned
approximately 56.2% of NRLP's outstanding units of
limited partner interest. ART is the 100% owner of NRLP
Management Corp., the general partner of NRLP.
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National Realty, L.P.
(NRLP) A publicly traded Delaware limited partnership primary
engaged in the business of owning and operating a
portfolio of real estate and financing real estate and
real estate activities through investments in mortgage
loans through National Operating, L.P., a Delaware
limited partnership (NOLP). BCM performs administrative
functions for NRLP, including accounting services,
mortgage servicing and portfolio review and analysis,
on a cost reimbursement basis. BCM also performs loan
placement services, leasing services, real estate
brokerage and property management services with respect
to some of NRLP's properties, and may perform other
services for NRLP for fees and commissions.
Basic Capital Management,
Inc. (BCM) An affiliate and majority shareholder of ART. BCM is
the advisor to ART, NRLP and NOLP. As of October 31,
1999, BCM owned 6,008,872 shares of ART common stock,
representing approximately 56.9% of the outstanding
shares of ART common stock.
NRLP Management Corp.
(NMC) A Nevada corporation and a wholly owned subsidiary of
ART. NMC is the general partner of NRLP and NOLP.
National Operating, L.P.
(NOLP) A Delaware limited partnership and 99% owned by NRLP.
NOLP is the operating partnership of NRLP.
Garden Capital, L.P.
(GCLP) A Delaware limited partnership in which NOLP is the
99.3% limited partner and Garden National Realty, Inc.,
a Nevada corporation and wholly owned subsidiary of
ART, is the .7% general partner.
NRLP Acquisition Corp. A Delaware corporation and the newly-formed and wholly
owned subsidiary of Newco which is to be merged with
and into NRLP.
ART Acquisition Corp. A Georgia corporation and the newly-formed and wholly
owned subsidiary of Newco which is to be merged with
and into ART.
The principal operating offices of each of Newco, ART, NRLP, ART
Acquisition Corp. and NRLP Acquisition Corp. are located at 10670 North Central
Expressway, Suite 300, Dallas, Texas 75231. The telephone number is (214) 692-
4700.
For more information on the business combination, you may call our
solicitation agent, Georgeson Shareholder Communications, Inc., at 1-800-221-
5724.
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The Mergers
Conditions of the Mergers. Completion of the mergers is dependent upon the
-------------------------
fulfillment of a number of conditions, including the following material
conditions:
. the approval of the mergers by the holders of a majority of the
partnership units of NRLP voting at the meeting (other than those held
by ART or its subsidiaries) and the holders of a majority of the
capital stock of ART voting at the meeting (other than those held by
BCM);
. this joint proxy statement and prospectus having been declared
effective by the SEC;
. the shares of Newco common stock to be issued in the merger having
been approved for listing on the New York Stock Exchange.
. all necessary consents from third parties having been obtained;
. each party having performed its obligations under the reorganization
agreement in all material respects;
. no restraining order, injunction, order or decree of any court having
been issued;
. the delivery of opinions of legal counsel;
. the filing by the parties of all documents and instruments required to
be filed with governmental entities; and
. no action having been taken by any state or federal government or
agency which would prevent the merger or impose material conditions on
the merger.
The reorganization agreement permits the parties to waive any of these
conditions to the merger that are in favor of that party. If the parties elect
to waive any of these material conditions to one of the mergers, this joint
proxy statement and prospectus will be amended or supplemented, as appropriate,
and will be recirculated to the affected unitholders or shareholders if the
waiver occurs prior to approval of the applicable merger by the unitholders or
shareholders. If any of these material conditions to one of the mergers is
waived after the parties receive unitholder or shareholder approval, the
unitholders or shareholders of a party adversely affected by the waiver will be
asked to reapprove that merger.
The reorganization agreement may be terminated by one or more parties at
any time prior to the effective time if specific events occur. See "THE PROPOSED
BUSINESS COMBINATION AND RELATED MATTERS -- Conditions to the Business
Combination; Termination; Waiver and Amendment" on page ___.
Availability of Dissenters' Rights. Holders of ART common stock do
----------------------------------
not have dissenters' rights under Georgia law. The holders of ART preferred
stock will have dissenters' rights as described in the section entitled "THE
REORGANIZATION AGREEMENT - Dissenters' Rights" on page ___. NRLP unitholders do
not have dissenters' rights under the NRLP partnership agreement or Delaware
law.
9
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The Mergers. The reorganization agreement provides that, subject to
-----------
the satisfaction or waiver of certain conditions, ART Acquisition Corp. will be
merged with and into ART, whereupon the separate existence of ART Acquisition
Corp. will cease and ART will be the surviving entity of the ART merger. In
addition, NRLP Acquisition Corp. will be merged with and into NRLP, whereupon
the separate existence of NRLP Acquisition Corp. will cease and NRLP will be the
surviving entity of the NRLP merger. The mergers will become effective upon the
filing of certificates of merger with the Secretary of State of each of the
states of Georgia and Delaware. As soon as practicable following the closing of
the business combination, ART shareholders and NRLP unitholders (other than ART
and its subsidiaries) will receive shares of Newco stock. See "THE PROPOSED
BUSINESS COMBINATION AND RELATED MATTERS" on page ___.
The reorganization agreement may be terminated and the mergers abandoned
prior to the effective time, whether before or after the shareholder and
unitholder approvals are obtained, as follows:
. by mutual written consent of ART and NRLP;
. by ART or NRLP if the mergers have not been consummated on or before
March 31, 2000;
. by ART or NRLP if any of the conditions precedent to ART or NRLP's
obligations under the agreement have not been met or, to the extent
permitted by applicable law, have not been waived in writing prior to
this date; or
. by ART or NRLP if either party accepts a proposal from an unaffiliated
party concerning a merger, sale of substantial assets or similar
transaction or the sale of any securities.
Under the reorganization agreement, the ART board and the general partner
of NRLP have agreed to propose and recommend to the ART shareholders and the
NRLP unitholders the adoption and approval of the business combination as
described herein.
New York Stock Exchange Listing of Newco Common Stock
Newco will take all actions as are necessary and within its control to
cause the Newco common stock to become listed on the New York Stock Exchange.
The listing of the Newco shares for trading on the NYSE is a condition to the
respective obligations of ART and NRLP to consummate the mergers. See "THE
PROPOSED BUSINESS COMBINATION AND RELATED MATTERS -- Conditions to the Business
Combination; Termination; Waiver and Amendment" on page ___.
The Special Meetings
Date, Time and Place The ART special meeting will be held on March 21,
2000, at the offices of ART at 10670 North Central
Expressway, Suite 600, Dallas, Texas 75231, at
10:00 a.m., Central Standard Time.
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The NRLP special meeting will be held on
March 21, 2000, at the offices of NRLP at
10670 North Central Expressway, Suite 600,
Dallas, Texas 75231, at 10:30 a.m., Central
Standard Time.
Matters to be Considered At your meeting, you will be asked to
consider and vote upon the proposal to
approve your merger.
Record Date January 26, 2000.
Votes Required Approval of the ART merger requires:
. The vote of a majority of the
outstanding shares of ART common stock
entitled to vote at the meeting;
. The vote of a majority of each class of
outstanding ART preferred stock, voting
separately as a class; and
. The vote of a majority of the shares of
ART common stock not owned by BCM
present at the meeting, whether in
person or by proxy.
Approval of the NRLP merger requires:
. The vote of a majority of the
outstanding NRLP partnership units
entitled to vote at the meeting and
. The vote of a majority of the NRLP
partnership units not owned by ART or
its subsidiaries present at the meeting,
whether in person or by proxy.
ART owns 56.2% of the limited partnership units of NRLP. ART intends to
vote its units in favor of the NRLP merger. NRLP owns 1.9% of the outstanding
common shares of ART. NRLP intends to vote its shares in favor of the ART
merger. BCM owns 56.9% of the outstanding common shares of ART and 11.0% of the
outstanding partnership units of NRLP. BCM intends to vote its shares in favor
of the ART and NRLP mergers.
The Recommendation of the ART Board (see page ___)
The board of directors of ART has recommended that ART approve the merger.
The ART board has determined that the terms of the proposed merger are fair to
and in the best interests of ART's shareholders and unanimously recommends that
its shareholders vote "for" the ART merger. For a complete discussion of the
reasons the board of directors determined to recommend the ART merger, see "THE
PROPOSED BUSINESS COMBINATION AND RELATED MATTERS--The Recommendation of the ART
Board" on page ___.
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The Recommendation of the NRLP General Partner (see page ____)
The board of directors of NMC has recommended that NMC approve the NRLP
merger. The NMC board has determined that the terms of the proposed merger are
fair to and in the best interests of NRLP's unitholders and unanimously
recommends that its unitholders vote "for" the NRLP merger. For a complete
discussion of the reasons the general partner determined to recommend the NRLP
merger, see "THE PROPOSED BUSINESS COMBINATION AND RELATED MATTERS--The NRLP
General Partner Recommendation" on page ___.
Conflicts of Interest (see page ____)
In considering your board's recommendation that you vote for the merger,
you should be aware that the determination of the boards of NMC, the sole
general partner of NRLP, and ART to participate in the merger may have been
affected by conflicts of interest. In particular:
. ART is the sole shareholder of NMC, which is the general partner of both
NRLP and its operating partnership subsidiary (NOLP);
. ART holds 56.2% of the partnership units of NRLP;
. NRLP holds 1.9% of the shares of ART;
. BCM is the owner of 56.9% of the outstanding common shares of ART and is an
advisor to ART, and is the owner of 11.0% of the outstanding partnership
units of NRLP and performs administrative services to NRLP and NOLP; and
. Karl L. Blaha and Colleen C. Currie are directors of each of NMC and ART,
which means that they have fiduciary duties to more than one party to the
mergers and that these duties may conflict.
The directors of NMC and of ART were aware of these interests and
considered them in approving the merger.
Opinions of Financial Advisors (see pages ____ and ____)
Fieldstone, Inc., ART's financial advisor (Fieldstone), has delivered its
opinion to the board of ART that, based upon the assumptions and analyses
contained in its letter dated November 3, 1999, after allowing for the factors
and assumptions stated in its opinion and as of that date, the merger
consideration to be received by the shareholders of ART in the merger is fair to
its shareholders from a financial point of view.
Houlihan Lokey Howard & Zukin, NRLP's financial advisor (Houlihan Lokey), has
given its opinion to the board of NMC that, based upon the assumptions and
analyses contained in its letter dated November 3, 1999, and as of that date,
the consideration to be received by unitholders of NRLP, other than ART, is fair
to its unitholders from a financial point of view.
These opinions are attached as Appendices B and C. We encourage you to read
these opinions.
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Federal Income Tax Considerations (see page ___)
The merger involves numerous federal income tax consequences to you,
depending in part on whether you are a common shareholder of ART, a preferred
shareholder of ART or a unitholder of NRLP. Material federal income tax
consequences of the merger generally include the following:
. Holders of ART common stock should not recognize gain or loss pursuant
to the merger other than gain or loss attributable to receipt of cash
in lieu of fractional shares. The aggregate tax basis of the Newco
common stock received by a shareholder will be equal to the aggregate
tax basis of the ART common stock converted in the merger, reduced by
any amounts allocable to a fractional share interest for which cash is
received. The holding period of the Newco common stock will include
the holding period of the ART common stock so converted.
. Holders of ART preferred stock will not recognize gain or loss
pursuant to the merger as long as the Newco preferred stock is not
classified as "nonqualified preferred stock". In this case, the
aggregate tax basis in the Newco preferred stock received in the
exchange will be equal to the tax basis in the ART preferred stock
exchanged therefor, and the holding period of the Newco preferred
stock will include the holding period of the ART preferred stock.
Holders of ART preferred stock who receive Newco preferred stock that
is classified as "nonqualified preferred stock" will recognize gain or
loss computed based on the difference between the fair market value of
the Newco preferred stock and the adjusted basis of the ART preferred
stock.
. A unitholder generally will not recognize gain or loss upon an
exchange of units for Newco common stock pursuant to the merger. The
tax basis of the Newco common stock received by a unitholder
recognizing no gain or loss will be equal to the tax basis of the NRLP
units so converted, decreased by the amount of partnership liabilities
attributable to the units. The holding period of the Newco common
stock received in the merger will include the holding period of the
NRLP units so converted.
Tax matters are very complicated, and the tax consequences of the merger to
shareholders and limited partners will depend upon the facts of each
individual's situation. We urge you to consult your tax advisor for a full
understanding of the merger's tax consequences to you.
Accounting Treatment (see page ___)
The combined company will account for the transaction under the purchase
method of accounting as if ART had acquired the minority interest in NRLP.
Accordingly, the combined company will record the assets and liabilities of ART
and the consideration paid to NRLP minority unitholders in the merger.
Comparison of Shareholder and Partner Rights (see pages ___ through ___)
The rights of ART shareholders are currently governed by Georgia law and
ART's charter and bylaws. The rights of NRLP unitholders are currently governed
by Delaware law and NRLP's partnership agreement. If the mergers are approved,
the rights of ART shareholders and NRLP unitholders will change and their rights
as Newco shareholders will be governed by Nevada
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corporate law and Newco's charter and bylaws. Important differences in
shareholder and unitholder rights include the following:
. differences in the potential liability of shareholders for obligations
of the corporation;
. the inspection rights of shareholders;
. the ability of shareholders to call special meetings;
. the composition of the board of directors;
. the ability of shareholders to remove directors;
. the requirements for advance notice of actions to be taken at meetings
of shareholders;
. the ability of Newco to redeem its shares;
. the ability of Newco to pay dividends;
. the limitations on liability of directors and officers to Newco or its
shareholders;
. the indemnification of directors and officers;
. the requirements to amend the charter and bylaws;
. the requirements with respect to business combinations; and
. the provisions of Nevada law with respect to control share
acquisitions.
These different provisions may be less favorable to ART shareholders and
NRLP unitholders than the corresponding provisions of Georgia and Delaware law,
as applicable, and ART's charter and bylaws and NRLP's partnership agreement.
Some of these differences may have the effect of delaying, deferring or
preventing a change in control in Newco or other transaction that might involve
a premium price for Newco shares or otherwise be in their best interests of
Newco shareholders.
Comparative Per Unit/Share Information
The following table sets forth per share/unit data of the shares of ART
common stock and units of NRLP partnership interests on a historical, pro forma
combined and pro forma equivalent basis. Pro forma equivalent information for
ART and NRLP was calculated by multiplying the pro forma per share amounts for
Newco by the exchange ratio for ART common stock and NRLP partnership units, .91
and 1, respectively. This table should be read in conjunction with the
historical financial statements and notes thereto contained herein and in NRLP's
and ART's Annual Reports on Form 10-K for the fiscal year ended December 31,
1998, Quarterly Reports on Form 10-Q for the fiscal quarter ended September 30,
1999, each of which is incorporated by reference herein, and in
14
<PAGE>
conjunction with the unaudited pro forma combined financial information
appearing elsewhere in this proxy statement.
<TABLE>
<CAPTION>
ART Common Shares
Historical Newco
---------- --------
<S> <C> <C>
Income (loss) per common share
Nine months ended September 30, 1999................................... $ .02 $ 2.89
Year ended December 31, 1998........................................... (2.24) (.09)
Cash dividend per common share
Nine months ended September 30, 1999................................... .05 .046
Year ended December 31, 1998........................................... .20 .182
Book value per common share
September 30, 1999..................................................... .40 4.64
<CAPTION>
NRLP Partnership Units
Historical Newco
---------- --------
<S> <C> <C>
Income (loss) per common share
Nine months ended September 30, 1999................................... $12.86 $ 2.89
Year ended December 31, 1998........................................... 7.36 (.09)
Cash distribution per unit
Nine months ended September 30, 1999................................... .375 .05
Year ended December 31, 1998........................................... .50 .20
Book value per unit
September 30, 1999..................................................... 7.00 4.64
</TABLE>
Market Prices and Dividend Information
The shares of ART common stock are traded on the New York Stock Exchange
under the symbol "ARB." The NRLP partnership units are traded on the American
Stock Exchange under the symbol "NLP." The following table sets forth the
quarterly high and low reported sales prices of ART common stock and NRLP
partnership units, as well as the quarterly distributions declared per share or
unit, as applicable, for periods indicated below. On November 2, 1999, the last
full trading day prior to the public announcement of the merger, the closing
price of ART common stock was $17.50 per share and the closing price of NRLP
partnership units was $20.00 per unit.
15
<PAGE>
ART Common Stock
HIGH LOW DISTRIBUTIONS
1997 $22 1/4 $ 9 3/4 $ .05
First Quarter 16 5/8 11 1/2 .05
Second Quarter 13 1/4 12 1/8 .05
Third Quarter 15 1/2 12 5/8 .05
Fourth Quarter
1998 15 14 .05
First Quarter 15 1/16 14 1/4 .05
Second Quarter 16 1/4 13 7/8 .05
Third Quarter 16 3/8 14 3/4 .05
Fourth Quarter
1999 17 3/8 15 1/2 .05
First Quarter 16 3/4 15 7/16 -
Second Quarter 16 1/8 14 7/8 -
Third Quarter 17 5/8 16 1/8 -
Fourth Quarter
(through December 10, 1999)
NRLP Partnership Units
1997
First Quarter $19 1/8 $ 12 7/8 $ .10
Second Quarter 19 1/2 16 3/8 .10
Third Quarter 24 19 .10
Fourth Quarter 24 3/4 24 3/8 1.60/1/
1998
First Quarter 24 1/8 19 3/8 .125
Second Quarter 20 1/16 18 1/2 .125
Third Quarter 22 19 .125
Fourth Quarter 23 19 3/4 .125
1999
First Quarter 23 3/4 21 3/4 .125
Second Quarter 22 7/8 21 3/4 .125
Third Quarter 22 1/8 21 1/4 .125
Fourth Quarter 21 3/8 18 5/8 .125
(through December 10, 1999)
_________________
/1/ Includes a special distribution of $1.10 per unit
16
<PAGE>
RISK FACTORS
ART shareholders and NRLP unitholders should consider, among other things,
the following risk factors in connection with the transactions contemplated by
the business combination. These factors are intended to identify the significant
sources of risk affecting an investment in the Newco common stock.
Possible Detrimental Effects of the Business Combination
Tax Risks to NRLP Unitholders. NRLP presently is taxed as a limited
-----------------------------
partnership and, as such, does not generally pay federal income tax at the
partnership level. Rather, its items of income, gain, loss and deduction flow
through to its unitholders. Unitholders will receive Newco common stock in the
merger transaction. Because Newco is a corporation, its income will be taxed at
the corporate level and, to the extent distributions are made to its
stockholders, such distributions will be taxable to the stockholders to the
extent of Newco's accumulated and current earnings and profits. As a result of
the merger, the former unitholders who become Newco stockholders will no longer
receive the pass-through tax treatment accorded to partners.
Dilution of Current Ownership Interest. If the business combination is
--------------------------------------
consummated, the percentage ownership of the ART shareholders and the NRLP
unitholders in the assets of their respective companies will be reduced. See
"Correlation Between the Value of Newco Common Stock and the Success of the
Combined Business of ART and NRLP" below.
Anti-Takeover Effect. If the mergers are consummated, BCM will acquire an
--------------------
aggregate of 6,165,048 shares of Newco common stock, or approximately 49.1% of
the Newco shares outstanding after the merger. As a result of the foregoing,
third party attempts to acquire control of Newco may not be practicable.
Accordingly, if the mergers are approved, it is unlikely that an attempted take-
over of Newco, which might result in an increase in the price at which Newco
shares could be sold, will occur.
Conflicts of Interest Between ART and NRLP. The managements of ART and
------------------------------------------
NRLP are subject to conflicts of interest in recommending the business
combination and approval of the related proposals because ART is the 100% owner
of NMC, the general partner of NRLP, and most members of management of ART also
are members of the management of NMC.
Conflicts of Interest Between ART and BCM. The management of BCM is
-----------------------------------------
subject to conflicts of interest in recommending the business combination and
approval of the related proposals because BCM is the majority owner of the
outstanding common stock of ART, and is the advisor to ART, and performs
administrative services to NRLP and NOLP.
Reliance on the Newco Board to Declare Dividends on the Newco Common Stock.
--------------------------------------------------------------------------
Dividends will not be paid unless and until they are declared by the Newco board
of directors. Holders of Newco common stock will not have the authority to
direct or compel the Newco board to declare dividends with respect to the Newco
common stock.
Application for the Listing and Trading of Newco Common Stock and Possible
--------------------------------------------------------------------------
Subsequent Delisting. While the listing of the Newco common stock on the NYSE
- --------------------
is a condition precedent to the obligation of ART and NRLP to consummate the
mergers, there can be no assurance that an active market for the Newco common
stock will develop or be sustained in the future on the exchange if the listing
is approved. Listing will also depend upon the satisfaction of the NYSE's
listing requirements
17
<PAGE>
with respect to the Newco common stock. In addition, no assurances can be given
as to the liquidity of or the price at which the Newco common stock will
actually trade.
Correlation Between the Value of the Newco Common Stock and the Success to the
Combined Business of ART and NRLP
As part of the merger consideration and pursuant to the mergers, ART
shareholders and NRLP unitholders will receive Newco common stock, the value of
which will be substantially dependent upon the success of ART's and NRLP's
combined business. Set forth below is a summary of potential risks relating to
ART's and NRLP's business operations.
Recent Operating History of ART. ART has experienced net losses of
-------------------------------
$22,805,000, $2,428,000, $5,554,000, $2,836,000 and $2,426,000, respectively,
for each of the fiscal years ended December 31, 1998, 1997, 1996, 1995 and 1994,
and ART had an accumulated deficit at December 31, 1998 of $51,880,000. For the
nine months ended September 30, 1999, ART had net income of $1,878,000 and an
accumulated deficit of $52,251,000. Through September 30, 1999, ART had
declared cumulative dividends in 1999 of $.05 with respect to each share of ART
common stock. During the fiscal year ended December 31, 1998, ART paid a
cumulative dividend of $0.20 with respect to each share. There can be no
assurance that Newco will be able to pay dividends in respect of the Newco
common stock in the future.
Recent Operating History of NRLP. NRLP has realized net income of
--------------------------------
$47,491,000, $8,718,000, $3,797,000, and $5,017,000, respectively, for each of
the fiscal years ended December 31, 1998, 1997, 1995 and 1994, and experienced a
net loss of $375,000 in the fiscal year ended December 31, 1996 and NRLP had an
accumulated partner's deficit at December 31, 1998 of $32,115,000. For the nine
months ended September 30, 1999, NRLP had net income of $82,929,000 and an
accumulated partner's equity of $48,399,000. Through September 30, 1999, NRLP
had declared cumulative dividends of $.375 with respect to each unit of NRLP
limited partnership interest. During the fiscal year ended December 31, 1998,
NRLP paid a cumulative dividend of $.50 with respect to each unit. There can be
no assurance that Newco will be able to pay dividends in respect of the Newco
common stock in the future.
Changes in Policies Without Shareholder Approval. The investment,
------------------------------------------------
financing, borrowing and distribution policies of ART and their policies with
respect to all other activities, growth, debt, capitalization and operations,
will be determined by the ART board and NMC, respectively. Although they have
no present intention to do so, the ART board and NMC, respectively may amend or
revise these policies at any time and from time to time at their discretion
without a vote of the stockholders of Newco. A change in these policies could
adversely affect the market price of the Newco common stock. See "BUSINESS OF
ART" on page ___ and "BUSINESS OF NRLP" on page ___.
Nature of Investments Made by ART and NRLP May Involve High Risk. ART and
----------------------------------------------------------------
NRLP may make investments in real estate-related assets and businesses which
have experienced severe financial difficulties, which difficulties may never be
overcome. Since these investments may involve a high degree of risk, poor
performance by any of these investments could severely affect the financial
condition and results of operations of ART and NRLP. ART has a significant
percentage of its real estate portfolio invested in unimproved land. Investments
in unimproved land involve a high degree of risk because the property generally
generates no income, other than from sales, but substantial carrying costs may
be incurred, particularly for real estate taxes and interest on loans secured by
the land. If the land is not sold or developed in sufficient quantities to
timely pay these
18
<PAGE>
carrying costs, ART will have to use other sources to pay for these costs. This
may adversely affect the market price of the Newco common stock.
Existing Debt Maturities. As of September 30, 1999, approximately $117.0
------------------------
million of ART's outstanding indebtedness became due within the next twelve
months. During the third quarter of 1999, ART either extended, refinanced, paid
down, paid off or received commitments from lenders to extend or refinance $33.7
million of the debt scheduled to mature in 2000. As of September 30, 1999,
approximately $3.1 million of NRLP's outstanding indebtedness became due within
the next twelve months. During the third quarter of 1999, NRLP paid off all of
its debt scheduled to mature in 2000. If ART or NRLP is unable to refinance any
of the foregoing indebtedness on acceptable terms, the company may be forced to
dispose of properties on disadvantageous terms, which could result in losses.
Resulting losses would adversely affect the amount of cash available for
additional investments, to make payments on its outstanding indebtedness or to
make distributions to Newco.
Possible Inability to Meet Payments on Debt Financing. ART's and NRLP's
-----------------------------------------------------
debt-to-equity ratio, inclusive of margin debt, was 21.0 to 1 as of December 31,
1998 and 20.6 to 1 as of September 30,1999. Under certain circumstances, ART's
cash flow may be insufficient to meet required payments of principal, interest
on its debt and dividend distributions. If a property is mortgaged to secure
payment of indebtedness and either ART or NRLP is unable to meet mortgage
payments, the lender could foreclose upon the property, appoint a receiver and
receive an assignment of rents and leases or pursue other remedies, all with a
consequent loss of income and asset value to ART or NRLP. If ART or NRLP
defaults on secured indebtedness, the lender may foreclose and ART or NRLP could
lose its entire investment in the security for the loan. Because ART and NRLP
may engage in portfolio financings where several investments are cross-
collateralized, multiple investments may be subject to the risk of loss. As a
result, ART or NRLP could lose its interests in performing investments in the
event those investments are cross-collateralized with poorly performing or
nonperforming investments. In addition, recourse debt may subject other assets
of ART or NRLP to risk of loss. Any losses of this type would adversely affect
Newco's ability to make distributions in respect of the Newco common stock.
Distributions in respect of the Newco common stock will be subordinate in right
of payment to ART's and NRLP's debt obligations which, as of September 30, 1999,
had aggregate outstanding principal balances of approximately $791.4 million and
$298.0 million, respectively. Substantially all of ART's and NRLP's mortgage
notes receivable, real estate, equity security holdings and trading portfolio of
equity securities have been pledged to secure outstanding indebtedness. These
borrowings increase ART's and NRLP's risk of loss because they represent a prior
claim on ART's and NRLP's assets and require fixed payments regardless of
profitability. If ART or NRLP defaults on this secured indebtedness, the lender
may foreclose on ART's or NRLP's assets securing the indebtedness, and ART or
NRLP could lose its investments in the pledged assets.
Rising Interest Rates on Variable Rate Debt. As of September 30, 1999,
-------------------------------------------
approximately 13.7 % and 86.3 % of ART's indebtedness and 8.1% and 91.9% of
NRLP's indebtedness was subject to variable interest rates and fixed interest
rates, respectively. ART and NRLP may incur indebtedness in the future that also
bears interest at a variable rate or may be required to refinance these debts at
higher rates. Accordingly, increases in variable interest rates could increase
ART's or NRLP's interest expense and adversely affect the financial condition
and results of operations of ART or NRLP. In the event that ART's or NRLP's
financial condition and results of operations are adversely affected, the value
of the Newco common stock will likely decline.
19
<PAGE>
Investments in Real Property are Illiquid and Subject to Various Economic Risks.
Real property investments are subject to varying degrees of risk and are
relatively illiquid. Income from real property investments and Newco's resulting
ability to pay dividends to its stockholders may be adversely affected by a
number of factors, including:
. the general economic climate and local real estate conditions (such as
oversupply of or reduced demand for space and changes in market rental
rates);
. the perceptions of prospective tenants of the safety, convenience and
attractiveness of the properties;
. the ability of the owner of the properties to provide adequate
management, maintenance and insurance;
. energy and supply shortages; the ability to collect on a timely basis
all rent from tenants and interest from borrowers;
. the expense of periodically renovating, repairing and reletting
spaces; and
. increasing operating costs (including real estate taxes and utilities)
which may not be passed through to tenants. Certain significant
expenditures associated with investments in real estate (such as
mortgage payments, real estate taxes, insurance and maintenance costs)
are generally not reduced when circumstances cause a reduction in
rental revenues from the investment.
If a property is mortgaged to secure the payment of indebtedness and if the
borrower is unable to meet its mortgage payments, a loss could be sustained as a
result of foreclosure on the property or the exercise of other remedies by the
mortgagee. Real estate values and income from properties are also affected by
factors such as compliance with laws, including tax laws, interest rate levels
and the availability of financing. The illiquid nature of real estate
investments may limit the ability of ART and NRLP to modify their portfolios in
response to changes in economic conditions.
Potential Environmental Liability.
Under various Federal, state and local environmental laws, ordinances and
regulations, an owner of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on the property. These
laws often impose environmental liability without regard to whether the owner
knew of, or was responsible for, the presence of hazardous or toxic substances.
The presence of hazardous substances, or the failure properly to remediate them,
may adversely affect the owner's ability to sell or rent the property or to
borrow using the property as collateral. Persons who arrange for the disposal
or treatment of hazardous or toxic substances may also be liable for the costs
of removal or remediation of these substances at a disposal or treatment
facility, whether or not the facility is owned or operated by this person.
Certain laws impose liability for release of asbestos-containing materials into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with asbestos-containing materials.
In connection with the ownership (directly or indirectly through its lending
activities), operation, management and development of real properties, ART or
NRLP may be considered an owner or operator of these properties or as having
arranged for the disposal or treatment of hazardous or toxic
20
<PAGE>
substances and, therefore, potentially liable for removal or remediation costs,
as well as for certain other related costs, including governmental fines and
injuries to persons and property.
Neither ART's nor NRLP's management is aware of any environmental matters
affecting properties or investments that would have a material adverse effect on
their respective business, assets or results of operations. No assurance can be
given that existing environmental assessments with respect to any of ART's or
NRLP's properties reveal all environmental liabilities, that any prior owner of
a property did not create any material environmental condition not known to ART
or to NRLP, or that a material environmental condition does not otherwise exist
with respect to any one or more properties of ART or NRLP.
Difficulty of Locating Suitable Investments; Competition.
Identifying real estate investments has from time to time been highly
competitive. Completing and realizing a return involves a high degree of
uncertainty. ART and NRLP compete for investments with many public and private
real estate investment entities, including financial institutions (such as
mortgage banks, pension funds and real estate investment trusts), other
institutional investors and individuals. Many competitors are considerably
larger, have greater financial resources and may have management personnel with
more experience than the officers of ART and NRLP. There can be no assurance
that ART or NRLP will continue to be able to locate and complete investments
which satisfy their respective investment objectives. In addition, there can be
no assurance that investments will provide anticipated returns or that ART or
NRLP will be able to fully invest their available capital.
General Investment Risks Associated with Acquisition Activities.
From time to time, ART and NRLP will acquire existing properties to the
extent that they can be acquired on advantageous terms and meet investment
criteria established by the companies. The acquisition of real estate involves
general investment risks, including the risk that an investment will fail to
perform as expected, that improvement costs may be inaccurate and that occupancy
rates and rents achieved may be less than anticipated.
Dependence on Rental Income from Real Property.
ART and NRLP's cash flow, results of operations and asset value of its
assets would be adversely affected if a significant number of tenants of each
company's properties failed to meet lease obligations or if a significant amount
of space is not able to be leased on economically favorable terms. In the event
of a default by a lessee, delays may be experienced in enforcing lessor rights
and substantial costs may be incurred in protecting the investment. The
bankruptcy or insolvency of a major tenant may have an adverse effect on a
property. At any time, a tenant may also seek protection under the bankruptcy
laws, which could result in rejection and termination of the tenant's lease
resulting in a reduction in the property's cash flow. If a tenant rejects its
lease, a claim for breach of the lease would be treated as a general unsecured
claim (absent the availability of collateral securing the claim). Generally,
the amount of a claim for breach would be limited to the amount owed for unpaid
pre-petition lease payments unrelated to the rejection, plus the greater of one
year's lease payments or 15% of the remaining lease payments payable under the
lease (not exceeding three years). No assurance can be given that a property in
which ART or NRLP has an interest will not experience significant tenant
defaults in the future.
21
<PAGE>
Properties that Serve as Collateral for Mortgage Notes Receivable.
A substantial portion of ART's and NRLP's assets have been invested in
mortgage notes receivable, principally those secured by income producing real
estate. The income producing real estate properties have included apartment
complexes, hotels, office buildings, shopping centers and partnership interests.
Those properties are located in the Midwest, Northeast and Southwest regions of
the United States. Specific geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency on
mortgage loans. Any concentration of loan assets in a region may present certain
risks in addition to those generally present for similar mortgage-backed or
asset-backed securities without this concentration. See "BUSINESS OF ART --
Geographic Regions" on page ___ and " BUSINESS OF NRLP -- Geographic Regions" on
page ___ for a description of the geographic regions in which these companies
own properties.
Property Operating Risks.
As described below, the properties in which ART and NRLP have an interest
are subject to industry-specific operating risks, any and all of which may
adversely affect income. All properties are subject to increases in operating
expenses such as: cleaning; electricity; heating, ventilation and air-
conditioning; elevator repair and maintenance; insurance and administrative
costs; and other general costs associated with security, landscaping, repairs,
regulatory compliance and maintenance. While commercial tenants are often
obligated to pay a portion of these escalating costs, there can be no assurance
that they will agree to pay these costs in the absence of a contractual duty or
that their payments will fully cover these costs. If operating expenses
increase, the local rental market, governmental regulations or the lease may
limit the extent to which rents may be increased to meet expenses without
decreasing occupancy rates. To the extent rents cannot be increased or costs
controlled, the cash flow and financial condition of ART and NRLP may be
adversely affected.
Apartment Properties. Market values of apartments can be affected
--------------------
significantly by the supply and demand in the geographic market for the
properties securing the loan and, therefore, may be subject to adverse economic
conditions. Market values of apartments may vary as a result of economic events
or governmental regulations outside the control of the borrower or lender.
Governmental regulations such as rent control laws may impact the future cash
flow of the apartments.
Hotel Properties. Like any income producing property, the income generated
----------------
by a hotel property is subject to factors such as local, regional and national
economic conditions and competition. However, because the income is primarily
generated by short-term occupancies, the level of income respond more quickly to
market conditions. Sensitivity to competition may require more frequent
improvements and renovations than other properties. To the extent a hotel is
affiliated with a regional, national or international chain, changes in the
public perception of the affiliated chain may have an impact on the income
generated by the hotel. In addition, since the hotel industry is generally
seasonal, income generated by a hotel property will fluctuate in accordance with
the particular demand characteristics of the market in which it is located.
Office and Retail Properties. The market value of properties, such as
----------------------------
office buildings and shopping centers, is affected by the risk that a lease may
not be renewed, that the space may not be released, and that the terms of
renewal or re-lease (including the cost of required renovations or concessions
to tenants) may be less favorable than current lease terms.
22
<PAGE>
Investments in Non-Recourse Mortgage Loans.
To the extent ART or NRLP invests in mortgage loans, the loans may or may
not be recourse obligations of the borrower and generally will not be insured or
guaranteed by governmental agencies or otherwise. In the event of a default
under this type of a loan, ART or NRLP may have to foreclose the mortgage or
protect its investment by acquiring title to the property. Taking title to a
property may require investing in substantial improvements or repairs in order
to maximize the property's investment potential. Borrowers may contest
enforcement of foreclosure or other remedies, seek bankruptcy protection against
foreclosure and/or bring claims for lender liability in response to actions to
enforce mortgage obligations. Because of relatively high "loan-to-value" ratios
and declines in the value of the mortgaged property, the amount received in
foreclosure may be less than the amount outstanding under the mortgage loan.
ART and NRLP may participate in loans originated by other financing
institutions. As a participant, the companies may not have the sole authority
to declare a default under the mortgage or to control the management or
disposition of the financed property or any related foreclosure proceedings.
ART and NRLP may participate in loans that are subordinated to other
obligations of the debtor. Any investments in subordinated mortgage loans
involve additional risks, including the lack of control over collateral and
related foreclosure proceedings. In the event of a default on a senior
mortgage, ART or NRLP may make payments to prevent foreclosure on the senior
mortgage without necessarily improving its position with respect to the real
property. In this event, ART or NRLP would be entitled to share in the proceeds
only after satisfaction of the amounts due to the holder of the senior mortgage.
Possibility of Uninsured Loss on Uninsurable or Economically Uninsurable
Properties.
ART and NRLP carry comprehensive liability, fire, extended coverage and
rental loss insurance with respect to all of the improved real property that
they own, with policy specifications, insured limits and deductibles customarily
carried for similar properties. There are certain types of losses (such as
losses arising from acts of war or relating to pollution) that are not generally
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
capital invested in a property as well as anticipated future revenues could be
lost. In addition, obligations on any mortgage indebtedness and the property
would continue. Any uninsured loss could adversely affect the financial
condition and results of operations of ART or NRLP.
With respect to those properties in which an interest is held through a
mortgage, as well as those properties owned by entities to whom an unsecured
loan is made, the borrowers will most likely be obligated to maintain insurance
on the properties and to arrange for ART or NRLP to be covered as a named
insured on the policies. The face amount and scope of the insurance coverage
may be less comprehensive than ART or NRLP would carry if it held the fee
interest in the property. Accordingly, in these circumstances, or in the event
that the borrowers fail to maintain required coverage, uninsured or underinsured
losses may occur, which could have an adverse impact on cash flow or the
financial condition of ART or NRLP.
23
<PAGE>
Costs of Compliance with the Americans with Disabilities Act and Similar Laws.
Under the Americans with Disabilities Act of 1980 (ADA), places of public
accommodations and commercial facilities are required to meet certain
requirements related to access and use by disabled persons. Compliance with ADA
requirements could require both structural and non-structural changes to the
properties in which ART and NRLP invest. Noncompliance could result in fines
imposed by the federal government or an award of damages to private litigants.
Although management of ART and NRLP believe that their respective properties are
substantially in compliance with present requirements of the ADA, additional
costs may be incurred to ensure compliance in the future. A number of additional
federal, state and local laws exist which impose additional burdens or
restrictions on owners with respect to access by disabled persons. Those laws
may require modifications or restrict renovations to properties in which ART and
NRLP invest. The ultimate amount of the cost of compliance with the ADA or other
related laws is not currently ascertainable. While the cost of compliance are
not expected to have a material effect on either ART or NRLP, they could be
substantial. If required changes involve greater expense than currently
anticipated, the financial condition and results of operations for either ART or
NRLP could be adversely affected.
Noncompliance with Other Laws.
Real estate properties are also subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to private
litigants. ART and NRLP management believe that their respective properties are
currently in material compliance with all of the regulatory requirements.
However, there can be no assurance that these requirements will not be changed
or that new requirements will not be imposed which would require significant
unanticipated expenditures by ART and NRLP having an adverse effect on results
of operations or financial condition.
Changes in Laws.
Increases in real estate taxes, income taxes and service or other taxes
generally are not passed through to tenants under existing leases. These
increases may adversely affect ART's and NRLP's cash flow from operations and
their ability to make distributions to Newco. Similarly, changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions may
result in significant unanticipated expenditures, which would adversely affect
funds from operations and thus the ability of ART or NRLP to make distributions
and payments on outstanding indebtedness.
Lack of Control and Other Risks of Equity Investments in and with Third Parties.
ART and NRLP may invest in shares or other equity interests of real estate
investment trusts or other entities that invest in real estate assets. In these
cases, ART and NRLP will be relying on the assets, investments and management of
the real estate investment trust or other entity in which it is investing. These
entities and their properties will be subject to the other risks affecting the
ownership and operation of real estate set forth herein.
ART and NRLP may also co-invest with third parties through partnerships,
joint ventures or other entities, acquiring non-controlling interests in or
sharing responsibility for managing the affairs of a property, partnership,
joint venture or other entity and, therefore, will not be in a position to
24
<PAGE>
exercise sole decision-making authority regarding the property, partnership,
joint venture or other entity.
Investments in partnerships, joint ventures, or other entities may, under
certain circumstances, involve risks which would not be present were a third
party not involved, including the possibility that ART's or NRLP's partners or
co-venturers might become bankrupt or otherwise fail to fund their share of
required capital contributions, that the partners or co-venturers might at any
time have economic or other business interests or goals which are inconsistent
with the business interests or goals of ART or NRLP, and that the partners or
co-venturers may be in a position to take action contrary to the instructions or
the requests of ART or NRLP and contrary to ART's or NRLP's policies or
objectives. These investments may also have the potential risk of impasse on
decisions, such as a sale, because neither ART, NRLP nor its partner or co-
venturer would have full control over the partnership or joint venture.
Consequently, actions by a partner or co-venturer might result in subjecting
properties owned by the partnership or joint venture to additional risk. In
addition, ART or NRLP may in certain circumstances be liable for the actions of
its third-party partners or co-venturers .
Limitations on Remedies.
Although ART and NRLP will have certain contractual remedies upon the
default by borrowers under certain debt instruments, such as foreclosing on the
underlying real estate or collecting rents generated therefrom, certain legal
requirements (including the risks of lender liability) may limit the ability of
ART and NRLP to effectively exercise these remedies.
The right of a mortgage lender to convert its loan position into an equity
interest may be limited or prevented by certain common law or statutory
prohibitions.
RATIO OF EARNINGS TO FIXED CHARGES
The following table summarizes the ratio of ART's earnings to fixed charges
and preferred stock dividends at the dates set forth below:
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Ratio of earnings to
fixed charges and ** ** ** ** **
preferred stock dividends
** Earnings were inadequate to cover fixed charges and preferred stock
dividends by $4,887,000, $8,474,000, $4,819,000, $189,000 and $1,390,000 in
1998, 1997, 1996, 1995 and 1994, respectively.
USE OF PROCEEDS
Neither ART nor NRLP will receive any cash proceeds from the business
combination.
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THE SPECIAL MEETINGS
Introduction
This joint proxy statement and prospectus is being furnished in connection
with the solicitation of proxies by the ART board of directors and the NRLP
general partner for use in connection with the special meeting to be held by
each entity and any adjournments or postponements of either meeting.
It is anticipated that the mailing of this joint proxy statement and
prospectus to ART shareholders and NRLP unitholders will commence on or about
February __, 2000.
ART Special Meeting
The special meeting of ART's shareholders will be held on Tuesday, March
21, 2000 at 10:00 a.m., Dallas time at 10670 North Central Expressway, Suite
600, Dallas, Texas. The purpose of the ART meeting is to consider and vote upon
the proposal to approve the merger and the reorganization agreement.
Shareholders may vote at the meeting by attending the meeting and voting in
person, by completing the enclosed proxy card and returning it in the enclosed
envelope, by telephoning the transfer agent, by faxing it to the transfer agent
or by voting on the Internet. Instructions for voting by written proxy card,
telephone, fax or the Internet are set forth below. Proxies will be received,
tabulated and certified as to time of receipt and vote by transfer agent. Faxed
proxies will be accepted until 5:00 p.m., Dallas time, on March __, 2000.
If the shareholders have any questions regarding the merger or the
reorganization, they should contact Investor Relations at (214) 692-4800 or 1-
800-400-6407.
NRLP Special Meeting
The special meeting of NRLP limited partners will be held on Tuesday, March
21, 2000, at 10:30 a.m., Dallas time at 10670 North Central Expressway, Suite
600, Dallas, Texas. The purpose of the meeting is to consider and vote upon the
proposal to approve the merger and the reorganization agreement. Limited
partners may vote at the meeting by attending the meeting and voting in person,
by completing the enclosed proxy card and returning it in the enclosed envelope,
by telephoning the transfer agent, by faxing it to the transfer agent or by
voting on the Internet. Instructions for voting by written proxy card,
telephone, fax or the Internet are set forth below. Proxies will be received,
tabulated and certified as to time of receipt and vote by the transfer agent.
Faxed proxies will be accepted until 5:00 p.m., Dallas time, on March __, 2000.
If the unitholders have any questions regarding the merger or the
reorganization, they should contact Investor Relations, at (214) 692-4800 or 1-
800-400-6407.
Voting Instructions
Voting by Written Proxy Card
----------------------------
To vote by written proxy card, sign and date each proxy card you receive
and return it in the prepaid envelope. If a shareholder or unitholder is a
corporation or partnership, the accompanying proxy card must be signed in the
full corporate or partnership name by a duly authorized person. If the proxy
card is signed pursuant to a power of attorney or by an executor, administrator,
trustee or
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guardian, the signer's full title must be given and a certificate or other
evidence of appointment must be furnished. If shares or units are owned jointly,
each joint owner must sign the proxy card.
Voting by Telephone, Fax or the Internet
----------------------------------------
Instructions for a shareholder or unitholder of record to vote by
telephone, fax or the Internet are set forth on the enclosed proxy card. The
telephone, fax and Internet voting procedures are designed to authenticate votes
cast by use of a personal identification number. The procedures, which comply
with both Georgia and Delaware law, allow shareholders and unitholders to
appoint a proxy to vote their shares or units and to confirm that their
instructions have been properly recorded.
Record Date; Votes Required
ART. Only holders of shares of record at the close of business on January
---
26, 2000, will be entitled to notice of and to vote at the ART meeting. The
merger and the reorganization agreement will be approved if each of those
proposals receives the affirmative vote, in person or by proxy, of (1) a
majority of the outstanding shares of common stock entitled to vote at the ART
meeting, (2) a majority of the outstanding shares of each series of ART
preferred stock, voting separately as a class, and (3) a majority of the shares
of ART common stock, not owned by BCM, present at the meeting. The holders of a
majority of the shares entitled to vote, present in person or by proxy, will
constitute a quorum for purposes of the ART meeting. As of the record date for
the meeting, there were [10,563,720] shares of ART common stock outstanding and
entitled to vote. BCM currently owns 56.9% of the outstanding shares of ART
common stock. BCM plans to vote all of its shares in favor of the ART merger.
The members of the board of directors and executive officers of ART and their
affiliates beneficially owned, as of the record date, 7,528,218 shares, which
represent approximately 71.3% of the outstanding shares. The directors and
members of management intend to vote their shares in favor of all proposals.
Abstentions and broker non-votes have the same effect as a vote against the
proposals.
NRLP. Only limited partners of record at the close of business on January
----
26, 2000 will be entitled to notice of and to vote at the NRLP meeting. The
reorganization agreement will be approved if it receives the affirmative vote of
(a) (1) a majority of the outstanding NRLP partnership units and (2) a majority
of the NRLP partnership units, not owned by ART or its subsidiaries, present at
the meeting in person or by proxy, and (b) the general partner. As of the
record date for the meeting, there were [6,321,524] NRLP partnership units
outstanding and entitled to vote. ART currently owns 56.2% of the NRLP
partnership units. ART plans to vote all of its units in favor of the NRLP
merger. The general partner intends to vote in favor of the merger.
Abstentions and broker non-votes will, for the purposes of the merger vote, have
the same effect as a vote against the merger.
Dissenters' Rights
ART Shareholders. The holders of ART common stock who vote against the ART
----------------
merger will not be entitled to demand appraisal of, or to receive payment for,
their shares. The holders of ART preferred stock who vote against the ART
merger and who follow the procedures prescribed by Georgia law will be entitled,
in lieu of receiving shares of Newco preferred stock, to receive cash equal to
the "fair value" of the shareholders' shares. See "THE REORGANIZATION AGREEMENT
- - Dissenters' Rights" on page ___.
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NRLP Limited Partners. Limited partners who vote against the NRLP merger
---------------------
will not be entitled to demand appraisal of, or to receive payment for, their
partnership units. See "THE REORGANIZATION AGREEMENT - Dissenters' Rights" on
page ___.
Proxy
Enclosed is a form of proxy which should be completed, dated, signed and
returned by each ART shareholder and NRLP unitholder before the ART and NRLP
special meetings to ensure that each shareholder's shares or partner's
partnership units will be voted at the meeting. Any ART shareholder or NRLP
unitholder signing and delivering a proxy has the power to revoke the proxy at
any time prior to its use by:
(1) filing with the corporate secretary of ART or the general partner of
NRLP, as applicable, a written revocation of the proxy or a duly
executed proxy;
(2) submitting another proper proxy bearing a later date than that of the
proxy first given by:
(a) signing and returning a proxy card to either ART or the
general partner of NRLP;
(b) following the telephone or fax voting instructions;
(c) following the Internet voting instructions; or
(3) attending and voting in person at the meeting.
Shares or units represented by a properly executed proxy, and all properly
completed proxies voted by telephone, fax or the Internet, which are delivered
pursuant to this solicitation (and not later revoked) will be voted in
accordance with the instructions indicated on the proxy, and at the discretion
of the proxy holders on all other matters properly addressed at the meeting. If
an ART shareholder or NRLP unitholder executes a proxy without instructions, the
votes represented by the proxy will be submitted in favor of the proposals.
Solicitation of Proxies
ART and NRLP will share the expense of the proxy solicitation. Georgeson
Shareholder Communications, Inc. has been retained to act as proxy solicitor in
connection with the special meetings. The proxy solicitor may contact ART
shareholders and NRLP unitholders by mail, telephone, telex, telegraph and
personal interviews and may request brokers, dealers and other nominee
shareholders to forward the proxy materials to beneficial owners of ART shares
or NRLP units. The proxy solicitor will receive a fee estimated not to exceed
$2,500 for these services, plus reimbursement of out-of-pocket expenses. ART
and NRLP will indemnify the proxy solicitor against certain liabilities and
expenses in connection with the mergers, including liabilities under federal
securities laws. The telephone number of the proxy solicitor is 1-800-221-5724.
Other Matters
Neither the ART board nor the general partner of NRLP knows of any other
matters, other than those described in this proxy statement, which are to be
brought before the ART or NRLP
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<PAGE>
special meetings. However, if any other matters properly come before the
meeting, it is the intention of the persons named in the enclosed form of proxy
to vote that proxy in accordance with their judgment on these matters.
THE PROPOSED BUSINESS COMBINATION AND RELATED MATTERS
General
The following is a description of all material matters concerning the
mergers and the business combination. Pursuant to the business combination, ART
and NRLP will become subsidiaries of Newco. Holders of ART common stock will
receive .91 shares of Newco common stock for each share of ART common stock, and
holders of ART preferred stock will receive one share of Newco preferred stock
for each share of ART preferred stock. Holders of NRLP partnership units, other
than ART and its subsidiaries, will receive one share of Newco common stock for
each unit. This description is qualified in its entirety by reference to the
reorganization agreement, a copy of which is attached as Appendix A to this
proxy statement and incorporated herein by reference. ART shareholders and NRLP
unitholders are urged to read the reorganization agreement in its entirety.
Background of the Business Combination
From their inception, both ART and NRLP have experienced considerable
growth. Beginning early 1998, market prices for publicly traded real estate
companies, particularly real estate investment trusts, began a significant
decline. As a result, both companies have been constrained from obtaining
financing through public equity or debt markets. At the same time, private
sources of financing, including bank credit facilities, were becoming more
difficult to obtain. For some time, the boards of ART and NMC, NRLP's general
partner, had been discussing ways to strengthen their balance sheets, increase
access to additional sources of capital and increase cash flows.
Because of the overlap of management, and the resulting familiarity with
each other's operations, and the similarity between the two companies' operating
philosophies, discussions between ART and NRLP about some form of business
combination began in August 1999. During these initial discussions, both
parties recognized that by combining they could compete more effectively with
other real estate acquirors and operators both for properties and attractive
sources of financing.
On August 25, 1999, management of ART reported to the ART board that
management had been reviewing alternative ways to combine ART and NRLP. The ART
board was informed that a proposal for a combination was being finalized by
management and would be submitted to the ART board within the next few weeks.
On September 7, 1999, management of ART sent a memorandum to the ART board
outlining a proposed structure of a potential combination between ART and NRLP
and recommending to the ART board the retention of Fieldstone, Inc. to provide a
fairness opinion to ART should a transaction be undertaken. During this time,
management of NMC had been evaluating this proposed combination, and on
September 3, 1999 sent a memorandum to the NMC board recommending the retention
of Houlihan Lokey Howard & Zukin to render a fairness opinion to NRLP should a
transaction be undertaken.
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<PAGE>
Discussions between NRLP and ART continued from September 7 through
September 24, 1999 when both the NMC board and ART board met with their
respective fairness opinion providers to discuss the proposed transaction and
preliminary evaluations of the entities. Both the NMC board and the ART board
also, during these meetings, discussed the process of structuring a transaction
and valuing the entities and the legal steps to be followed to complete a
transaction.
On September 28, 1999, the ART board met to review the financial statements
of both NRLP and ART in connection with evaluating the consideration to be paid
in a proposed combination. The ART board also addressed specific strategic
advantages to ART that would result from a proposed transaction. See "REASONS
FOR THE BUSINESS COMBINATION - The Recommendation of the ART Board." At this
meeting, the ART board was also advised by the company's legal advisors that it
would be advisable to appoint an independent representative, someone who was not
also a member of the board of directors of NMC, to work with management to
negotiate the terms of any business combination with NRLP. The ART board
selected Roy E. Bode to serve as the independent representative.
On October 4, 1999, Randall Gonzalez resigned from the NMC board for
personal reasons. Also on October 4, 1999, the ART board met to review
preliminary evaluations and to receive a report from Mr. Bode on the status of
the discussions between management for NRLP and management for ART. At this
meeting, senior management and the fairness opinion provider and legal advisors
of ART made detailed presentations concerning pricing issues and the structure
of the proposed transaction.
On October 19, 1999, Richard D. Morgan was elected to fill the vacancy on
the NMC board left by Mr. Gonzalez's resignation. At this meeting, the NMC
board appointed Mr. Morgan to serve as that board's independent representative
to work with management of NRLP in negotiating the terms of the proposed
business between NRLP and ART.
On October 27, 1999, Mr. Bode and Mr. Morgan met to discuss the financial
terms of a proposed business combination. At that meeting, they each agreed to
recommend to their respective boards that each outstanding NRLP partnership
unit, other than those held by ART or its subsidiaries, be exchanged for one
share of Newco common stock and that each outstanding share of ART common stock
be exchanged for .91 shares of Newco common stock.
On October 28, 1999, the boards of NMC and ART met to receive the reports
of their respective independent representatives. At this meeting, both boards
agreed to accept the recommendations of the independent representatives, subject
to the receipt of a fairness opinion from their respective fairness opinion
providers that the ratios established were fair to each entity's
securityholders.
Special meetings of the boards of NMC and ART were held on November 2, 1999
to consider the proposal as negotiated and documented. At each entity's board
meeting, senior management and the fairness opinion provider and legal advisors
of that entity made detailed presentations concerning all material aspects of
the proposed transactions. Legal counsel to both boards reviewed the material
terms of the business combination agreements that had been distributed to the
board and discussed various aspects of the directors' fiduciary duties in
connection with the business combination. Each entity's fairness opinion
provider then rendered its oral opinion, subsequently confirmed by delivery of a
written opinion, that as of the date of the opinion, the consideration to be
paid to the holders of NRLP partnership units and ART common stock, as
applicable, was fair, from a financial point of view, to those holders.
Following further discussion,
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<PAGE>
during which the directors asked numerous questions that were responded to by
representatives of management and by each entity's advisors, the boards of NMC
and ART, by unanimous vote, approved the definitive agreements and the
transactions contemplated thereby and authorized the officers of each entity to
execute and deliver the agreements.
On November 3, 1999, Newco, ART and NRLP executed and delivered the
agreement and plan of reorganization, a copy of which is attached to this joint
proxy statement and prospectus as Appendix A.
Effects of the Mergers
The reorganization agreement provides that, subject to shareholder approval
and the satisfaction or waiver of the other conditions to the ART merger, ART
Acquisition Corp., a wholly owned subsidiary of Newco, will be merged with and
into ART. The separate existence of ART Acquisition Corp. will cease upon the
merger of the two entities, and ART will be the surviving corporation of the ART
merger. The reorganization agreement also provides that, subject to unitholder
approval of the merger and the satisfaction or waiver of the other conditions to
the NRLP merger, NRLP Acquisition Corp., a wholly owned subsidiary of Newco,
will be merged with and into NRLP. The separate existence of NRLP Acquisition
Corp. will cease upon the merger of the two entities, and NRLP will be the
surviving entity in the NRLP merger. As soon as possible after the mergers are
completed, the merger consideration will be paid to the ART shareholders and
NRLP unitholders as described below.
Effective Time of the Mergers
Subject to the satisfaction or waiver of the conditions to the obligations
of ART and NRLP to complete the mergers, the business combination will be
completed as quickly as possible following the approval of each of the mergers
by the ART shareholders and the NRLP unitholders at their respective special
meetings.
Exchange of Securities
As soon as possible after the effective time of the mergers, the exchange
agent for Newco will mail a letter of transmittal to each holder of record of
shares of ART capital stock and NRLP units. The letter of transmittal will also
contain instructions for surrendering ART certificates and NRLP certificates in
exchange for certificates representing shares of Newco capital stock. Upon
surrender of an ART certificate or an NRLP certificate to the exchange agent for
cancellation, together with the letter of transmittal and any other documents
reasonably required by Newco or the exchange agent, each holder of an ART
certificate representing shares of ART capital stock and each holder of an NRLP
certificate, other than ART and its subsidiaries, representing NRLP partnership
units will be entitled to receive a certificate representing shares of Newco
common stock or Newco preferred stock, as applicable. NRLP unitholders, other
than ART and its subsidiaries, will receive one share of Newco common stock in
exchange for each unit surrendered. Holders of ART common stock will receive
.91 shares of Newco common stock in exchange for each share surrendered.
Holders of ART preferred stock will receive 1 share of Newco preferred stock in
exchange for each share surrendered. In addition, ART common shareholders may
receive cash in lieu of fractional shares of Newco common stock.
After the effective time of the merger, each ART certificate and NRLP
certificate, other than those held by ART and its subsidiaries, will represent
only the right to receive, upon surrender, the
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<PAGE>
certificate representing shares of Newco common stock or preferred stock, as
applicable, and cash in lieu of fractional shares of Newco common stock in the
case of ART common stock. The exchange agent will not be entitled to vote or
exercise any rights of ownership with respect to the shares of Newco capital
stock it holds, except that it will receive and hold all dividends or other
distributions paid or distributed with respect to those shares for the account
of persons entitled to dividends or distributions.
Cash in Lieu of Fractional Shares of Newco Common Stock
No certificates representing fractional shares of Newco shares will be
issued pursuant to the mergers. In lieu of fractional shares, each ART common
shareholder who would otherwise be entitled to a fractional Newco share will
receive, on the date the merger consideration is paid to the ART common
shareholder, cash in an amount equal to the fraction (expressed as a decimal and
rounded to the nearest 0.01 of a share) multiplied by the value of a share of
Newco common stock.
Conditions to the Business Combination; Termination; Waiver and Amendment
Conditions. A number of conditions must be met in order to complete the
----------
business combination, including:
. the approval of the reorganization agreement by the holders of
(1) a majority of NRLP units and the ART common stock;
(2) the holders of a majority of the ART preferred stock; and
(3) a majority of the shares of ART common stock, not owned by BCM,
represented at the ART special meeting, whether in person or by
proxy;
. no court or other governmental entity will have enacted a law that is
in effect and prohibits either merger or the business combination;
. the approval of the NRLP merger by the holders of a majority of the
units (except ART and its subsidiaries) entitled to vote and present
at the special meeting in person or by proxy;
. the approval of the ART merger by the holders of a majority of the
shares (except BCM) entitled to vote and present at the special
meeting in person or by proxy;
. the obtaining of any necessary consent of any lender or other third
party that is required to be obtained; and
. approval for listing of the Newco common stock on the NYSE.
Termination. The reorganization agreement can be terminated by:
-----------
. the mutual consent of NRLP and ART;
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. the action of the board of directors of either NMC, the general
partner of NRLP, or ART if, without fault of the terminating party,
the mergers are not completed by March 31, 2000;
. the action of the board of either NMC, the general partner of NRLP, or
ART if either entity fails to comply in any material respect with any
of the covenants or agreements contained in the reorganization
agreement that were to have been performed by it at or prior to the
date of termination;
. by either NRLP or ART if either of them receive an offer from a third
party for a merger, merger or combination or a tender offer or
exchange, and the applicable board of directors determines, in its
good faith reasonable judgment, that the acceptance of the offer could
reasonably be required by the fiduciary obligations of those directors
under applicable law; or
. the action of the board of directors of either NMC, the general
partner of NRLP, or ART if the board of directors or the independent
directors withdraw or adversely modify their approval or
recommendation of the reorganization agreement or the applicable
merger.
Amendment. The parties may modify or amend the reorganization agreement, by
---------
written agreement prior to the completion of the merger, according to the
applicable provisions of the Delaware Revised Uniform Limited Partnership Act,
as it applies to NRLP, or the Georgia General Corporation Law, as it applies to
ART.
Covenants. The parties to the reorganization agreement made a number of
---------
covenants or promises. Each of the original entities covenanted to, among other
things:
. operate its business and that of its subsidiaries in the usual and
ordinary course consistent with past practices;
. use its best efforts to preserve its business organization;
. maintain its existing relations with customers, suppliers, employees
and business associates;
. not take any action that would adversely affect the ability of the
parties to complete the merger;
. take all actions necessary to convene the meetings to vote on the
approval of the reorganization agreement;
. give the representatives of the other parties reasonable access to
information concerning its business; and
. notify the other parties of any material adverse change in the
condition of its business, properties, assets, liabilities or results
of operations.
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Reasons for the Business Combination
Joint Reasons for the Business Combination. ART and NRLP are engaged in
------------------------------------------
substantially the same business and have substantially similar operating
concepts and philosophies. The boards of directors of ART and the general
partner of NRLP believe that the business combination will benefit the companies
for the following reasons:
. The size of the combined companies may represent a more attractive
investment vehicle for institutional investors.
. Newco, as a larger company, may benefit from greater access to the
capital markets.
. The size of the combined companies should enhance the opportunity to
raise capital through equity offerings.
. The preferred stockholders of Newco could benefit from holding
preferred stock in a larger parent company with a stronger capital
structure.
. The operations and assets of ART and NRLP are complimentary.
- NRLP has an aging income portfolio that it would like to replace
with newer investments and developments;
- ART has land available for development opportunities; and
- NRLP enjoys significant cash flow while ART has substantial assets.
The purpose of the proposed transaction is to allow the companies to take
advantage of the benefits of joint operations by (a) combining ART and NRLP as
subsidiaries of Newco, (b) creating a new company, American Realty Investors,
Inc., a recently formed Nevada corporation (Newco), which will operate as the
parent corporation of NRLP and ART, and (c) distributing the shares of Newco
common stock to the current shareholders of ART and the unitholders of NRLP. As
a result of the mergers, ART and NRLP will each become subsidiaries of Newco and
the capital stock of Newco will be distributed to the former shareholders of ART
and unitholders of NRLP (other than ART and its subsidiaries). In the ART
merger, (1) each outstanding share of ART common stock will be converted into
0.91 shares of Newco common stock and (2) each outstanding share of ART
preferred stock will be converted into one share of Newco preferred stock. In
the NRLP merger, each outstanding partnership unit of NRLP (other than those
owned by ART and its subsidiaries) will be converted into the one share of Newco
common stock.
The Recommendation of the ART Board
The ART board believes that the business combination is fair to and in the
best interests of ART and the ART shareholders and has unanimously approved the
reorganization agreement and the transactions contemplated by it. THE ART BOARD
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF ART VOTE "FOR" ADOPTION AND
APPROVAL OF THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY
IT.
In considering the recommendations of ART's board with respect to the ART
merger, ART shareholders should be aware that some members of the ART board have
interests in the business
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<PAGE>
combination that are different from, or in addition to, yours. In addition, the
executive officers and directors of ART will become executive officers and
directors of Newco. The ART board was aware of these interests and considered
them, among other matters, in approving the reorganization agreement and the ART
merger. See "THE REORGANIZATION AGREEMENT-Interests of Certain Persons in the
Mergers."
The discussion in this section regarding the information and factors
considered by the ART board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the merger,
the parties did not find it practical to and did not attempt to rank or assign
relative weights to any of the factors described below. Individual members of
the ART board may have given different weights to different factors. On
balance, however, the discussions among the members of the ART board evidenced
the general view that, except with respect to the increased exposure to
litigation resulting from the merger, the factors enumerated below were regarded
favorably by the ART board in making its determination to approve the merger.
In arriving at the decision to approve and recommend the terms of the
reorganization agreement, the ART board considered a number of factors,
including, but not limited to, the following:
. the conditions in the real estate industry;
. the strategic options available to ART;
. the limitations placed on ART's ability to take advantage of
opportunities due to its present size, level of leverage and limited
borrowing capacity;
. the ART board's consideration of ART's strategic plan as an
independent company and the belief that its ability to pursue its plan
would be enhanced by the merger;
. the ART board's belief that the merger would create a company with a
larger equity capitalization that would, because of its increased
size, more easily attract the interest of institutional investors and
financial advisors, create more liquidity for the shareholders and
have better access to the capital markets than the constituent
entities;
. the ART board's consideration of the business, operations, assets,
financial position, prospects and personnel of ART and NRLP and the
common operations of the companies;
. the ART board's belief that the merger would be accomplished for ART
shareholders on a generally tax-free basis for federal income tax
purposes;
. the ART board's belief that it the availability of additional cash
flow from NRLP operations will be available for use in the development
of ART properties;
. the ART board's consideration of presentations by, and discussions
with, senior executives of NRLP Management Corp. and representatives
of Locke Liddell & Sapp LLP, counsel to ART, regarding the terms of
the reorganization agreement, and the results of the management's due
diligence presentation; and
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. the ART board's receipt of a letter dated November 3, 1999 from
Fieldstone, Inc. that, based upon the factors and assumptions stated
in its opinion and as of the date of the opinion, the merger
consideration to be received by the public shareholders of ART in the
merger is fair to the shareholders from a financial point of view.
The ART board also considered the matters described under "RISK FACTORS" as
well as a number of negative factors, including those discussed below, in its
deliberations concerning the business combination.
. The exchange ratio in the business combination was fixed in the
business combination agreement, which means that ART stockholders will
receive 0.91 Newco common shares for each share of ART common stock
they own and one share of Newco preferred stock for each share of ART
preferred stock they own. The exchange ratio will not be adjusted for
any change in the value of ART's shares or the value of NRLP
partnership units.
. As a result of the business combination, approximately 77.9% of the
equity of the combined company will be owned by ART shareholders and
the remaining 22.1% will be owned by former NRLP unitholders other
than ART. Accordingly, following the business combination, each ART
shareholder will hold a smaller percentage ownership in the ART
assets.
. Management estimates that the transaction expenses associated with the
business combination will be $500,000 each or $1 million total.
. NRLP has an aging income portfolio which will require the purchase
and/or development of newer properties to replace NRLP's older assets.
. There is a risk that the public announcement of the business
combination may negatively affect the trading price of ART's common
stock.
The Recommendation of the NRLP General Partner
NRLP Management Corp., the general partner of NRLP, believes that the
business combination is fair to and in the best interests of NRLP and the
holders of NRLP units. By unanimous vote, the NMC board approved the merger and
the transactions contemplated thereby and unanimously recommend that the NRLP
unitholders approve the merger. THE NMC BOARD UNANIMOUSLY RECOMMENDS THAT THE
UNITHOLDERS OF NRLP VOTE "FOR" ADOPTION AND APPROVAL OF THE REORGANIZATION
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY IT.
In considering the recommendations of NRLP's general partner with respect
to the NRLP merger, NRLP unitholders should be aware that some members of the
NMC board have interests in the business combination that are different from, or
in addition to, yours. In addition, some of the executive officers and directors
of NMC will become executive officers and directors of Newco. The NMC board was
aware of these interests and considered them, among other matters, in approving
the reorganization agreement and the NRLP merger. See "THE REORGANIZATION
AGREEMENT- Interests of Certain Persons in the Mergers."
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The discussion in this section regarding the information and factors
considered by the NRLP general partner is not intended to be exhaustive. In view
of the variety of factors considered in connection with its evaluation of the
merger, the general partner did not find it practical to and did not attempt to
rank or assign relative weights to the factors discussed below. Individual
members of the NMC board may have given different weights to different factors.
On balance, however, the discussions among the members of the NMC board
evidenced the general view that, except with respect to the increased exposure
to litigation resulting from the merger, the factors enumerated below were
regarded favorably by the NMC board in making its determination to approve the
merger.
In arriving at the decision to approve and recommend the terms of the
reorganization agreement, NRLP's general partner considered a number of factors,
including, but not limited to, the following:
. the strategic options available to NRLP to maximize value for the
unitholders and the conclusion that the merger represents the best
strategic option available;
. the likelihood of future merger in the real estate industry and the
conclusion that the merger affords the holders of units the
opportunity to own the equity of a larger public company that would be
better positioned in light of trends in the industry;
. the restrictions placed on NRLP's ability to take advantage of a
number of business opportunities due to its present size and level of
leverage that are a negative factor if the merger were not approved;
. the consideration of NRLP's strengths and weaknesses as an independent
company and the conclusion that its ability to pursue its strategic
plan would be enhanced by the merger;
. the belief that newer properties owned by ART will provide a more
balanced asset portfolio in light of NRLP's aging investment
portfolio;
. the conclusion that the merger would create a company with a larger
equity capitalization and simplified ownership structure that would,
therefore, more easily attract the interest of institutional investors
and financial analysts, create more liquidity for the unitholders of
NRLP and have better access to the capital markets than the entities
would separately;
. the consideration of the business, operations, assets, financial
positions and prospects of ART and NRLP, the shared management and the
common operations of the companies, a factor that supports a
conclusion that the merger would be in the best interests of the
unitholders;
. the consideration of, and discussions with, senior executives of ART
regarding the terms of the reorganization agreement and other factors
that management believed would assist the NMC board in arriving at a
fair value for NRLP's interests;
. the analysis of the complexities of the limited partnership structure
of NRLP, a negative factor if the merger were not approved, and the
relative liquidity and
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marketability of units of NRLP compared to the expected liquidity and
marketability of shares of Newco's common stock;
. the analysis of the complexities to financial analysts and potential
and current unitholders of the cross ownership of the securities of
NRLP and ART, which makes it more difficult for securities analysts to
analyze NRLP and for investors to assess the opportunities and risks
of an investment in NRLP, compared to the simpler ownership structure
of Newco following the merger; and
. the receipt of Houlihan Lokey's opinion that, as of November 3, 1999,
the merger consideration was fair, from a financial point of view, to
the public unitholders.
NRLP's general partner also considered the matters described under "RISK
FACTORS" as well as a number of negative factors, including those discussed
below, in its deliberations concerning the business combination.
. The exchange ratio in the business combination was fixed in the
business combination agreement, which means that NRLP unitholders will
receive one share of Newco common stock for each unit of limited
partnership interest in NRLP. The exchange ratio will not be adjusted
for any change in the value of NRLP units or the value of ART common
stock.
. As a result of the business combination, approximately 22.1% of the
equity of the combined company will be owned by former NRLP
unitholders, other than ART, and the remaining 77.9% will be owned by
former ART shareholders. Accordingly, following the business
combination, each NRLP unitholder will hold a substantially smaller
percentage ownership the NRLP assets.
. Management estimates that the transaction expenses associated with the
business combination will be $500,000 each or $1 million total.
. The business combination could be dilutive to NRLP's earnings per unit
and book value per unit on a historical pro forma basis due to ART's
historical losses and lack of cash flow.
. There is a risk that the benefits sought in the business combination
would not be obtained; achieving the anticipated benefits would depend
upon a successful integration of the companies' businesses and
operations and a successful transition to an internal management team.
. There is a risk that the public announcement of the business
combination may effect trading price of NRLP's units. The announcement
of the business combination could trigger a decline in the trading
price of NRLP units and ART shares.
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Opinion of Financial Advisors
Opinion of ART's Financial Advisor
----------------------------------
ART retained Fieldstone, Inc., or Fieldstone, to act as ART's financial
advisor in connection with the merger. In connection with this engagement, ART
requested that Fieldstone evaluate the fairness, from a financial point of view,
of the consideration to be paid to the holders of the issued and outstanding
shares of ART common stock in connection with the merger of ART with and into
Newco.
As part of its investment banking business, Fieldstone engages in the
valuation of businesses and securities in connection with mergers and
acquisitions, public offerings, private placements and valuations for corporate
purposes. On November 3, 1999, at a meeting of the ART Board of Directors held
to evaluate the merger, Fieldstone delivered an oral opinion, subsequently
confirmed by delivery of a written opinion dated November 3, 1999, to the Board
of Directors of ART to the effect that, as of the date of Fieldstone's opinion
and based upon and subject to certain matters stated in that opinion, the merger
consideration was fair, from a financial point of view, to the holders of ART's
common stock.
Under the terms of the merger agreement ART's stockholders will receive
0.91 shares of Newco common stock for each share of ART common stock owned at
the effective time of the merger.
In connection with rendering its opinion, Fieldstone reviewed and analyzed,
among other things, the following:
. ART's Annual Reports, Forms 10-K and related financial information for
the three fiscal years ended December 31, 1998 and ART's Forms 10-Q
and the related unaudited financial information of the three months
ended March 31, 1999 and six months ended June 30, 1999;
. NRLP's Annual Reports, Forms 10-K and related financial information
for the three (3) years ended December 31, 1998 and NRLP's Forms 10-Q
and the related unaudited financial information for the three months
ended March 31, 1999 and six months ended June 30, 1999;
. specific publicly available business and financial information
relating to ART and NRLP, which were deemed relevant;
. relevant historical and projected financial operating information with
respect to the business and operation of ART and NRLP furnished to
Fieldstone by the management or advisors of ART and NRLP;
. appraisals of real estate assets of both ART and NRLP, or the
Appraisals, as prepared by various recognized appraisal firms;
. the market prices, trading history and valuation multiples of the ART
shares and the NRLP units which were compared to each other, as well
as specific publicly traded companies that Fieldstone deemed to be
relevant;
. conducted discussions with members of senior management of ART and
NRLP concerning their respective businesses and prospects;
. reviewed a draft of the Agreement provided to Fieldstone on November
2, 1999; and
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. conducted specific financial studies and analyses and took into
account this relevant financial, economic and market criteria as
Fieldstone deemed appropriate in arriving at its opinion.
In the review and analysis and in arriving at its opinion, Fieldstone
assumed and relied upon the accuracy and completeness of all of the financial
and relevant information provided or publicly available and assumed and relied
upon the representations and warranties of each of ART, NRLP and Newco contained
in the Agreement. Fieldstone was not engaged to, and did not independently
attempt to, verify any of this information. Fieldstone also relied upon the
management of both ART and NRLP as to the reasonableness and ability to achieve
the financial and operating projections (and the assumptions and bases therefor)
provided and, with the consent of the management of ART and NRLP, Fieldstone
assumed that these projections reflect the best currently available estimates
and judgments of the respective management and that the projections and
forecasts will be realized in the amounts and in the time periods currently
estimated by the management of ART and NRLP.
Fieldstone was not engaged to assess ART's or NRLP's ability to achieve
these projections or the assumptions on which the projections were based and
expressed no view as to these projections or assumptions. In addition,
Fieldstone did not conduct a physical inspection or appraisal of any of the
assets, properties or facilities of either ART or NRLP nor was Fieldstone
furnished with any direct written evaluation or appraisal reports. Fieldstone
also assumed that the conditions to the merger as set forth in the Agreement
would be satisfied and that the merger would be completed on a timely basis in
the manner contemplated by the Agreement. Fieldstone also assumed that the
merger would be treated as a tax-free reorganization to the extent of the stock
for stock exchange contemplated by the merger agreement.
It should be noted that Fieldstone based its opinion on economic and market
conditions, existing circumstances and information available at the time the
opinion was given and does not address any matter subsequent to the date of the
opinion.
The full text of the written opinion of Fieldstone dated November 3, 1999,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached as Appendix B, and is incorporated by reference.
Holders of ART common stock and preferred stock are urged to read this opinion
carefully in its entirety. The Fieldstone's opinion is directed to the Board of
Directors of ART and relates only to the fairness of the merger consideration
from a financial point of view. The opinion does not address any other aspect of
the merger or related transactions and does not constitute a recommendation to
any stockholder as to how that stockholder should vote at the ART meeting. The
summary of Fieldstone's opinion set forth in this Joint Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of the opinion. In preparing its opinion, Fieldstone performed a variety of
financial and comparative analyses, including those described below. The summary
of the analyses does not purport to be a complete description of the analyses
underlying Fieldstone's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to summary description. Accordingly, Fieldstone
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying the analyses and opinion. In its analyses, Fieldstone made numerous
assumptions with respect to ART, NRLP, industry performance, general business,
economic,
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market and financial conditions and other matters, many of which are beyond the
control of ART and NRLP. The estimates contained in the analyses and the
valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by the analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, the analyses and estimates are
inherently subject to substantial uncertainty. Fieldstone' opinion and analyses
were only one of many factors considered by the ART Board of Directors in its
evaluation of the merger and should not be viewed as determinative of the views
of the Board of Directors or management of ART with respect to the merger
consideration or the merger.
ART and NRLP were valued using a cost, income and market approach, in order
to gain an underlying assessment of the two companies and determine a range of
values for the exchange ratio. An exchange ratio was also derived on the basis
of the two companies' market capitalization.
Valuation of ART
----------------
Cost, Income and Market Approach
--------------------------------
This valuation approach of ART included:
. an assessment of income producing properties,
. a land valuation,
. a lending portfolio valuation,
. an assessment of non-real estate operations, and
. a subsidiary valuation.
The value generated by this approach was then compared against the
companies market capitalization. No single valuation method was preferred over
another.
Income Producing Properties
---------------------------
For the most part, income producing properties were valued, based on an
income approach and a comparable analysis approach. The income approach used a
range of capitalization rates and the trailing twelve-month net operating
income. In some instances, Fieldstone was supplied alternative valuation
methods, such as appraisals, stabilized value estimates, and book/carrying
value, which, in the absence of other information, were utilized and compared
against market comparables. Values derived under the income approach were
subjected to a comparable analysis, utilizing a nationwide market study, the
"Market Monitor" obtained from CB Richard Ellis. Using this valuation technique,
the total asset value for the income producing properties ranged between
$271,130,471 and $282,081,637.
Land Valuation
--------------
Fieldstone was also provided by ART, in the majority of cases, a property
by property land sales forecast that detailed projected revenue, timing, and
acreage of land parcels to be sold, and their respective debt balances. For the
most part, land values were derived based on these forecasts. Specifically,
varying mid-year discount rates of between 25%-30%, based on the
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respective company's weighted average cost of capital for land holdings, were
applied to the sales forecast to derive estimated market value of the land
portfolio. Outstanding debt, taken at face value, was then subtracted from the
estimated market values to obtain the net equity value for each property. This
valuation approach provided a net equity value range from $357,129,214 under the
25% discount rate, to $317,912,666 under the 30% discount rate.
Some relatively small parcels, which according to the provided sales
forecast, had no foreseeable sales activity, were valued at book value. The
estimated value of these parcels was less than $1 million.
Lending Portfolio Valuation
---------------------------
The lending portfolio was subjected to a portfolio review that evaluated
provisioning levels and whether equity write-downs were necessary. Performing
loans were valued at face value.
Management has indicated that the $92.2 million line of credit from NRLP to
ART will not be extinguished upon the Merger.
Non-Real Estate Operation (Pizza World Supreme, Inc.)
-----------------------------------------------------
The Company, through a wholly-owned subsidiary, Pizza World Supreme, Inc.,
or PWSI, operates and franchises pizza parlors featuring pizza delivery, carry-
out and dine-in under the trademark "Me-N-Ed's" in California and Texas.
Due to the lack of income projections for PWSI, a comparable company was
employed to determine the value of ART's holdings in PWSI on a Price/EBITDA
comparable. Six comparable publicly traded companies were identified including:
. Papa John's International, Inc.,
. PJ America, Inc.,
. Pizza Inn, Inc.,
. Sbarro, Inc.,
. Chicago Pizza & Brewery, Inc. and
. Uno Restaurant Corporation.
Two comparable transactions were identified; Bain Capital's acquisition of
Domino's Pizza Inc. on September 25, 1998, and the Sbarro Family acquisition of
the remaining outstanding shares of Sbarro, Inc., which was approved on August
13, 1999.
For the basis of the valuation of ART, a range of values was set utilizing
the market value derived from the comparable take out companies and comparable
transactions utilizing take out
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companies, or Take Out Multiples, since the business profile of these companies
more closely mirrors that of Me-N-Ed's than that of all pizza parlors. Based on
the methodology described above, PWSI range of value is as follows:
Estimated
Market Value
-------------
Comparable Company - Take Out $19,859,128.0
Comparable Transaction - Take Out $24,944,204.4
Subsidiary Valuation
--------------------
In addition to its own real-estate related operations, ART has
significant investments in a number of real estate companies:
Company Stake
--------------------------------------------------------------
Continental Mortgage and Equity Trust (CMET): 41.1%
Income Opportunity Realty Investors, Inc. (IORI): 30.4%
Transcontinental Realty Investors, Inc. (TCI): 31.1%
NRLP: 55.4%
The valuation techniques described above were applied to the ART's equity
investments in its ownership interests in related companies, or Ownership
Interests. Once an estimated market value was obtained for the Ownership
Interests, ART's ownership stake was applied against that value to derive the
market value of ART's interest. In total, these ownership interests have a
range of value between $466,429,459 and $494,682,141.
ART owns a 55.4% stake in NRLP and, through a wholly-owned subsidiary,
serves as its General Partner (an additional 1.3% stake). Fieldstone estimates
that this equity ownership, which is included in the value range given in the
preceding paragraph, is valued between $344,688,439 to $358,317,212.
Market Capitalization
---------------------
ART is listed on the New York Stock Exchange and has a market
capitalization of approximately $167.0 million. ART has 100,000,000 shares
authorized and 10,563,434 shares outstanding.
Valuation of NRLP
-----------------
Cost, Income and Market Approach
--------------------------------
This valuation approach of NRLP included:
. an assessment of income producing properties,
. a land valuation and
. a lending portfolio valuation.
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The value generated by this approach was then compared against the
companies market capitalization. No single valuation method was preferred over
another.
Income Producing Property Valuation
-----------------------------------
The company owns a variety of income-producing real estate assets including
46 residential properties located in 19 states, 6 retail properties located in 5
states and 6 office properties located in 5 states.
Set out below is the estimated market value of the income producing
properties, derived under the two scenarios on a net basis (after sales and
reserves before outstanding debt):
Property Type Value 1 Value 2
------------- ------------ ------------
Residential $365,269,299 $387,185,457
Retail 29,178,935 30,701,314
Office 24,744,576 25,906,712
------------ ------------
Total Asset Value $419,192,809 $443,793,483
------------ ------------
Land Valuation
--------------
NRLP has a land portfolio underlying its income producing properties with a
book value of $38,865,000. This land portfolio included in the income producing
properties valuation.
Lending Portfolio Valuation
---------------------------
NRLP had a lending portfolio consisting of 17 loans of a short-term nature.
NRLP has an outstanding loan of $92,900,000 to ART. Summarizing, the loan
portfolio consists of carrying amounts of mortgage, net of discount, in the
amount of $176,937,000 and an allowance of estimated losses in the amount of
$1,910,000. As of August 31, 1999, two loans classified non-performing, RB
Cattle and Riverside.
Market Capitalization
---------------------
NRLP is a Delaware registered limited partnership with 6,321,577 Limited
Partnership units outstanding. NRLP is listed on the American Stock Exchange
and has a market capitalization of about $134.3 million. A subsidiary of ART is
the General Partner and holds a 2.0% General Partnership interest.
Miscellaneous
-------------
Pursuant to the terms of Fieldstone' engagement, ART has agreed to pay
Fieldstone for its services in connection with the merger, an advisory fee equal
to 1% of the transaction value, contingent upon the consummation of the merger
(less the nonrefundable fee of $150,000 set forth below). ART has also paid
Fieldstone a non-refundable fee of $150,000 for its services in rendering this
opinion and further agreed to reimburse Fieldstone for travel and other
reasonable out-of-pocket expenses incurred by Fieldstone in performing its
services, including the reasonable fees and expenses of its legal counsel, and
to indemnify Fieldstone and related persons against certain liabilities,
including liabilities under the federal securities laws, arising out of
Fieldstone's engagement.
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Fieldstone has advised ART that, in the ordinary course of business,
Fieldstone and its affiliates may actively trade or hold the securities of ART
and NRLP for their own account or for the account of customers and, accordingly,
may at any time hold a long or short position in these securities. Fieldstone
has in the past provided investment banking and financial advisory services to
ART unrelated to the merger, including serving as managing underwriter for ART's
public offering of the ART preferred stock, for which services Fieldstone has
received compensation.
Fieldstone is a nationally recognized investment banking firm with full
licensing from appropriate NASD and other securities authorities worldwide and
was selected by ART based on its experience, expertise and familiarity with ART
and its business. Fieldstone regularly engages in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and corporate purposes.
Opinion of NRLP's Financial Advisor
-----------------------------------
NRLP retained Houlihan Lokey pursuant to an engagement letter dated August
25, 1999, to render a fairness opinion, from a financial point of view to the
NRLP unitholders which are not affiliated with ART (referred to as the Non-
Affiliated Unitholders) of the consideration to be received by the Non-
Affiliated Unitholders for their NRLP units pursuant to the terms of the
reorganization agreement pursuant to which NRLP and ART would become
subsidiaries of Newco. The proposed exchange ratio of NRLP's limited partnership
units for Newco shares is 1.0 to 1.0. The proposed exchange ratio of ART's
common shares for shares of Newco is 1.0 to .91.
Houlihan Lokey is a nationally recognized investment banking firm that
provides financial advisory services in connection with mergers and
acquisitions, leveraged buyouts, business valuations for a variety of regulatory
and planning purposes, recapitalizations, financial restructurings, and private
placements of debt and equity securities. NRLP agreed to pay Houlihan Lokey a
fee of $150,000 for its preparation and delivery of the fairness opinion in the
business combination plus reasonable out-of-pocket expenses that may be incurred
by Houlihan Lokey in connection herewith, plus a refundable indemnification
deposit of $50,000. No portion of Houlihan Lokey's fee is contingent upon the
successful completion of the business combination or any other related
transaction. Houlihan Lokey has been retained by NRLP solely to deliver its
fairness opinion to the board of directors of NMC, the general partner of NRLP.
NRLP agreed to indemnify Houlihan Lokey and its affiliates against certain
liabilities, including liabilities under federal securities laws that arise out
of the engagement of Houlihan Lokey.
The full text of Houlihan Lokey's opinion, which sets forth the assumptions
made, general procedures followed, factors considered and limitations on the
review undertaken by Houlihan Lokey in rendering its opinion is attached hereto
as Appendix C and is incorporated herein by reference. The discussion of the
opinion below is qualified in its entirety by reference to the opinion. You are
urged to read Houlihan Lokey's opinion in its entirety carefully for a
description of the procedures followed, the factors considered and the
assumptions made by Houlihan Lokey.
Houlihan Lokey's opinion to the NMC board addresses only fairness from a
financial point of view of the consideration to be received in the business
combination by the Non-Affiliated Unitholders with respect to the NRLP units
held by them and does not constitute a recommendation as to how any person
should vote with respect to the business combination. Houlihan Lokey has not
been requested and does not intend to update, revise or reaffirm its fairness
opinion in connection
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with the business combination unless requested to do so by the NMC board. Events
that could affect the fairness of the business combination, from a financial
point of view, include adverse changes in industry performance or market
conditions and changes to the business, financial condition and results of
operations of NRLP or ART.
Houlihan Lokey did not, and was not requested by NRLP or the NMC board to,
make any recommendations as to the form or amount of consideration to be
received by the Non-Affiliated Unitholders in connection with the business
combination. Houlihan Lokey's opinion also does not address NRLP's underlying
business decision to effect the business combination. Houlihan Lokey was not
asked to opine on and does not express any opinion as to the tax consequences of
the business combination, the public market values or realizable value of
Newco's common shares given as consideration in the business combination, the
prices at which Newco's common shares may trade in the future following the
business combination, or the fairness of any aspect of the business combination
not expressly addressed in its fairness opinion.
In arriving at its fairness opinion, Houlihan Lokey completed the following
tasks, among others:
1. reviewed the annual report on Form 10-K for the fiscal years ended December
31, 1998 and quarterly report on Form 10-Q for the quarter ended June 30,
1999 for the NRLP and ART;
2. reviewed the annual report on Form 10-K for the fiscal years ended December
31, 1998 and quarterly report on Form 10-Q for the quarter ended June 30,
1999 for Transcontinental Realty Investors, Inc., Continental Mortgage and
Equity Trust, and Income Opportunity Realty Investors, Inc. (the ART
Investment Companies and collectively with ART and NRLP, the Subject
Companies);
3. reviewed the Subject Companies' property information binders dated June 30,
1999;
4. met with the senior management of BCM, the advisor for the Subject
Companies, to discuss the business combination, operations, financial
condition, future prospects and performance of the Subject Companies;
5. reviewed the reorganization agreement;
6. reviewed ART's land portfolio book dated August 1999;
7. reviewed ART's valuation book as of December 31, 1998;
8. reviewed public market trading data for the Subject Companies;
9. reviewed internally prepared financial statements for the Subject
Companies, for the six months ended June 30, 1997 and June 30, 1998 and for
the fiscal year ended December 31, 1998;
10. reviewed a schedule of properties acquired or sold since June 30, 1999;
11. reviewed publicly available information on companies Houlihan Lokey deemed
comparable to the Subject Companies; and
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12. conducted other studies analyses, studies and investigations as Houlihan,
Lokey deemed appropriate under the circumstances for rendering the opinion
expressed herein.
In order to determine the fairness, from a financial point of view, of the
consideration to be received by the Non-Affiliated Unitholders, Houlihan Lokey
determined an indicated range of the market value of equity for Newco, on a pro
forma basis, and the relative contribution of NRLP and ART to that market value
of equity.
The primary value of ART and NRLP are their real estate holdings that
consist of income producing real property, mortgage notes and loans receivable
and land held for sale. In addition, ART owns securities in the ART Investment
Companies, which hold similar types of assets. The securities of the ART
Investment Companies are publicly traded and were valued separately in order to
determine the value of ART's investments in those companies. Houlihan Lokey
performed various analyses to estimate a range of equity values for each the
Subject Companies, which resulted in the estimated range of equity value for
Newco, and the relative contribution to that value by NRLP.
In valuing the income producing properties held by the Subject Companies,
Houlihan Lokey conducted several analyses, including the following: (i) a "Net
Asset Value" approach whereby Houlihan Lokey applied capitalization rates to the
income producing properties held by the Subject Companies, (ii) a "Portfolio"
approach whereby Houlihan Lokey applied market based multiples of comparable
public companies to representative segment level earnings of the Subject
Companies and (iii) various other analyses. In valuing the land assets held for
sale, a "Discounted Cash Flow" approach was utilized whereby projected proceeds
from projected future sales of the land assets were discounted at an appropriate
rate to consider the risk of the cash flows and the time value of money. In
addition, certain other assets such as mortgage notes receivable were assumed to
be equal to book value.
Net Asset Value Approach - Income Producing Property
----------------------------------------------------
The Net Asset Value approach assumes an orderly liquidation of the assets
of the Subject Companies in the open market. Houlihan Lokey reviewed financial
data for each of the individual income producing real property assets owned by
the Subject Companies. The income producing assets held by the Subject Companies
consist of various types of assets which Houlihan Lokey classified into the
following categories: apartment, hotel, retail, office and industrial. The
analysis utilized capitalization rates of net operating income (NOI) primarily
from the National Real Estate Index, an independent organization, which compiles
data from real estate transactions. The capitalization rates were applied to
the NOI of each individual income producing property by dividing the NOI of the
property by the capitalization rate to determine the value of each income
producing property. BCM provided the property level financial information used
to determine the NOI of each property to Houlihan Lokey. Once the individual
income producing property asset values were determined, each property's value
was allocated to the Subject Companies based on the respective ownership of the
assets. Houlihan Lokey adjusted the resulting aggregate net asset values of the
Subject Companies upward for cash, land assets held for sale and other assets
and downward for accounts payable, notes payable and other liabilities of the
applicable Subject Company.
Portfolio Approach - Income Producing Property
----------------------------------------------
The Subject Companies own various real estate assets that were combined
based on asset types, into portfolios. Portfolio level financial data by
portfolio was provided by BCM based on internally prepared property operating
statements, and by publicly filed financial statements on Form
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10-K and 10-Q. Houlihan Lokey used both sources of data to obtain representative
earnings before interest, taxes, depreciation and amortization (EBITDA).
In using the "Portfolio Approach", Houlihan Lokey applied market based
multiples of comparable public companies to representative historical EBITDA
levels of the various income producing property types for the Subject Companies
to arrive at the values of the income producing assets. Houlihan Lokey adjusted
the resulting portfolio values of the Subject Companies upward for land assets
held for sale and other assets and downward for notes payable of the applicable
Subject Company.
Discounted Cash Flow Approach - Land held for Sale
--------------------------------------------------
Houlihan Lokey utilized BCM's cash flow projections of land held for sale
to determine the value of ART's land holdings. Houlihan Lokey calculated a net
present value of the land holdings by applying discount rates ranging from 20 to
25 percent.
Other Analysis
--------------
The Subject Companies own other assets that were considered in the
valuation of NRLP and ART. Those assets consist primarily of notes and interest
receivable. Based on Houlihan Lokey's discussions with BCM, the value of those
assets was assumed to be equal to book value.
Valuation Conclusion - NRLP
---------------------------
Based on the approaches discussed above, Houlihan Lokey estimated a range
of total asset value for NRLP as follows: (i) $404.2 million to $444.0 million
for the NRLP income producing properties; and (ii) $175.0 million for the notes
and interest receivable. The result indicated a range of value for the total
assets of NRLP from $579.3 million to $618.0 million. After subtracting $344.4
million of NRLP's notes and interest payable, the concluded range of equity
value for NRLP is estimated to be from $234.9 million to $274.6 million (see
chart below).
<TABLE>
<CAPTION>
==============================================================================================
NRLP VALUATION SUMMARY
- ----------------------------------------------------------------------------------------------
($ in millions)
Houlihan Lokey's Range of
Market Value of Equity
-------------------------
<S> <C> <C>
Income Producing Properties
Portfolio Approach - Internal Financials $ 434.3 - $ 475.6
Portfolio Approach - Publicly Disclosed Financials 355.3 - 389.1
Net Assets Value Approach 423.2 - 467.1
-------- ---------
Concluded Enterprise Value 404.2 - 444.0
Notes and Interest Receivable 175.0 - 175.0 (1)
-------- ---------
Subtotal 579.3 - 619.0
Less: Notes and Interest Payable 344.4 - 344.4 (1)
-------- ---------
Concluded Equity Value $ 234.9 - $ 274.6
======== =========
(1) As per June 30, 1999 Form 10Q
==============================================================================================
</TABLE>
48
<PAGE>
Valuation Conclusion - ART
--------------------------
Based on the approaches discussed above, Houlihan Lokey estimated a range
of total asset value for ART as follows: (i) $203.4 million to $225.4 million
for the ART income producing properties; (ii) $533.7 million to $567.5 million
for land held for sale; $92.2 million for the notes and interest receivable;
(iii) $66.1 million to $91.5 million for the ART Investment Companies; (iv)
$15.5 million for ART's 100 percent interest in American General Realty, a
restaurant business; and (v) $579.3 million to $619.0 million for 100 percent of
the asset value of NRLP. After subtracting $92.2 million to eliminate an
intercompany receivable (which for purposes of this analysis was included in
NRLP's assets), $836.4 million in a consolidated ART and NRLP notes and interest
payable, and $122.5 million for NRLP's minority interest, the concluded range of
equity value for ART is estimated to be from $478.8 million to $538.0 million
(see chart below).
49
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================
ART VALUATION SUMMARY
- -------------------------------------------------------------------------------------------------------
($ in millions) Houlihan Lokey's Range of
Market Value of Equity
-------------------------
<S> <C> <C>
Building & Improvements
Portfolio Approach - Internal Financials $ 200.4 - $ 221.8
Portfolio Approach - Publicly Disclosed Financials 170.4 - $ 188.8
Net Asset Value Approach 239.3 - $ 265.6
-------- --------
Concluded Value - Income Producing Properties 203.4 - 225.4
Land
Discounted Cash Flow Approach 533.7 - 567.5 (1)
Notes and Interest Receivable 92.2 - 92.2 (2)
100.0% NRLP - Assets 619.0 - 579.3
ART Investment Companies:
30.4% Income Opportunity Realty Investors, Inc. 8.0 - 10.6
41.1% Continental Mortgage & Equity Trust 34.5 - 46.2
31.1% Transcontinental Realty Investors, Inc. 23.5 - 34.7
-------- --------
Subtotal - ART Investment Companies 66.1 - 91.5
-------- --------
American General Realty, Inc. (Pizza) 15.5 - 15.5
Less: Notes and Interest Payable (836.4) - (836.4)
Less - Minority Interest in National Realty, LP - 44.6% (122.5) - (104.8)
Less - NRT Intercompany Receivable (eliminated in consolidation) (92.2) - (92.2)
-------- --------
Concluded Equity Value $ 478.8 - $ 538.0
======== ========
(1) Based on management estimates of future land values and sale dates.
(2) As per June 30, 1999 Form 10Q. Net of allowance for estimated losses.
=======================================================================================================
</TABLE>
Newco Valuation and Relative Contribution Summary
-------------------------------------------------
Based on the above equity value indications for NRLP and ART, Houlihan
Lokey calculated the relative contribution of the Non-Affiliated Unitholders
interest in Newco. In order to establish the widest relevant range of value for
Newco, Houlihan Lokey utilized the low indicated value of the ART range combined
with the high indicated value of the NRLP range as well as the high indicated
value of the ART range combined with the low indicated value of the NRLP range.
The range of market value of equity for Newco is the result of: (i) the
value of ART including NRLP; less (ii) the value of ART's 55.4% interest in
NRLP; plus (iii) the value of NRLP's standalone market equity. The resulting
pro-forma range of market value of equity for Newco is from $601.2 million to
$642.7 million.
The above range of market value of equity yields the pro-forma relative
value contribution by the Non-Affiliated Unitholders to Newco ranging from 16.3%
to 20.4%. This indicated relative contribution falls below the pro-forma
percentage of Newco shares that will be owned by the Non-
50
<PAGE>
Affiliated Unitholders following consummation of the business combination based
on the proposed exchange ratio pursuant to the Agreement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Newco Valuation and
Relative Contribution Summary
- -----------------------------------------------------------------------------------------------------------------
($ in millions) Houlihan Lokey's Range of
Indicated Equity Value
----------------------------------------
American Low American High
------------- -------------
Newco Pro-forma Valuation Summary National High National Low
- --------------------------------- ------------- -------------
<S> <C> <C>
ART (Including NRLP) $ 478.8 - $ 538.0
Less: ART's Interest in NRLP (55.4%) (152.2) - (130.2)
------------- -------------
ART (Excluding NRLP) 326.6 - 407.9
Add: NRLP 274.6 - 234.9
------------- -------------
Concluded Equity Value $ 601.2 - $ 642.7
============= =============
Pro-forma Relative Value Contribution to Newco
- ----------------------------------------------
NRLP's Percentage of Value Contribution to Newco 45.7% - 36.5%
Multiplied by: Non-Afilliated Unitholders' Ownership in NRLP 44.6% - 44.6%
------------- -------------
Houlihan Lokey's Concluded Range of Non-Afilliated
Unitholders Value Contribution to Newco 20.4% - 16.3%
============= =============
Pro-forma Percentage of Newco Shares Owned by Non-Afilliated
Unitholders 22.4%
-------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
In conclusion, Houlihan Lokey's analyses indicated that the consideration
to be received in the business combination by the Non-Affiliated Unitholders
with respect to the NRLP units held by the Non-Affiliated Unitholders is fair,
from a financial point of view.
In arriving at its fairness opinion, Houlihan Lokey reviewed certain key
economic and market indicators including, but not limited to, growth in gross
domestic product, inflation rates, interest rates, consumer spending levels,
manufacturing productivity levels, unemployment rates and general stock market
conditions. Houlihan Lokey's opinion is based on the business, economic, market
and other conditions as they existed as of November 3, 1999 and on the projected
financial information provided to Houlihan Lokey as of that date. In rendering
its opinion, Houlihan Lokey has relied upon and assumed, without independent
verification, that the historical and projected financial information (including
the future value and estimated sale dates of the land held for sale) provided to
Houlihan Lokey by BCM has been reasonably and accurately prepared based upon the
best current available estimates of the financial results and condition of the
Subject Companies. Houlihan Lokey did not independently verify the accuracy or
completeness of the information supplied to it with respect to the Subject
Companies and does not assume responsibility for it. Except as set forth above,
Houlihan Lokey did not make any independent appraisal of the specific properties
or assets of the Subject Companies.
The summary set forth above describes the material points of more detailed
analyses performed by Houlihan Lokey in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its
51
<PAGE>
opinion, Houlihan Lokey made qualitative judgments as to the significance and
relevance of each analysis and factor. Accordingly, Houlihan Lokey believes that
its analyses and summary set forth herein must be considered as a whole and that
selecting portions of its analyses, without considering all analyses and
factors, or portions of this summary, could create an incomplete view of the
processes underlying the analyses set forth in Houlihan Lokey's fairness
opinion. In its analysis, Houlihan Lokey made numerous assumptions with respect
to the Subject Companies, industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of the respective entities. The estimates contained in the analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by the analyses.
However, there were no specific factors reviewed by Houlihan Lokey that did not
support its opinion. Additionally, analyses relating to the value of businesses
or securities are not appraisals. Accordingly, the analyses and estimates are
inherently subject to substantial uncertainty.
Federal Income Tax Consequences
In General:
- ----------
This section summarizes material U.S. federal income tax considerations
relevant to the shareholders of ART and to the unitholders of NRLP participating
in the mergers. This discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury Regulations, judicial
decisions and current administrative rulings and pronouncements, all as of the
date of this document and any of which may be changed at any time with
retroactive effect. There can be no assurance that future legislation,
regulations, administrative rulings or court decisions would not alter the tax
consequences set forth below. The discussion does not address all aspects of
federal income taxation that may be important to particular shareholders or
unitholders in light of their personal investment circumstances or to
shareholders or unitholders subject to special treatment under the federal
income tax laws (such as dealers in securities, life insurance companies,
foreign persons, broker-dealers, regulated investment companies, tax-exempt
entities, financial institutions, taxpayers subject to the alternative minimum
tax, taxpayers who acquired their ART stock or NRLP units upon exercise of
employee stock options or otherwise as compensation and persons holding their
stock or units as part of a "straddle," "hedge" or other integrated investment)
and does not address any aspect of state, local or foreign taxation. For
purposes of this discussion, it is assumed that the ART stock and the NRLP units
are held by the ART shareholders and NRLP unitholders respectively, as capital
assets at the time of the consummation of the mergers, within the meaning of
Section 1221 of the Internal Revenue Code. THEREFORE, SHAREHOLDERS AND
UNITHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF MERGERS AND RELATED TRANSACTIONS, INCLUDING APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
As a condition to ART's and NRLP's obligations to complete the mergers,
ART, NRLP and Newco will receive an opinion of Locke Liddell & Sapp LLP, dated
as of the closing date, to the effect that, for federal income tax purposes,
each merger shall be treated as part of a transaction that satisfies the
requirements of Section 351 of the Internal Revenue Code. We will not waive this
condition to the mergers unless we amend this document and resolicit your
proxy.
It is the opinion of Locke Liddell & Sapp LLP that the mergers, pursuant to
which the ART shareholders and the NRLP unitholders exchange their shares and
units for Newco stock, will be treated for federal income tax purposes as
exchanges described in Section 351 of the Internal
52
<PAGE>
Revenue Code. This opinion is based upon assumptions and conditioned upon
representations as to factual matters and covenants to be made by ART, NRLP and
Newco and such other parties as requested by Locke Liddell & Sapp LLP, which
representations and covenants will be confirmed prior to the closing of the
merger. This opinion is also based upon representations contained in the merger
agreements. The opinion assumes that the merger will be consummated in
accordance with the terms of the merger agreements, that no conditions to the
mergers will be waived, that the assumptions and representations upon which the
opinions are based will be true and accurate as of the time the mergers are
completed, and that no actions inconsistent with these representations and
assumptions has occurred or will occur.
No ruling has been or will be obtained from the Internal Revenue Service in
connection with the mergers. ART shareholders and NRLP unitholders should be
aware that an opinion of counsel is not binding on the Internal Revenue Service
or the courts, and no assurance can be given that the Internal Revenue Service
will not challenge the tax treatment of the mergers.
Tax Consequences of the ART Transaction:
- ---------------------------------------
Treatment of Newco, ART and ART Acquisition Corp.:
No gain or loss will be recognized by Newco, ART or ART Acquisition Corp.
as a result of the merger of ART Acquisition Corp. into ART.
Treatment of ART Common Stock Shareholders:
Except as discussed in the next paragraph, a shareholder whose shares of
ART common stock are converted in the merger into shares of Newco common stock
will not recognize gain or loss upon the conversion. The aggregate tax basis of
the Newco common stock received by a shareholder will be equal to the aggregate
tax basis of the ART common stock so converted, reduced by any amounts allocable
to a fractional share interest for which cash is received. The holding period of
the Newco common stock will include the holding period of the ART common stock
so converted.
A holder of ART common stock that receives cash in lieu of fractional
shares of Newco common stock will be treated as having received the fractional
shares in the merger and then as having exchanged the fractional share for cash
in a redemption by Newco. Any gain or loss attributable to fractional shares
will generally be capital gain or loss, provided that the payment is not treated
as a dividend for tax purposes. The amount of the gain or loss will be
equal to the difference between the ratable portion of the tax basis of the ART
common stock converted in the merger that is allocated to the fractional share
and the cash received in lieu of it. Any capital gain or loss will constitute
long-term capital gain or loss if ART common stock has been held by the holder
for more than one year at the time of the consummation of the merger. For
holders who are individuals, net long-term capital gain is generally taxed at
lower rates than ordinary income.
Treatment of ART Preferred Stock Shareholders:
Pursuant to the merger of ART Acquisition Corp. into ART, (i) holders of
issued and outstanding ART Series F preferred stock will receive Newco Series A
preferred stock and (ii) holders of issued and outstanding ART Series I
preferred stock will receive Newco Series E preferred stock. No other series of
ART preferred stock will be issued and outstanding at the time of the merger
transactions. Accordingly, no other series of Newco preferred stock will be
issued pursuant to the merger transactions. Based upon the assumption that the
Newco Series A preferred stock is not classified as "nonqualified preferred
stock" within the meaning of Section 351(g)(2) of the Internal Revenue Code, as
described below, no gain or loss will be recognized by a holder of ART Series F
preferred stock upon the conversion of ART Series F preferred stock into Newco
Series A preferred stock pursuant to the merger. In this case, a shareholder's
aggregate tax basis in any Newco Series A preferred stock received in the
exchange will be equal to the shareholder's tax basis in the ART Series F
preferred stock exchanged therefor, and the holding period of the Newco
preferred stock will include the holding period of the ART preferred stock.
53
<PAGE>
However, the nonrecognition rule described above will not apply, and gain
or loss will be recognized upon the exchange of ART Series F preferred stock
solely for Newco Series A preferred stock, if the Newco Series A preferred stock
is classified as "nonqualified preferred stock" within the meaning of Section
351(g)(2) of the Internal Revenue Code. In this case, the gain or loss would be
computed based on the difference between the fair market value of the Newco
Series A preferred stock and the adjusted tax basis of the ART Series F
preferred stock. For these purposes, the term "nonqualified preferred stock"
means preferred stock if (i) the holder of the stock has the right to require
the issuer or a related person to redeem or purchase the stock within 20 years
of the issuance of the stock, (ii) the issuer or a related person is required to
redeem or purchase the stock within 20 years of the issuance of the stock, (iii)
the issuer or a related person has the right to redeem or purchase the stock
and, as of the issue date, it is more likely than not that the right will be
exercised within 20 years of the issuance of the stock, or (iv) the dividend
rate on the stock varies in whole or in part (directly or indirectly) with
reference to interest rates, commodity prices, or other similar indices. For
this purpose, "preferred stock" is defined as stock which is limited and
preferred as to dividends and does not participate in corporate growth to any
significant extent.
The Newco Series A preferred stock is not mandatorily redeemable by Newco
or puttable to Newco by a holder of Newco Series A preferred stock. In addition,
the dividend rate on the Newco Series A preferred stock does not vary in whole
or in part (directly or indirectly) with reference to interest rates, commodity
prices or other similar indices. However, Newco does have the right to redeem
the Newco Series A preferred stock. The Newco Series A preferred stock will
constitute "nonqualified preferred stock" if it is more likely than not that
Newco will exercise the right. Section 351(g)(2) was added to the Internal
Revenue Code in 1997. To date, there is little guidance concerning the scope of
this provision. Neither the legislative history nor any other direct authority
establishes the parameters that will be utilized to determine whether it is more
likely than not that preferred stock like the Newco Series A preferred stock
will be redeemed. The Internal Revenue Service recently issued proposed
regulations addressing certain technical issues concerning "nonqualified
preferred stock." However, the proposed regulations did not address this "more
likely than not" issue. Newco has represented that it has no plan or intention
to redeem the Newco Series A preferred stock. In addition, the Newco Series A
preferred stock has no features that effectively would require or are intended
to compel its redemption. Newco will take the position that the Newco Series A
preferred stock is not more likely than not to be redeemed. However, there can
be no assurance that the Internal Revenue Service will not take a contrary
position.
There is analogous authority in the Section 305 regulations that gives some
indication of the standards that could be adopted by the Internal Revenue
Service. The Section 305 regulations set forth a safe harbor under which an
issuer's right to redeem preferred stock is not treated as "more likely than
not" to be exercised if (i) the issuer and the holder are not related, (ii)
there are no plans, arrangements or agreements that effectively require or are
intended to compel the issuer to redeem the stock and (iii) exercise of the
right to redeem the stock would not reduce the yield of the stock, as determined
under principles similar to the original issue discount rules.
If the same safe harbor is adopted for purposes of applying Section
351(g)(2) of the Internal Revenue Code, the Newco Series A preferred stock
should not be treated as nonqualified preferred stock. The Newco Series A
preferred stock provides for the payment of dividends at a rate intended to
provide a 10% cumulative return, compounded on a quarterly basis as long as the
preferred stock is outstanding. The Newco Series A preferred stock may be
redeemed by Newco at any time for a fixed amount based on 103% of the adjusted
liquidation value of the stock. Neither the dividend rate nor the redemption
percentage increases over time. Therefore, a redemption of the Newco Series A
stock would not decrease the yield. However, there can be no assurance that the
Internal Revenue Service will adopt this approach for defining nonqualified
preferred stock.
The Newco Series E preferred stock is redeemable by Newco at any time. In
addition, Newco has represented that it is anticipated that the Newco Series E
preferred stock will be redeemed within 20 years of the issuance of the stock.
Therefore, Newco anticipates taking the position that the Newco Series E
preferred stock is nonqualified preferred stock.
54
<PAGE>
A holder of ART preferred stock that receives solely cash in exchange for
that stock in the merger by virtue of the exercise of dissenter's rights will
recognize capital gain or loss at the time of the consummation of the merger
equal to the difference between the tax basis of the ART preferred stock
surrendered in the merger and the amount of cash received for it, provided that
the payment is not treated as a dividend for tax purposes. The capital gain or
loss will constitute long-term capital gain or loss if the ART preferred stock
has been held by the holder for more than one year at the time of the
consummation of the merger. For holders who are individuals, net long-term
capital gain is generally taxed at lower rates than ordinary income.
Reporting Requirements of All ART Shareholders:
Under United States Treasury regulations, each ART shareholder that
exchanges ART stock for Newco stock in the merger will be required to retain
records and file with the shareholder's federal income tax return a statement
setting forth certain facts relating to the merger.
Tax Consequences of the NRLP Transaction:
- ----------------------------------------
Treatment of Newco, NRLP and NRLP Acquisition Corp.:
No gain or loss will be recognized by Newco, NRLP or NRLP Acquisition Corp.
as a result of the NRLP merger.
Treatment of NRLP Unitholders:
Except as provided below, a unitholder whose units of NRLP are converted in
the merger into shares of Newco common stock will not recognize gain or loss
upon the conversion. The tax basis of the Newco common stock received by a
unitholder who recognizes no gain or loss will be equal to the tax basis of the
NRLP units so converted, decreased by the amount of the partnership liabilities
attributable to the units. The holding period of the Newco common stock received
in the merger will include the holding period of the NRLP units so converted.
Under Section 357(c) of the Internal Revenue Code, if a corporation assumes
liabilities of the transferor (or accepts property subject to liabilities) in a
transaction subject to Section 351 of the Internal Revenue Code, the transferor
must recognize gain in the amount by which the liabilities exceed the
transferor's basis in the property contributed to the corporation. For this
purpose, partnership liabilities allocable to the NRLP units that are exchanged
by the unitholders will be treated as liabilities of the unitholders and assumed
by Newco. Accordingly, a unitholder will recognize gain upon the exchange of
units if and to the extent that (a) the aggregate amount of partnership
liabilities attributable to the units exchanged by the unitholder exceeds (b)
the unitholder's aggregate tax basis in the units exchanged. In general, because
the partnership's liabilities allocable to units are included in the basis of
those units, a unitholder's exchange of units will not cause the unitholder to
recognize gain under Section 357(c) of the Internal Revenue Code, unless the
unitholder's tax basis has been reduced by other factors, such as distributions
to the unitholder in excess of its share of the partnership's income or
distributions or deductions financed with nonrecourse debt (including through
predecessor partnerships acquired by NRLP). In the event
55
<PAGE>
that a unitholder recognizes gain under Section 357(c), the gain will increase
its basis in its Newco stock.
56
<PAGE>
Gain will generally be capital gain and will be treated as long term
capital gain to the extent that the unitholder has a holding period of more than
one year with respect to its units. It is possible that a portion of the gain
that unitholders recognize with respect to their units may be recharacterized as
ordinary income under Section 751 of the Internal Revenue Code. This will occur
if NRLP holds appreciated inventory, or depreciable property, other than real
estate, the value of which exceeds its depreciated basis. It is also possible
that a portion of the gain could be characterized as "unrecaptured Section 1250
gain," which is subject to tax at a rate in excess of the regular capital gains
rate.
Section 465 of the Internal Revenue Code requires individuals and closely
held corporations to recapture losses previously allowed with respect to their
interests in a partnership in the event their amount "at-risk" with respect to
that partnership becomes less than zero. The consequence of recapture is that a
taxpayer must recognize income equal to the negative at-risk amount. A partner's
at-risk amount is generally equal to its basis in its partnership units,
adjusted to exclude certain non-qualified partnership liabilities which would
otherwise be included in basis ("at-risk basis") and increased by any gain
recognized on the disposition of the partner's units. One event that would
reduce a partner's at-risk amount and therefore potentially create a negative
at-risk amount is the reduction of the partner's share of qualified liabilities.
Although guidance is scarce, it is likely that the recapture income that a
partner would recognize is treated as either ordinary income or has the
character of the losses and deductions previously allowed.
In general, as long as a unitholder's at-risk basis in the units that it
exchanges is greater than the unitholder's share of qualifying indebtedness
attributable to those units, the unitholder should not recognize recapture
income under Section 465(e) of the Internal Revenue Code. However, if a
unitholder's share of the liabilities exceeds its at-risk basis in the units the
unitholder exchanges, it will be subject to at-risk recapture although the
amount of recapture will be reduced or substantially eliminated by the amount of
the gain that the unitholder recognizes under Section 357(c) of the Internal
Revenue Code apportioned to those units (as discussed above).
Unlike a share of stock, a unitholder's tax basis in its NRLP units is
increased by its share of partnership income and gain and decreased by
distributions to its unitholders. NRLP has recognized income and gain in amounts
significantly in excess of NRLP distributions in recent years. This excess
amount has resulted in a net increase in the tax basis of each unitholder in its
NRLP units. NRLP anticipates that the basis increases have been of such a
magnitude that no unitholder will recognize income or gain pursuant to Section
357(c) or Section 465(e). However, you should consult your own tax advisor
concerning whether these provisions apply to your particular circumstances.
Depending on the individual circumstances of each unitholder if a
unitholder recognizes gain, the unitholder may be able to offset this gain with
certain prior suspended loses from the issuing partnership (i.e. losses that
were allocated to a unitholder by the partnership, but which the unitholder
could not deduct under Section 704(d) of the Internal Revenue Code because they
exceeded the tax basis of the unitholder), subject to any applicable at-risk
limitations under Section 465 of the Internal Revenue Code.
Ownership of Newco Stock Instead of NRLP Units:
Following the completion of the mergers, unitholders of NRLP will be
stockholders of Newco. As such, they will not be taxed directly on the earnings
of Newco, in contrast to the treatment of a person who previously held a unit of
NRLP. Rather, Newco will be a taxpaying entity that will pay federal income tax
with respect to its taxable income. Thus, the unitholders of NRLP
57
<PAGE>
will lose the tax benefits of operating through a "pass-through" entity for
federal income tax purposes. Former unitholders will be subject to "double
taxation" to the extent that Newco's earnings are first taxed to Newco and then
distributed to Newco's shareholders.
As stockholders of Newco, the former NRLP unitholders generally will
recognize taxable income with respect to the Newco stock upon the receipt of
dividends or upon the disposition of their Newco stock. Any dividends generally
will be included in the recipient's ordinary income to the extent that they are
paid out of Newco's current or accumulated earnings and profits; to the extent
they exceed the amount, they will first be treated as a nontaxable return of
basis to the extent of a stockholder's basis in its Newco stock, and then as a
gain from the sale of the Newco stock, generally as capital gain. Upon a sale or
other taxable disposition of Newco stock, a stockholder generally will recognize
taxable gain or loss equal to the difference between the amount realized on the
disposition and his adjusted tax basis in the disposed stock. Provided that the
Newco stock disposed of was held as a capital asset, any gain or loss of this
type generally will be capital gain or loss.
Reporting Requirements of NRLP Unitholders:
Under United States Treasury regulations, each NRLP unitholder that
exchanges NRLP units for Newco stock in the merger will be required to retain
records and file with the unitholder's federal income tax return a statement
setting forth certain facts relating to the merger. Further, each NRLP
unitholder will be required to file a statement with its federal income tax
return setting forth information with respect to the unitholder's share of
NRLP's Section 751 assets and related matters.
Backup Withholding:
- ------------------
An ART shareholder and an NRLP unitholder may be subject to backup
withholding at a 31% rate with respect to any payments received in the mergers
unless the shareholder or unitholder complies with certification procedures
required to avoid the withholding or is an exempt recipient under applicable
Treasury Regulations. Payments could include cash received in lieu of fractional
shares and cash received upon the exercise of appraisal rights. Any amounts
withheld under the backup withholding rules are not an additional tax and may be
refunded or credited against the holder's federal income tax liability, provided
that the required information is provided to the Internal Revenue Service. Newco
will report to the ART shareholders and NRLP unitholders and to the Internal
Revenue Service the amount of reportable payments and any amount withheld in
connection with the merger.
THE ABOVE DISCUSSION ADDRESSES ONLY THE FEDERAL INCOME TAX CONSEQUENCES OF
THE PROPOSED TRANSACTIONS TO AN NRLP UNITHOLDER OR AN ART STOCKHOLDER GENERALLY.
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PROPOSED
TRANSACTIONS AND THE OWNERSHIP AND DISPOSITION OF STOCK IN NEWCO ARE COMPLEX
AND, IN SOME CASES, UNCERTAIN. THESE CONSEQUENCES ALSO MAY VARY BASED UPON THE
INDIVIDUAL CIRCUMSTANCES OF EACH NRLP UNITHOLDER AND ART STOCKHOLDER.
ACCORDINGLY, NRLP UNITHOLDERS AND ART STOCKHOLDERS ARE URGED TO CONSULT, AND
MUST RELY UPON, THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES TO THEM OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF STOCK IN NEWCO, INCLUDING THE
APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY PENDING OR
PROPOSED LEGISLATION.
58
<PAGE>
Litigation
Both ART and NRLP are involved in various lawsuits arising in the ordinary
course of business. Management of both entities is of the opinion that the
outcome of these lawsuits would have no material impact on either ART's or
NRLP's financial condition.
THE REORGANIZATION AGREEMENT
The following is a discussion of the material provisions of the
reorganization agreement. This discussion is qualified in its entirety by
reference to the full text of the reorganization agreement, which is attached as
Appendix A. We encourage you to read the reorganization agreement in its
entirety. For purposes of convenience, references to the "original entity" means
NRLP or ART, before giving effect to the mergers. "Newco subsidiary" means the
particular subsidiary of Newco that is merging with and into NRLP or ART.
"Surviving entity" refers to NRLP or ART, after giving effect to the mergers.
Representations and Warranties of each of ART and NRLP. The reorganization
------------------------------------------------------
agreement contains representations and warranties of each original entity
relating to, among other things:
. the original entity's organization, qualification, standing and
similar corporate or partnership matters;
. the original entity's capital structure, such as the number of
authorized shares or units, number of shares or units outstanding,
etc.;
. the authorization, performance and enforceability of the
reorganization agreement and that there are no violations of the
original entity's governing instruments or applicable laws and
agreements, governmental filings, authorizations and consents required
to complete the merger;
. the availability to Newco and the other parties of selected reports
and financial statements;
. the absence of any material adverse changes or events relating to the
business and properties of the original entity, its capital stock, or
its accounting principles, practices or methods;
. the absence of any brokers or broker fees to be paid in connection
with the merger, other than those being paid to Fieldstone, ART's
financial advisor, and Houlihan Lokey, NRLP's financial advisor; and
. the absence of any untrue statements of a material fact or any
omission of a material fact relating to the original entity, as
represented by that original entity, but not as to the other parties
to the reorganization agreement, that must be stated in this document.
Representations and Warranties of Newco. Newco and each Newco subsidiary
---------------------------------------
made representations and warranties relating to:
59
<PAGE>
. their proper organization, qualification, standing and similar
corporate or partnership matters;
. the authorization, performance and enforceability of the
reorganization agreement;
. the absence of any violations of their governing instruments or
applicable laws and agreements, governmental filings, authorizations
and consents required to complete the merger; and
. the absence of any untrue statements of a material fact or any
omission of a material fact relating to Newco or the Newco subsidiary,
as represented by the party, but not as to the other parties to the
reorganization agreement, that must be stated in this document.
Covenants. The parties to the reorganization agreement made a number of
---------
covenants or promises. Each of the original entities covenanted to, among other
things:
. operate its business and that of its subsidiaries in the usual and
ordinary course consistent with past practices;
. use its best efforts to preserve its business organization;
. maintain its existing relations with customers, suppliers, employees
and business associates;
. not take any action that would adversely affect the ability of the
parties to complete the merger;
. take all actions necessary to convene the meetings to vote on the
approval of the reorganization agreement;
. give the representatives of the other parties reasonable access to
information concerning its business; and
. notify the other parties of any material adverse change in the
condition of its business, properties, assets, liabilities or results
of operations.
Other Agreements. Each original entity, Newco and each Newco subsidiary
----------------
have also agreed that it shall use its reasonable best efforts to complete the
merger.
Conditions to the Merger. A number of conditions must be met in order to
------------------------
complete the merger, including:
. the approval of the reorganization agreement by the holders of a
majority of NRLP units and ART common stock;
. no court or other governmental entity will have enacted a law that is
in effect and prohibits the merger;
60
<PAGE>
. the obtaining of any necessary consent of any lender or other third
party that is required to be obtained; and
. the approval for listing of the Newco common shares on the NYSE.
Termination. The reorganization agreement can be terminated by:
-----------
. the mutual consent of Newco, NRLP and ART;
. the action of the board of directors of Newco, NRLP or ART if, without
fault of the terminating party, the mergers are not completed by March
31, 2000;
. the action of the board of either NRLP or ART if either entity fails
to comply in any material respect with any of the covenants or
agreements contained in the reorganization agreement that were to have
been performed by it at or prior to the date of termination;
. by either NRLP or ART if either receives an offer from a third party
for a merger, merger or combination or a tender offer or exchange, and
the applicable board of directors determines, in its good faith
reasonable judgment, that the acceptance of the offer could reasonably
be required by the fiduciary obligations of those directors under
applicable law; or
. the action of the board of directors of either NRLP or ART if the
board of directors or the independent directors withdraw or adversely
modify their approval or recommendation of the reorganization
agreement or the applicable merger.
Amendment. The parties may modify or amend the reorganization agreement,
---------
by written agreement prior to the completion of the merger, according to the
applicable provisions of the Delaware law as it applies to NRLP, or the Georgia
law as it applies to ART.
Exchange of Certificates
At the effective time of the mergers, all NRLP units, other than those held
by ART and its subsidiaries, and all shares of ART common stock will cease to be
outstanding and will automatically be canceled and retired. Each certificate
formerly representing NRLP units, other than those held by ART and its
subsidiaries, and shares of ART common stock and ART preferred stock will
represent ownership of the right to receive the Newco common stock or Newco
preferred stock, as applicable, issuable in the mergers until those certificates
are surrendered to the exchange agent. The exchange agent for the merger is
American Stock Transfer & Trust Co.
As soon as possible after the completion of the merger, the exchange agent
will mail you a form of letter of transmittal and instructions for your use in
exchanging your NRLP unit certificates or ART common stock or preferred stock
certificates for Newco common stock and preferred stock certificates. When you
surrender your certificates, together with a signed letter of transmittal, you
will receive in exchange certificate(s) representing whole shares of Newco
common stock or Newco preferred stock to which you are entitled, based on the
conversion ratio that applies. If you are a holder of ART preferred stock and
are contemplating voting against the merger and requesting
61
<PAGE>
dissenters' rights, please see "Dissenters' Rights" below for a detailed
explanation of the procedures for doing so.
You should not send your certificates to the exchange agent until you
receive a letter of transmittal.
Accounting Treatment
For accounting purposes, the exchange of NRLP units and ART common stock
for shares of the newly created Newco will be treated as a purchase by ART of
NRLP partnership units it does not currently own. Accordingly, the assets and
liabilities of ART, including its share of the assets and liabilities of NRLP
owned prior to the transaction, will be recorded at historical cost, and the
remaining assets and liabilities of NRLP will be recorded at estimated fair
values.
Consequences Under Federal Securities Laws; Resale of Newco Stock
The Newco common stock and Newco preferred stock issuable in connection
with the merger have been registered under the Securities Act. Accordingly,
there will be no federal securities law restrictions upon the resale or transfer
of the shares by shareholders, except for those shareholders who are considered
"affiliates" of NRLP or ART, as that term is defined in Rule 144 and Rule 145
adopted under the Securities Act. However, there are certain restrictions as
imposed by Newco's articles of incorporation. For a full discussion of these
restrictions please see "DESCRIPTION OF THE CAPITAL STOCK OF NEWCO - Description
of Preferred Stock" on page ___.
Newco stock received by those unitholders and shareholders who are
considered to be "affiliates" of NRLP or ART may be resold without registration
only as provided for by Rule 145 or as otherwise permitted under the Securities
Act. Persons who may be considered to be affiliates of NRLP or ART generally
include individuals or entities that control, are controlled by or are under
common control with, NRLP or ART, and may include the executive officers and
directors of NRLP and ART, as well as some of the principal unitholders or
shareholders of NRLP and ART.
Dissenters' Rights
ART Shareholders.
----------------
Common Stock. Under Georgia law, the holders of ART common stock who vote
against the merger and the reorganization agreement will not be entitled to
demand appraisal of, or to receive payment for, their shares.
Special Stock. Section 14-2-1302 of the Georgia Business Corporation Code
(GBCC) entitles any holder of ART special stock who objects to the merger and
who follows the procedures prescribed by Sections 14-2-1320-27, in lieu of
receiving Newco special stock, to receive cash equal to the "fair value" of the
shareholders' shares of ART special stock. Set forth below is a summary of the
procedures relating to the exercise of these dissenters' rights. This summary
does not purport to be a complete statement of dissenters' rights and is
qualified in its entirety by reference to Sections 14-2-1301 - 03 and 14-2-1320
- - 32 of the GBCC, which are reproduced in full as Appendix D attached to this
joint proxy statement and prospectus.
ANY SHAREHOLDER CONTEMPLATING THE POSSIBILITY OF DISSENTING FROM THE ART
MERGER SHOULD CAREFULLY REVIEW THE TEXT OF APPENDIX
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<PAGE>
D (PARTICULARLY THE SPECIFIC PROCEDURAL STEPS REQUIRED TO PERFECT DISSENTERS'
RIGHTS) AND SHOULD CONSULT LEGAL COUNSEL. THESE RIGHTS WILL BE LOST IF THE
PROCEDURAL REQUIREMENTS OF SECTIONS 14-2-1320-27 OF THE GBCC ARE NOT FULLY AND
PRECISELY SATISFIED.
Holders of ART special stock who follow the procedures set forth in
Sections 14-2-1320-27 of the GBCC are entitled to receive a cash payment equal
to the fair value of their shares of ART special stock immediately before the
effective time of the merger. Unless all of the procedures set forth in the
GBCC are followed by a shareholder who wishes to exercise dissenters' rights,
the shareholder will be bound by the terms of the merger and the reorganization
agreement. To be entitled to a cash payment upon exercise of dissenters'
rights, a shareholder must:
(a) file with ART (at ART's address, 10670 N. Central Expressway, Suite
300, Dallas, Texas, 75231, Attention: Secretary) a written notice of
intent to demand fair value of the dissenting shareholder's shares of
ART special stock (a Shareholder's Notice), prior to the shareholders'
vote on the ART merger and the reorganization agreement at the ART
special meeting; and
(b) not vote the shareholder's shares in favor of the ART merger and the
adoption of the reorganization agreement.
A vote against the ART merger and the reorganization agreement will not in
itself constitute a shareholder's notice to demand fair value of the shares.
The failure to vote will not affect the validity of a timely shareholder's
notice. However, the submission of a signed blank proxy will constitute a vote
in favor of the merger and a waiver of statutory dissenters' rights.
After the ART merger has been approved by the ART shareholders, ART or
Newco will send a notice to each holder of ART special stock who filed a
shareholder's notice and did not vote in favor of the ART merger and
reorganization. This notice will set forth, among other things, the address to
which a demand for payment and certificates representing the shares of ART
special stock must be sent by the dissenting shareholder in order to obtain fair
value for the shares under the GBCC and the date by which they must be received
and including a form to certify the date on which the shareholder acquired the
shares of ART special stock. In order to obtain fair value for the shares under
Section 14-2-1323 of the GBCC, a dissenting shareholder must demand payment and
deposit with Newco the stock certificates in not less than 30 nor more than 60
days after the notice is deposited in the United States mail. A SHAREHOLDER WHO
FAILS TO MAKE DEMAND FOR PAYMENT OR TO DEPOSIT STOCK CERTIFICATES AS REQUIRED BY
SECTION 14-2-1323 OF THE GBCC WILL LOSE THE RIGHT TO RECEIVE THE FAIR VALUE OF
THE SHAREHOLDER'S SHARES UNDER THAT SECTION, NOTWITHSTANDING THE TIMELY FILING
OF THE SHAREHOLDER'S NOTICE UNDER THAT SECTION.
Following the effective time or the receipt of the dissenting
shareholder's demand for payment, whichever is later, Newco shall by notice to
each dissenting shareholder who complied with Section 14-2-1323 offer to pay to
the dissenting shareholder the amount Newco estimates to be the fair value of
the shareholder's shares of ART special stock, plus interest, if any, and
accompanied by, among other things, a brief description of the method used to
reach the estimate of fair value. For purposes of Section 14-2-1325 "interest"
means interest from the effective date of the action until the date of payment,
at a rate that is fair and equitable under all the circumstances. If the
shareholder accepts Newco's offer by written notice to Newco within 30 days
after the Newco's offer or is deemed to have accepted the offer by failure to
respond within the 30 day period, payment for the
63
<PAGE>
dissenting shareholder's shares will be made within 60 days after the making of
the offer or the effective date of the merger, whichever is later.
If the dissenting shareholder believes Newco's offer is less than the fair
value of the shareholder's shares of ART special stock, the dissenting
shareholder may decline the offer by giving written notice to Newco of the
dissenting shareholder's estimate of the fair value of the shareholder's shares
of ART special stock, with interest, if any, within 30 days. Failure to give
this notice within the 30-day period entitles the dissenting shareholder only to
the amount offered by Newco.
If Newco receives a demand notice within the applicable 30-day period, it
shall, within 60 days after receipt thereof, either cause to be paid to the
dissenting shareholder the amount demanded or agreed to by the dissenting
shareholder after discussion with Newco or file a petition in a court of
competent jurisdiction in Georgia to obtain a judicial determination of the fair
value of the shares with interest, if any. All dissenting shareholders whose
demands are not settled within the applicable 60-day settlement period shall be
parties to the proceeding.
The court will the determine whether each dissenting shareholder in
question has fully complied with the provisions of the GBCC. For all dissenting
shareholders who have fully complied and not lost or withdrawn statutory
dissenters' rights, this court will determine the fair value of the shares,
taking into account any and all factors the court finds relevant (including,
without limitation, the recommendation of any appraisers which may have been
appointed by the court), computed by any method that the court, in its
discretion, sees fit to use, whether or not used by Newco or a dissenting
shareholder. The fair value of the shares as determined by the court is binding
on all shareholders and may be less than, equal to or greater than the market
price of the Newco preferred stock to be issued to non-dissenting shareholders
for their ART special stock if the ART merger and business combination are
completed. However, under the statute, dissenting shareholders are not liable to
Newco for the amount, if any, by which payments remitted to the dissenting
shareholders exceed the fair value of the shares determined by the court, with
interest. The costs and expenses of the court proceeding will be assessed
against Newco, except that the court may assess part or all of those costs and
expenses against a dissenting shareholder whose action in demanding payment
under Section 14-2-1327 is found to be arbitrary or not in good faith.
NRLP Unitholders.
----------------
The NRLP unitholders have no appraisal rights under Delaware law or the
NRLP partnership agreement.
Interests of Certain Persons in the Mergers
In considering the recommendation of the boards of ART and NMC with respect
to the mergers, you should be aware that Karl Blaha is a director and an
executive officer of each of ART and NMC and Collene Currie is a director of
each of ART and NMC, and therefore they have an interest in the mergers that are
in addition to, or different from, yours. The boards were aware of these
interests, and considered them, among other matters, in approving the
reorganization agreement and the transactions contemplated by it. The boards
noted, however, that Mr. Blaha's and Ms. Currie's participation in approving the
merger on behalf of NRLP and ART was limited to acting upon the recommendations
of the independent directors of the boards of NMC and ART.
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<PAGE>
Management and Board of Directors after the Merger
Following completion of the business combination, the board of directors of
Newco will consist of members of the ART board and members of the NMC board. For
a detailed description of the Newco management please see "MANAGEMENT OF NEWCO"
on page ___.
Stock Options
Under the terms of the agreement and plan of reorganization, all
outstanding options to purchase shares of ART common stock will be converted in
the business combination into options to purchase shares of Newco common stock.
If these options are not exercised prior to the completion of the business
combination, they will be converted in the business combination into options to
acquire that number of shares of Newco common stock equal to the number of
shares of ART common stock for which the options are currently exercisable
multiplied by the 0.91 exchange rate.
Expenses of the Mergers
If the business combination is completed, Newco will pay all expenses of
the mergers for all parties, which are estimated to be approximately $1.0
million. If the business combination is not completed, each party will pay its
own expenses. These expenses are estimated to be approximately $500,000 for
NRLP and $500,000 for ART.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma consolidated financial statements of
Newco as of September 30, 1999 give effect to the issuance of shares of Newco
common stock and preferred stock in exchange for the ART common stock and ART
preferred stock and the NRLP partnership units as described in this proxy
statement.
The historical financial data for ART and NRLP for the year ended December
31, 1998 has been derived from the audited financial statements and notes
included in each of those entity's annual reports on Form 10-K for the year
ended December 31, 1998 and unaudited quarterly reports on Form 10-Q for the
nine months ended September 30, 1999.
The pro forma adjustments described in the accompanying notes are based
upon available information and assumptions that management believes are
reasonable. In the opinion of management, all adjustments necessary to present
the pro forma information have been made. The unaudited pro forma consolidated
financial statements are provided for informational purposes only and do not
necessarily indicate the financial results that would have occurred had the
merger actually occurred on the dates specified, nor do they indicate Newco's
future results. The unaudited pro forma consolidated financial information
should be read together with the consolidated financial statements and notes of
ART and NRLP contained in their annual reports on Form 10-K for the year ended
December 31, 1998 and their quarterly reports on Form 10-Q for the nine months
ended September 30, 1999.
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<PAGE>
AMERICAN REALTY INVESTORS, INC.
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
Historical Pro forma
ART (A) Adjustments Newco
------------- --------------- ---------
(dollars in thousands, except per share/unit)
Assets
------
<S> <C> <C> <C>
Notes and interest receivable....... $ 67,096 ${ 13,549 (B)} $ 67,096
{ <13,549>(C)}
Less - allowance for estimated
losses................... <2,577> <2,577>
-------- ----------- -------
64,519 --- 64,519
Real estate held for sale.... 314,273 314,273
Real estate held for
investment, net of 462,690 { 21,066 (D)} 484,756
accumulated depreciation.... { 1,000 (E)}
Pizza parlor equipment, net
of accumulated 6,935 6,935
depreciation................
Marketable equity securities,
at market value............ 740 740
Investment in equity
investees................... 40,665 40,665
Intangibles, net of
accumulated amortization... 14,422 14,422
Cash and cash equivalents.... 1,839 1,839
Other assets................. 33,249 33,249
-------- --------
$939,332 $22,066 $961,398
-------- --------- --------
</TABLE>
66
<PAGE>
AMERICAN REALTY INVESTORS, INC.
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET - Continued
September 30, 1999
<TABLE>
<CAPTION>
Historical Pro forma
ART (A) Adjustments Newco
------------ -------------- -----
(dollars in thousands, except per share/unit)
Liabilities and Stockholders'/
- ------------------------------
Unitholders' Equity
- -------------------
Liabilities
<S> <C> <C> <C>
Notes and interest payable........ $754,931 $ ( 13,549) (C) $741,382
Margin borrowings................. 36,507 36,507
Other liabilities................. 36,765 1,000 (E) 37,765
-------- ------------- -------
828,203 ( 12,549) 815,654
Minority interest.................. 72,723 ( 19,399) (D) 53,324
Stockholders'/Unitholders'
Equity
ART/Newco
Preferred Stock
Series F; 3,400,000 shares
Outstanding (liquidation
Preference $34,000)............. 6,200 6,200
Series G; 1,000 shares
Outstanding (liquidation
Preference $100)................ 2 2
Common Stock $.01 par value,
Issued 13,496,688 shares
historical 15,051,941
shares pro forma........ 135 16 (D) 151
Paid in capital................... 84,348 53,998 (D) 138,346
Accumulated <deficit>............. (52,251) (52,251)
Treasury stock 2,737,216 shares
historical; 2,490,866 shares pro
forma, at cost.................... (28) (28)
NRLP
General Partner................... - { ( 13,549) (B) } -
{ }
{ ( 13,549) (D) }
Limited Partners; 6,321,524
Units outstanding................. - -
38,406 54,014 92,420
-------- -------------------- --------
$939,332 $ 22,066 $ 961,398
======== ==================== =========
</TABLE>
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<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
September 30, 1999
Note A. As of December 31, 1998, ART began consolidation of NRLP. The assets,
liabilities and equity accounts of NRLP are included in ART's
historical consolidated balance sheet at September 30, 1999.
Note B. To record note receivable and accrued interest from NMC for its general
partner capital contribution to NRLP.
Note C. To eliminate NMC note payable and NRLP note receivable for NMC general
partner capital contribution.
Note D. To record the purchase by ART of the minority interest in NRLP at its
estimated fair market value. Estimate fair value of 2,769, 955 units
at $19.50 (the closing price of NRLP units on November 30, 1999).
Note E. To record estimated closing costs.
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<PAGE>
AMERICAN REALTY INVESTORS, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Historical Pro forma
ART (A) Adjustments Newco
------------ ------------ -----
(dollars in thousands, except per share)
Revenues
<S> <C> <C> <C>
Sales............................ $ 22,753 $ 22,753
Rents............................ 122,125 122,125
Interest......................... 5,029 5,029
Other............................ ( 740) ( 740)
----------- -----------
149,167 149,167
Expenses
Cost of sales.................... 19,509 19,509
Property operations.............. 80,778 80,778
Interest......................... 68,528 ($ 949)(E) 67,579
Depreciation and amortization.... 13,496 848 (F) 14,344
Advisory and servicing fee....... 3,958 1,400 (D) 5,358
Provision for loss............... 2,072 2,072
Litigation settlement............ 275 275
General and administrative....... 12,689 (591)(C) 12,098
Minority interest................ 38,561 (36,339)(B) 2,222
---------- ------- -----------
239,866 (35,631) 204,235
---------- ------- -----------
Income <loss> from operations...... (90,699) 35,631 (55,068)
Equity in income of investees.... 5,270 5,270
Gain on sale of real estate...... 87,307 87,307
---------- -----------
Net income......................... 1,878 35,631 37,509
Preferred dividend requirement... (1,704) (1,704)
---------- -------- -----------
Net income applicable to common
shares............................ $ 174 $ 35,631 $ 35,805
========== ======== ===========
Earnings per share
Net income..................... $ .02 $ 2.89
========== ===========
Weighted average shares used in
computing earnings per share......
10,753,600 12,378,619
========== ===========
</TABLE>
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<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
Note A. As of December 31, 1998, ART began consolidation of NRLP. The revenues
and expenses of NRLP are included in ART's historical consolidated
statement of operations for the nine months ended September 30, 1999.
Note B. To eliminate NRLP minority interest included in ART's historical
statement of operations.
Note C. To eliminate BCM costs reimbursements permitted by NRLP's partnership
agreement but identified as costs of the advisor in ART's advisory
agreement with BCM.
Note D. To charge the .75% per annum advisory fee on NRLP's assets at September
30, 1998, for which a charge had not previously been made.
Note E. To eliminate ART's interest expense relating to NMC's general partner
capital contribution note. Interest income is not recognized by NRLP.
Note F. To adjust depreciation for excess fair value of minority interest in
NRLP acquired over carrying value of NRLP assets acquired. Estimated
average remaining useful life of 20 years.
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AMERICAN REALTY INVESTORS, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
------------------------------------------
Pro forma
ART NRLP Adjustments Newco
------------------ ------------------- -------------------- --------------
(dollars in thousands, except per share/unit)
<S> <C> <C> <C> <C>
Revenues
Sales............................ $ 28,883 $ - $ 28,883
Rents............................ 63,491 107,127 170,618
Interest......................... 188 6,707 $ <404>(D) 6,491
Other............................ <5,476> - <5,476>
----------- ---------- ----------- -----------
87,086 113,834 <404> 200,516
Expenses
Cost of sales.................... 24,839 - 24,839
Property operations.............. 49,193 62,736 { <936>(E)} 111,929
Interest......................... 51,624 26,722 { <404>(D)} 77,006
Deferred borrowing costs
written off.................... - 12,963 12,963
Depreciation and amortization.... 6,990 9,691 1,130 (F) 17,811
Advisory and servicing fee....... 3,845 - 2,067 (C) 5,912
Provision for loss............... 3,916 - 3,916
Litigation for settlement........ 13,026 - 13,026
General and administrative....... 8,521 6,820 <696>(B) 14,645
Minority interest................ 3,157 - 3,157
----------- ---------- ----------- -----------
165,111 118,932 1,161 285,204
----------- ---------- ----------- -----------
<Loss> from operations............. <78,025> <5,098> <1,565> <84,688>
Equity in income of investees.... 37,966 - <23,067>(A) 14,899
Gain on sale of real estate...... 17,254 52,589 69,843
----------- ---------- ----------- -----------
Net income <loss>.................. <22,805> 47,491 <24,632> 54
Preferred dividend requirement... <1,177> - <1,177>
----------- ---------- ----------- -----------
Net income <loss> applicable
to common shares/partnership
units.......................... $ <23,982> $ 47,491 $ <24,632> $ <1,123>
=========== ========== =========== ===========
Earnings per share/unit
Net income <loss>.............. $ <2.24> $ 7.36 $ <.09>
=========== ========== ===========
Weighted average shares/units
used in computing earnings
per share...................... 10,695,388 6,321,425 12,400,043
=========== ========== ===========
</TABLE>
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<PAGE>
AMERICAN REALTY INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
Note A. To eliminate equity earnings of NRLP included in ART's historical
statement of operations.
Note B. To eliminate BCM costs reimbursements permitted by NRLP's partnership
agreement but identified as a cost of the advisor in ART's advisory
agreement with BCM.
Note C. To charge the .75% per annum advisory fee on NRLP's assets at December
31, 1998, for which a charge had not previously been made.
Note D. To eliminate NRLP interest income and ART interest expense on amounts
due to NRLP from ART.
Note E. To eliminate ART's interest expense related to NMC's general partner
capital contribution note. Interest income is not recognized by NRLP.
Note F. To adjust depreciation for excess of fair value of minority interest
in NRLP acquired over carrying value of NRLP assets acquired.
Estimated average remaining useful life of 20 years.
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<PAGE>
BUSINESS OF NEWCO
Newco is a newly-formed Nevada corporation created for the purpose of
holding ART and NRLP as subsidiaries. ART and NRLP will exist as separate and
distinct subsidiary entities and will conduct their respective businesses in
substantially the same manner as they were conducted prior to the merger.
MANAGEMENT OF NEWCO
Directors
Upon completion of the consolidation, Newco's board will consist of seven
persons. Six of the directors, Karl L. Blaha, Roy E. Bode, Collene C. Currie, Al
Gonzalez, Cliff Harris and Carey M. Portman, are members of ART's current board.
Three of the directors, Karl L. Blaha, Collene C. Currie and Richard D. Morgan,
are members of the board of NMC, the general partner of NRLP.
The directors are listed below, together with their ages, terms of service,
all positions and offices held' their principal occupations, business experience
and directorships with other companies during the last five years or more
KARL L. BLAHA: Age 52; Director (since June 1996), President (since October
1993) and Executive Vice President and Director of Commercial Management (April
1992 to October 1993) of ART; President (since September 1999), Executive Vice
President--Commercial Asset Management (July 1997 to September 1999) and
Executive Vice President and Director of Commercial Management (April 1992 to
August 1995) of BCM, Syntek Asset Management, Inc. (SAMI), Income Opportunity
Realty Investors, Inc. (IORI) and Transcontinental Realty Investors, Inc. (TCI);
Director (since November 1998) of SAMI and (since October 1998) of Garden
National Realty, Inc.; President (since September 1999), Director (since
December 1998) and Executive Vice President and Director of Commercial Asset
Management (January 1998 to September 1999) of NMC; Executive Vice President
(October 1992 to July 1997) of Carmel Realty, Inc.(Carmel Realty), a company
owned by First Equity Properties, Inc. (First Equity), which is 50% owned by a
subsidiary of BCM; Director and President (since 1996) of First Equity; and
Executive Vice President and Director of Commercial Management (April 1992 to
February 1994) of National Income Realty Trust (NIRT) and Vinland Property Trust
(VPT).
ROY E. BODE: Age 51; Director (since September 1996) of ART; Vice President
of Public Affairs (since May 1992) of University of Texas Southwestern Medical
Center; Editor (June 1988 to December 1991) of Dallas Times Herald; and
Executive Board Member (since October 1996) of Yellow Rose Foundation for
Multiple Sclerosis Research.
COLLENE C. CURRIE: Age 51; Director (since February 1999) of ART; Vice
President and Senior Relationship Manager (since February 1996) of Bank of
America Private Bank (formerly NationsBank Private Client Group of Dallas);
Director (since April 1998) of NMC; and Director of Marketing and Communications
(October 1993 to January 1999) of the Dallas Opera; and Business Transformation
Consultant (August 1988 to October 1993) for IBM..
AL GONZALEZ: Age 63; Director (since 1989) of ART; President (since March
1991) of AGE Refining, Inc.; President (January 1988 to March 1991) of Moody-Day
Inc.; owner and President of Gulf-Tex Construction Company; owner and lessor of
two restaurant sites in Dallas,
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Texas; and Director (since April 1990) of Avacelle, Inc. which is 53% owned by
ART and 47% owned by BCM.
CLIFF HARRIS: Age 51; Director (since 1997) of ART; President (since 1995)
of Energy Transfer Group, L.L.C.; Project Development Vice President (1990 to
1995) of Marsh & McLennan; Vice Chairman (1990 to 1997) of the Dallas
Rehabilitation Institute; Director (since 1992) of Court Appointed Special
Advocates; and Director (since 1989) of the NFL Alumni Association.
RICHARD D. MORGAN (David): Age 60; Director (since 1999) of NMC; and
Founder and President (since 1989) of Tara Group, Inc.
CAREY M. PORTMAN: Age 47; Director and Vice President (since December 1999)
of ART and BCM; Chairman, Vice Chairman and Director (since 1991) of Commerce
International Incorporated (USA)(London)Ltd.; Partner and Director (since 1991)
of Pathway Ltd.; Vice President (1995 to 1997) of E.D.&F Man International
Futures; and Vice President (1982 to 1985) of Chavin Enterprises.
Executive Officers
Upon completion of the consolidation, Newco will have four executive
officers, all of whom are currently executive officers of ART.
The executive officers are listed below, together with their ages, terms of
service, all positions and offices held, their principal occupations, business
experience and directorships with other companies during the last five years or
more.
BRUCE A. ENDENDYK: Age 51; Executive Vice President (since January 1995) of
ART; President (since November 1999) of Regis Realty, Inc. (Regis Realty), a
wholly owned subsidiary of Syntek West, Inc., a wholly owned company of Gene E.
Phillips; Executive Vice President (since January 1995) of BCM, SAMI, IORI and
TCI; Executive Vice President (since January 1998) of NMC; President (since
January 1995) of Carmel Realty; and Management Consultant (November 1990 to
December 1994).
THOMAS A. HOLLAND: Age 57; Executive Vice President and Chief Financial
Officer (since August 1995) and Senior Vice President and Chief Accounting
Officer (July 1990 to August 1995) of ART; Executive Vice President and Chief
Financial Officer (since August 1995) and Senior Vice President and Chief
Accounting Officer (July 1990 to August 1995) of BCM, SAMI, IORI and TCI;
Secretary (February 1997 to June 1999) of IORI and TCI; Executive Vice President
and Chief Financial Officer (since January 1998) of NMC; and Senior Vice
President and Chief Accounting Officer (July 1990 to February 1994) of NIRT and
VPT.
STEVEN K. JOHNSON: Age 42; Executive Vice President--Residential Asset
Management (since August 1998) of ART; Executive Vice President--Residential
Asset Management (since August 1998) and Vice President (August 1990 to August
1991) of BCM, SAMI, IORI and TCI; Executive Vice President--Residential Asset
Management (since August 1998) of NMC; Chief Operating Officer (January 1993 to
August 1998) of Garden Capital, Inc.; and Executive Vice President (December
1994 to August 1998) of Garden Capital Management, Inc.
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Officers
Upon completion of the merger, although not executive officers, the
following persons will serve as officers of Newco. Their positions with Newco
are not subject to a vote of stockholders. Their ages, terms of service, all
positions and offices held, other principal occupations, business experience and
directorships with other companies during the last five years or more are set
forth below.
ROBERT A. WALDMAN: Age 47; Senior Vice President and General Counsel (since
January 1995), Vice President (January 1993 to January 1995) and Secretary
(since December 1989) of ART; Senior Vice President and General Counsel (since
January 1995), Vice President (December 1990 to January 1995) and Secretary
(December 1993 to February 1997 and since June 1999) of IORI and TCI; Senior
Vice President and General Counsel (since November 1994), Vice President and
Corporate Counsel (November 1989 to November 1994) and Secretary (since November
1989) of BCM; Senior Vice President and General Counsel (since January 1995),
Vice President (April 1990 to January 1995) and Secretary (since December 1990)
of SAMI; and Senior Vice President, Secretary and General Counsel (since January
1998) of NMC.
DREW D. POTERA: Age 40; Vice President (since December 1996), Treasurer
(since August 1991) and Assistant Treasurer (December 1990 to August 1991) of
ART; Vice President (since December 1996) and Treasurer (since December 1990) of
IORI and TCI; Treasurer (December 1990 to February 1994) of NIRT and VPT; Vice
President, Treasurer and Securities Manager (since July 1990) of BCM; Vice
President and Treasurer (since February 1992) of SAMI; and Vice President and
Treasurer (since January 1998) of NMC.
EXECUTIVE COMPENSATION OF NEWCO
Newco will compensate its independent directors at the rate of $20,000 per
year, plus $300 per audit committee meeting attended. In addition, the chairman
of any committee will receive an annual fee of $500.
BUSINESS OF ART
General
ART, a Georgia corporation, is the successor to a District of Columbia
business trust organized July 14, 1961. The business trust merged into ART on
June 24, 1988. ART elected to be treated as a real estate investment trust
(REIT) under Sections 856 through 860 of the Internal Revenue Code, during the
period July 1, 1987 through December 31, 1990. ART allowed its REIT tax status
to lapse in 1991. ART's principal offices are located at 10670 North Central
Expressway, Suite 300, Dallas, Texas, 75231. ART's telephone number is (214)
692-4700.
ART's primary business is investing in equity interests in real estate
(including equity securities of real estate- related entities), leases, joint
venture development projects and partnerships. To a lesser extent, ART is also
engaged in financing real estate and real estate activities through investments
in mortgage loans, including first, wraparound and junior mortgage loans. The
ART board has broad authority under ART's governing documents to make real
estate investments,
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<PAGE>
including mortgage loans and equity real estate investments, as well as
investments in the securities of other entities, whether or not these entities
are engaged in real estate-related activities. ART does not have a policy
limiting the amount or percentage of assets that may be invested in any
particular property or type of property or in any geographic area. ART's
governing documents do not contain any limitation on the amount or percentage of
indebtedness ART may incur.
Effective December 18, 1998, NMC, a wholly owned subsidiary of ART, was
elected general partner of NRLP and NOLP. NRLP and NOLP operate as an economic
unit and, unless the context otherwise requires, all references herein to NRLP
shall constitute references to NRLP and NOLP as a unit. NRLP is a publicly
traded master limited partnership which was formed under the Delaware Uniform
Limited Partnership Act on January 29, 1998. It commenced operations on
September 18, 1987 when, through NOLP, it acquired all of the assets, and
assumed all of the liabilities, of 35 public and private limited partnerships.
NRLP is the sole limited partner of NOLP and owns 99% of the beneficial interest
in NOLP.
Until December 18, 1998, Syntek Asset Management, L.P. (SAMLP), a Delaware
limited partnership, was the general partner and owner of 1% of the beneficial
interest in each of NRLP and NOLP. ART is a 96% limited partner of SAMLP. With
its election as general partner, NMC succeeded to SAMLP's 1% beneficial interest
in each of NRLP and NOLP. NMC also assumed liability for SAMLP's note for its
capital contribution to NRLP. In addition, NMC assumed liability in connection
with a litigation settlement on a note which requires the repayment of the $11.5
million paid by NRLP plus $808,000 in court ordered attorney's fees and an
additional $30,000 paid to a Joseph B. Moorman. This note requires repayment
over a ten-year period, bears interest at a variable rate, currently 8.2% per
annum, and is guaranteed by ART.
As of October 31, 1999, ART owned approximately 56.2% of the outstanding
limited partner units of NRLP. Prior to NMC's election as general partner of
NRLP and NOLP, ART accounted for its investment in NRLP under the equity method.
As of December 31, 1998, ART has consolidated NRLP's accounts and has
consolidated its operations subsequent to that date. NMC has discretion in
determining methods of obtaining funds for NRLP's operations, and the
acquisition and disposition of its assets.
ART, through Pizza World Supreme, Inc. (PWSI), also operates and franchises
pizza parlors featuring pizza delivery, carry-out and dine-in under the
trademark "Me-N-Ed's" in California and Texas. The first Me-N-Ed's pizza parlor
opened in 1962. As of October 31, 1999, there were 56 Me-N-Ed's pizza parlors in
operation, consisting of 50 owned and 6 franchised pizza parlors. Seven of the
owned pizza parlors were in Texas and the remainder were in California.
ART's businesses are not seasonal. With regard to real estate investments,
ART is seeking both current income and capital appreciation. ART's plan of
operation is to continue, to the extent its liquidity permits, to make equity
investments in income producing real estate such as apartment complexes and
commercial properties or equity securities of real estate-related entities. ART
also intends to pursue higher risk, higher return investments, such as improved
and unimproved land where it can obtain financing of substantially all of a
property's purchase price. ART intends to dispose of some of its assets where
the market value justifies their disposition. ART has determined that it will no
longer actively seek to fund or purchase mortgage loans. In selected instances,
it may originate mortgage loans or provide purchase money financing in
conjunction with a property sale. In contrast, NRLP has increased its lending
activity, funding 16 loans in 1998, including a $95.0 million loan commitment to
ART and a $12.4 million loan assumed by NMC in connection with a litigation
settlement.
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<PAGE>
Except as required under the Exchange Act and the rules and regulations of
the NYSE, ART does not provide annual or other reports to its securityholders.
The Manager
Although the ART board is directly responsible for managing the affairs of
ART and for setting the policies which guide it, the day-to-day operations of
ART are performed by BCM, a contractual advisor under the supervision of the ART
board. The duties of the advisor include, among other things, investigating,
evaluating and recommending real estate and mortgage loan investment and sales
opportunities as well as financing and refinancing sources. The advisor also
serves as consultant in connection with ART's business plan and investment
policy decisions made by the ART board.
Since February 1, 1990, affiliates of BCM have provided property management
services to ART. Currently, these services are being provided by Triad Realty
Services, Ltd. (Triad, Ltd.). Triad, Ltd. subcontracts with other entities for
the provision of the property-level management services to ART at various rates.
BCM serves as the general partner of Triad, Ltd. The limited partners of Triad,
Ltd. are (1) Syntek West, Inc. (Syntek West), a company owned by Gene E.
Phillips and (2) Gene E. Phillips. Triad, Ltd. subcontracts the property-level
management of 22 of ART's commercial properties (shopping centers, office
buildings and a merchandise mart) to Regis Realty, Inc., (Regis Realty) which is
owned by Syntek West. Regis Realty is entitled to receive property and
construction management fees and leasing commissions in accordance with the
terms of its property-level management agreement with Triad, Ltd. The management
of ART's hotels is subcontracted to Regis Hotel Corporation which is a
subsidiary of Carmel Realty, Inc. which is an affiliate of BCM.
The advisory agreement provides for BCM, as the advisor, to receive monthly
base compensation at the rate of 0.125% per month (1.5% on an annualized basis)
of average invested assets. On October 23, 1991, based on the recommendation of
BCM, the ART board of directors approved a reduction in the advisor's base fee
by 50% effective October 1, 1991. This reduction remains in effect until ART's
earnings for the four preceding quarters equals or exceeds $.50 per share.
In addition to base compensation, BCM, or an affiliate of BCM, receives the
following forms of additional compensation:
(1) an acquisition fee for locating, leasing or purchasing real estate for
ART in an amount equal to the lesser of (i) the amount of compensation
customarily charged in similar arm's-length transactions or (ii) up to 6% of the
costs of acquisition, inclusive of commissions, if any, paid to non-affiliated
brokers;
(2) a disposition fee for the sale of each equity investment in real
estate in an amount equal to the lesser of (i) the amount of compensation
customarily charged in similar arm's-length transactions or (ii) 3% of the sales
price of each property, exclusive of fees, if any, paid to non-affiliated
brokers;
(3) a loan arrangement fee in an amount equal to 1% of the principal
amount of any loan made to ART arranged by BCM;
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(4) an incentive fee equal to 10% of net income for the year in excess of
a 10% return on stockholders' equity, and 10% of the excess of net capital gains
over net capital losses, if any, realized from sales of assets made under
contracts entered into after April 15, 1989; and
(5) a mortgage placement fee, on mortgage loans originated or purchased,
equal to 50%, measured on a cumulative basis, of the total amount of mortgage
origination and placement fees on mortgage loans advanced by ART for the fiscal
year.
The advisory agreement further provides that BCM shall bear the cost of
specified expenses of its employees, excluding fees paid to ART's directors;
rent and other office expenses of both BCM and ART (unless ART maintains office
space separate from that of BCM); costs not directly identifiable to ART's
assets, liabilities, operations, business or financial affairs; and
miscellaneous administrative expenses relating to the performance by BCM of its
duties under the advisory agreement.
If and to the extent that ART shall request BCM, or any director, officer,
partner or employee of BCM, to render services to ART other than those required
to be rendered by BCM under the advisory agreement, these additional services,
if performed, will be compensated separately on terms agreed upon between the
party and ART from time to time. ART has requested that BCM perform loan
administration functions, and ART and BCM have entered into a separate
agreement, as described below.
The advisory agreement automatically renews from year to year unless
terminated in accordance with its terms. ART's management believes that the
terms of the advisory agreement are at least as fair as could be obtained from
unaffiliated third parties.
Pursuant to the advisory agreement, BCM serves as the loan
administration/servicing agent for ART, under an agreement dated as of October
4, 1989, and terminable by either party upon thirty days' notice, under which
BCM services most of ART's mortgage notes and receives as compensation a monthly
fee of 0.125% of the month-end outstanding principal balances of the mortgage
loans serviced.
Situations may develop in which the interests of ART are in conflict with
those of one or more directors or officers in their individual capacities or of
BCM, or of their respective affiliates. In addition to services performed for
ART, as described above, BCM actively provides similar services as agent for,
and advisor to, other real estate enterprises, including persons and entities
involved in real estate development and financing, including Income Opportunity
Realty Investors, Inc. (IORI) and Transcontinental Realty Investors, Inc. (TCI).
BCM also performs some administrative services for NRLP on behalf of NMC, NRLP's
general partner. The advisory agreement provides that BCM may also serve as
advisor to other entities.
As advisor, BCM is a fiduciary of ART's public investors. In determining to
which entity a particular investment opportunity will be allocated, BCM will
consider the respective investment objectives of each entity and the
appropriateness of a particular investment in light of each entity's existing
mortgage note and real estate portfolios and business plan. To the extent any
particular investment opportunity is appropriate to more than one entity of this
type, the investment opportunity will be allocated to the entity that has had
funds available for investment for the longest period of time, or, if
appropriate, the investment may be shared among various entities. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS OF ART - Certain Business Relationships"
on page ___.
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The directors and principal officers of BCM are set forth below:
Mickey N. Phillips: Director
Ryan T. Phillips: Director
Carey M. Portman Director and Vice President
Karl L. Blaha: President
Steven K. Johnson Executive Vice President--Residential Asset
Management
David W. Starowicz: Executive Vice President--Commercial Asset
Management
Bruce A. Endendyk: Executive Vice President
Thomas A. Holland: Executive Vice President and Chief Financial
Officer
A. Cal Rossi, Jr.: Executive Vice President
Cooper B. Stuart: Executive Vice President
Clifford C. Towns, Jr.: Executive Vice President--Finance
Dan S. Allred: Senior Vice President--Land Development
James D. Canon, III: Senior Vice President--Portfolio Manager
Robert A. Waldman: Senior Vice President, General Counsel and
Secretary
Drew D. Potera: Vice President, Treasurer and Securities Manager
Mickey N. Phillips is the brother of Gene E. Phillips and Ryan T. Phillips
is the son of Gene E. Phillips. Gene E. Phillips serves as a representative of
the trust established for the benefit of his children which owns BCM and, in
this capacity, has substantial contact with the management of BCM and input with
respect to its performance of advisory services to ART.
Property Management. Since February 1, 1990, affiliates of BCM have
-------------------
provided property management services to ART. Currently, Triad, Ltd. provides
property management services for a fee of 5% or less of the monthly gross rents
collected on the properties under management. Triad, Ltd. subcontracts with
other entities for the provision of the property-level management services to
ART at various rates. Triad, Ltd. subcontracts the property-level management of
ART's commercial properties and a merchandise mart to Regis Realty, which is
company owned by Syntek West. Regis Realty is entitled to receive property and
construction management fees and leasing commissions in accordance with terms of
its property-level management agreement with Triad, Ltd. The management of ART's
hotels is subcontracted to Regis Hotel Corporation which is a subsidiary of
Carmel Realty, Inc., which is an affiliate of BCM.
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Real Estate Brokerage. Affiliates of BCM provide real estate brokerage
---------------------
services to ART and receive brokerage commissions in accordance with the
advisory agreement.
Geographic Regions
For purposes of its investments, ART has divided the continental United
States into the following six geographic regions.
Southeast region: Alabama, Florida, Georgia, Mississippi, North Carolina,
----------------
South Carolina, Tennessee and Virginia. As of September 30, 1999, ART had
40 apartments, 4 commercial properties and 2 hotels in this region.
Southwest region: Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and
----------------
Texas. As of September 30, 1999, ART had 15 apartments and 5 commercial
properties in this region.
Midwest region: Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan,
--------------
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, West
Virginia and Wisconsin. As of September 30, 1999, ART had 18 apartments, 4
commercial properties and 1 hotel in this region.
Mountain region: Colorado, Idaho, Montana, Nevada, Utah and Wyoming. As of
---------------
September 30, 1999, ART had 2 apartments, 2 commercial properties and 1
hotel in this region.
Pacific region: Alaska, California, Oregon and Washington. As of September
--------------
30, 1999, ART had 3 apartments, 3 commercial properties and 4 hotels in
this region.
Northeast region: Connecticut, Delaware, Maine, Maryland, Massachusetts,
----------------
New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and
Vermont, and the District of Columbia. As of September 30, 1999, ART had no
properties in this region.
Excluded from this description are a single family residence in Dallas, Texas
and 74 parcels of improved and unimproved land described below.
Real Estate
As of September 30, 1999, approximately 87% of ART's assets were invested
in real estate and equity securities of real estate entities. ART has invested
in real estate located throughout the continental United States, either on a
leveraged or nonleveraged basis. ART's real estate portfolio consists of
properties held for investment, investments in partnerships, properties held for
sale and investments in equity securities of IORI and TCI.
Types of Real Estate Investments. ART's real estate consists of apartments,
--------------------------------
commercial properties (office buildings, shopping centers and a merchandise
mart), hotels and improved and unimproved land. In selecting new real estate
investments, the location, age and type of property, gross rents, lease terms,
financial and business standing of tenants, operating expenses, fixed charges,
land values and physical condition are among the factors considered. ART may
acquire properties subject to or assume existing debt and may mortgage, pledge
or otherwise obtain financing for its properties. The ART board may alter the
types of and criteria for selecting new real estate investments and for
obtaining financing without a vote of ART's shareholders.
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Although ART has typically invested in developed real estate, ART may also
invest in new construction or development either directly or in partnership with
nonaffiliated parties or affiliates (subject to approval by the ART board). To
the extent that ART invests in construction and development projects, ART would
be subject to business risks, such as cost overruns and construction delays,
associated with these higher risk projects.
During 1998, ART completed construction of One Hickory Centre, a 102,615
sq. ft. office building in Farmers Branch, Texas. In December 1998, ART
commenced construction of Two Hickory Centre, a 102,607 sq. ft. office building
also in Farmers Branch, Texas. Construction of Two Hickory Centre is expected
to be completed in the fourth quarter of 1999.
In the opinion of ART's management, the properties owned by ART are
adequately covered by insurance.
The following table sets forth the percentages, by property type and
geographic region, of ART's owned real estate (excluding the 74 parcels of
improved and unimproved land, and a single family residence, described below) as
of September 30, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Region Apartments Commercial Properties Hotels
------ ---------- --------------------- ------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Midwest 28.3% 32.0% 13.9%
- ------------------------------------------------------------------------------------------------------------------
Mountain 5.2 24.5 11.4
- ------------------------------------------------------------------------------------------------------------------
Pacific 3.1 16.6 45.9
- ------------------------------------------------------------------------------------------------------------------
Southeast 35.9 15.5 28.8
- ------------------------------------------------------------------------------------------------------------------
Southwest 27.5 11.4 ---
----- ----- -----
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The foregoing table is based solely on the number of apartment units,
commercial square footage and hotel rooms owned by ART and does not reflect the
value of ART's investment in each region. Excluded from the above table are a
single family residence in Dallas, Texas and 74 parcels of improved and
unimproved land consisting of approximately 8,000 acres in the aggregate.
A summary of the activity in ART's owned real estate portfolio during 1998
and through September 30, 1999 was as follows:
<TABLE>
<S> <C>
Owned properties in real estate portfolio at January 1, 1998.. 56
Partnership properties........................................ 66
Properties purchased.......................................... 72
Property constructed.......................................... 1
Loan converted to property interest........................... 1
Property obtained through foreclosure......................... 1
Properties sold............................................... (13)
---
Owned properties in real estate portfolio at
September 30, 1999............................................ 184
===
</TABLE>
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Properties Held for Investment. Set forth below are ART's properties held for
- ------------------------------
investment and the monthly rental rate for apartments and the average annual
rental rate for commercial properties and the average daily room rate and total
room revenue divided by total available rooms for hotels and occupancy at
December 31, 1998, 1997, 1996, 1995 and 1994 for apartments and commercial
properties and average occupancy during these periods for hotels:
<TABLE>
<CAPTION>
Rent per Square Foot
--------------------------------------
Units/Square
Property Location Footage 1998 1997 1996 1995 1994
-------- -------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Apartments:
- ----------
Ashford Tampa, FL 56 units/ 42,196 sq. ft. $ .74 $ * $ * $ * $ *
Bay Anchor Panama City, FL 12 units/ 10,700 sq. ft. .54 * * * *
Carriage Park Tampa, FL 46 units/ 36,750 sq. ft. .80 * * * *
Chateau Bayou Ocean Springs, MS 122 units/ 105,536 sq. ft. .71 * * * *
Concord Indianapolis, IN 198 units/ 129,380 sq. ft. .19 * * * *
Conradi House Tallahassee, FL 98 units/ 49,900 sq. ft. .71 * * * *
Country Square Indianapolis, IN 225 units/ 158,625 sq. ft. .15 * * * *
Crossing Church Tampa, FL 52 units/ 40,024 sq. ft. .73 * * * *
Daluce Tallahassee, FL 112 units/ 95,432 sq. ft. .59 * * * *
Edgewater Gardens Biloxi, MS 140 units/ 148,900 sq. ft. .56 * * * *
Falcon House Ft. Walton, FL 82 units/ 71,220 sq. ft. .62 * * * *
Georgetown Panama City, FL 44 units/ 36,160 sq. ft. .61 * * * *
Governor Square Tallahassee, FL 168 units/ 146,550 sq. ft. .60 * * * *
Grand Lagoon Panama City, FL 54 units/ 47,460 sq. ft. .73 * * * *
Greenbriar Tallahasse, FL 50 units/ 36,600 sq. ft. .70 * * * *
Lake Chateau Thomasville, GA 98 units/ 65,800 sq. ft. .56 * * * *
Landings/Marina Pensacola, FL 52 units/ 34,464 sq. ft. .67 * * * *
Lee Hills Tallahasse, FL 16 units/ 14,720 sq. ft. .54 * * * *
Med Villas San Antonio, TX 140 units/ 158,960 sq. ft. .49 * * * *
Morning Star Tallahasse, FL 82 units/ 41,000 sq. ft. .76 * * * *
Northside Villas Tallahasse, FL 81 units/ 134,000 sq. ft. .57 * * * *
Oak Hill Tallahasse, FL 92 units/ 81,240 sq. ft. .60 * * * *
Park Avenue Tallahasse, FL 121 units/ 78,979 sq. ft. .79 * * * *
Pinecrest Tallahasse, FL 48 units/ 46,400 sq. ft. .57 * * * *
Regency Tampa, FL 78 units/ 55,810 sq. ft. .81 * * * *
Rolling Hills Tallahasse, FL 134 units/ 115,730 sq. ft. .61 * * * *
Seville Tallahassee, FL 62 units/ 63,360 sq. ft. .56 * * * *
Stonegate Tallahassee, FL 83 units/ 34,900 sq. ft. .77 * * * *
Sunset Odessa, TX 240 units/ 160,400 sq. ft. .46 * * * *
Valley Hi Tallahassee, FL 54 units/ 27,800 sq. ft. .71 * * * *
Villager Ft. Walton, FL 33 units/ 22,840 sq. ft. .71 * * * *
Waters Edge III Gulfport, MS 238 units/ 212,216 sq. ft. .59 * * * *
Westwood Mary Ester, FL 120 units/ 93,000 sq. ft. .67 * * * *
Westwood Parc Tallahassee, FL 94 units/ 55,950 sq. ft. .69 * * * *
White Pines Tallahassee, FL 85 units/ 17,000 sq. ft. .74 * * * *
Windsor Tower Ocala, FL 64 units/ 66,000 sq. ft. .45 * * * *
Arlington Place Pasadena, TX 230 units/ 205,476 sq. ft. .64 .63 .62 .60 .60
Barcelona Tampa, FL 368 units/ 346,144 sq. ft. .52 .50 .49 .47 .49
Bavarian Middletown, OH 259 units/ 229,560 sq. ft. .63 .63 .62 .60 .59
Bent Tree Addison, TX 292 units/ 244,480 sq. ft. .73 .70 .66 .60 .56
Blackhawk Ft. Wayne, IN 209 units/ 190,520 sq. ft. .57 .54 .53 .53 .53
Bridgestone Friendswood, TX 76 units/ 65,519 sq. ft. .67 .64 .64 .62 .62
Candlelight Square Lenexa, KS 119 units/ 114,630 sq. ft. .61 .58 .55 .53 .51
Chalet I Topeka, KS 162 units/ 131,791 sq. ft. .65 .62 .61 .61 .61
Chalet II Topeka, KS 72 units/ 49,164 sq. ft. .70 .68 .67 .67 *
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Rent per Square Foot
--------------------------------------
Units/Square
Property Location Footage 1998 1997 1996 1995 1994
-------- -------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Chateau Bellevue, NE 115 units/ 99,220 sq. ft. .71 .69 .63 .60 .59
Club Mar Sarasota, FL 248 units/230,180 sq. ft. .65 .61 .59 .57 .59
Confederate Point Jacksonville, FL 206 units/277,860 sq. ft. .58 .46 .45 .44 .42
Country Place Round Rock, TX 152 units/119,808 sq. ft. .72 .71 .71 .68 .63
Covered Bridge Gainesville, FL 176 units/171,416 sq. ft. .64 .64 .63 .60 .57
Fair Oaks Euless, TX 208 units/166,432 sq. ft. .65 .61 .58 .55 .52
Four Seasons Denver, CO 384 units/254,900 sq. ft. .86 .80 .78 .77 .74
Fox Club Indianapolis, IN 336 units/317,600 sq. ft. .56 .54 .54 .54 .54
Foxwood Memphis, TN 220 units/212,000 sq. ft. .57 .54 .51 .49 .46
Horizon East Dallas, TX 166 units/141,081 sq. ft. .55 .53 .52 .50 .48
Kimberly Woods Tucson, AZ 279 units/249,678 sq. ft. .59 .57 .55 .54 .52
La Mirada Jacksonville, FL 320 units/341,400 sq. ft. .52 .51 .50 .47 .46
Lake Nora Arms Indianapolis, IN 588 units/429,380 sq. ft. .68 .65 .63 .61 .60
Lantern Ridge Richmond, VA 120 units/112,296 sq. ft. .54 .53 .51 .50 .49
Mallard Lake Greensboro, NC 336 units/295,560 sq. ft. .64 .63 .62 .59 .57
Manchester
Commons Manchester, MO 280 units/331,820 sq. ft. .56 .53 .50 .49 .46
Mesa Ridge Mesa, AZ 480 units/386,336 sq. ft. .68 .65 .65 .61 .59
Nora Pines Indianapolis, IN 254 units/254,676 sq. ft. .60 .59 .57 .55 .55
Oak Hollow Austin, TX 409 units/290,072 sq. ft. .90 .87 .87 .81 .75
Oak Tree Grandview, MO 189 units/160,591 sq. ft. .60 .57 .54 .54 .52
Olde Towne Middletown, OH 199 units/179,395 sq. ft. .58 .57 .57 .57 .57
Pheasant Ridge Bellevue, NE 264 units/243,960 sq. ft. .62 .61 .56 .51 .51
Pines Little Rock, AR 257 units/221,981 sq. ft. .42 .41 .41 .39 .37
Place One Tulsa, OK 407 units/302,263 sq. ft. .55 .57 .51 .49 .47
Quail Point Huntsville, AL 184 units/202,602 sq. ft. .44 .42 .42 .41 .41
Regency Lincoln, NE 106 units/111,700 sq. ft. .67 .63 .60 .56 .56
Regency Falls San Antonio, TX 546 units/348,692 sq. ft. .64 .63 .63 .63 .60
Rockborough Denver, CO 345 units/249,723 sq. ft. .80 .73 .70 .70 .67
Santa Fe Kansas City, MO 225 units/180,416 sq. ft. .58 .56 .53 .52 .51
Shadowood Addison, TX 184 units/134,616 sq. ft. .76 .74 .69 .66 .64
Sherwood Glen Urbandale, IA 180 units/143,745 sq. ft. .79 .77 .75 .74 .72
Stonebridge Florissant, MO 100 units/140,576 sq. ft. .43 .45 .43 .46 .46
Summerwind Reseda, CA 172 units/114,711 sq. ft. .93 .90 .90 .97 .97
Sun Hollow El Paso, TX 216 units/156,000 sq. ft. .66 .65 .64 .63 .63
Tanglewood Arlington Heights, IL 838 units/612,816 sq. ft. 1.07 1.03 .99 .96 .96
Timber Creek Omaha, NE 180 units/162,252 sq. ft. .70 .66 .64 .60 .59
Villa Del Mar Wichita, KS 162 units/128,004 sq. ft. .60 .58 .58 .58 .57
Villas Plano, TX 208 units/156,632 sq. ft. .80 .77 .73 .70 .67
Whispering Pines Canoga Park, CA 102 units/ 61,671 sq. ft. 1.05 1.01 1.00 .98 .98
Whispering Pines Topeka, KS 320 units/299,264 sq. ft. .51 .49 .49 .49 .49
Windridge Austin, TX 408 units/281,778 sq. ft. .89 .88 .88 .85 .80
Windtree I & II Reseda, CA 159 units/109,062 sq. ft. .93 .90 .90 .90 .90
Woodlake Carrollton, TX 256 units/210,208 sq. ft. .77 .73 .68 .66 .63
Woodsong II Smyrna, GA 190 units/207,460 sq. ft. .56 .54 .54 .51 .46
Woodstock Dallas, TX 320 units/222,112 sq. ft .63 .60 .56 .54 .51
Office Buildings:
- -----------------
56 Expressway Oklahoma City, OK 54,649 sq. ft 9.53 8.64 8.21 7.94 7.77
Executive Court Memphis, TN 41,840 sq. ft. 10.64 9.79 10.11 9.87 9.91
Marina Playa Santa Clara, CA 124,322 sq. ft. 21.55 20.54 19.54 18.11 17.00
Melrose Business
Park Oklahoma City, OK 124,200 sq. ft. 3.03 2.88 2.76 2.65 2.59
One Hickory Centre Farmers Branch, TX 102,615 sq. ft. -- * * * *
Rosedale Towers Minneapolis, MN 84,798 sq. ft. 15.48 15.03 14.88 13.16 14.46
University Square Anchorage, AK 22,260 sq. ft. 13.86 14.07 15.07 13.16 13.81
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Rent per Square Foot
--------------------------------------
Units/Square
Property Location Footage 1998 1997 1996 1995 1994
-------- ------------ ---------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Shopping Centers:
- ---------------------
Collection Denver, CO 267,812 sq. ft. 8.92 9.46 * * *
Cross County Mall Mattoon, IL 304,575 sq. ft. 4.99 4.88 4.90 4.86 4.39
Cullman Cullman, AL 92,466 sq. ft. 3.91 3.87 3.86 3.83 3.82
Harbor Plaza Aurora, CO 45,863 sq. ft. 9.86 9.44 8.73 8.42 7.82
Katella Plaza Orange, CA 52,169 sq. ft. 9.79 9.20 7.73 9.97 11.34
Oak Tree Village Lubbock, TX 45,623 sq. ft. 8.27 8.17 7.98 7.34 *
Preston Square Dallas, TX 35,508 sq. ft. 16.04 15.26 * * *
Regency Point Jacksonville, FL 67,410 sq. ft. 12.36 12.07 11.39 11.26 10.63
Westwood Tallahassee, FL 149,855 sq. ft. 6.77 6.44 6.42 5.31 5.00
Merchandise Mart:
- -----------------
Denver Mart Denver, CO 509,008 sq. ft. 11.35 14.75 15.33 14.53 14.18
</TABLE>
<TABLE>
<CAPTION>
Average Room Rate
--------------------------------------------
Property Location Rooms 1998 1997 1996 1995 1994
- -------------------- ------------ -------- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Hotels:
- -------
Best Western
Oceanside Virginia Beach, VA 110 Rooms $92.65 $90.44 $41.11 $ * $ *
Continental Las Vegas, NV 371 Rooms ** * * * *
Holiday Inn Kansas City, MO 196 Rooms 65.38 70.73 66.46 61.66 52.47
Piccadilly Airport Fresno, CA 185 Rooms 68.53 62.98 * * *
Piccadilly Chateau Fresno, CA 78 Rooms 55.18 50.86 * * *
Piccadilly Shaw Fresno, CA 194 Rooms 70.63 64.07 * * *
Piccadilly
University Fresno, CA 190 Rooms 67.42 62.22 * * *
Quality Inn Denver, CO 161 Rooms 54.07 53.15 46.66 44.69 42.38
Williamsburg
Hospitality House Williamsburg, VA 296 Rooms 85.87 81.87 * * *
</TABLE>
<TABLE>
<CAPTION>
Total Room Revenues Divided
by Total Available Rooms
---------------------------------------------------------------------
Property 1998 1997 1996 1995 1994
- -------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Hotels:
Best Western $60.37 $54.03 $17.69 $ * $ *
Oceanside
Continental ** * * * *
Holiday Inn 51.38 54.13 52.63 46.31 39.27
Piccadilly Airport 41.68 35.94 * *
Piccadilly Chateau 33.19 27.74 * * *
Piccadilly Shaw 46.71 41.17 * * *
Piccadilly University 39.42 35.65 * * *
Quality Inn 32.95 28.02 16.80 17.79 17.73
Williamsburg 54.85 55.30 * * *
Hospitality House
</TABLE>
* Property was acquired in 1995, 1996, 1997 or 1998.
84
<PAGE>
** Leased to a licensed casino operator.
85
<PAGE>
<TABLE>
<CAPTION>
Occupancy %
-------------------------------------------------------------------
Property 1998 1997 1996 1995 1994
- -------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Apartments:
- -----------
Ashford 98 * * * *
Carriage Park 94 * * * *
Chateau Bayou 98 * * * *
Concord 33 * * * *
Conradi House 96 * * * *
Country Squire 27 * * * *
Crossing Church 98 * * * *
Daluce 94 * * * *
Edgewater Gardens 99 * * * *
Georgetown 93 * * * *
Governor Square 92 * * * *
Grand Lagoon 80 * * * *
Greenbriar 96 * * * *
Lake Chateau 97 * * * *
Landings/Marina 87 * * * *
Lee Hills 94 * * * *
Med Villas 93 * * * *
Morning Star 100 * * * *
Northside Villas 93 * * * *
Oak Hill 97 * * * *
Park Avenue 90 * * * *
Pinecrest 90 * * * *
Regency 96 * * * *
Rolling Hills 92 * * * *
Seville 100 * * * *
Stonegate 93 * * * *
Sunset 96 * * * *
Valley Hi 100 * * * *
Villager 97 * * * *
Waters Edge III 96 * * * *
Westwood 91 * * * *
Westwood Parc 100 * * * *
White Pines 94 * * * *
Windsor Tower 96 * * * *
Arlington Place 98 95 91 95 88
Barcelona 91 94 93 96 85
Bavarian 90 92 96 92 95
Bent Tree 93 96 97 100 99
Blackhaw 94 96 95 94 96
Bridgestone 97 99 94 97 93
Candlelight Square 96 94 97 96 92
Chalet I 97 96 96 94 87
Chalet II 91 93 89 97 *
Chateau 94 95 99 97 94
Club Mar 93 99 91 95 92
Confederate Point 93 91 94 98 92
Country Place 94 88 93 95 97
Covered Bridge 97 98 94 100 99
Fair Oaks 93 96 96 98 96
Four Seasons 96 98 94 93 96
Fox Club 89 95 88 91 95
Foxwood 90 94 93 95 97
Hidden Valley 96 96 93 97 96
Horizon East 96 93 92 94 93
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Occupancy %
-------------------------------------------------------------------
Property 1998 1997 1996 1995 1994
- --------- ------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Kimberly Woods 92 92 93 94 95
La Mirada 99 91 93 98 93
Lake Nora Arms 94 95 91 95 94
Lake Nora Arms 97 93 95 93 98
Mallard Lake 91 93 95 97 98
Manchester Commons 91 95 93 95 94
Mesa Ridge 95 98 88 92 95
Nora Pines 95 92 94 97 95
Oak Hollow 97 94 91 97 99
Oak Tree 99 95 94 96 95
Olde Towne 90 94 92 91 94
Pheasant Ridge 89 93 94 97 85
Pines 92 90 93 90 88
Place One 93 92 96 96 92
Quail Point 89 91 96 86 90
Regency 87 98 95 88 97
Regency Falls 82 92 93 93 90
Rockborough 94 94 92 92 96
Santa Fe 92 93 91 92 90
Shadowood 94 96 97 97 98
Sherwood Glen 90 94 96 93 93
Stonebridge 95 100 98 92 92
Summerwind 97 96 92 91 92
Sun Hollow 93 97 90 96 92
Tanglewood 92 93 92 95 96
Timber Creek 97 95 98 94 91
Villa Del Mar 92 97 94 90 89
Villas 94 98 95 95 97
Whispering Pines, CA 93 94 92 93 93
Whispering Pines, KS 95 95 89 90 92
Windridge 94 95 93 95 96
Windtree I & II 95 96 94 91 24
Woodlake 97 98 99 98 99
Woodsong II 99 96 85 99 97
Woodstock 95 92 95 96 94
Office Buildings:
- -----------------
56 Expressway 91 94 88 93 85
Executive Court 96 99 95 92 92
Marina Playa 97 100 99 97 81
Melrose Business Park 80 93 90 97 81
One Hickory Centre 0 * * * *
Rosedale Towers 94 93 91 90 94
University Square 81 100 84 90 82
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Occupancy %
Property 1998 1997 1996 1995 1994
- --------- ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Shopping Centers:
- -----------------
Collection 94 82 * * *
Cross County Mall 90 89 90 95 87
Cullman 98 97 98 00 96
Harbor Plaza 86 94 97 78 87
Katella Plaza 71 71 71 71 71
Oak Tree Village 70 90 89 91 *
Preston Square 77 92 * * *
Regency Point 91 83 84 81 95
Westwood 93 93 74 59 81
Merchandise Mart:
- -----------------
Denver Mart 92 93 95 96 97
Hotels:
- -------
Best Western Oceanside 65 60 42 * *
Continental ** * * * *
Holiday Inn 79 77 79 75 75
Piccadilly Airport 61 50 * * *
Piccadilly Chateau 60 49 * * *
Piccadilly Shaw 66 62 * * *
Piccadilly University 59 49 * * *
Quality Inn 61 53 36 40 42
Williamsburg
Hospitality House 64 60 * * *
</TABLE>
* Property was acquired in 1995, 1996, 1997 or 1998.
** Leased to a licensed casino operator.
Occupancy presented above is without reference to whether leases in effect are
at, below or above market rates.
As of September 30, 1999, none of ART's properties had a book value which
exceeded 10% of ART's total assets. For the nine months ended September 30,
1999, none of ART's properties had revenues that exceeded 10% of ART's total
revenues.
Properties Held for Sale. Set forth below are ART's properties held for
------------------------
sale, at December 31, 1998, consisting of improved and unimproved land:
<TABLE>
<CAPTION>
Property Location Acres
-------- -------- -----
<S> <C> <C>
Atlanta Atlanta, GA 3.5 Acres
Bad Lands Duchense, UT 420.0 Acres
Bonneau Dallas County, TX 8.4 Acre
Chase Oaks Plano, TX 39.0 Acres
Croslin Dallas, TX .8 Acres
Dalho Farmers Branch, TX 3.4 Acres
Desert Wells Palm Desert, CA 420.0 Acres
Dowdy Collin County, TX 165.0 Acres
Eldorado Parkway Collin County, TX 8.5 Acres
FRWM Cummings Farmers Branch, TX 6.4 Acres
Hollywood Casino Farmers Branch, TX 51.7 Acres
HSM Farmers Branch, TX 6.2 Acres
Jeffries Ranch Oceanside, CA 82.4 Acres
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Property Location Acres
-------- -------- -----
<S> <C> <C>
JHL Connell Carrollton, TX 7.7 Acres
Katrina Palm Desert, CA 454.8 Acres
Katy Road Harris County, TX 130.6 Acres
Keller Tarrant County, TX 811.8 Acres
Lacy Longhorn Farmers Branch, TX 17.1 Acres
Las Colinas I Las Colinas, TX 46.1 Acres
Marine Creek Fort Worth, TX 54.2 Acres
Mason/Goodrich Houston, TX 244.8 Acres
McKinney Corners I Collin County, TX 30.4 Acres
McKinney Corners II Collin County, TX 173.9 Acres
McKinney Corners III Collin County, TX 15.5 Acres
McKinney Corners IV Collin County, TX 31.3 Acres
McKinney Corners V Collin County, TX 9.7 Acres
Mendoza Dallas, TX .35 Acres
Messick Palm Springs, CA 72.0 Acres
Pantex Collin County, TX 182.5 Acres
Parkfield Denver, CO 329.4 Acres
Pioneer Crossing Austin, TX 1,448.0 Acres
Plano Parkway Plano, TX 81.2 Acres
Rasor Plano, TX 141.7 Acres
Santa Clarita Santa Clarita, CA 19.5 Acres
Scoggins Tarrant County, TX 314.5 Acres
Scout Tarrant County, TX 546.0 Acres
Stagliano Farmers Branch, TX 3.2 Acres
Stone Meadow Houston, TX 13.5 Acres
Thompson Farmers Branch, TX 4.0 Acres
Thompson II Dallas County, TX 3.5 Acres
Tomlin Farmers Branch, TX 9.2 Acres
Tree Farm - LBJ Dallas County, TX 10.4 Acres
Valley Ranch Irving, TX 319.8 Acres
Valley Ranch III Irving, TX 12.5 Acres
Valley Ranch IV Irving, TX 12.4 Acres
Valwood Dallas, TX 280.0 Acres
Van Cattle McKinney, TX 126.6 Acres
Vineyards Grapevine, TX 15.8 Acres
Vista Business Park Travis County, TX 41.8 Acres
Vista Ridge Lewisville, TX 160.0 Acres
Walker Dallas County, TX 132.6 Acres
Yorktown Harris County, TX 325.8 Acres
Other (7 properties) Various 113.5 Acres
</TABLE>
Mortgage Loans
In addition to real estate, a substantial portion of ART's assets have been
and are expected to continue to be invested in mortgage notes receivable,
principally those secured by income-producing real estate. ART's mortgage notes
receivable consist of first, wraparound, and junior mortgage loans.
Types of Mortgage Activity. In addition to originating its own mortgage
--------------------------
loans, ART may acquire existing mortgage loans either directly from builders,
developers or property owners, or through mortgage banking firms, commercial
banks or other qualified brokers. BCM services ART's mortgage notes receivable
in its capacity as a mortgage servicer.
Types of Properties Subject to Mortgages. The types of properties securing
----------------------------------------
ART's mortgage notes receivable portfolio at September 30, 1999 consisted of
commercial properties (an office building and shopping centers), unimproved land
and partnership interests. The ART board may alter
89
<PAGE>
the types of properties subject to mortgages in which ART invests without a vote
of ART's stockholders.
At September 30, 1999, the obligors on $14.3 million, or 21.3%, of ART's
mortgage notes receivable portfolio were affiliates of ART. Also at that date,
$14.9 million, or 22.2%, of ART's mortgage notes receivable portfolio was
nonperforming.
A summary of the activity in ART's mortgage notes receivable portfolio
during 1998 and through September 30, 1999 is as follows:
<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio
at January 1, 1998................................ 11*
Partnership loans................................. 19
Loans funded...................................... 12
Loans collected in full........................... (13)
Loans sold........................................ (3)
Loan foreclosed................................... (1)
Loan converted to property interest (1)
---
Loans in mortgage notes receivable portfolio
at September 30, 1999............................. 24
===
</TABLE>
* Includes a mortgage note receivable collateralized by two condominium
mortgage loans at January 1998 and one condominium mortgage loan at
September 30, 1999.
First Mortgage Loans. ART may invest in first mortgage loans, with either
--------------------
short-, medium- or long-term maturities. First mortgage loans generally provide
for level periodic payments of principal and interest sufficient to
substantially repay the loan prior to maturity, but may involve interest-only
payments or moderate or negative amortization of principal or all interest and a
"balloon" principal payment at maturity. With respect to first mortgage loans,
it is ART's general policy to require that the borrower provide a title policy
or an acceptable legal opinion of title as to the validity and the priority of
ART's mortgage lien over all other obligations, except liens arising from unpaid
property taxes and other exceptions normally allowed by first mortgage lenders
in the relevant area. ART may grant to other lenders participations in first
mortgage loans originated by ART.
Wraparound Mortgage Loans. ART may invest in wraparound mortgage loans,
-------------------------
sometimes called all-inclusive loans, made on real estate subject to prior
mortgage indebtedness. A wraparound mortgage note is a mortgage note having an
original principal amount equal to the outstanding balance under the prior
existing mortgage loan plus the amount actually advanced under the wraparound
mortgage loan. Wraparound mortgage loans may provide for full, partial or no
amortization of principal. ART's policy is to make wraparound mortgage loans in
amounts and on properties as to which it would otherwise make a first mortgage
loan.
Junior Mortgage Loans. ART may invest in junior mortgage loans. These notes
---------------------
are secured by mortgages that are subordinate to one or more prior liens either
on the fee or a leasehold interest in real estate. Recourse on the notes
ordinarily includes the real estate which secures the note, other collateral and
personal guarantees of the borrower. On September 30, 1999 ART had funded $10.9
million on these junior mortgage loans.
90
<PAGE>
Related Party
Beginning in 1997 and through January 1999, NRLP funded a $1.6 million loan
commitment to Bordeaux Investments Two, L.L.C. (Bordeaux). The loan is secured
by the following:
(1) a 100% membership interest in Bordeaux, which owns a shopping
center in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns
6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and
(3) the personal guarantees of the Bordeaux members.
The loan bears interest at 14.0% per annum. Until November 1998, the loan
required monthly payments of interest only at 12.0% per annum, with the deferred
interest payable at maturity in January 1999. In November 1998, the loan was
modified to allow payments based on monthly cash flow of the collateral property
and the maturity date was extended to December 1999. In the second quarter of
1999, the loan was again modified, increasing the loan commitment to $2.1
million and NRLP funded an additional $33,000. In the third quarter of 1999,
NRLP funded an additional $213,000. In October 1999, NRLP received a $724,000
paydown on the loan, which was applied first to accrued but unpaid interest due
of $261,000 then to principal, reducing the loan balance to $1.4 million. In
October 1999, Richard D. Morgan, a Bordeaux member, was elected a director of
NMC, the general partner of NRLP.
During 1998, NRLP funded a $1.8 million loan to Warwick of Summit Square,
Inc. The loan is secured by a second lien on a shopping center in Rhode Island,
by 100% of the stock of the borrower and by the personal guarantee of the
principal shareholder of the borrower. The loan bears interest at 14.0% per
annum and matures in December 1999. All principal and interest are due at
maturity. During 1999, the Partnership funded an additional $314,000, increasing
the loan balance to $2.1 million. In October 1999, Richard D. Morgan, the
principal shareholder of Warwick of Summit Square, Inc., was elected a director
of NMC, the general partner of NRLP.
In 1999, ART funded $1.7 million of a $2.0 million loan commitment to
Lordstown, L.P. The loan is secured by a second lien on land in Ohio and
Florida, by 100% of the general and limited partner interest in Partners
Capital, Ltd. and a profits interest in subsequent land sales. In October 1999,
Richard D. Morgan, a general partner in Lordstown, L.P., was elected a director
of NMC, the general partner of NRLP.
Also in 1999, ART funded $1.5 million of a $2.4 million loan commitment to
261, L.P. The loan is secured by 100% of the general and limited partner
interest in Partners Capital, Ltd. and a profits interest in subsequent land
sales. In October 1999, Richard D. Morgan, a general partner in 261, L.P., was
elected a director of NMC, the general partner of NRLP.
In February 1999, GCLP funded a $5.0 million unsecured loan to One Realco
Corporation (formerly called Davister Corp.), which at September 30, 1999, owned
approximately 15.8% of the outstanding shares of ART's common stock. The loan
bears interest at 12.0% per annum and matures in February 2000. All principal
and interest are due at maturity. The loan is guaranteed by BCM.
Further, in October 1999, GCLP funded a $4.7 million loan to Realty
Advisors, Inc., the corporate parent of BCM. The loan is secured by a pledge of
100% of Realty Advisors, Inc.'s
91
<PAGE>
interest in American Reserve Life Insurance Company. The loan bears interest at
a variable rate, currently 10.25% per annum, and matures in November 2001. All
principal and interest are due at maturity.
Investments in Real Estate Investment Trusts and Real Estate Partnerships
ART invests in equity interests in real estate (including equity securities
of real estate-related entities), leases, joint venture development projects and
partnerships and finances real estate and real estate activities through
investments in mortgage loans. ART has invested in private and open market
purchases in the equity securities of Continental Mortgage and Equity Trust
(CMET), IORI, TCI and NRLP. On November 30, 1999, TCI acquired CMET in a merger
transaction.
ART's investment in real estate entities includes (1) equity securities of
three publicly traded real estate investment trusts (collectively the Affiliated
REITs), CMET, IORI and TCI, (2) units of limited partner interest of NRLP, and
(3) interests in real estate joint venture partnerships. BCM also serves as
advisor to the Affiliated REITs, and performs administrative and management
functions for NRLP on behalf of NMC.
Since acquiring its initial investments in the equity securities of the
Affiliated REITs and NRLP in 1989, ART has made additional investments in the
equity securities of these entities through private and open market purchases.
ART's cost with respect to shares of the Affiliated REITs at September 30, 1999
totaled $19.1 million, and its cost with respect to units of limited partner
interest in NRLP totaled $19.6 million. The aggregate carrying value (cost plus
or minus equity in income or losses and less distributions received) of the
equity securities of the Affiliated REITs was $33.1 million at September 30,
1999 and the aggregate market value of the equity securities was $41.8 million.
The aggregate investee book value of the equity securities of the Affiliated
REITs based upon the September 30, 1999 financial statements of each of the
entities was $75.4 million.
The ART board has authorized the expenditure by ART of up to an aggregate
of $35.0 million to acquire, in open market purchases, units of NRLP and shares
of the Affiliated REITs, excluding private purchase transactions which were
separately authorized. As of September 30, 1999, ART had expended $6.5 million
to acquire units of NRLP and a total of $6.8 million to acquire shares of the
Affiliated REITs, in open market purchases, in accordance with these
authorizations. ART expects to make additional investments in the equity
securities of the Affiliated REITs and NRLP.
The purchases of the equity securities of the Affiliated REITs and NRLP
were made for the purpose of investment and were based principally on the
opinion of ART's management that the equity securities of each were and are
currently undervalued. The determination by ART to purchase additional equity
securities of the Affiliated REITs and NRLP is made on an entity-by-entity basis
and depends on the market price of each entity's equity securities relative to
the value of its assets, the availability of sufficient funds and the judgment
of ART's management regarding the relative attractiveness of alternative
investment opportunities. Substantially all of the equity securities of the
Affiliated REITs and NRLP owned by ART are pledged as collateral for borrowings.
Pertinent information regarding ART's investment in the equity securities of the
Affiliated REITs, at September 30, 1999, is summarized below (dollars in
thousands):
92
<PAGE>
<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of ART's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee September 30, 1999 September 30, 1999 September 30, 1999 September 30, 1999
-------- -------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
CMET 41.3% $16,108 $36,074 $24,488
IORI 30.4 3,269 7,203 2,439
TCI 31.4 13,680 32,145 14,851
</TABLE>
ART accounted for its investment in NRLP under the equity method until
December 1998 when NMC, a wholly owned subsidiary of ART, was elected general
partner of NRLP, as more fully discussed in "NRLP", below. As of December 31,
1998, the accounts of NRLP are consolidated with those of ART.
Each of the Affiliated REITs and NRLP own a considerable amount of real
estate, much of which, particularly in the case of NRLP, has been held for many
years. Because of depreciation, these entities may earn substantial amounts in
periods in which they sell real estate and will probably incur losses in periods
in which they do not. ART's reported income or loss attributable to these
entities will differ materially from its cash flow attributable to them. ART
does not have a controlling equity interest in any of the Affiliated REITs and
therefore it cannot, acting by itself, determine either the individual
investments or the overall investment policies of the investees. However, due to
ART's equity investments in, and the existence of common officers with, each of
the Affiliated REITs, and that the Affiliated REITs have the same advisor as ART
and that Mr. Karl L. Blaha, the president of ART, is also the president of the
Affiliated REITs and BCM.
ART may be considered to have the ability to exercise significant influence
over the operating and investing policies of these entities. ART accounts for
its investment in the Affiliated REITs using the equity method. Under the equity
method, ART recognizes its proportionate share of the income or loss from the
operations of the Affiliated REITs currently, rather than when realized through
dividends or on sale. ART discontinued accounting for its investment in NRLP
under the equity method as of December 31, 1998, due to the election of NMC, as
general partner of NRLP, as more fully discussed in "NRLP" below. The carrying
value of ART's investment in the Affiliated REITs, as set forth in the table
above, is the original cost of each of the investments adjusted for ART's
proportionate share of each entity's income or loss and distributions received.
The difference between the carrying value of ART's investment and the
equivalent investee book value is being amortized over the life of the
properties held by each investee.
ART's management continues to believe that the market value of each of the
Affiliated REITs and NRLP undervalues their assets and ART may, therefore,
continue to increase its ownership in these entities in 1999.
The following is a summary description of each of NRLP and the Affiliated
REITs, based upon information publicly reported by the entities.
NRLP. For a description of NRLP, please see "BUSINESS OF NRLP" on page
----
_____.
CMET. CMET was a California business trust which was organized on August
----
27, 1980 and commenced operations on December 3, 1980. On November 30, 1999,
CMET was acquired by TCI in a merger transaction. CMET's business was investing
in real estate through direct equity investments and partnerships and financing
real estate and real estate-related activities through
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investments in mortgage notes. CMET held equity investments in apartments and
commercial properties (office buildings, industrial warehouses and shopping
centers) throughout the continental United States. CMET's apartments and
commercial properties were concentrated in the Southeast, Southwest and Midwest
regions of the continental United States. At December 31, 1998, CMET owned 57
income producing properties located in 14 states consisting of 34 apartments
comprising of 6,158 units, 11 office buildings with an aggregate of 2.1 million
sq. ft., 11 industrial warehouses with an aggregate of 1.6 million sq. ft. and a
shopping center with 133,558 sq. ft. CMET also held mortgage notes receivable
secured by real estate located in the Southeast, Southwest and Midwest regions
of the continental United States, with a concentration in the Southeast and
Southwest regions.
CMET reported net income of $347,000 in 1998 as compared to net income of
$4.2 million in 1997. CMET's 1998 net income included gains on the sale of real
estate of $6.1 million, whereas its 1997 net income included gains on the sale
of real estate of $8.2 million. CMET's cash flow from property operations
improved to $28.9 million in 1998 from $23.7 million in 1997. At December 31,
1998, CMET had total assets of $333.8 million, which consisted of $294.2 million
of real estate held for investment, $3.3 million of real estate held for sale,
$3.4 million of notes and interest receivable, $30.7 million of investments in
marketable equity securities and other assets and $2.2 million in cash and cash
equivalents.
For the nine months ended September 30, 1999, CMET reported net income of
$2.2 million compared to net income of $667,000 in the nine months ended
September 30, 1998. CMET's net income for the nine months ended September 30,
1999, included gains on the sale of real estate of $6.6 million compared to $5.9
million in the nine months ended September 30, 1998.
On September 25, 1998, CMET and TCI announced that they had reached an
agreement for CMET to be acquired by TCI. The shareholders of CMET and TCI
approved the merger proposal on September 28, 1999. The merger was completed on
November 30, 1999. TCI issued 1.181 shares of its common stock for each share of
CMET.
CMET has paid quarterly distributions since the first quarter of 1993. ART
received a total of $868,000 in distributions from CMET in 1998 and $454,000 in
the first nine months of 1999.
IORI. IORI is a Nevada corporation which was originally organized on
----
December 14, 1984 as a California business trust and commenced operations on
April 10, 1985. Like CMET, IORI's business is investing in real estate through
direct equity investments and partnerships. IORI holds equity investments in
apartments and commercial properties (office buildings) in the Pacific,
Southeast and Southwest regions of the continental United States. At December
31, 1998, IORI owned 14 income producing properties located in four states.
These properties consisted of four apartments comprising 654 units and ten
office buildings with an aggregate of 620,577 sq. ft.
IORI reported a net loss of $679,000 in 1998 as compared to net income of
$3.3 million in 1997. IORI's net income in 1997, is attributable to $4.0 million
of gains on sale of real estate. IORI had no gains of this type in 1998. IORI's
cash flow from property operations increased to $7.9 million in 1998 from $6.5
million in 1997. At December 31, 1998, IORI had total assets of $88.7 million,
which consisted of $83.7 million in real estate held for investment, $4.9
million in investments in partnerships and other assets and $103,000 in cash and
cash equivalents.
For the nine months ended September 30, 1999, IORI reported net income of
$805,000 compared to a net loss of $513,000 in the nine months ended September
30, 1998.
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IORI has paid quarterly dividends since the first quarter of 1993. ART
received a total of $264,000 in dividends from IORI in 1998 and $135,000 in the
first nine months of 1999.
TCI. TCI is a Nevada corporation which was originally organized on
---
September 6, 1983, as a California business trust, and commenced operations on
January 31, 1984. TCI also has investment policies similar to those of CMET and
IORI. TCI holds equity investments in apartments, commercial properties (office
buildings, industrial warehouses and shopping centers) and hotels throughout the
continental United States with a concentration in the Southeast and Southwest
regions. At December 31, 1998, TCI owned 72 income producing properties located
in 14 states. These properties consisted of 38 apartments comprising 7,000
units, 19 office buildings with an aggregate of 1.6 million sq. ft., six
industrial warehouses with an aggregate of 1.5 million sq. ft., 5 shopping
centers with an aggregate of 489,103 sq. ft. and 4 hotels with a total of 209
rooms. TCI also holds mortgage notes receivable secured by real estate located
in the Southeast and Southwest regions of the continental United States.
TCI reported net income of $6.9 million in 1998 as compared to net income
of $12.6 million in 1997. TCI's net income for 1998 included gains on the sale
of real estate of $12.6 million whereas its net income for 1997 included gains
on the sale of real estate of $21.4 million. TCI's cash flow from property
operations increased to $29.8 million in 1998 as compared to $16.2 million in
1997. At December 31, 1998, TCI had total assets of $382.2 million, which
consisted of $347.4 million in real estate held for investment, $1.4 million in
real estate held for sale, $3.4 million in investments in real estate entities,
$19.5 million in notes and interest receivable and other assets and $10.5
million in cash and cash equivalents. At December 31, 1998, TCI owned 345,728
shares of IORI's common stock, approximately 22.7% of IORI's shares then
outstanding.
For the nine months ended September 30, 1999, TCI reported net income of
$13.0 million compared to net income of $8.0 million in the nine months ended
September 30, 1998. TCI's net income for the nine months ended September 30,
1999, included gains on the sale of real estate of $16.0 million compared to
$12.0 million in the nine months ended September 30, 1998.
On September 25, 1998, TCI and CMET announced that they had reached
agreement for TCI to acquire CMET. At a special meeting of shareholders held on
September 28, 1999, shareholders approved the merger proposal. The merger was
completed November 30, 1999. TCI issued 1.181 shares of its common stock for
each share of CMET.
TCI has paid quarterly dividends since the fourth quarter of 1995. In
1998, ART received a total of $1.9 million in dividends from TCI, including $1.2
million accrued in December 31, 1997 and $346,000 in the first nine months of
1999.
River Trails II. In January 1992, ART entered into a partnership agreement
---------------
with an entity affiliated with a limited partner, at the time, in a partnership
that owned approximately 15.8% of ART's outstanding shares of common stock, to
acquire 287 developed residential lots adjacent to ART's other residential lots
in Fort Worth, Texas. The partnership agreement designates ART as managing
general partner. The partnership agreement also provides each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1997, 214 residential lots had been sold. During 1998, an additional 52 lots
were sold and at December 31, 1998 and September 30, 1999, 21 lots remained to
be sold. During 1998, each partner received $418,000 in return of capital
distributions from the partnership and $493,000 in profit distributions. No
distributions of this type have been received in 1999.
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R. G. Bond, Ltd. In June 1995, ART purchased the corporate general partner
---------------
of a limited partnership which owned apartment complexes in Illinois, Florida
and Minnesota, with a total of 900 units. In August 1998, in conjunction with
the sale of the apartment complexes, ART sold its general partner interest for
$903,000 in cash. ART recognized a gain of $270,000 on the sale. In December
1998, ART received a return of capital distribution of $100,000.
Campbell Center Associates, Ltd. In April 1996, ART purchased a 28%
-------------------------------
general partner interest in Campbell Center Associates, Ltd. ("Campbell
Associates") which in turn had a 56.25% interest in Campbell Centre Joint
Venture, which owned at the time a 413,175 sq. ft. office building in Dallas,
Texas. The purchase price of the general partner interest was $550,000 in cash
and a $500,000 note. In January 1997, ART exercised its option to purchase an
additional 28% general partner interest in Campbell Associates. The purchase
price was $300,000 in cash and a $750,000 note. In July 1997, ART purchased an
additional 9% general partner interest in Campbell Associates for $868,000 in
cash. In March 1998, Consolidated Equity Properties, Inc., a wholly owned
subsidiary of ART, acquired a 30% limited partner interest in Campbell
Associates for $500,000 in cash. In June 1998, ART purchased the remaining 5%
general partner interest in Campbell Associates for $1.1 million in cash. Also
in June 1998, Campbell Centre Joint Venture sold the office building for $32.2
million in cash. Campbell Associates, as a partner, received net cash of $13.2
million from the sales proceeds and escrowed an additional $190,000 for pending
parking lot issues. Campbell Associates recognized a gain of $8.2 million on the
sale.
Highway 380/Preston Partners, Ltd. In June 1996, a newly formed limited
---------------------------------
partnership, of which ART is 1% general partner, purchased 580 acres of
unimproved land in Collin County, Texas for $5.7 million in cash. ART
contributed $100,000 in cash to the partnership with the remaining $5.6 million
being contributed by the limited partner. The partnership agreement designates
ART as the managing general partner. At January 1, 1998, 251.9 acres remained to
be sold. In January 1998, the partnership sold a 155.4 acre tract for $2.9
million. The partnership received $600,000 in cash and provided financing of an
additional $2.2 million. Of the net sales proceeds, $300,000 was distributed to
the limited partner and $300,000 was distributed to ART as general partner in
accordance with the partnership agreement. The seller financing bore interest at
12% per annum, required monthly payments of interest only and matured in July
1998. The seller financing was collected at maturity, with the net proceeds
being distributed $1.1 million to the limited partner and $1.1 million to ART as
general partner. The partnership recognized a gain of $1.2 million on the sale.
In September 1998, the partnership sold the remaining 96.5 acres for $1.3
million in cash. Of the net proceeds, $587,000 was distributed to the limited
partner and $587,000 was distributed to ART as general partner. The partnership
recognized a gain of $128,000 on the sale.
Elm Fork Branch Partners, Ltd. In September 1997, a newly formed limited
-----------------------------
partnership of which ART is a 1% general partner and 21.5% limited partner,
purchased a 422.4 acre parcel of unimproved land in Denton County, Texas, for
$16.0 million in cash. ART contributed $3.6 million in cash to the partnership
with the remaining $12.4 million being contributed by the other limited
partners. The partnership agreement designates ART as the managing general
partner. In September 1997, the partnership obtained mortgage financing of $6.5
million secured by the 422.4 acres of land. The mortgage bears interest at 10%
per annum, requires quarterly payments of interest only and matures in September
2001. The net financing proceeds were distributed to the partners, ART receiving
a return of $2.9 million of its initial investment. The partnership agreement
also provides that the limited partners receive a 12% preferred cumulative
return on their investment before any sharing of partnership profits occurs. One
of the limited partners in the partnership was, at the time, also a limited
partner in a partnership that owned 15.8% of the outstanding shares of ART
common stock.
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Legal Proceedings
ART is involved in various lawsuits arising in the ordinary course of
business. In the opinion of ART's management the outcome of these lawsuits will
not have a material impact on ART's financial condition, results of operations
or liquidity.
Competition
Identifying, completing and realizing on real estate investments has from
time to time been highly competitive, and involves a high degree of uncertainty.
ART competes for investments with many public and private real estate investment
vehicles, including financial institutions (such as mortgage banks, pension
funds and real estate investment trusts) and other institutional investors, as
well as individuals. Many of those with whom ART competes for investments and
its services are far larger than ART, may have greater financial resources than
ART and may have management personnel with more experience than the officers of
ART.
Employees
ART has no employees, payroll, employee benefit plans and pays no
compensation to executive officers of ART; however, PWSI has 910 employees and a
majority owned development subsidiary has 3 employees. See "BUSINESS OF ART--
The Manager" on page ___.
SELECTED FINANCIAL DATA OF ART
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
-------------------------- -----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------- ----------- ------------ ------------ ------------ ------------ ----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenue $ 149,167 $ 66,157 $ 87,086 $ 57,031 $ 41,522 $ 22,952 $ 23,070
Expense 239,866 106,177 165,111 90,252 52,601 28,314 26,490
----------- ----------- ----------- ----------- ----------- ----------- -----------
(Loss) from operations (90,699) (40,020) (78,025) (33,221) (11,079) (5,362) (3,420)
Equity in income (loss) of 5,270 27,429 37,966 10,497 1,485 (851) 292
investees
Gain on sale of real estate 87,307 14,692 17,254 20,296 3,659 2,594 379
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
Extraordinary gain 1,878 2,101 (22,805) (2,428) (5,935) (3,619) (2,749)
Extraordinary gain -- -- -- -- 381 783 323
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) 1,878 2,101 (22,805) (2,428) (5,554) (2,836) (2,426)
Preferred dividend requirement (1,704) (595) (1,177) (206) (113) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) applicable to
Common shares $ 174 $ 1,506 $ (23,982) $ (2,634) $ (5,667) $ (2,836) $ (2,426)
=========== =========== =========== =========== =========== =========== ===========
PER SHARE DATA
Income (loss) before extraordinary
gain $ .02 $ .14 $ (2.24) $ (.22) $ (.46) $ (.31) $ (.23)
Extraordinary Gain -- -- -- -- .03 .07 .03
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net (loss) $ .02 $ .14 $ (2.24) $ (.22) $ (.43) $ (.24) $ (.20)
=========== =========== =========== =========== =========== =========== ===========
Dividends per common share $ .05 $ .15 $ .20 $ .20 $ .15 $ -- $ --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common
Shares outstanding 10,753,600 10,741,137 10,695,388 11,710,013 12,765,082 11,716,656 12,208,876
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
September 30, December 31,
- ----------------------------------- -----------------------------------------------
1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------
Notes and interest receivable, net $ 64,519 $ 52,053 $ 25,526 $ 48,485 $ 49,741 $ 45,664
- ----------------------------------------------------------------------------------------------------
Real estate, net 776,963 734,907 302,453 119,035 59,424 47,526
- ----------------------------------------------------------------------------------------------------
Total assets 939,332 918,605 433,799 239,783 162,033 137,362
- ----------------------------------------------------------------------------------------------------
Notes and interest payable 754,931 768,272 261,986 127,863 61,163 45,695
- ----------------------------------------------------------------------------------------------------
Margin borrowings 36,507 35,773 53,376 40,044 34,017 26,391
- ----------------------------------------------------------------------------------------------------
Stockholders' equity 38,406 38,272 63,453 47,786 53,068 55,894
- ----------------------------------------------------------------------------------------------------
Book value per Common Share .40 .44 3.53 3.74 4.53 4.77
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
________________________
Shares and per share data have been adjusted for the 2 for 1 forward common
stock splits effected January 2, 1996 and February 17, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ART
Introduction
ART was organized in 1961 to provide investors with a professionally
managed, diversified portfolio of equity real estate and mortgage loan
investments selected to provided opportunities for capital appreciation as well
as current income.
Liquidity and Capital Resources
General. Cash and cash equivalents at September 30, 1999 totaled $1.8
-------
million, compared with $11.5 million at December 31, 1998. Although ART
anticipates that during the remainder of 1999 it will generate excess cash flow
from property operations, as discussed below, the excess cash is not sufficient
to discharge all of ART's debt obligations as they mature. ART will therefore
continue to rely on externally generated funds, including borrowings against its
investments in various real estate entities, the sale or refinancing of
properties and, to the extent available or necessary, borrowings from its
advisor and affiliates, which totaled $12.4 million at September 30, 1999, to
meet its debt service obligations, pay taxes, interest and other non-property
related expenses.
At December 31, 1998, notes payable totaling $164.2 million had either
scheduled maturities or required principal reduction payments during 1999.
During the first nine months of 1999, ART either extended, refinanced, paid
down, paid off or received commitments from lenders to extend or refinance
$155.6 million of the debt scheduled to mature in 1999.
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Net cash used in operating activities increased to $30.9 million in the
nine months ended September 30, 1999, from $11.8 million in the nine months
ended September 30, 1998. Fluctuations in the components of cash flow used in
operating activities are discussed in the following paragraphs.
Net cash from pizza operations (sales less cost of sales) in the nine
months ended September 30, 1999, increased to $3.4 million from $1.2 million in
1998. The increase was due to the benefits of a more aggressive marketing and
advertising strategy.
Net cash from property operations (rents collected less payments for
expenses applicable to rental income) increased to $27.1 million in the nine
months ended September 30, 1999, from $13.0 million in 1998. The increase was
primarily attributable to the 36 apartments purchased by ART in 1998 and the
consolidation of NRLP effective January 1, 1999.
ART expects an increase in cash flow from property operations during the
remainder of 1999. This increase is expected to be derived from a full year of
operations of the 36 apartments acquired by ART during 1998 and the
consolidation of NRLP effective January 1, 1999. ART is also expecting
substantial land sales and selected property sales to generate additional cash.
Interest collected increased to $3.7 million in the nine months ended
September 30, 1999, from $381,000 in 1998. The increase was attributable to
loans funded by NRLP in 1998 and 1999.
Interest paid increased to $54.8 million in the nine months ended September
30, 1999, from $23.9 million in 1998. The increase was primarily due to debt
incurred or assumed relating to 16 land parcels and 36 apartments purchased by
ART in 1998, six land parcels and an office building in 1999 and the
consolidation of NRLP's operations effective January 1, 1999.
Advisory fee paid increased to $4.0 million in the nine months ended
September 30, 1999, from $2.8 million in 1998. The increase was due to an
increase in ART's gross assets, the basis for the fee.
General and administrative expenses paid increased to $12.7 million in the
nine months ended September 30, 1999, from $5.9 million in 1998. The increase
was primarily attributable to the consolidation of NRLP's operations effective
January 1, 1999.
Distributions from equity investees decreased to $935,000 in the nine
months ended September 30, 1999, from $9.2 million in 1998. Included in 1998
distributions were special distributions totaling $6.1 million from TCI and NRLP
that had been accrued at December 31, 1997.
Other cash from operating activities increased to $5.5 million in the nine
months ended September 30, 1999, from a use of $3.1 million in 1998. The
increase was due to a decrease in property prepaids, other miscellaneous
property receivables and property escrows.
Real Estate. In January 1999, GCLP sold the 199 unit Olde Town Apartments
-----------
in Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after
the payment of various closing costs.
In February 1999, ART purchased Frisco Bridges land, a 336.8 acre parcel of
unimproved land in Collin County, Texas, for $46.8 million, paying $7.8 million
in cash and obtained mortgage and seller financing totaling $39.0 million.
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<PAGE>
Also in February 1999, ART sold a 4.6 acre tract of its Plano Parkway land
parcel for $1.2 million, receiving net cash of $1.1 million after the payment of
various closing costs. Simultaneously with the sale, the mortgage debt secured
by the land parcel was refinanced in the amount of $7.1 million. The net cash
from the sale and refinancing along with an additional $921,000 in cash was used
to payoff the $8.9 million seller financing secured by the land parcel.
Further in February 1999, GCLP sold the 225 unit Santa Fe Apartments in
Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million
after the payment of various closing costs.
In February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa,
Arizona, for $19.5 million, receiving net cash of $793,000 after the payment of
various closing costs and remitting $17.8 million to the lender to hold in
escrow pending collateral substitution. In May 1999, the 259 unit Bavarian Woods
Apartments and the 149,855 sq. ft. Westwood Shopping Center were approved as
substitute collateral. GCLP received net cash of $7.8 million after paying off
$7.2 million in mortgage debt secured by the Bavarian Woods Apartments and
Westwood Shopping Center, funding required escrows and closing costs on the two
properties, and paying off $2.2 million on the Mesa Ridge debt, including a
$133,000 prepayment penalty.
In March 1999, ART sold a 13.0 acre tract of its Rasor land parcel for $1.6
million, receiving no net cash after paying down by $1.5 million the mortgage
debt secured by the land parcel and the payment of various closing costs.
Also in March 1999, ART sold two tracts totaling 9.9 acres of its
Mason/Goodrich land parcel for $956,000, receiving net cash of $33,000 after
paying down by $860,000 the mortgage debt secured by the land parcel and the
payment of various closing costs.
Further in March 1999, ART sold in a single transaction, a 13.7 acre tract
of its McKinney II land parcel and a 20.0 acre tract of its McKinney IV land
parcel for a total of $7.7 million, receiving no net cash after paying down by
$5.5 million the mortgage debt secured by the land parcels, the funding of
required escrows and the payment of various closing costs.
In April 1999, GCLP sold the 166 unit Horizon East Apartments in Dallas,
Texas, for $4.0 million, receiving net cash of $1.2 million after paying off
$2.6 million in mortgage debt and the payment of various closing costs.
Also in April 1999, GCLP sold the 120 unit Lantern Ridge Apartments in
Richmond, Virginia, for $3.4 million, receiving net cash of $880,000 after the
payment of various closing costs.
In May 1999, ART sold a 15.0 acre tract of its Vista Ridge land parcel for
$2.6 million, receiving net cash of $552,000 after paying down by $1.8 million
the mortgage debt secured by the land parcel and the payment of various closing
costs.
Also in May 1999, ART purchased Rowlett Creek land, a 80.4 acre parcel of
unimproved land in Collin County, Texas, for $1.6 million. ART paid $400,000 in
cash and obtained seller financing of the remaining $1.2 million of the purchase
price.
Further in May 1999, ART purchased Leone land, a 8.2 acre parcel of
unimproved land in Irving, Texas, for $1.5 million. ART paid $300,000 in cash
and obtained seller financing of the remaining $1.2 million of the purchase
price.
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In May 1999, a newly-formed controlled partnership in which a wholly-owned
subsidiary of ART is the 1% managing general partner and ART is the 99% Class B
limited partner purchased the 177,211 sq. ft. Encino Executive Plaza in Los
Angeles, California, for $40.1 million. The partnership paid $2.8 million in
cash, assumed $34.6 million in mortgage debt, obtained $1.1 million in seller
financing and issued 1.6 million Class A limited partner units.
Also in May 1999, ART sold two tracts of its Plano Parkway land parcel
totaling 24.5 acres for $4.9 million. ART received no net cash after paying down
by $4.7 million the mortgage debt secured by the land parcel and the payment of
various closing costs.
Further in May 1999, ART acquired the remaining joint venture interest in
its 3.6 acre Atlanta land parcel for $1.3 million in cash. Subsequently, ART
exchanged the Atlanta land parcel for 147.4 acres of land in Nashville,
Tennessee and $1.3 million in cash.
In May 1999, NRLP purchased the 27,000 sq. ft. Cooley Office Building in
Farmers Branch, Texas, for $3.5 million, paying $1.5 million in cash and
obtaining mortgage financing of $2.0 million.
In June 1999, ART sold two tracts of its Frisco Bridges land parcel
totaling 77.6 acres for $16.9 million. ART received net cash of $2.7 million
after paying off $2.0 million in mortgage debt secured by the land parcel,
paying down by $11.0 million another mortgage secured by the land parcel and the
payment of various closing costs.
Also in June 1999, ART sold a 6.0 acre tract of its Plano Parkway land
parcel for $1.6 million. ART received no net cash after paying down by $1.6
million the mortgage debt secured by the land parcel and the payment of various
closing costs.
Further in June 1999, ART sold its Continental Hotel for $25.0 million,
receiving a nonrefundable deposit of $5.0 million and providing short term
financing of $20.0 million. In the third quarter of 1999, ART received $1.5
million in principal payments.
In June 1999, ART purchased Vineyards II land, a 18.6 acre parcel of
unimproved land in Tarrant County, Texas, for $6.3 million. ART paid $2.3
million in cash and obtained seller financing of the remaining $4.0 million of
the purchase price.
Also in June 1999, NRLP purchased the Lake Houston land, a 33.58 acre
parcel of unimproved land in Harris County, Texas, for $2.5 million in cash. A
construction loan in the amount of $13.7 million was obtained enabling
development of a 312 unit apartment complex on the site. Construction costs are
expected to approximate $16.7 million. Construction was begun in July 1999 and
completion is expected in the third quarter of 2000.
Further in June 1999, GCLP sold the 368 unit Barcelona Apartments in Tampa,
Florida, for $9.8 million, receiving net cash of $2.2 million after paying off
$7.0 million in mortgage debt and the payment of various closing costs.
In July 1999, the Stone Meadows land, a 13.5 acre parcel of unimproved land
in Harris County, Texas, was purchased by NRLP from ART at the land's carrying
value of $2.2 million. NRLP paid $1.3 million in cash and assumed $974,000 in
mortgage debt. The mortgage debt was paid in full at maturity in October 1999.
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Also in July 1999, ART sold a .13 acre tract of its JHL Connell land parcel
for $53,000. ART received no net cash after paying down by $49,000 the mortgage
debt secured by the land parcel and the payment of various closing costs.
Further in July 1999, ART sold two tracts totaling 11.8 acres of its Plano
Parkway land parcel for $3.8 million. ART received net cash of $1.7 million
after paying down by $2.0 million the mortgage debt secured by the land parcel
and the payment of various closing costs.
In July 1999, ART sold two tracts totaling 6.7 acres of its Vista Ridge
land parcel for $1.4 million. ART received net cash of $329,000 after paying
down by $975,000 the mortgage debt secured by the land parcel and the payment of
various closing costs.
Also in July 1999, ART purchased Monterey land, a 85.0 acre parcel of
unimproved land in Riverside County, California, for $5.6 million. ART paid $1.1
million in cash and obtained seller financing for the remaining $4.5 million of
the purchase price.
Further in July 1999, ART purchased Wakefield land, a 70.0 acre parcel of
unimproved land in Allen, Texas, for $1.3 million. ART paid $688,000 in cash and
obtained seller financing of the remaining $612,000 of the purchase price.
In July 1999, ART sold a 1.4 acre tract of its Valley Ranch land parcel for
$163,000. ART received net cash of $159,000 after the payment of various closing
costs.
In August 1999, NRLP sold the 152 unit Country Place Apartments in Round
Rock, Texas, for $6.0 million, receiving net cash of $1.3 million after the
payment of various closing costs. The purchaser assumed the $4.3 million
mortgage secured by the property.
Also in August 1999, NRLP sold the 588 unit Lake Nora Apartments and the
336 unit Fox Club Apartments in Indianapolis, Indiana, to a single buyer for
$29.1 million. NRLP received net cash of $2.7 million after paying off $24.5
million in mortgage debt, including an $889,000 prepayment penalty and the
payment of various closing costs.
Further in August 1999, ART sold a 2.1 acre tract of its Keller land parcel
for $185,000, receiving net cash of $91,000 after paying down by $90,000 the
mortgage debt secured by the land parcel and the payment of various closing
costs.
In August 1999, ART sold its Sun City lots for $260,000, receiving net cash
of $240,000 after the payment of various closing costs.
Also in August 1999, ART sold a 121.2 acre tract of its Katrina land parcel
for $6.6 million, receiving net cash of $5.5 million after the payment of
various closing costs.
In September 1999, NRLP sold the 409 unit Oakhollow Apartments and the 408
unit Windridge Apartments in Austin, Texas, to a single buyer for a total of
$35.5 million. NRLP received net cash of $7.8 million after paying off $22.2
million in mortgage debt, including a $912,000 prepayment penalty and the
payment of various closing costs. In conjunction with the sale, NRLP provided
$2.1 million in purchase money financing secured by limited partnership units in
two limited partnerships owned by the buyer.
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Further in September 1999, ART sold a 13.6 acre tract of its Frisco Bridges
land parcel for $2.6 million, receiving no net cash after paying down by $2.1
million the mortgage debt secured by the land parcel and the payment of various
closing costs.
In September 1999, ART sold a 6.2 acre tract of its Plano Parkway land
parcel for $900,000 receiving net cash of $208,000 after paying down by $650,000
the mortgage debt secured by the land parcel and the payment of various closing
costs.
Also in September 1999, ART sold four tracts totaling 185.6 acres of its
Keller, Scout and Scoggins land parcels for $3.5 million, receiving net cash of
$758,000 after paying down by $2.5 million the mortgage debt secured by the land
parcels and the payment of various closing costs.
Further in September 1999, ART sold a 1.3 acre tract of its Vista Ridge
land parcel for $715,000, receiving net cash of $665,000 after the payment of
various closing costs.
In October 1999, NRLP sold the 838 unit Tanglewood Apartments in Arlington
Heights, Illinois, for $41.0 million. NRLP received net cash of $8.4 million,
after paying off $28.9 million in mortgage debt, including a $1.2 million
prepayment penalty, and the payment of various closing costs.
In October 1999, ART sold the 140 unit Edgewater Gardens Apartments in
Biloxi, Mississippi, for $5.7 million. ART received net cash of $2.7 million,
after paying off $2.9 million in mortgage debt and the payment of various
closing costs.
Also in October 1999, ART sold a 12.4 acre tract of its Frisco Bridges land
parcel for $2.0 million. The proceeds from the sale of $1.1 million plus an
additional $800,000 in cash were used to pay down by $1.9 million the mortgage
debt secured by the land parcel and the payment of various closing costs. ART
also provided purchase money financing of $813,000.
Notes Receivable. Principal payments were received totaling $40.0 million
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in the nine months ended September 30, 1999.
In February 1999, GCLP funded a $5.0 million unsecured loan to One Realco
Corporation, which at September 30, 1999, owned approximately 15.8% of the
outstanding shares of ART's common stock. The loan is guaranteed by BCM.
In August 1998, NRLP funded a $6.0 million loan to Centura Holdings,
L.L.C., a subsidiary of Centura Tower, Ltd. (Centura). The loan is secured by
6.4 acres of land in Farmers Branch, Texas. In February 1999, NRLP funded an
additional $37,500.
Also in August 1998, NRLP funded a $3.7 million loan to JNC Enterprises,
Ltd. (JNC). The loan was secured by a contract to purchase 387 acres of land in
Collin County, Texas, and the personal guaranty of JNC's principal partner. In
January 1999, ART purchased the contract from JNC and acquired the land. In
connection with the purchase, GCLP funded $6.0 million on a then $95.0 million
loan commitment to ART. A portion of the funds were used to payoff the $3.7
million JNC note, including accrued but unpaid interest, pay down $1.3 million
on the JNC line of credit and pay down $820,000 on the JNC Frisco Panther
Partners, Ltd. loan.
In 1997 and 1998, NRLP funded a $3.8 million loan to Stratford & Graham
Developers, L.L.C. The loan is secured by 1,485 acres of unimproved land in
Riverside County, California. In the
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first nine months of 1999, NRLP funded an additional $316,000, increasing the
loan balance to $4.1 million.
Also in 1998 and 1999, NRLP funded a $5.0 million loan commitment to JNC.
The loan is secured by a second lien on 1,791 acres of land in Denton County,
Texas, and a second lien on 220 acres of land in Tarrant County, Texas. In
January 1999, NRLP received a $1.3 million paydown on the loan.
During 1998 and 1999, NRLP funded a total of $31.0 million of a $52.5
million loan commitment to Centura. The loan was secured by 2.2 acres of land
and an office building under construction in Farmers Branch, Texas. In August
1999, $24.1 million of the note and accrued but unpaid interest was converted to
a partnership interest.
In 1999, ART funded $1.7 million of a $2.0 million loan commitment to
Lordstown, L.P. The loan is secured by a second lien on land in Ohio and
Florida, by 100% of the general and limited partner interest in Partners
Capital, Ltd. and a profits interest in subsequent land sales.
Also in 1999, ART funded $1.5 million of a $2.4 million loan commitment to
261, L.P. The loan is secured by 100% of the general and limited partner
interest in Partners Capital, Ltd. and a profits interest in subsequent land
sales.
During 1998 and through August 1999, NRLP funded a total of $2.1 million of
a $2.2 million loan commitment to Varner Road Partners, L.L.C. The loan is
secured by 129.77 acres of land in Riverside County, California, and a pledge of
the stock of the borrower.
In 1997, 1998 and 1999, NRLP funded $1.8 million of a $2.1 million loan
commitment to Bordeaux. The loan is secured by:
(1) a 100% membership interest in Bordeaux, which owns a shopping center
in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns
approximately 6.5 acres of undeveloped land in Oklahoma City,
Oklahoma; and
(3) the personal guarantees of the Bordeaux members.
In October 1999, NRLP received a paydown of $724,000.
In July 1999, NRLP received a total of $2.5 million on the collection of
two mortgage notes receivable, including accrued but unpaid interest.
In August and September 1999, NRLP received a total of $3.3 million in
paydowns on a mortgage note receivable and funded a $2.6 million mortgage loan.
Also in October 1999, NRLP collected in full a mortgage note receivable
with a principal balance of $740,000.
Further in October 1999, GCLP funded a $4.7 million loan to Realty
Advisors, Inc., the corporate parent of BCM. The loan is secured by a pledge of
the stock of an insurance subsidiary.
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Notes Payable. In February 1999, NRLP obtained mortgage financing secured
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by the unencumbered 54,649 sq. ft. 56 Expressway Office Building in Oklahoma
City, Oklahoma, in the amount of $1.7 million. NRLP received net cash of $1.7
million after the payment of various closing costs.
Also in February 1999, NRLP obtained mortgage financing secured by the
unencumbered 124,200 sq. ft. Melrose Business Park in Oklahoma City, Oklahoma,
in the amount of $900,000. NRLP received net cash of $870,000 after the payment
of various closing costs.
In March 1999, ART obtained a second mortgage financing on its Frisco
Bridges land in the amount of $2.0 million.
Also in March 1999, the Las Colinas I term loan lender provided additional
financing on ART's Stagliano, Dalho, Bonneau and Valley Ranch III land parcels
in the amount of $2.2 million. The proceeds from this financing along with an
additional $1.4 million in cash were used to pay off the $3.1 million in
mortgage debt secured by the land parcels.
In April 1999, ART refinanced the matured mortgage debt secured by its
Yorktown land in the amount of $4.8 million, receiving net cash of $580,000
after paying off $4.0 million in mortgage debt and the payment of various
closing costs.
In May 1999, NRLP obtained mortgage financing secured by the unencumbered
257 unit Pines Apartments in Little Rock, Arkansas, and by a $5.0 million note
receivable secured by second liens on two parcels of land in Denton County and
Tarrant County, Texas in the amount of $4.0 million. NRLP received net cash of
$3.9 million after the payment of various closing costs.
In September 1999, the mortgage debt was refinanced in the amount of $3.1
million. The refinancing proceeds and cash of $1.1 million was used to payoff
the $4.0 million of mortgage debt and the payment of various closing costs.
Also in May 1999, the Las Colinas I term loan lender provided additional
financing secured by ART's Plano Parkway land parcel in the amount of $2.0
million. The proceeds from this financing along with an additional $831,000 in
cash were used to payoff the remaining $2.7 million in mortgage debt secured by
the land parcel and the payment of various closing costs.
In June 1999, NRLP obtained mortgage financing secured by the unencumbered
100 unit Stonebridge Apartments in Florissant, Missouri, in the amount of $3.0
million. NRLP received net cash of $2.9 million after the payment of various
closing costs.
In July 1999, NRLP obtained mortgage financing secured by the unencumbered
76 unit Bridgestone Apartments in Friendswood, Texas, in the amount of $2.1
million. NRLP received net cash of $2.0 million after the payment of various
closing costs.
In August 1999, NRLP refinanced the mortgage debt secured by the 102 unit
Whispering Pines Apartments in Canoga Park, California, in the amount of $3.5
million. NRLP received net cash of $1.1 million after paying off $2.2 million in
mortgage debt, the funding of required escrows and the payments of various
closing costs.
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Also in August 1999, ART received an additional $2.7 million from its Las
Colinas I lender on a 56.0 acre tract of its Katrina land parcel. ART received
net cash of $2.6 million after the payment of various closing costs.
Further in August 1999, ART refinanced the mortgage debt secured by its
Mason/Goodrich land in the amount of $4.1 million. ART received net cash of
$710,000 after paying off $1.8 million in mortgage debt secured by the land
parcel, paying down by $1.0 million its mortgage debt secured by its Frisco
Bridges land parcel and the payment of various closing costs.
In September 1999, NRLP obtained mortgage financing secured by the
unencumbered 209 unit Blackhawk Apartments in Indianapolis, Indiana, in the
amount of $4.1 million. NRLP received net cash of $4.0 million after the payment
of various closing costs.
In October 1999, ART obtained a construction loan of $7.2 million on Two
Hickory Centre, a 96,126 sq. ft. office building under construction in Farmers
Branch, Texas. ART received net cash of $1.9 million after the payment of
various closing costs.
At March 31, 1999, the mortgage debt secured by ART's McKinney I, II, III,
IV, V and Dowdy land in the amount of $15.2 million matured. ART and the lender
reached an agreement to extend the mortgage's maturity to September 1999, in
exchange for, among other things, ART's payment of an extension fee. In October
1999, ART refinanced its McKinney Corners land for a total of $8.6 million. The
Las Colinas I term loan lender provided $4.1 million and a second lender
provided $4.5 million. The net financing proceeds and $6.6 million in cash were
used to payoff the existing $15.2 million mortgage debt secured by the land
parcels and the payment of various closing costs.
Equity Investments. During the fourth quarter of 1988, ART began purchasing
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shares of Affiliated REITs that have the same advisor as ART. It is anticipated
that additional equity securities of the Affiliated REITs will be acquired in
the future through open--market and negotiated transactions to the extent that
ART's liquidity permits.
Equity securities of the Affiliated REITs and NRLP held by ART may be
deemed to be "restricted securities" under Rule 144 of the Securities Act of
1933 ("Securities Act"). Accordingly, ART may be unable to sell the equity
securities other than in a registered public offering or pursuant to an
exemption under the Securities Act for a one--year period after they are
acquired. These restrictions may reduce ART's ability to realize the full fair
market value of the investments if it attempted to dispose of the securities in
a short period of time.
ART's cash flow from its Affiliated REIT investments is dependent on the
ability of each of the entities to make distributions. ART received
distributions totaling $935,000 in the nine months ended September 30, 1999,
from the Affiliated REITs. ART has margin arrangements with various brokerage
firms which provide for borrowing up to 50% of the market value of ART's
marketable equity securities. The borrowings under these margin arrangements are
secured by equity securities of the Affiliated REITs, NRLP and ART's trading
portfolio and bear interest rates ranging from 7.0% to 11.0%. Margin borrowing
totaled $36.5 million at September 30, 1999.
ART expects that it will be necessary for it to sell $117.0 million and
$63.1 million of its land holdings during each of the next two years to satisfy
the debt on the land as it matures. If ART is unable to sell at least the
minimum amount of land to satisfy the debt obligations on the land as it
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matures, or if it was not able to extend the debt, ART would either sell other
of its assets to pay the debt or return the property to the lender.
ART's management reviews the carrying values of its properties and mortgage
note receivables at least annually and whenever events or a change in
circumstances indicate that impairment may exist. Impairment is considered to
exist if, in the case of a property, the future cash flow from the property
(undiscounted and without interest) is less than the carrying amount of the
property. For notes receivable impairment is considered to exist if it is
probable that all amounts due under the terms of the note will not be collected.
In those instances where impairment is found to exist, a provision for loss is
recorded by a charge against earnings. Management's mortgage note receivable
review includes an evaluation of the collateral property securing the note. The
property review generally includes selective property inspections, a review of
the property's current rents compared to market rents, a review of the
property's expenses, a review of maintenance requirements, a review of the
property's cash flow, discussions with the manager of the property and a review
of properties in the surrounding area.
Commitments and Contingencies. In December 1999, an action was brought
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against ART to perform on certain alleged loan guarantees. Management believes
that it has counter claims against the plaintiff, therefore, ART's potential
liability, if any, can not currently be determined.
Results of Operations
Three and Nine Months Ended September 30, 1999 compared to Three and Nine
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Months Ended September 30, 1998. For the three and nine months ended September
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30, 1999, ART reported net income of $10.1 million and $1.9 million, compared to
net loss of $3.6 million and net income of $2.1 million for the three and nine
months ended September 30, 1998. The primary factors contributing to ART's
results are discussed in the following paragraphs.
Pizza parlor sales and cost of sales were $7.8 million and $6.7 million,
respectively for the three months ended September 30, 1999, compared to $7.3
million and $6.3 million in 1998. Sales and cost of sales were $22.8 million and
$19.5 million for the nine months ended September 30, 1999, compared to $21.3
million and $18.3 million in 1998. The increased sales were primarily
attributable to the effects of a more aggressive marketing and advertising
strategy, offset by an increase in cost of sales attributable to record high
cheese prices in January 1999. Cheese prices returned to more historic levels in
February 1999, but began escalating again late in the second quarter of 1999 and
reached record highs again in September 1999. In October 1999, cheese prices
began to decline and have continued to do so.
Rents increased to $40.2 million and $122.1 million in the three and nine
months ended September 30, 1999, from $15.5 million and $45.1 million in 1998.
Rents from commercial properties increased to $22.1 million for nine months
ended September 30, 1999, from $12.0 million in 1998. Rents from hotels of $25.0
million in the nine months ended September 30, 1999, approximated the $24.5
million in 1998. Rents from apartments increased to $74.7 million in the nine
months ended September 30, 1999, from $7.9 million in 1998. The increase in
commercial property rents was primarily attributable to the consolidation of
NRLP's operations effective January 1, 1999, and the increase in apartment rent
was due to the 36 apartments acquired by ART in 1998 and the consolidation of
NRLP's operations effective January 1, 1999. Rental income is expected to
increase significantly in 1999 as a result of the consolidation of NRLP's
operations.
Property operations expense increased to $27.4 million and $80.8 million in
the three and nine months ended September 30, 1999, from $12.0 million and $34.2
million in 1998. Property operations expense for commercial properties increased
to $11.9 million in the nine months ended September 30, 1999, from $7.1 million
in 1998. Hotel property operations expense of $17.7 million in the nine months
ended September 30, 1999 approximated the $18.1 million in 1998. Land property
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operations expense increased to $6.5 million in the nine months ended September
30, 1999 from $4.1 million in 1998. Apartments property operations expense
increased to $44.7 million in the nine months ended September 30, 1999, from
$4.8 million in 1998. The increase in commercial property operations expense was
primarily due to the consolidation of NRLP's operations effective January 1,
1999. The increase for land was primarily due to the 16 land parcels acquired by
ART in 1998 and six land parcels in 1999. The increase for apartments property
operations expense was due to the 36 apartments acquired by ART in 1998 and the
consolidation of NRLP's operations effective January 1, 1999. Property
operations expense is expected to increase significantly in the remainder of
1999 as a result of the consolidation of NRLP's operations.
Interest income from mortgage notes receivable increased to $1.3 million
and $5.0 million in the three and nine months ended September 30, 1999 from
$15,000 and $169,000 in 1998. The increase is attributable to loans funded by
NRLP in 1998. Interest income is expected to increase significantly in the
remainder of 1999 as a result of the consolidation of NRLP's operations.
Other income was income of $300,000 in the three months ended September
30,1999 and a loss of $740,000 in the nine months ended September 30, 1999
compared to income of $486,000 and a loss of $454,000 in 1998. An unrealized
increase in market value of trading portfolio securities of $33,000 and a
decrease of $1.8 million was recognized in the three and nine months ended
September 30, 1999, compared to income of $1.1 million and a loss of $2.6
million in 1998.
Interest expense increased to $23.0 million and $68.5 million in the three
and nine months ended September 30, 1999, from $12.4 million and $35.7 million
in 1998. Of the increases, $7.3 million and $21.4 million was attributable to
the consolidation of NRLP's operations effective January 1, 1999, $3.3 million
and $4.8 million was due to 16 parcels of land acquired by ART in1998 and, $3.4
million was due to the six land parcels acquired by ART in 1999, and for the
nine months ended September 30, 1999, $3.9 million was due to the 36 apartments
acquired by ART in 1998. In the remainder of 1999 interest expense is expected
to continue to rise due to the 36 apartments acquired in 1998 and the
consolidation of NRLP's operations.
Depreciation expense increased to $4.5 million and $13.5 million in the
three and nine months ended September 30, 1999, from $1.5 million and $4.7
million in 1998. The increases were attributable to the consolidation of NRLP's
operations effective January 1, 1999, and the acquisition by ART of 36
apartments in 1998.
Advisory fees increased to $1.5 million and $4.0 million in the three and
nine months ended September 30, 1999, from $1.1 million and $2.8 million in1998.
The increases were attributable to an increase in ART's gross assets, the basis
for the fee. The fee is expected to increase as ART's gross assets increase.
General and administrative expenses increased to $3.8 million and $12.7
million in the three and nine months ended September 30, 1999, from $1.7 million
and $5.9 million in 1998. The increases were primarily attributable to the
consolidation of NRLP's operations effective January 1, 1999.
In the nine months ended September 30, 1999, a provision for loss of $2.1
million was recognized. The loss relates to the June 1999 relinquishment by ART
of its general and Class B limited partner interests in a controlled partnership
that owned two apartments in Indianapolis, Indiana in 1998. In the three and
nine months of 1998 a provision for loss of $3.0 million was
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recognized to writedown ART's Valley Ranch land to its estimated realizable
value less estimated costs of sale. The writedown was necessitated by an
increase in the acreage designated as flood plain.
Minority interest increased to $23.1 million and $38.6 million in the three
and nine months ended September 30, 1999, from $658,000 and $1.6 million in
1998. The increase was attributable to the consolidation of NRLP.
Equity in income of investees decreased to $1.9 million and $5.3 million in
the three and nine months ended September 30, 1999 from $6.1 million and $27.4
million in 1998. The decreases in equity income were attributable to the
consolidation of NRLP.
In the nine months ended September 30, 1999, gains on sale of real estate
of $87.3 million were recognized. In January 1999, a gain of $2.2 million was
recognized on the sale of the Olde Towne Apartments. In February 1999, gains
were recognized on the sales of: (1) a 4.6 acre tract of its Plano Parkway land;
(2) the Santa Fe Apartments; and (3) the Mesa Ridge Apartments, totaling $11.4
million. In March 1999, gains were recognized on the sales of: (1) a 9.9 acre
tract of Mason/Goodrich land; (2) two tracts of McKinney II and McKinney IV land
totaling 33.7 acres; and (3) a 13.0 acre tract of Rasor land, totaling $4.3
million. In April 1999, a gain was recognized of $1.8 million on the sale of the
Horizon East Apartments and $2.3 million on the sale of the Lantern Ridge
Apartments. In May 1999, gains were recognized of: (1) $913,000 on the sale of a
15.0 acre tract of Vista Ridge land and (2) $1.1 million on the sale of two
tracts totaling 24.5 acres of Plano Parkway land. In June 1999, gains were
recognized on the sale of: (1) two tracts totaling 77.6 acres of Frisco Bridges
land; (2) 6.6 acres of Plano Parkway land; (3) the Continental Hotel; and (4)
the Barcelona Apartments, totaling $14.9 million. In July 1999, gains were
recognized on the sale of: (1) .13 acres of JH Connell land; (2) two tracts
totaling 11.8 acres of Plano Parkway land; (3) two tracts totaling 6.7 acres of
Vista Ridge land; and (4) 1.4 acres of Valley Ranch land totaling $2.6 million.
In August 1999, gains were recognized on the sale of: (1) Country Place
Apartments; (2) Lake Nora Apartments; (3) Fox Club Apartments; (4) 2.1 acres of
Keller land; (5) Sun City lots; and (6)121.2 acres of Katrina land, totaling
$16.5 million. In September 1999, gains were recognized on the sale of: (1)
Oakhollow Apartments; (2) Windridge Apartments; (3) 13.6 acres of Frisco Bridges
land; (4) four tracts totaling 185.6 acres of Keller, Scout and Scoggins land;
and (5) 1.3 acres of Vista Ridge land, totaling $27.0 million and a loss of
$40,000 on the sale of 6.2 acres of Plano Parkway land.
For the three months ended September 30, 1998, ART recognized gains from
the sale of: (1) a 2.5 acre tract of the Las Colinas I land of $869,000; (2)
60.0 acres of Parkfield land; (3) 10.5 acres of BP Las Colinas land; (4) its
Kamperman land; and (5) 1.1 acres of Santa Clarita land totaling $5.7 million.
In the first six months of 1998 gains on the sale of real estate totaling $8.1
million were recognized from: (1) 81.3 acres of Parkfield land; (2) Lewisville
land; (3) 21.2 acres of Chase Oaks land; (4) 150.0 acres of Rasor land; (5) Palm
Desert land; (6) 39.4 acres of Valley Ranch land; (7) 2.5 acres of Las Colinas I
land; (8) 10.5 acres of BP Las Colinas land; (9) 1.1 acres of Santa Clarita
land; and (10) Kamperman land.
1998 Compared to 1997. ART reported a net loss of $22.8 million in 1998 as
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compared to a net loss of $2.4 million in 1997. The primary factors contributing
to ART's net loss are discussed in the following paragraphs.
Sales and cost of sales were $28.9 million and $24.8 million in 1998 and
$25.0 million and $20.0 million, in 1997. Pizza parlor operations experienced
lower profit margins in 1998 due to higher labor and pizza ingredient costs,
primarily cheese. Cheese prices have declined since January 1, 1999.
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Rents increased to $63.5 million in 1998 from $29.1 million in 1997. Rent
from commercial properties increased to $16.5 million in 1998 from $13.9 million
in 1997, rent from hotels increased to $32.2 million in 1998 from $14.9 million
in 1997 and rent from apartments was $14.2 million in 1998. The increase in rent
from hotels was primarily attributable to a full year of operations of the five
hotels acquired in 1997, the increase in rent from commercial properties was
primarily attributable to a full year of operations of the two shopping centers
acquired in 1997 and apartment rent was due to the 36 apartments acquired in
1998. ART owned no apartments in 1997.
Property operations expense increased to $49.2 million in 1998 from $24.2
million in 1997. Property operations expense for commercial properties of $9.7
million in 1998 approximated the $10.0 million in 1997, for hotels this expense
increased to $24.4 million in 1998 from $11.2 million in 1997, for land it
increased to $6.3 million in 1998 from $3.0 million in 1997 and for apartments
was $8.8 million in 1998. The increase in hotel property operations expense was
primarily due to a full year of operations of the five hotels acquired in 1997,
the increase for land was primarily due to the 16 land parcels acquired in 1998.
Property operations expense for apartments was due to the 36 apartments acquired
in 1998. ART owned no apartments in 1997.
Interest income decreased to $188,000 in 1998 from $2.8 million in 1997.
The decrease was attributable to the sale of two notes receivable and the
foreclosure of the collateral securing a third note receivable in 1997 and the
foreclosure of the collateral securing a wraparound mortgage note receivable in
1998.
Other income decreased to a loss of $5.5 million in 1998 from income of
$168,000 in 1997. This decrease was due to recognizing an unrealized loss on
marketable equity securities of $6.1 million in 1998, compared to an unrealized
loss of $850,000 in 1997. Also contributing to the decrease was a decrease in
dividend income and net gains on sales of marketable equity securities of
$15,000 and $260,000, respectively.
Interest expense increased to $51.6 million in 1998 from $30.2 million in
1997. Of this increase, $7.5 million was due to a full year of interest on the
debt secured by the five hotels, two shopping centers and 24 parcels of land
acquired in 1997 and an additional $10.4 million was due to debt secured by 36
apartments and 16 parcels of land acquired in 1998. Interest on margin debt also
increased by $1.5 million and deferred borrowing costs increased by $3.5
million.
Advisory and mortgage servicing fees increased to $3.8 million in 1998 from
$2.7 million in 1997. The increase was attributable to the increase in ART's
gross assets, the basis for this fee. This fee will continue to increase as
ART's gross assets increase.
General and administrative expenses increased to $8.5 million in 1998 from
$7.8 million in 1997. The increase was primarily attributable to the general and
administrative expenses of a development subsidiary established in 1998.
Depreciation and amortization increased to $7.0 million in 1998 from $3.5
million in 1997. The increase was due to a full year of depreciation on the 5
hotels and 2 shopping centers acquired in 1997 and 36 apartments acquired in
1998.
In the third and fourth quarters of 1998, provisions for loss of $3.0
million and $916,000 respectively, were recorded to write down the Valley Ranch
land to its estimated realizable value less
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<PAGE>
estimated costs of sale. These write downs were necessitated by an increase in
the acreage designated as flood plain. ART recorded no provision of this type in
1997.
In December 1998, upon the election of NMC as general partner of the NRLP,
NMC assumed liability for some legal settlement payments. This obligation is
included in litigation expense in the Consolidated Statement of Operations.
Minority interest increased to $3.2 million in 1998 from $1.4 million in
1997. Minority interest is the preferred return paid on limited partner units of
some of the controlled limited partnerships. Minority interest in 1997 was
attributable to the preferred returns paid on a limited partner units of Ocean
Beach Partners, L.P., Valley Ranch, L.P., Grapevine American, Ltd., Edina Park
Plaza Associates, L.P. and Hawthorne Lakes Associations, L.P. In 1998 preferred
returns paid on limited partner units for ART Florida Portfolio III and ART Palm
Limited Partnership also were included.
Equity in income of investees increased to $38.0 million in 1998 from $10.5
million in 1997. The increase in equity income was attributable to an increase
totaling $55.2 million in gains on sale of real estate in IORI, NRLP and TCI
offset in part by a decrease of $1.2 million in CMET. ART's equity share of the
gains was $33.3 million. This net increase was offset by decreased operating
income totaling $7.5 million in IORI, NRLP, and CMET offset in part by an
increase in operating income of $3.1 million in TCI. ART's equity share of
equity investees' net operating losses was $6.9 million. Equity in income of
investees is expected to decrease significantly in 1999 as a result of the
consolidation of NRLP's operations subsequent to December 31, 1998.
Gains on sale of real estate decreased to $17.3 million in 1998 from $20.3
million in 1997. In 1998, ART recognized gains of $663,000 on the sale of three
tracts totaling 78.5 acres of its Valley Ranch land in Irving, Texas; $1.9
million on its Lewisville land in Lewisville, Texas; $714,000 on a 21.3 acre
tract of its Parkfield land in Denver, Colorado; $848,000 on a 21.6 acre tract
of its Chase Oaks land in Plano, Texas; $789,000 on a 150.0 acre tract of its
Rasor land in Plano, Texas; $3.9 million on its Palm Desert land in Palm Desert,
California; $869,000 on a 2.5 acre tract of its Las Colinas I land in Las
Colinas, Texas; $898,000 on its Kamperman land in Collin County, Texas; $3.4
million on its final 10.5 acre tract of BP Las Colinas land in Las Colinas,
Texas; $409,000 on a 1.1 acre tract of its Santa Clarita land in Santa Clarita,
California; $2.6 million on a 20.8 acre tract of its Mason Goodrich land in
Houston, Texas, and ART recognized a $179,000 previously deferred gain on a sale
of its Valley Ranch land in 1997. In 1997, ART recognized gains of $5.9 million
on the sale of a 49.7 acre tract of BP Las Colinas land in Las Colinas, Texas;
$3.5 million on the sale of tracts totaling 116.8 acres of Valley Ranch land in
Irving, Texas; $2.7 million on the sale of a 12.5 acre tract of Las Colinas I
land in Las Colinas, Texas; $3.6 million on the sale of Pin Oak land in Houston,
Texas; $216,000 on the sale of a 99.7 acre tract of Kamperman land in Collin
County, Texas; $371,000 on the sale of a 32.0 acre tract of Parkfield land in
Denver, Colorado; $211,000 on the sale of a 86.5 acre tract of Rasor land in
Plano, Texas; $106,000 on the sale of Park Plaza Shopping Center in Manitowoc,
Wisconsin; $480,000 on the sale of the Mopac Building in St. Louis, Missouri;
and $172,000 on the sale of a mortgage note receivable. ART also recognized a
previously deferred gain of $3.0 million on the sale of Porticos Apartments.
1997 Compared to 1996. ART reported a net loss of $2.4 million in 1997, as
---------------------
compared to a net loss of $5.6 million in 1996. The primary factors contributing
to ART's net loss are discussed in the following paragraphs.
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<PAGE>
Sales and cost of sales were $25.0 million and $20.0 million in 1997 and
$14.4 million and $11.0 million in 1996. ART acquired 80% of the outstanding
common stock of PWSI in April 1996. ART had no sales or cost of sales prior to
April 1996. These items of revenue and cost relate to PWSI.
Rents increased from $20.7 million in 1996 to $29.1 million in 1997. Rent
from hotels increased from $6.1 million in 1996 to $14.9 million in 1997 and
rent from commercial properties increased from $12.4 million in 1996 to $13.8
million in 1997. The increase in rent from hotels was due to the acquisition of
four hotels in October 1997 and the obtaining of a fifth hotel through
foreclosure in September 1997. The increase in rent from commercial properties
was due to the acquisition of a shopping center in September 1997.
Property operations expense increased from $15.9 million in 1996 to $24.2
million in 1997. Property operations expense for hotels increased from $4.8
million in 1996 to $11.2 million in 1997, for commercial properties it decreased
from $10.4 million in 1996 to $10.0 million in 1997 and for land the expense
increased from $735,000 in 1996 to $3.0 million in 1997. The increase in hotel
property operations expense was due to the acquisition of the four hotels in
October 1997 and the obtaining of a fifth hotel through foreclosure in September
1997, the decrease for commercial properties was due to control of property
operations expenses, primarily at ART's merchandise mart and the increase for
land was due to 24 land parcels acquired in 1997.
Interest income decreased from $4.8 million in 1996 to $2.8 million in
1997. This decrease was primarily attributable to the sale of two notes
receivable and the collection of a third note receivable in 1997.
Other income decreased from $1.7 million in 1996 to $168,000 in 1997. This
decrease was due in part to recognizing a unrealized gain on marketable equity
securities of $486,000 in 1996 compared to an unrealized loss of $850,000 in
1997. This decrease was also attributable in part to a decrease in dividend
income and net gains on sales of marketable equity securities of $67,000 and
$56,000, respectively.
Interest expense increased from $16.5 million in 1996 to $30.2 million in
1997. Of this increase, $10.8 million was due to the debt secured by the Best
Western Oceanside Hotel acquired in 1996 and the Williamsburg Hospitality House,
Piccadilly Hotels, Pin Oak land, Scout land, Katy Road land, McKinney land, Lacy
Longhorn land, Santa Clarita land, Chase Oaks land, Pioneer Crossing land,
Pantex land, Keller land, Perkins land, Rasor land, Dowdy land, Palm Desert land
and LBJ land acquired in 1997, $2.0 million due to additional borrowings and a
full year of interest on the loan secured by NRLP units and $1.1 million due to
refinancing the debt secured by the Kansas City Holiday Inn and Denver
Merchandise Mart.
Advisory and mortgage servicing fees increased from $1.5 million in 1996 to
$2.7 million in 1997. The increase was attributable to the increase in ART's
gross assets, the basis for the fee.
General and administrative expenses, increased from $3.9 million in 1996 to
$7.8 million in 1997. The increase was attributable to a $1.1 million increase
in legal fees and travel expenses in 1997 relating to potential acquisitions,
financings and refinancings, a $1.1 million increase in advisor cost
reimbursements and $1.3 million attributable to a full year of general and
administrative expenses of PWSI.
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<PAGE>
Depreciation and amortization increased from $2.4 million in 1996 to $3.5
million in 1997 due to the acquisition of six properties in 1997.
Minority interest in 1997 is the preferred return paid on limited partner
units of Ocean Beach Partners, L.P., Valley Ranch, L.P., Grapevine American,
Ltd., Edina Park Plaza Associates, L.P. and Hawthorne Lakes Associates, L.P.
Equity in income of investees increased from $1.5 million in 1996 to $10.5
million in 1997. The increase in equity income was primarily attributable to an
increase of $32.1 million in gains on sale of real estate in IORI, NRLP and TCI
offset by a decrease of $1.9 million in CMET. ART's equity share of the gains
was $13.5 million. The increase was also attributable to an improvement in
income from property operations for the REITs and NRLP, from increased rental
rates and operating expense control.
Gains on the sale of real estate increased from $3.7 million in 1996 to
$20.3 million in 1997. In 1996, ART recognized a $2.0 million gain on the sale
of a 32.3 acre tract of BP Las Colinas land in Las Colinas, Texas, and a $1.1
million gain on the sale of a 4.6 acre tract of Las Colinas I land also in Las
Colinas, Texas.
In 1997, ART recognized gains of $5.9 million on the sale of a 49.7 acre
tract of BP Las Colinas land in Las Colinas, Texas; $3.5 million on the sale of
tracts totaling 116.8 acres of Valley Ranch land in Irving, Texas; $2.7 million
on the sale of a 12.5 acre tract of Las Colinas I land in Las Colinas, Texas;
$3.6 million on the sale of Pin Oak land in Houston, Texas; $216,000 on the sale
of a 99.7 acre tract of Kamperman land in Collin County, Texas; $371,000 on the
sale of a 32.0 acre tract of Parkfield land in Denver, Colorado; $211,000 on the
sale of a 86.5 acre tract of Rasor land in Plano, Texas; $106,000 on the sale of
Park Plaza Shopping Center in Manitowoc, Wisconsin; $480,000 on the sale of the
Mopac Building in St. Louis, Missouri; and $172,000 on the sale of a mortgage
note receivable. ART also recognized a previously deferred gain of $3.0 million
on the sale of Porticos Apartments.
ART reported $381,000 in extraordinary gains in 1996 compared to no
extraordinary gains in 1997. The 1996 extraordinary gains were ART's equity
share of equity investees' extraordinary gains from the early payoff of debt and
from an insurance settlement.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, ART may be potentially liable for removal or remediation costs, as
well as certain other potential costs relating to hazardous or toxic substances
(including governmental fines and injuries to persons and property) where
property-level managers have arranged for the removal, disposal or treatment of
hazardous or toxic substances. In addition, certain environmental laws impose
liability for release of asbestos-containing materials into the air and third
parties may seek recovery from ART for personal injury associated with these
materials.
Management is not aware of any environmental liability relating to the
above matters that would have a material adverse effect on ART's business,
assets or results of operations.
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<PAGE>
Inflation
The effects of inflation on ART's operations are not quantifiable. Revenues
from property operations fluctuate proportionately with inflationary increases
and decreases in housing costs. Fluctuations in the rate of inflation also
affect the sales values of properties and, correspondingly, the ultimate gains
to be realized by ART from property sales.
Year 2000
BCM has informed management that its computer hardware operating system and
computer software have been certified as year 2000 compliant. Triad, Ltd., an
affiliate of BCM that performs property management services for ART's
properties, has informed management that effective January 1, 1999, it began
using year 2000 compliant computer hardware and property management software for
ART's commercial properties. With regard to ART's apartments, Triad, Ltd. has
informed management that its subcontractors are also using year 2000 compliant
computer hardware and property management software.
ART has not incurred nor does it expect to incur any costs related to its
computer hardware and accounting and property management computer software being
modified, upgraded or replaced to make it year 2000 compliant. These costs have
been or will be borne by either BCM, Triad, Ltd. or the property management
subcontractors of Triad, Ltd.
Management has completed its evaluation of ART's computer controlled
building systems, such as security, elevators, heating and cooling, etc. to
determine what systems are not year 2000 compliant. Management believes that
necessary modifications are insignificant and do not require significant
expenditures to make the affected systems year 2000 compliant, as enhanced
operating systems are readily available.
ART has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks that ART faces are that certain of its vendors
will not be able to supply goods or services and that financial institutions and
taxing authorities will not be able to accurately apply payments made to them.
Management believes that other vendors are readily available and that financial
institutions and taxing authorities will, if necessary, apply monies received
manually. The likelihood of the above having a significant impact on ART's
operations is negligible.
Quantitative and Qualitative Disclosure About Market Risk of ART
ART's future operations, cash flow and fair values of financial instruments
are partially dependent upon the then existing market interest rates and market
equity prices. Market risk is the changes in the market rates and prices, and
the affect of the changes on the future operations of ART. ART manages its
market risk by matching a property's anticipated net operating income to an
appropriate financing. The following table contains only those exposures that
existed at December 31, 1998. Anticipation of exposures of risk on positions
that could possibly arise was not considered. ART's ultimate interest rate risk
and its affect on the operations will depend on future capital market exposures,
which cannot be anticipated with a probable assurance level.
Dollars in thousands.
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<PAGE>
<TABLE>
<CAPTION>
Assets
- ------
Trading Instruments--Equity Price Risk
Marketable securities at market value $ 2,899
Notes receivable
Fixed interest rate- fair value $ 53,688
1999 2000 2001 2002 2003 Thereafter Total
--------- ------- ------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Instrument's maturities $ 39,903 $ 6,020 $ -- $ -- $ 7,976 $ 594 $ 54,493
Instrument's amortization........ 3 3 3 3 3 2 17
Interest........................ 4,880 1,608 1,038 1,038 110 82 8,756
Average rate.................... 13.6% 13.0% 11.2% 11.1% 2.3% 2.3%
Liabilities
- -----------
Notes payable
Variable interest rate-fair value $ 48,580
1999 2000 2001 2002 2003 Thereafter Total
--------- ------- ------- -------- -------- ---------- --------
Instrument's maturities $ 7,250 $17,243 $ -- $ 14,000 $ -- $ 6,557 $ 45,050
Instrument's amortization........ 343 373 405 257 172 1,029 2,579
Interest........................ 4,138 2,324 1,951 1,405 576 2,593 12,987
Average rate...................... 9.3% 9.4% 8.8% 10.7% 7.5% 7.5%
Fixed interest rate- fair value $698,052
1999 2000 2001 2002 2003 Thereafter Total
--------- ------- ------- -------- -------- ---------- --------
Instrument's maturities $ 163,804 $41,630 $32,891 $ 11,166 $143,777 $ 235,704 $628,972
Instrument's amortization........... 7,356 7,873 8,558 8,685 7,169 42,201 81,842
Interest........................... 54,758 40,894 35,102 32,255 24,215 98,075 285,299
Average rate....................... 9.3% 8.0% 7.6% 7.4% 6.7% 6.7%
</TABLE>
BUSINESS OF NRLP
General
NRLP is a publicly traded master limited partnership formed under the
Delaware Uniform Limited Partnership Act on January 29, 1987. It commenced
operations on September 18, 1987 when, through NOLP, also a Delaware limited
partnership, it acquired all of the assets and assumed all of the liabilities of
35 public and private limited partnerships. NOLP was formed on February 27,
1987, to facilitate compliance with recording and filing requirements by holding
title to and operating the real estate owned by NRLP. NRLP and NOLP operate as
an economic unit and, unless the context otherwise requires, all references
herein to NRLP shall constitute references to NRLP and NOLP as a unit. NRLP is
the sole limited partner of NOLP and owns a 99% beneficial interest in NOLP.
Unless earlier dissolved, in accordance with the provisions of NRLP's Agreement
of Limited Partnership, (the Partnership Agreement), NRLP will terminate
December 31, 2086. NRLP's principal offices are located at 10670 North Central
Expressway, Suite 300, Dallas, Texas 75231. NRLP believes that its offices are
suitable and adequate for its present operations.
NRLP's primary business is owning and operating, through NOLP, a portfolio
of real estate and financing real estate and real estate activities through
investments in mortgage loans. In addition,
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<PAGE>
NRLP owns interests in mortgage loans that were either funded by NRLP or that
arose from the sale of NRLP's properties which are secured by various commercial
properties, land and partnership interests in income producing properties. These
loans are more fully described below under "Real Estate" on page __ and
"Mortgage Loans" on page __.
The objectives of NRLP are to increase asset values and, to a lesser
extent, to generate cash available for distribution to unitholders through
aggressive management of NRLP's real estate and mortgage notes receivable
portfolios. NRLP intends to continue its lending activity to take advantage of
favorable interest rate spreads or profit participation opportunities. NRLP's
primary emphasis, however, remains on capital appreciation rather than current
income. NRLP has been making quarterly distributions since the fourth quarter of
1993. In each quarter of 1998, NRLP declared a quarterly distribution of $.125
per unit. NRLP declared total distributions of $.50 per unit or a total of $3.2
million in 1998 and 1999.
The general partner, and owner of 1% of a beneficial interest in each of
NRLP and NOLP, is NMC, a Nevada corporation and wholly owned subsidiary of ART.
At the discretion of NMC, NRLP may, from time to time, acquire or sell
properties and other assets, renovate or make improvements to properties, make
additional investments or obtain additional or initial financing for its
properties.
The establishment, implementation and modification of the business
objectives and policies of NRLP are the responsibility of NMC, and, in general,
the limited partners have no voting rights with respect to these matters. Though
NRLP's primary business purpose is the ownership of improved, income-producing
real estate, NRLP may also conduct any business that may lawfully be conducted
under the Delaware Revised Uniform Limited Partnership Act.
In November 1992, NRLP refinanced 52 of the apartments in its real estate
portfolio and the underlying debt of a wraparound mortgage note receivable with
a financial institution. To facilitate the refinancing, NOLP transferred these
assets to GCLP, a Delaware limited partnership in which NOLP owns a 99.3%
limited partner interest. Concurrent with the transfer, GCLP refinanced all of
the mortgage debt associated with the transferred properties and the wraparound
mortgage note. Effective August 1998, Garden National Realty, Inc. (GNRI), a
Nevada corporation and wholly owned subsidiary of ART, acquired the .7% managing
general partner interest in GCLP.
The Manager
All decisions relating to the operation of NRLP, including the acquisition,
disposition, improvement, financing or refinancing of NRLP's properties or other
investments, are made by NMC. BCM performs some administrative functions for
NRLP, such as accounting services, mortgage servicing and portfolio review and
analysis, on a cost reimbursement basis. BCM also performs loan placement
services, leasing services, real estate brokerage and property management
services with respect to some of NRLP's properties, and may perform other
services for NRLP for fees and commissions. BCM is a company owned by a trust
for the benefit of the children of Gene E. Phillips. Mr. Phillips served as a
director of BCM until December 1989 and as chief executive officer of BCM until
September 1, 1992.
Since February 1, 1990, affiliates of NMC have provided property management
services to NRLP. Currently, Triad, Ltd. provides property management services.
Triad, Ltd. subcontracts with other entities for the property-level management
services to NRLP. The general partner of Triad, Ltd. is BCM. The limited
partners of Triad, Ltd. are (1) Syntek West, which is a company owned by Gene
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E. Phillips and (2) Gene E. Phillips. Triad, Ltd. subcontracts the property-
level management and leasing of nine of NRLP's commercial properties to Regis
Realty, which is a company owned by Syntek West. Regis Realty is entitled to
receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with Triad,
Ltd.
BCM performs administrative functions such as accounting services, mortgage
servicing and portfolio review and analysis for NRLP on a cost reimbursement
basis. Affiliates of BCM also perform loan placement services, leasing services
and real estate brokerage, and other services for NRLP for fees and commissions.
Geographic Regions
NRLP has divided the United States into the following six geographic
regions.
Northeast region comprised of the states of Connecticut, Delaware,
----------------
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island and Vermont, and the District of Columbia. NRLP has no
properties in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia,
----------------
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. NRLP
has 8 apartments and 4 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana,
----------------
New Mexico, Oklahoma and Texas. NRLP has 13 apartments and 3 commercial
properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas,
--------------
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, West Virginia and Wisconsin. NRLP has 18 apartments and 1
commercial property in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana,
---------------
Nevada, Utah and Wyoming. NRLP has 2 apartments and 1 commercial property
in this region.
Pacific region comprised of the states of Alaska, California, Hawaii,
--------------
Oregon and Washington. NRLP has 3 apartments and 3 commercial properties in
this region.
________________________
(1) Does not include 1 apartment and 1 commercial property under
construction in the Southwest region.
Real Estate
At September 30, 1999, no single asset of NRLP accounted for 10% or
more of its total assets. At September 30, 1999, 48% of NRLP's assets consisted
of real estate and 43% consisted of mortgage notes and interest receivable. The
remaining 9% of NRLP's assets at September 30, 1999, consisted of cash, cash
equivalents and other assets.
NRLP's real estate consists of properties purchased and properties obtained
through foreclosure of mortgage notes. NRLP holds investments in 44 apartments
and 12 commercial properties (6 office buildings and 6 shopping centers) in all
geographic regions of the United States,
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except for the Northeast region, as shown more specifically in the table below.
NRLP holds mortgage notes receivable secured by real estate in all geographic
regions of the United States, except the Pacific and Mountain regions, as shown
more specifically in the table under "Mortgage Loans" below.
At September 30, 1999, NRLP owned 59 properties located in 20 states,
consisting of 44 apartments with a total of 10,506 units, 12 commercial
properties (6 office buildings with an aggregate of 394,271 sq. ft. and 6
shopping centers with an aggregate of 712,338 sq. ft.), a 410,910 sq. ft. office
building and a 312 unit apartment, both under construction, and 13.5 acres of
unimproved land.
All but 2 of NRLP's properties are encumbered by mortgage debt. Generally,
the ability to make debt service payments under a mortgage loan will be
dependent upon the performance of the property, which is subject to the risks
associated with real estate investments, many of which are beyond the control of
management or the general partner. In the event of default under one of these
mortgages, the property securing the mortgage would be subject to foreclosure.
Most of NRLP's borrowings are subject to substantial balloon payments at
maturity.
Eighteen of the apartments transferred to GCLP were refinanced in 1998,
under a five-year blanket mortgage loan, evidenced by a single mortgage with an
original principal balance of $150.0 million. A portion of the blanket mortgage
debt was assigned to each apartment complex and each is cross- defaulted and
cross-collateralized. In the event of a default, the lender is entitled to
accelerate all or any portion of the principal amount of the loan and to
exercise its remedies against any or all of the mortgaged properties.
Additional detailed information with respect to individual NRLP properties
and associated debt is set forth in "SELECTED FINANCIAL DATA OF NRLP" on page
__.
The following table sets forth the percentages, by property type and
geographic region, of NRLP's real estate as of September 30, 1999.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties
---------- ----------
<S> <C> <C>
Southeast............................. 17.9% 31.8%
Southwest............................. 33.1 18.6
Midwest............................... 37.9 27.5
Mountain.............................. 7.0 4.1
Pacific............................... 4.1 18.0
----- -----
100.0% 100.0%
</TABLE>
The foregoing table is based solely on the number of apartment units and
amount of commercial square footage owned by NRLP and does not reflect the value
of NRLP's investment in each geographic region. See "SELECTED FINANCIAL DATA OF
NRLP" on page __ for a more detailed description of NRLP's real estate.
A summary of the activity in NRLP's owned real estate portfolio during 1998
and the first nine months of 1999 is as follows:
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<PAGE>
<TABLE>
<S> <C>
Owned properties in real estate portfolio at January 1, 1998..... 79
Properties purchased............................................. 3
Loan converted to property interest.............................. 1
Properties sold.................................................. (24)
---
Owned properties in real estate portfolio at September 30, 1999.. 59
===
</TABLE>
Set forth below are NRLP's properties and the monthly rental rate for
apartments and the average annual rental rate for commercial properties and
occupancy thereof at December 31, 1998, 1997, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Rent per Square Foot
---------------------------------------
Units/Square
Property Location Footage 1998 1997 1996 1995 1994
-------- -------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Apartments:
- -----------
Arlington Place Pasadena, TX 230 units/205,476 sq. ft. $ .64 $ .63 $ .62 $ .60 $ .60
Barcelona Tampa, FL 368 units/346,144 sq. ft. .52 .50 .49 .47 .49
Bavarian Middletown, OH 259 units/229,560 sq. ft. .63 .63 .62 .60 .59
Bent Tree Addison, TX 292 units/244,480 sq. ft. .73 .70 .66 .60 .56
Blackhawk Ft. Wayne, IN 209 units/190,520 sq. ft. .57 .54 .53 .53 .53
Bridgestone Friendswood, TX 76 units/ 65,519 sq. ft. .67 .64 .64 .62 .62
Candlelight Square Lenexa, KS 119 units/114,630 sq. ft. .61 .58 .55 .53 .51
Chalet I Topeka, KS 162 units/131,791 sq. ft. .65 .62 .61 .61 .61
Chalet II Topeka, KS 72 units/ 49,164 sq. ft. .70 .68 .67 .67 *
Chateau Bellevue, NE 115 units/ 99,220 sq. ft. .71 .69 .63 .60 .59
Club Mar Sarasota, FL 248 units/230,180 sq. ft. .65 .61 .59 .57 .59
Confederate Point Jacksonville, FL 206 units/277,860 sq. ft. .58 .46 .45 .44 .42
Country Place Round Rock, TX 152 units/119,808 sq. ft. .72 .71 .71 .68 .63
Covered Bridge Gainesville, FL 176 units/171,416 sq. ft. .64 .64 .63 .60 .57
Fair Oaks Euless, TX 208 units/166,432 sq. ft. .65 .61 .58 .55 .52
Four Seasons Denver, CO 384 units/254,900 sq. ft. .86 .80 .78 .77 .74
Fox Club Indianapolis, IN 336 units/317,600 sq. ft. .56 .54 .54 .54 .54
Foxwood Memphis, TN 220 units/212,000 sq. ft. .57 .54 .51 .49 .46
Horizon East Dallas, TX 166 units/141,081 sq. ft. .55 .53 .52 .50 .48
Kimberly Woods Tucson, AZ 279 units/249,678 sq. ft. .59 .57 .55 .54 .52
La Mirada Jacksonville, FL 320 units/341,400 sq. ft. .52 .51 .50 .47 .46
Lake Nora Arms Indianapolis, IN 588 units/429,380 sq. ft. .68 .65 .63 .61 .60
Lantern Ridge Richmond, VA 120 units/112,296 sq. ft. .54 .53 .51 .50 .49
Mallard Lake Greensboro, NC 336 units/295,560 sq. ft. .64 .63 .62 .59 .57
Manchester
Commons Manchester, MO 280 units/331,820 sq. ft. .56 .53 .50 .49 .46
Mesa Ridge Mesa, AZ 480 units/386,336 sq. ft. .68 .65 .65 .61 .59
Nora Pines Indianapolis, IN 254 units/254,676 sq. ft. .60 .59 .57 .55 .55
Oak Hollow Austin, TX 409 units/290,072 sq. ft. .90 .87 .87 .81 .75
Oak Tree Grandview, MO 189 units/160,591 sq. ft. .60 .57 .54 .54 .52
Olde Towne Middletown, OH 199 units/179,395 sq. ft. .58 .57 .57 .57 .57
Pheasant Ridge Bellevue, NE 264 units/243,960 sq. ft. .62 .61 .56 .51 .51
Pines Little Rock, AR 257 units/221,981 sq. ft. .42 .41 .41 .39 .37
Place One Tulsa, OK 407 units/302,263 sq. ft. .55 .57 .51 .49 .47
Quail Point Huntsville, AL 184 units/202,602 sq. ft. .44 .42 .42 .41 .41
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
Rent per Square Foot
---------------------------------------
Units/Square
Property Location Footage 1998 1997 1996 1995 1994
-------- -------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Regency Lincoln, NE 106 units/111,700 sq. ft. .67 .63 .60 .56 .56
Regency Falls San Antonio, TX 546 units/348,692 sq. ft. .64 .63 .63 .63 .60
Rockborough Denver, CO 345 units/249,723 sq. ft. .80 .73 .70 .70 .67
Santa Fe Kansas City, MO 225 units/180,416 sq. ft. .58 .56 .53 .52 .51
Shadowood Addison, TX 184 units/134,616 sq. ft. .76 .74 .69 .66 .64
Sherwood Glen Urbandale, IA 180 units/143,745 sq. ft. .79 .77 .75 .74 .72
Stonebridge Florissant, MO 100 units/140,576 sq. ft. .43 .45 .43 .46 .46
Summerwind Reseda, CA 172 units/114,711 sq. ft. .93 .90 .90 .97 .97
Sun Hollow El Paso, TX 216 units/156,000 sq. ft. .66 .65 .64 .63 .63
Tanglewood Arlington Heights, IL 838 units/612,816 sq. ft. 1.07 1.03 .99 .96 .96
Timber Creek Omaha, NE 180 units/162,252 sq. ft. .70 .66 .64 .60 .59
Villa Del Mar Wichita, KS 162 units/128,004 sq. ft. .60 .58 .58 .58 .57
Villas Plano, TX 208 units/156,632 sq. ft. .80 .77 .73 .70 .67
Whispering Pines Canoga Park, CA 102 units/ 61,671 sq. ft. 1.05 1.01 1.00 .98 .98
Whispering Pines Topeka, KS 320 units/299,264 sq. ft. .51 .49 .49 .49 .49
Windridge Austin, TX 408 units/281,778 sq. ft. .89 .88 .88 .85 .80
Windtree I & II Reseda, CA 159 units/109,062 sq. ft. .93 .90 .90 .90 .90
Woodlake Carrollton, TX 256 units/210,208 sq. ft. .77 .73 .68 .66 .63
Woodsong II Smyrna, GA 190 units/207,460 sq. ft. .56 .54 .54 .51 .46
Woodstock Dallas, TX 320 units/222,112 sq. ft .63 .60 .56 .54 .51
Office Buildings:
- -----------------
56 Expressway Oklahoma City, OK 54,649 sq. ft 9.53 8.64 8.21 7.94 7.77
Executive Court Memphis, TN 41,840 sq. ft. 10.64 9.79 10.11 9.87 9.91
Marina Playa Santa Clara, CA 124,322 sq. ft. 21.55 20.54 19.54 18.11 17.00
Melrose Business Oklahoma City, OK 124,200 sq. ft. 3.03 2.88 2.76 2.65 2.59
Park
University Square Anchorage, AK 22,260 sq. ft. 13.86 14.07 15.07 13.16 13.81
Shopping Centers:
- -----------------
Cross County Mall Mattoon, IL 304,575 sq. ft. 4.99 4.88 4.90 4.86 4.39
Cullman Cullman, AL 92,466 sq. ft. 3.91 3.87 3.86 3.83 3.82
Harbor Plaza Aurora, CO 45,863 sq. ft. 9.86 9.44 8.73 8.42 7.82
Katella Plaza Orange, CA 52,169 sq. ft. 9.79 9.20 7.73 9.97 11.34
Regency Point Jacksonville, FL 67,410 sq. ft. 12.36 12.07 11.39 11.26 10.63
Westwood Tallahassee, FL 149,855 sq. ft. 6.77 6.44 6.42 5.31 5.00
</TABLE>
* Property was acquired in 1995, 1996, 1997 or 1998.
** Leased to a licensed casino operator.
120
<PAGE>
<TABLE>
<CAPTION>
Occupancy %
----------------------------------------------------------------------
Property 1998 1997 1996 1995 1994
- -------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Apartments:
- -----------
Arlington Place 98 95 91 95 88
Barcelona 91 94 93 96 85
Bavarian 90 92 96 92 95
Bent Tree 93 96 97 100 99
Blackhawk 94 96 95 94 96
Bridgestone 97 99 94 97 93
Candlelight Square 96 94 97 96 92
Chalet I 97 96 96 94 87
Chalet II 91 93 89 97 *
Chateau 94 95 99 97 94
Club Mar 93 99 91 95 92
Confederate Point 93 91 94 98 92
Country Place 94 88 93 95 97
Covered Bridge 97 98 94 100 99
Fair Oaks 93 96 96 98 96
Four Seasons 96 98 94 93 96
Fox Club 89 95 88 91 95
Foxwood 90 94 93 95 97
Hidden Valley 96 96 93 97 96
Horizon East 96 93 92 94 93
Kimberly Woods 92 92 93 94 95
La Mirada 99 91 93 98 93
Lake Nora Arms 94 95 91 95 94
Lake Nora Arms 97 93 95 93 98
Mallard Lake 91 93 95 97 98
Manchester Commons 91 95 93 95 94
Mesa Ridge 95 98 88 92 95
Nora Pines 95 92 94 97 95
Oak Hollow 97 94 91 97 99
Oak Tree 99 95 94 96 95
Olde Towne 90 94 92 91 94
Pheasant Ridge 89 93 94 97 85
Pines 92 90 93 90 88
Place One 93 92 96 96 92
Quail Point 89 91 96 86 90
Regency 87 98 95 88 97
Regency Falls 82 92 93 93 90
Rockborough 94 94 92 92 96
Santa Fe 92 93 91 92 90
Shadowood 94 96 97 97 98
Sherwood Glen 90 94 96 93 93
Stonebridge 95 100 98 92 92
Summerwind 97 96 92 91 92
Sun Hollow 93 97 90 96 92
Tanglewood 92 93 92 95 96
Timber Creek 97 95 98 94 91
Villa Del Mar 92 97 94 90 89
Villas 94 98 95 95 97
Whispering Pines, CA 93 94 92 93 93
Whispering Pines, KS 95 95 89 90 92
Windridge 94 95 93 95 96
Windtree I & II 95 96 94 91 24
Woodlake 97 98 99 98 99
Woodsong II 99 96 85 99 97
Woodstock 95 92 95 96 94
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
Occupancy %
----------------------------------------------------------------------
Property 1998 1997 1996 1995 1994
- -------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Office Buildings:
- -----------------
56 Expressway 91 94 88 93 85
Executive Court 96 99 95 92 92
Marina Playa 97 100 99 97 81
Melrose Business Park 80 93 90 97 81
University Square 81 100 84 90 82
Shopping Centers:
- -----------------
Cross County Mall 90 89 90 95 87
Cullman 98 97 98 00 96
Harbor Plaza 86 94 97 78 87
Katella Plaza 71 71 71 71 71
Regency Point 91 83 84 81 95
Westwood 93 93 74 59 81
</TABLE>
* Property was acquired in 1995, 1996, 1997 or 1998.
** Leased to a licensed casino operator.
Occupancy presented above is without reference to whether leases in effect are
at, below or above market rates.
As of September 30, 1999, none of NRLP's properties had a book value which
exceeded 10% of NRLP's total assets. For the nine months ended September 30,
1999, none of NRLP's properties had revenues that exceeded 10% of NRLP's total
revenues.
NRLP owns a fee simple interest in each property except for the Katella and
Westwood shopping centers located in Orange, California and Tallahassee,
Florida, respectively, in each of which NRLP owns a long-term leasehold
interest. These leasehold interests permit some potential for capital
appreciation and marketability.
Mortgage Loans
In addition to real estate, a substantial portion of NRLP's assets are
invested in mortgage notes receivable, secured by income-producing real estate,
unimproved land and other income producing assets. NRLP expects that the
percentage of its assets invested in mortgage loans will increase as it
increases its lending activity in 1999 to take advantage of interest rate
spreads or profit participation opportunities. NRLP intends to service and hold
for investment the mortgage notes currently in its portfolio. NRLP's mortgage
notes consist of first, wraparound and junior mortgage loans secured by real
estate, and other secured and unsecured loans.
Types of Mortgage Activity. NRLP may originate its own mortgage loans.
--------------------------
NRLP is not, however, considering acquiring existing mortgage notes. BCM, in its
capacity as a mortgage servicer, services NRLP's mortgage notes. NRLP's
investment policy is described in "BUSINESS OF NRLP--General" on page ___.
Types of Properties Subject to Mortgages. The properties securing NRLP's
----------------------------------------
mortgage notes receivable portfolio at December 31, 1998 and September 30, 1999,
consisted of an office building, shopping centers, unimproved land and
partnership interests.
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<PAGE>
At September 30, 1999, NRLP's mortgage notes had an aggregate face amount
of $174.3 million and an aggregate net carrying value of $152.0 million, net of
deferred gains ($2.4 million), discounts ($109,000) and allowance for estimated
losses ($1.9 million).
The following table sets forth the percentage (based on the outstanding
mortgage note balance at September 30, 1999), by property type and geographic
region, of the properties that serve as collateral for the mortgage notes in
NRLP's mortgage notes receivable portfolio during 1998 and through September 30,
1999, excluding the $128.3 million in mortgage notes secured by unimproved land
and other security as discussed below. See "SELECTED FINANCIAL DATA FOR NRLP" on
page ___ for further details of NRLP's mortgage notes receivable portfolio.
<TABLE>
<CAPTION>
Commercial
Region Apartments Properties Total
------ ---------- ---------- -----
<S> <C> <C> <C>
Southeast................... 44.2% --% 44.2%
Southwest................... 5.5 -- 5.5
Northeast................... -- 9.7 9.7
Midwest..................... -- 40.6 40.6
------- ------ -----
49.7% 50.3% 100.0%
======= ====== =====
</TABLE>
A summary of the activity in NRLP's mortgage notes receivable portfolio
during 1998 and the first nine months of 1999 as follows:
<TABLE>
<S> <C>
Loans in mortgage notes receivable portfolio at January 1, 1998...... 13
Loans funded......................................................... 19
Loans paid in full................................................... (12)
Loan converted to property interest (1)
----
Loans in mortgage notes receivable portfolio at September 30, 1999... 19
====
</TABLE>
First Mortgage Loans. These loans can provide for level periodic payments
--------------------
of principal and interest, may involve interest only payments or for all
interest and a balloon principal payment at maturity with respect to first
mortgage loans, it is NRLP's general policy to require that the borrower provide
a mortgagee's title policy or an acceptable legal opinion of title as to the
validity and the priority of the mortgage lien over all other obligations,
except liens arising from unpaid property taxes and other exceptions normally
allowed by first mortgage lenders in the relevant area. At September 30, 1999,
NRLP had an aggregate of $14.9 million of these first mortgage loans
outstanding.
Wraparound Mortgage Loans. A wraparound mortgage loan, sometimes called an
-------------------------
all-inclusive loan, is a mortgage loan having an original principal amount equal
to the outstanding balance under the prior existing mortgage loan(s) plus the
amount actually advanced under the wraparound mortgage loan. Wraparound mortgage
loans may provide for full, partial or no amortization of principal.
At September 30, 1999, NRLP's one wraparound mortgage note receivable was
in default. NRLP has been vigorously pursuing its rights regarding the loan.
NRLP expects to incur no loss in excess of reserves previously provided if it is
unable to collect the balance due.
Junior Mortgage Loans. Junior mortgage loans are loans secured by
---------------------
mortgages that are subordinate to one or more prior liens either on the fee or a
leasehold interest in real estate. Recourse on these loans ordinarily includes
the real estate on which the loan is made, other collateral and
123
<PAGE>
personal guarantees by the borrower. At September 30, 1999, NRLP had an
aggregate of $10.9 million of these junior mortgage loans outstanding.
Other. Beginning in 1997 and through January 1999, NRLP funded a $1.6
-----
million loan commitment to Bordeaux. The loan is secured by the following:
(1) a 100% membership interest in Bordeaux, which owns a shopping center
in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5
acres of undeveloped land in Oklahoma City, Oklahoma; and
(3) the personal guarantees of the Bordeaux members.
The loan bears interest at 14.0% per annum. Until November 1998, the loan
required monthly payments of interest only at 12.0% per annum, with the deferred
interest payable at maturity in January 1999. In November 1998, the loan was
modified to allow payments based on monthly cash flow of the collateral property
and the maturity date was extended to December 1999. In the second quarter of
1999, the loan was again modified, increasing the loan commitment to $2.1
million and NRLP funded an additional $33,000. In the third quarter of 1999,
NRLP funded an additional $213,000. The property has had no cash flow;
therefore, NRLP ceased accruing interest in the second quarter of 1999. In
October 1999, NRLP received a $724,000 paydown on the loan, which was applied
first to accrued but unpaid interest due of $261,000 then to principal, reducing
the loan balance to $1.4 million. In October 1999, Richard D. Morgan, a
Bordeaux member, was elected a director of NMC, the general partner of NRLP.
In June 1998, NRLP funded a $365,000 loan to RB Land & Cattle, L.L.C. The
loan is secured by a pledge of a note secured by 7,200 acres of undeveloped land
near Crowell, Texas and the personal guarantee of the owner and manager of the
borrower. The loan bore interest at 10.0% per annum and matured in December
1998. All principal and interest were due at maturity. The borrower did not
make the required payments and the loan was classified as nonperforming. NRLP
has begun foreclosure proceedings. NRLP expects to incur no loss on foreclosure
as the fair value of the collateral property less estimated costs of sale,
exceeds the carrying value of the note.
In August 1998, NRLP funded a $3.7 million loan to JNC. The loan was
secured by a contract to purchase 387 acres of land in Collin County, Texas, and
the personal guaranty of its partner. The loan bore interest at 12.0% per annum
and matured the earlier of termination of the purchase contract or February
1999. All principal and interest were due at maturity. This loan was cross-
collateralized with other JNC loans. In January 1999, ART purchased the contract
from JNC and acquired the land. In connection with the purchase, GCLP funded an
additional $6.0 million of a $95.0 million loan commitment to ART. A portion of
the funds were used to payoff the $3.7 million loan, including accrued but
unpaid interest, paydown by $1.3 million the JNC line of credit and paydown by
$820,000 the JNC Frisco Panther Partners Ltd. loan.
Also in August 1998, NRLP funded a $635,000 loan to La Quinta Partners,
LLC. The loan is secured by interest bearing accounts prior to being used as
escrow deposits toward the purchase of a total of 956 acres of land in La
Quinta, California. The loan bore interest at 10.0% per annum and matured in
November 1998. All principal and interest were due at maturity. In November and
December 1998, NRLP received $250,000 in principal paydowns. In the first
quarter of 1999, NRLP received an additional $25,000 paydown. In the second
quarter of 1999, the loan was modified,
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<PAGE>
increasing the interest rate to 15.0% per annum and extending the maturity date
to November 1999. Accrued but unpaid interest was added to the principal
balance, increasing it by $42,000 to $402,000.
In October 1998, NRLP funded a $350,000 loan to Four "J" International
Corp., 5J-CTMS, Ltd. and an individual. The loan was secured by 1.1 million
Class A limited partnership units in Grapevine American Ltd., which are
convertible into shares of Series G Cumulative Convertible Preferred Stock of
ART. The loan bore interest at 15.0% per annum and matured in February 1999. All
principal and interest were due at maturity. In January 1999, the note was
collected in full.
In July 1997, NRLP funded a $700,000 loan to an individual. In February
1998, NRLP funded an additional $40,000 and the loan was modified, increasing
the principal balance to $740,000. The loan was secured by a security interest
in an oil, gas and mineral lease in Anderson County, Texas and by a second lien
mortgage on a ranch in Henderson County, Texas. The loan bore interest at 12.0%
per annum, required monthly payments of interest only and originally matured in
December 1998. In October 1998, the loan was modified, extending the maturity
date to September 1999. In October 1999, the loan, including accrued but unpaid
interest, was collected in full.
Related Party. In 1998 and the first nine months of 1999, GCLP funded
-------------
$94.7 million of a then $95.0 million loan commitment to ART. The loan is
secured by:
(1) second liens on an office building in Minnesota, three apartments in
Mississippi and one in Texas, and 130.54 acres of land in Texas;
(2) the stock of ART Holdings, Inc., a wholly owned subsidiary of ART that
owned 3,268,535 units of NRLP as of October 31, 1999; and
(3) the stock of NMC.
The loan bears interest at 12.0% per annum, requires monthly payments of
interest only and matures in November 2003. In September 1999, the board of
GCLP approved an increase in the loan commitment to $125.0 million. In February
1999 GCLP received a $999,000 paydown on the loan. In October 1999, GCLP funded
an additional $5.5 million and received a paydown of $150,000.
In December 1998, in connection with a litigation settlement, NMC, a wholly
owned subsidiary of ART and the new general partner of NRLP, assumed
responsibility for repayment to NRLP of the $12.2 million paid by NRLP to the
class members and legal counsel. The loan bears interest at the 90 day LIBOR
(London InterBank Offered Rate) plus 2.0% per annum, currently 7.0% per annum,
adjusted every 90 days and requires annual payments of accrued interest plus
principal payments of $500,000 in each of the first three years, $750,000 in
each of the next three years, $1.0 million in each of the next three years, with
payment in full of the remaining balance in the tenth year. The note is
guaranteed by ART. The note matures upon the earlier of the liquidation or
dissolution of NRLP, NMC ceasing to be the general partner or 10 years from
March 31, 1999, the date of the first cash distribution to the class members in
a litigation settlement.
During 1998, NRLP funded a $1.8 million loan to Warwick of Summit Square,
Inc. The loan is secured by a second lien on a shopping center in Rhode Island,
by 100% of the stock of the borrower and by the personal guarantee of the
principal shareholder of the borrower. The loan bears interest at 14.0% per
annum and matures in December 1999. All principal and interest are due at
maturity. During 1999, NRLP funded an additional $314,000, increasing the loan
balance to $2.1
125
<PAGE>
million. In October 1999, Richard D. Morgan, the principal shareholder of
Warwick of Summit Square, Inc., was elected a director of NMC, the general
partner of NRLP.
In February 1999, GCLP funded a $5.0 million unsecured loan to One Realco
Corporation, which at September 30, 1999, owned approximately 15.8% of the
outstanding shares of ART's common stock. The loan bears interest at 12.0% per
annum and matures in February 2000. All principal and interest are due at
maturity. The loan is guaranteed by BCM.
In October 1999, GCLP funded a $4.7 million loan to Realty Advisors, Inc.,
the corporate parent of BCM. The loan is secured by a pledge of 100% of Realty
Advisors, Inc.'s interest in American Reserve Life Insurance Company. The loan
bears interest at a variable rate, currently 10.25% per annum, and matures in
November 2001. All principal and interest are due at maturity.
Investment in Marketable Equity Securities of ART
At September 30, 1999, NRLP owned 195,732 shares of ART's common stock,
approximately 1.9% of ART's outstanding shares. The executive officers of the
general partner are also executive officers of ART. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF NRLP" on page ___. As of October
31, 1999, the market value of the ART common stock owned by NRLP was $3.4
million. As of September 30, 1999, ART and BCM owned 3,551,569 and 696,975
units, respectively, of NRLP's units of limited partner interest, approximately
56.2% and 11.0% of the units then outstanding.
Legal Proceedings
NRLP is involved in various lawsuits arising in the ordinary course of
business. Management of NRLP is of the opinion that the outcome of these
lawsuits would have no material impact on NRLP's financial condition.
Competition
The real estate business is highly competitive and NRLP competes with
numerous entities engaged in real estate activities, some of which may have
greater financial resources than NRLP. Management believes that success against
the competition is dependent upon the geographic location of the property, the
performance of the property managers in areas such as marketing, collection and
the ability to control operating expenses, the amount of new construction in the
area, and the maintenance and appearance of the property. Additional competitive
factors with respect to commercial properties are the ease of access to the
property, the adequacy of related facilities, such as parking, and sensitivity
to market conditions in setting rent levels. With respect to apartments,
competition is also based upon the design and mix of the units and the ability
to provide a community atmosphere for the tenants. Management believes that
general economic circumstances and trends and the rate at which properties are
renovated or new properties are developed in the vicinity of each of NRLP's
properties are also competitive factors.
To the extent that NRLP seeks to sell any of its properties, the sales
prices for the properties may be affected by competition from other real estate
entities and financial institutions also attempting to sell their properties
located in areas in which NRLP's properties are located, as well as aggressive
buyers attempting to penetrate or dominate a particular market.
126
<PAGE>
The executive officers of NMC are also executive officers of ART and some
other entities, each of which has business objectives similar to NRLP's. These
executive officers owe fiduciary duties to the other entities and NRLP under
applicable law.
In addition, NRLP also competes with other entities which are affiliates of
BCM or for which BCM acts as advisor, and which may have investment objectives
similar to NRLP's and that may compete with NRLP in purchasing, selling, leasing
and financing real estate and real estate related investments. In resolving any
potential conflicts of interest which may arise, BCM has informed NRLP that it
intends to continue to exercise its best judgment as to what is fair and
reasonable under the circumstances in accordance with applicable law.
NRLP is subject to all of the risks incident to the ownership of real
estate and interests therein, many of which relate to the general illiquidity of
real estate investments. These risks include changes in general or local
economic conditions, changes in interest rates and the availability of permanent
mortgage financing which may render the sale or refinancing of a property
difficult or unattractive and which may make debt service burdensome, changes in
real estate and zoning laws, increases in real estate taxes, federal or local
economic or rent controls, floods, earthquakes, hurricanes and other acts of God
and other factors beyond the control of management. Also, the illiquidity of
real estate investments may impair management's ability to respond promptly to
changing circumstances. Management believes that the risks are partially
mitigated by the diversification by geographic region and property type of
NRLP's real estate portfolio.
Employees
Neither NRLP nor NOLP has any employees, payroll or benefit plans and pays
no salary or other cash compensation, except as described under "EXECUTIVE
COMPENSATION OF NRLP" below. See also "BUSINESS OF NRLP - The Manager" on page
___.
SELECTED FINANCIAL DATA OF NRLP
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
------------- -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per unit)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenues........................... $ 82,221 $ 85,661 $ 113,834 $ 117,365 $ 112,681 $ 110,892 $ 107,546
Expenses
Interest.......................... 21,398 23,483 39,685 34,189 33,759 34,956 34,145
Property operations............... 40,370 57,587 62,736 64,620 63,136 63,320 60,793
General and administrative........ 5,492 5,075 6,820 7,856 5,975 6,252 5,809
Depreciation...................... 6,051 7,432 9,691 10,338 10,247 10,268 10,034
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses.................. 73,311 93,577 118,932 117,003 113,117 114,796 110,781
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income(loss) from operations....... 8,910 (7,916) (5,098) 362 (436) (3,904) (3,235)
Gain on sale of real estate 74,019 34,216 52,589 8,356 61 7,701 8,252
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 82,929 $ 26,300 $ 47,491 $ 8,718 $ (375) $ 3,797 $ 5,017
========== ========== ========== ========== ========== ========== ==========
PER UNIT DATA
Net income (loss).................. $ 12.86 $ 4.08 $ 7.36 $ 1.35 $ (.06) $ .58 $ .77
========== ========== ========== ========== ========== ========== ==========
Distributions per unit............. $ .375 $ .375 $ .50 $ 1.90 $ 1.10 $ 1.28 $ .44
Weighted average units of limited
partner interest used in
computing earnings per unit....... 6,321,533 6,322,528 6,321,425 6,327,418 6,387,270 6,418,104 6,418,572
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
------------- -------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real estate, net................... $172,293 $167,409 $ 211,424 $ 224,764 $229,482 $241,535
Notes and interest receivable, net. 151,972 114,525 24,943 13,279 10,246 11,532
Total assets....................... 356,148 337,782 279,580 281,333 292,930 290,140
Notes and interest payable......... 297,975 358,100 339,102 325,921 326,500 326,775
Redeemable General
Partner interest.................. -- -- 45,442 37,855 31,997 28,800
Partners' equity (deficit) 48,399 (32,115) (122,275) (112,946) (99,267) (91,823)
</TABLE>
Units and per unit data have been restated for the three for one forward
unit split, effected January 2, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF NRLP
Introduction
NRLP is a Delaware limited partnership formed on January 29, 1987, that
owns and operates a portfolio of real estate and mortgage notes. Most of NRLP's
properties were acquired in transactions consummated on September 18, 1987,
pursuant to which NRLP acquired all of the assets and assumed all of the
liabilities of 35 public and private limited partnerships.
Liquidity and Capital Resources
Cash and cash equivalents totaled $705,000 at September 30, 1999, compared
to $9.0 million at December 31, 1998. The principal reasons for this decrease in
cash are discussed in the following paragraphs.
NMC has discretion in determining methods of obtaining funds for NRLP's
operations. NRLP's governing documents place no limitation on the amount of
leverage that NRLP may incur either in the aggregate or with respect to any
particular property or other investment. At September 30, 1999, the aggregate
loan-to-value ratio of NRLP's real estate portfolio was 65.6%, computed on the
basis of the ratio of total property-related debt to aggregate appraised values
as of December 31, 1998, as compared with a loan-to-value ratio of 63.5% at
December 31, 1998.
NRLP's principal sources of cash have been and will continue to be from
property operations, collection of principal and interest on its mortgage notes
receivable and externally generated funds. Externally generated funds include
borrowings, proceeds from the sale of NRLP's properties and other assets and
proceeds from borrowings secured by NRLP's properties or mortgage notes
receivable. NRLP expects that its cash on hand, cash flow from property
operations together with externally generated funds will be sufficient to meet
NRLP's various cash needs, including, but not limited to, funding of lending
commitments, distributions to unitholders, the payment of debt service
obligations coming due and property maintenance and improvements, as more fully
discussed in the paragraphs below.
NRLP's cash flow from property operations (rents collected less payments
for property operating expenses) increased to $28.4 million in the nine months
ended September 30, 1999, from $28.1 million in the nine months ended September
30, 1998. The increase was due to the payment in
128
<PAGE>
1998 of $2.7 million in property level payables at December 31, 1997. This
increase was partially offset by the sale of 11 apartments in 1999 and 10
apartments and two commercial properties in 1998.
Interest collected on mortgage notes receivable increased to $8.2 million
in the nine months ended September 30, 1999, from $2.8 million in 1998. Of this
increase, $5.6 million was due to the ART loan, funding of which began in 1998
and has continued in 1999, $244,000 was due to the payoff of a loan that had
matured in 1998 and for which interest was not being recognized until it was
collected, $677,000 was due to a partial payment on a loan and $1.0 million was
due to the collection of interest on the payoffs of six mortgage loans in 1999
for which interest was not due until the loans' payoff or maturity. These
increases were partially offset by a decrease of $968,000 due to loans that were
paid off in 1998 and $143,000 due to a loan modified in 1998 to only require
interest be paid from the collateral property's cash flow.
Interest paid decreased to $19.7 million in the nine months ended September
30, 1999, from $22.1 million in 1998. Of this decrease, $1.3 million was due to
the sale of 11 apartments in 1999 and 10 apartments and two commercial
properties in 1998 and $3.2 million was due to loans paid off in 1998. These
decreases were partially offset by an increase of $2.1 million due to properties
refinanced, where the debt balance was increased or unencumbered properties
financed in 1998 and 1999 and $124,000 was due to properties acquired in 1999.
General and administrative expenses paid decreased to $4.2 million in the
nine months ended September 30, 1999, from $5.0 million in 1998. The decrease
was due to a decrease in legal and other expenses due to the settlement of two
lawsuits in 1998 partially offset by an increase in cost reimbursements to BCM.
NRLP paid incentive disposition fees of $1.1 million to NMC in the nine
months ended September 30, 1999, related to the sales of the Mesa Ridge
Apartments and the Country Place Apartments. No such fee was paid in 1998.
In the first nine months of 1999, a total of $18.4 million was received on
the collection of seven mortgage notes receivable and partial paydowns of six
other mortgage note receivables.
In January 1999, the Olde Towne Apartments in Middleton, Ohio, was sold for
$4.6 million. Net cash of $4.4 million was received after the payment of various
closing costs.
In February 1999, GCLP funded a $5.0 million unsecured loan to One Realco
Corporation, which at September 30, 1999, owned approximately 15.8% of the
outstanding shares of ART's common stock. The loan is guaranteed by BCM.
Also in February 1999, the Santa Fe Apartments in Kansas City, Missouri,
was sold for $4.6 million. Net cash of $4.3 million was received after the
payment of various closing costs.
Further in February 1999, the Mesa Ridge Apartments in Mesa, Arizona, was
sold for $19.5 million. Net cash of $793,000 was received after the payment of
various closing costs and remitting $17.8 million to the lender to hold in
escrow pending a substitution of collateral.
In May 1999, the Bavarian Woods Apartments and Westwood Shopping Center
were approved as substitute collateral. Net cash of $7.8 million was received
after paying off $7.2 million in mortgage debt secured by the Bavarian Woods
Apartments and Westwood Shopping Center,
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funding required escrows and the payment of various closing costs on the two
properties, and paying off $2.2 million of Mesa Ridge debt, including a $133,000
prepayment penalty.
In February 1999, mortgage financing secured by the unencumbered 56
Expressway Office Building in Oklahoma City, Oklahoma, in the amount of $1.7
million was obtained. Net cash of $1.7 million was received after the payment of
various closing costs.
Also in February 1999, mortgage financing secured by the unencumbered
Melrose Business Park in Oklahoma City, Oklahoma, in the amount of $900,000 was
obtained. Net cash of $870,000 was received after the payment of various closing
costs.
In April 1999, GCLP sold the 166 unit Horizon East Apartments in Dallas,
Texas, for $4.0 million. Net cash of $1.2 million was received after paying off
$2.6 million in mortgage debt and the payment of various closing costs.
Also in April 1999, the Lantern Ridge Apartments in Richmond, Virginia, was
sold for $3.4 million. Net cash of $880,000 was received after the payment of
various closing costs and the purchaser's assumption of the $2.4 million
mortgage debt.
In May 1999, mortgage financing secured by the unencumbered Pines
Apartments in Little Rock, Arkansas, and by a $5.0 million note receivable in
the amount of $4.0 million was obtained. Net cash of $3.9 million was received
after the payment of various closing costs. In September 1999, the mortgage
debt was refinanced in the amount of $3.1 million. The net refinancing proceeds
and cash of $1.1 million were used to payoff $4.0 million of mortgage debt and
the payment of various closing costs.
Also in May 1999, NRLP purchased the 27,000 sq. ft. Cooley Office Building
in Farmers Branch, Texas, for $3.5 million, paying $1.5 million in cash and
obtained mortgage financing of $2.0 million.
In June 1999, mortgage financing secured by the unencumbered Stonebridge
Apartments in Florissant, Missouri, in the amount of $3.0 million was obtained.
Net cash of $2.9 million was received after the payment of various closing
costs.
Also in June 1999, the Lake Houston land, a 33.58 acre parcel of unimproved
land in Harris County, Texas, was purchased for $2.5 million in cash. A
construction loan in the amount of $13.7 million was obtained enabling
development of a 312 unit apartment complex on the site. Construction, expected
to approximate $16.7 million in costs, was begun in July 1999 and completion is
expected in the third quarter of 2000.
Further in June 1999, the Barcelona Apartments in Tampa, Florida, was sold
for $9.8 million. Net cash of $2.2 million was received after paying off $7.0
million in mortgage debt and the payment of various closing costs.
In July 1999, the Stone Meadows land, a 13.5 acre parcel of unimproved
land, in Harris County, Texas, was purchased from ART for $2.2 million, $1.3
million in cash and assuming $974,000 in mortgage debt. The mortgage was paid in
full at its October 1999 maturity.
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Also in July 1999, mortgage financing secured by the unencumbered 76 unit
Bridgestone Apartments in Friendswood, Texas, in the amount of $2.1 million was
obtained. Net cash of $2.0 million was received after the payment of various
closing costs.
In August and September 1999, NRLP received a total of $3.3 million in
paydowns on a mortgage note receivable, and funded a $2.6 million mortgage loan.
Also in August 1999, the Country Place Apartments in Round Rock, Texas, was
sold for $6.0 million. Net cash of $1.3 million was received after the payment
of various closing costs and the purchaser's assumption of the $4.3 million
mortgage debt.
Further in August 1999, the Lake Nora Apartments and the Fox Club
Apartments in Indianapolis, Indiana, were sold for a total of $29.1 million. Net
cash of $2.7 million was received after paying off $24.5 million in mortgage
debt, the funding of required escrows and the payment of various closing costs.
In September 1999, the Oakhollow Apartments and the Windridge Apartments in
Austin, Texas, were sold for a total of $35.5 million. Net cash of $7.8 million
was received after paying off $22.2 million in mortgage debt and the payment of
various closing costs.
Also in September 1999, mortgage financing secured by the unencumbered
Blackhawk Apartments in Indianapolis, Indiana, in the amount of $4.1 million was
obtained. Net cash of $4.0 million was received after the payment of various
closing costs.
In 1998, NRLP funded a $6.0 million loan to Centura Holdings, LLC, a
subsidiary of Centura Tower, Ltd. The loan is secured by 6.4109 acres of land in
Dallas, Texas. In February 1999, NRLP funded an additional $37,500.
Also in 1998, NRLP funded a $3.7 million loan to JNC. The loan was secured
by a contract to purchase 387 acres of land in Collin County, Texas, and the
personal guaranty of JNC's principal partner. In January 1999, ART purchased the
contract from JNC and acquired the land. In connection with the purchase, GCLP
funded an additional $6.0 million of a $95.0 million loan commitment to ART. A
portion of the funds were used to pay off the $3.7 million JNC loan, including
accrued but unpaid interest, paydown by $1.3 million of the JNC line of credit
and pay down a portion of the JNC Frisco Panther Partners, Ltd. loan.
In 1997 and 1998, NRLP funded a $3.8 million loan to Stratford & Graham
Developers, LLC. The loan is secured by 1,485 acres of unimproved land in
Riverside County, California. In the first nine months of 1999, NRLP funded an
additional $316,000 increasing the loan balance to $4.1 million.
Also in 1998 and the first nine months of 1999, NRLP funded a $5.0 million
loan commitment to JNC. The loan is secured by a second lien on 1,791 acres of
land in Denton County, Texas, and a second lien on 220 acres of land in Tarrant
County, Texas. In January 1999, NRLP received a $1.3 million paydown on the
loan, as discussed above.
Further in 1998 and the first nine months of 1999, GCLP funded $94.7
million of a then $95.0 million loan commitment to ART. The loan is secured by:
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(1) second liens on an office building in Minnesota, three apartments in
Mississippi and one in Texas and 130.54 acres of land in Texas;
(2) the stock of ART Holdings, Inc., a wholly-owned subsidiary of ART that
owns 3,268,535 units of NRLP; and
(3) by the stock of NMC.
In September 1999, the board of GCLP approved an increase in the loan commitment
to $125.0 million. In February 1999, GCLP received a $999,000 paydown on the
loan. In October 1999, GCLP funded an additional $5.5 million and received a
paydown of $150,000.
During 1998 and the first nine months of 1999, NRLP funded a total of $31.0
million of a $52.5 million loan commitment to Centura Tower,Ltd. The loan is
secured by a mortgage on 2.244 acres of land and a building under construction
in Dallas, Texas. In August 1999, $24.1 million of the note and accrued but
unpaid interest was converted to a partnership interest.
During 1998 and 1999, NRLP funded a total of $2.1 million of a $2.2 million
loan commitment to Varner Road Partners, L.L.C. The loan is secured by 129.77
acres of land in Riverside County, California, and a pledge of the stock of the
borrower.
In 1997, 1998 and 1999, NRLP funded $1.8 million of a $2.1 million loan
commitment to Bordeaux. The loan is secured by:
(1) a 100% membership interest in Bordeaux, which owns a shopping center
in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns
approximately 6.5 acres of unimproved land in Oklahoma City, Oklahoma;
and
(3) the personal guarantees of the Bordeaux members.
In October 1999, NRLP received a paydown of $724,000.
In July 1999, NRLP received a total of $2.5 million on the collection of
two mortgage notes receivable, including accrued but unpaid interest.
In the first nine months of 1999, NRLP declared distributions of $.375 per
unit, or a total of $1.6 million.
Management reviews the carrying values of NRLP's properties and mortgage
notes receivable at least annually and whenever events or a change in
circumstances indicate that impairment may exist. Impairment is considered to
exist if, in the case of a property, the future cash flow from the property
(undiscounted and without interest) is less than the carrying amount of the
property. For notes receivable impairment is considered to exist if it is
probable that all amounts due under the terms of the note will not be collected.
If impairment is found to exist, a provision for loss is recorded by a charge
against earnings. NRLP's mortgage note receivable review includes an evaluation
of the collateral property securing the note. The property review generally
includes selective property inspections, a review of the property's current
rents compared to market rents, a review of the property's expenses, a review of
maintenance requirements, a review of the property's
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cash flow, discussions with the manager of the property and a review of
properties in the surrounding area.
Results of Operations
Three and Nine Months Ended September 30, 1999 compared to Three and Nine
-------------------------------------------------------------------------
Months Ended September 30, 1998. NRLP reported net income of $51.9 million and
- -------------------------------
$82.9 million for the three and nine months ended September 30, 1999, including
gains on sale of real estate of $49.6 million and $74.0 million. NRLP had net
income of $3.7 million and $26.3 million for the three and nine months ended
September 30, 1998, including gains on sale of real estate of $5.6 million and
$34.2 million. These and other factors contributing to NRLP's net income are
discussed in the following paragraphs.
Rents decreased to $21.9 million and $69.0 million in the three and nine
months ended September 30, 1999, from $26.0 million and $81.2 million in 1998.
Of the decrease, $4.3 million and $13.7 million was due to the sale of 11
apartments in 1999 and 10 apartments and two commercial properties in 1998.These
decreases were partially offset by increases of $249,000 and $1.1 million due to
increased rental rates at NRLP's apartments. Rents are expected to continue to
decrease during the remainder of 1999 as NRLP continues to selectively sell
properties.
Interest income increased to $4.6 million and $13.2 million in the three
and nine months ended September 30, 1999, from $1.9 million and $4.5 million
in1998. Increases of $3.5 million and $10.7 million were attributable to loans
funded in 1998 and 1999. These increases were partially offset by decreases of
$150,000 and $1.1 million due to loans paid off during 1998 and 1999 and
$710,000 and $836,000 due to decreases in short-term investments. Interest
income during the remainder of 1999 is expected to increase due to additional
funding by GCLP on the ART line of credit.
Interest expense increased to $7.3 million and decreased to $21.4 million
in the three and nine months ended September 30, 1999, from $6.6 million and
$23.5 million in 1998. Decreases of $160,000 and $3.0 million were due to loans
paid off in 1998, and decreases of $598,000 and $2.7 million were due to the
sale of a total of 23 properties, subject to debt, in 1998 and 1999. These
decreases were partially offset by increases of $133,000 and $147,000 on
properties acquired in 1999 and $1.6 million and $3.3 million due to interest
expense recorded on borrowings secured by mortgages on two unencumbered
apartments and two unencumbered commercial properties in 1999 and four
unencumbered apartments and seven notes receivable in 1998, the refinancing of
47 of the GCLP apartments and the refinancing of mortgages in 1998 and 1999
where the loan balance was increased. Interest expense is expected to decline
during the remainder of 1999 as a result of the refinancing of the GCLP
properties at a lower interest rate and the expected sale of selected
properties.
Deferred borrowing costs for the three and nine months ended September 30,
1998, is the unamortized borrowing costs associated with the November 1992
financing of the GCLP properties on their refinancing in July 1998.
Depreciation, property taxes and insurance, utilities, property level
payroll, repairs and maintenance, other operating expenses and property
management fees in the three and nine months ended September 30, 1999, all
declined from 1998 due to the sale of 10 apartments and two commercial
properties in 1998 and 11 apartments in 1999. These costs are expected to
continue to decrease during the remainder of 1999 as NRLP continues to
selectively sell properties.
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General and administrative expenses increased to $1.5 million and $5.5
million in the three and nine months ended September 30, 1999, from $1.5 million
and $5.1 million in 1998. The nine month increase was due to an increase of $1.2
million in cost reimbursements to an affiliate of NMC, partially offset by a
decrease of $891,000 in legal fees as a result of the settlement of two lawsuits
in 1998.
NRLP paid $200,000 and $1.1 million in incentive disposition fees to NMC in
the three and nine months ended September 30, 1999, related to the sales of Mesa
Ridge Apartments and Country Place Apartments. No such fees were paid in 1998.
In the three and nine months ended September 30, 1999, gains on sale of
real estate totaling $49.6 million and $74.0 million were realized, $2.7 million
on the sale of the Olde Towne Apartments in January, $1.3 million on the sale of
the Santa Fe Apartments and $12.4 million on the sale of the Mesa Ridge
Apartments in February, $2.2 million on the sale of the Horizon East Apartments
and $2.6 million on the sale of the Lantern Ridge Apartments in April, $3.2
million on the sale of the Barcelona Apartments in June, $3.9 million on the
sale of Country Place Apartments and $18.1 million on the sale of Lake Nora
Apartments and Fox Club Apartments in August and $27.7 million on the sale of
Oakhollow Apartments and Windridge Apartments in September.
For the three and nine months ended September 30, 1998, gains on sale of
real estate totaling $5.6 million and $34.2 million, were realized; $3.1 million
on the sale of the Brookview Apartments, $2.9 million on the sale of the
Creekwood Apartments and $772,000 on the sale of the Indian Meadows land in
April, $8.5 million on the sale of the Alexandria Apartments in May, $1.1
million on the sale of the Countryside Plaza in June, $1.7 million on the sale
of Lakewood Park Apartments and $3.9 million on the sale of Royal Oaks
Apartments in July and a $12.2 million deferred gain on a prior year's property
sale, on the payoff of the mortgage note receivable secured by the property in
June.
1998 Compared to 1997. NRLP had net income of $47.5 million for 1998 as
---------------------
compared to net income of $8.7 million for 1997. Included in NRLP's 1998 net
income are gains on the sale of real estate of $52.6 million. Included in NRLP's
1997 net income are gains on the sale of real estate of $8.4 million. The
primary factors affecting NRLP's operating results are discussed in the
following paragraphs.
Rents decreased to $107.1 million for 1998, from $112.9 million for 1997.
This decrease was primarily due to a decrease of $9.6 million from the sale of
an apartment and three commercial properties in 1997 and ten apartments, two
commercial properties and one parcel of undeveloped land in 1998. This decrease
was partially offset by an increase of $3.7 million due to increased rental
rates at NRLP's apartment and commercial properties.
Interest income increased to $6.7 million for 1998, from $4.5 million for
1997. An increase of $3.5 million was attributable to loans funded in 1997 and
1998 and an additional $865,000 was due to increased short-term investment
income. These increases were partially offset by a decrease of $2.2 million due
to loans paid off during 1997 and 1998.
Interest expense decreased to $26.7 million for 1998 from $34.2 million for
1997. A decrease of $5.0 million was due to loans paid off in 1997 and 1998,
secured by mortgage notes receivable. A decrease of $1.2 million was due to the
payoff of the pension notes in September 1997. A decrease of $2.3 million was
due to a total of 16 properties being sold, subject to debt, in 1997 and
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1998. These decreases were partially offset by increases of $1.2 million due to
interest expense recorded on borrowings in 1997, secured by mortgages on four
unencumbered commercial properties, NRLP's interest in GCLP and six notes
receivable and four unencumbered apartments and seven notes receivable in 1998,
the refinancing of 47 of the GCLP apartments and the refinancing of mortgages in
1997 and 1998 where the loan balance was increased.
Deferred borrowing costs for 1998 were the unamortized borrowing costs
associated with the November 1992 blanket mortgage refinancing of the GCLP
properties. The mortgage debt was refinanced in July 1998.
Property taxes and insurance, utilities, property level payroll and other
operating expenses for 1998 declined from 1997 due to the sale of 10 apartments
and two commercial properties in 1998 and an apartment and three commercial
properties in 1997. Repairs and maintenance and property management fees
approximated that of 1997.
General and administrative expenses decreased to $6.8 million in 1998 from
$7.9 million in 1997. The decrease is due to a decrease in legal fees related to
the Southern Palms litigation of $754,000, a decrease of $256,000 in legal and
other fees related to a litigation settlement, a decrease of $580,000 related to
NRLP overhead reimbursements to BCM and a decrease of $125,000 is due to a
decrease in audit and tax preparation costs.
For 1998, gains on sale of real estate totaled $52.6 million, including
$3.1 million on the sale of Brookview Apartments in April 1998, $2.9 million on
the sale of Creekwood Apartments in April 1998, $772,000 on the sale of Indian
Meadows land in April 1998, $8.5 million on the sale of Alexandria Apartments in
May 1998, $1.1 million on the sale of Countryside Plaza in June 1998, $1.7
million on the sale of Lakewood Park Apartments in July 1998, $3.9 million on
the sale of the Royal Oaks Apartments in July 1998, $5.0 million on the sale of
Skipper's Pond Apartments in October 1998, $2.9 million on the sale of Towne
Oaks Apartments in December 1998, $4.2 million on the sale of Oakmont Apartments
in December 1998, $3.8 million on the sale of River Glen Apartments in December
1998, $2.7 million on the sale of Wisperwood Apartments in December 1998 and
$1.0 million from the early payoff as well as an $11.2 million deferred gain on
the prior year sale of the Warner Creek Apartments, on the collection in June
1998 of the $17.5 million financing provided by NRLP at the time of sale. For
1997, gains on sale of real estate totaled $8.4 million, including $3.6 million
on the sale of the Tollhill East Office Building, a $2.1 million deferred gain
recognized on the payoff of the Nellis Bonanza note receivable, a gain of
$563,000 on the sale of Crestview Shopping Center and a gain of $2.1 million on
the sale of Village Square Apartments.
1997 Compared to 1996. NRLP reported net income of $8.7 million for 1997
---------------------
as compared to net loss of $375,000 for 1996. Contributing to NRLP's 1997 net
income were gains on sale of real estate of $8.4 million. The primary factors
affecting NRLP's operating results are discussed in the following paragraphs.
Rents increased from $109.4 million in 1996 to $112.9 million in 1997.
This increase is primarily attributable to a 3.0% increase in average rental
rates combined with a 1.0% increase in average occupancy rates at NRLP's
apartment complexes and an average 1.0% increase in commercial rental rates
combined with a 3.0% increase in occupancy rates as compared to 1996. These
increases are partially offset by a decrease of $750,000 due to the sale of the
Tollhill East Office Building in April 1997, the Fondren Office Building in June
1997, Crestview Shopping Center in November 1997 and Village Square Apartments
in December 1997.
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Interest income increased from $3.3 million in 1996 to $4.5 million in
1997. This increase is due to 13 mortgage and other loans being funded in 1997.
Interest expense increased from $33.8 million in 1996 to $34.2 million in
1997. Of this increase, $802,000 is due to an increase in interest expense on
the variable rate portion of the blanket mortgage secured by the GCLP
properties. An additional increase of $657,000 is due to mortgage debt which was
refinanced in 1996 and 1997. These increases are partially offset by a decrease
of $741,000 due to loans paid in full, including the pension notes, and a
decrease of $117,000 due to the sale of the Tollhill East Office Building in
April 1997, the Crestview Shopping Center in November 1997, and the Village
Square Apartments in December 1997.
Depreciation, property taxes and insurance, utilities, property-level
payroll costs, repairs and maintenance, other property operation expenses and
property management fees for 1997 approximated those of 1996.
General and administrative expenses increased from $6.0 million in 1996 to
$7.9 million in 1997. This increase is primarily attributable to an increase in
legal and consulting fees related to the Southern Palms Associates litigation of
$892,000, an increase of $151,000 related to insurance deductibles and an
increase of $1.0 million in NRLP's overhead reimbursements to BCM. These
increases are partially offset by a decrease of $180,000 due to a decrease in
legal fees relating to litigation and a decrease of $237,000 related to a
decrease in appraisals and other professional fees.
In 1996, NRLP recognized a gain on the sale of real estate of $61,000 on
the sale of unimproved land in Colorado, compared to gains on the sale of real
estate totaling $8.4 million in 1997, $3.6 million on the sale of the Tollhill
East Office Building, a $2.1 million deferred gain recognized on the payoff of
the Nellis Bonanza note receivable, a gain of $563,000 on the sale of Crestview
Shopping Center and a gain of $2.1 million on the sale of Village Square
Apartments.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, NRLP may be potentially liable for removal or remediation costs, as
well as certain other potential costs relating to hazardous or toxic substances
(including governmental fines and injuries to persons and property) where
property-level managers have arranged for the removal, disposal or treatment of
hazardous or toxic substances. In addition, certain environmental laws impose
liability for release of asbestos-containing materials into the air, and third
parties may seek recovery from NRLP for personal injury associated with these
materials.
NMC is not aware of any environmental liability relating to the above
matters that would have a material adverse effect on NRLP's business, assets or
results of operations.
Inflation
The effects of inflation on NRLP's operations are not quantifiable.
Revenues from apartment operations tend to fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the rate
of inflation also affect the sales values of NRLP's properties and the ultimate
gains to be realized by NRLP from property sales. Inflation also has an effect
on NRLP's earnings from short-term investments and on its interest income and
interest expense to the extent that the income and expense is affected by
floating interest rates.
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Taxes
NRLP is a publicly traded limited partnership and, for federal income tax
purposes, all income or loss generated by NRLP is included in the income tax
returns of the individual partners. Under Internal Revenue Service guidelines
generally applicable to publicly traded partnerships, a limited partner's use of
his or her share of partnership losses is subject to special limitations.
Year 2000
BCM has informed management that its computer hardware operating system and
computer software have been certified as year 2000 compliant. Triad, Ltd., an
affiliate of BCM that performs property management services for NRLP's
properties, has informed management that effective January 1, 1999, it began
using year 2000 compliant computer hardware and property management software for
NRLP's commercial properties. With regard to NRLP's apartments, Triad, Ltd. has
informed management that its subcontractors are also using year 2000 compliant
computer hardware and property management software.
NRLP has not incurred nor does it expect to incur any costs related to its
computer hardware and accounting and property management computer software being
modified, upgraded or replaced to make them year 2000 compliant. These costs
have been or will be borne by either BCM, Triad, Ltd. or the property management
subcontractors of Triad, Ltd.
Management has completed its evaluation of NRLP's computer controlled
building systems, such as security, elevators, heating and cooling, etc., to
determine what systems are not year 2000 compliant. Management believes that
necessary modifications are insignificant and do not require significant
expenditures to make the affected systems year 2000 compliant, as enhanced
operating systems are readily available.
NRLP has or will have in place the year 2000 compliant systems that will
allow it to operate. The risks NRLP faces are that certain of its vendors will
not be able to supply goods or services and that financial institutions and
taxing authorities will not be able to accurately apply payments made to them.
Management believes that other vendors are readily available and that financial
institutions and taxing authorities will, if necessary, apply monies received
manually. The likelihood of the above having a significant impact on NRLP's
operations is negligible.
Quantitative and Qualitative Disclosure About Market Risk of NRLP
NRLP's future operations, cash flow and fair values of financial
instruments are partially dependent upon the then existing market interest rates
and market equity prices. Market risk is the changes in the market rates and
prices, and the effect of the changes on the future operations of NRLP. NRLP
manages its market risk by matching the property's anticipated net operating
income to an appropriate financing.
The following table contains only those exposures that existed at December
31, 1998. Anticipation of exposures of risk on positions that could possibly
arise was not considered. NRLP's ultimate interest rate risk and its affect on
the operations will depend on future capital market exposures, which cannot be
anticipated with a probable assurance level.
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Dollars are in thousands.
Assets
- ------
Trading Instruments - Equity Price Risk
Marketable securities at market value $ 3,205
Non-trading Instruments - Equity Price Risk
Notes receivable
Variable interest rate - fair value $ 9,085
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
----- ----- ----- ----- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Instrument's maturities.......... $ -- $ -- $ -- $ -- $ -- $ 5,491 $ 5,491
Instrument's amortization........ -- 500 500 500 750 4,500 6,750
Interest....................... 882 846 810 774 720 11,978 16,010
Average rate................... 7.2% 7.1% 7.1% 7.1% 7.1% 7.0% 7.0%
Fixed interest rate - fair value $103,099
</TABLE>
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Instrument's maturities........ $40,012 $6,020 $ -- $ -- $57,820 $ -- $103,852
Instrument's amortization...... -- -- -- -- -- -- --
Interest..................... 10,697 7,508 6,938 6,938 5,355 -- 37,436
Average rate................. 12.6% 12.2% 12.0% 12.0% 12.1% -- %
Liabilities....................
Non-trading Instruments -
Equity Price Risk
Notes payable
Variable interest rate -
fair value $4,582
</TABLE>
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Instrument's maturities............ $ -- $ -- $ -- $6,235 $ -- $6,557 $ 12,792
Instrument's amortization.......... 329 358 390 243 158 961 2,439
Interest......................... 1,255 1,230 1,203 781 570 2,561 7,600
Average rate..................... 8.3% 8.4% 8.4% 7.9% 7.5% 7.5%
Fixed interest rate - fair value... $319,494
</TABLE>
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Instrument's maturities........ $15,235 $ -- $ 2,145 $ -- $136,796 $141,766 $295,942
Instrument's amortization...... 5,166 5,524 5,901 6,070 4,827 18,540 46,028
Interest..................... 24,103 22,510 21,979 21,196 16,944 47,833 154,565
Average rate................. 7.2% 7.1% 7.1% 7.1% 7.1% 7.0% 7.0%
</TABLE>
138
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF ART
Security Ownership of Certain Beneficial Owners. The following table sets
-----------------------------------------------
forth the ownership of ART's common stock both beneficially and of record, both
individually and in the aggregate, for those persons or entities known by ART to
be the owner of more than 5% of the shares of ART's common stock as of the close
of business on October 31, 1999.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Class (1)
- ------------------------------------ -------------------- ----------
<S> <C> <C>
Basic Capital Management, Inc.......... 6,008,872(2) 56.9%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
One Realco Corporation 1,670,299(3) 15.8%
16800 N. Dallas Parkway
Suite 220
Dallas, TX 75248
Transcontinental Realty Investors, Inc. 820,850(4) 7.8%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Ryan T. Phillips....................... 6,107,204(2)(5) 57.8%
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231
</TABLE>
- --------
(1) Percentages are based upon 10,513,720 shares outstanding as of October 31,
1999.
(2) Includes 6,008,872 shares owned by BCM over which Ryan T. Phillips, a
director of BCM, may be deemed to be a beneficial owner by virtue of his
position as a director of BCM. Ryan T. Phillips disclaims beneficial
ownership of the shares.
(3) Each of the directors of One Realco Corporation, Ronald F. Akin and Ronald
F. Bruce, may be deemed to be the beneficial owners by virtue of their
positions as directors of One Realco Corporation. Messrs. Akins and Bruce
disclaim beneficial ownership of the shares.
(4) Each of the directors of TCI, Richard W. Douglas, Larry E. Harley, R.
Douglas Leonhard, Murray Shaw, Ted P. Stokely, Martin L. White and Edward
G. Zampa, may be deemed to be the beneficial owners by virtue of their
positions as directors of TCI. The directors of TCI disclaim this
beneficial ownership.
(5) Includes 98,332 shares owned by the Gene E. Phillips' Children's Trust.
Ryan T. Phillips is a beneficiary of this trust.
Security Ownership of Management. The following table sets forth the
--------------------------------
ownership of shares of ART's common stock, both beneficially and of record, both
individually in the aggregate, for the directors and executive officers of ART,
as of the close of business on October 31, 1999.
<TABLE>
<CAPTION>
Number of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class (1)
- ------------------------ ------------------ --------------------
<S> <C> <C>
All directors and Executive Officers
as a group (9 persons)...................... 7,528,218 (2)(3)(4)(5)(6) 71.3%
</TABLE>
________________________
(1) Percentage is based upon 10,563,720 shares outstanding as of October 31,
1999.
139
<PAGE>
(2) Includes 820,850 shares owned by TCI over which the executive officers of
ART may be deemed to be beneficial owners by virtue of their positions as
executive officers of TCI. Also includes 195,732 shares owned by NOLP over
which the executive officers of ART may be deemed to be beneficial owners
by virtue of their positions as executive officers of NMC, the general
partner of NOLP. The executive officers of ART disclaim beneficial
ownership of the shares.
(3) Includes 6,008,872 shares owned by BCM over which the executive officers of
ART may be deemed to be the beneficial owners by virtue of their positions
as executive officers of BCM. The executive officers of ART disclaim
beneficial ownership of the shares.
(4) Includes 2,432 shares owned directly over which Thomas A. Holland and his
wife jointly hold voting and dispositive power and an additional 332 shares
held by Mr. Holland in an individual retirement account.
(5) Includes 500,000 shares owned by ND Investments, Inc., a wholly-owned
subsidiary of ART. The shares are pledged as additional collateral for
loans to ART.
(6) Includes 16,000 shares which may be acquired by directors and executive
officers of ART pursuant to stock options.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF NRLP
Security Ownership of Certain Beneficial Owners. The following table sets
-----------------------------------------------
forth the ownership of NRLP's units of limited partner interest, both
beneficially and of record, both individually and in the aggregate, for those
persons known by NRLP to be beneficial owners of more than five percent (5%) of
its units of limited partner interest, as of the close of business on October
31, 1999.
<TABLE>
<CAPTION>
Amount and Nature
Amount and Address of of Beneficial Percent of
Beneficial Owner Ownership Class (1)
--------------------- ----------------- ----------
<S> <C> <C>
American Realty Trust, Inc....... 3,551,569 56.2%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
Basic Capital Management, Inc.... 696,975 11.0%
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
</TABLE>
________________
(1) Percentage is based upon 6,321,524 units of limited partner interest
outstanding at October 31, 1999.
Security Ownership of Management. The following table sets forth the
--------------------------------
ownership of NRLP's units of limited partner interest, both beneficially and of
record, both individually and in the aggregate, by NMC and the executive
officers and directors of NMC, as of the close of business on October 31, 1999.
<TABLE>
<CAPTION>
Number of Percent of
Name of Beneficial Owner Units Units (1)
------------------------ ----- ---------
<S> <C> <C>
NMC and the executive officers and directors of NMC
as a group (7 individuals).......................... 4,248,544 (2) 67.2%
</TABLE>
________________
(1) Percentage is based upon 6,321,524 units of limited partner interest
outstanding as of October 31, 1999.
(2) Includes 3,551,569 units owned by ART and 696,975 units owned by BCM, of
which the directors and executive officers of NMC, ART and BCM may be
deemed to be the beneficial owners by virtue of their positions as
directors and executive officers of NMC, ART and BCM. The directors and
executive officers of NMC, ART and BCM disclaim beneficial ownership of the
units.
140
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ART
Policies with Respect to Certain Activities
The bylaws of ART, as amended, provide, in accordance with Georgia law,
that no contract or transaction between ART and one or more of its directors or
officers, or between ART and any other corporation, partnership, association or
other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or voidable
solely for that reason, or solely because the director or officer is present at
or participates in the meeting of the board of directors or committee thereof
which authorizes the contract or transaction, or solely because his or her votes
are counted for this purpose, if one or more of the following three conditions
are met:
(1) the material facts as to his or her interest and as to the contract or
transaction are disclosed or are known to the board of directors or
the committee, and board or committee in good faith authorizes the
contract or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors
constitute less than a quorum;
(2) the material facts as to his or her interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to
vote thereon, and the contract or transaction is specifically approved
or ratified in good faith by vote of the stockholders; or
(3) the contract or transaction is fair to ART as of the time it is
authorized, approved or ratified by the board of directors, a
committee thereof, or the stockholders.
ART's policy is to have these contracts or transactions approved or
ratified by a majority of the disinterested directors with full knowledge of the
character of the transactions, as being fair and reasonable to the stockholders
at the time of the approval or ratification under the circumstances then
prevailing. These directors also consider the fairness of the transactions to
ART. Management believes that, to date, these transactions have represented the
best investments available at the time and that they were at least as
advantageous to ART as other investments that could have been obtained.
ART expects to enter into future transactions with entities the officers,
trustees, directors or stockholders of which are also officers, directors or
stockholders of ART, if these transactions would be beneficial to the operations
of ART and consistent with ART's then-current investment objectives and
policies, subject to approval by a majority of disinterested directors as
discussed above.
ART does not prohibit its officers, directors, stockholders or related
parties from engaging in business activities of the types conducted by ART.
Certain Business Relationships
ART's advisor, BCM, is a company of which Messrs. Blaha, Endendyk, Holland,
Johnson and Starowicz serve as executive officers. BCM is a company owned by a
trust for the benefit of the children of Gene E. Phillips.
141
<PAGE>
Mr. Blaha, the president of ART, is the president of IORI and TCI, and owes
fiduciary duties to these entities as well as to BCM under applicable law. IORI
and TCI have the same relationship with BCM as does ART. In addition, BCM has
been engaged to perform some administrative functions for NRLP and NOLP. Mr.
Blaha is also president and a director of NMC, the general partner of NRLP and
NOLP.
Since February 1, 1990, ART has contracted with affiliates of BCM for property
management services. Currently, Triad, Ltd. provides property management
services. The general partner of Triad, Ltd. is BCM. The limited partners of
Triad, Ltd. are (1) Syntek West and (2) Gene E. Phillips. Triad, Ltd.
subcontracts the property-level management of 32 of ART's commercial properties
(office buildings, shopping centers and a merchandise mart) to Regis Realty,
which is a company owned by Syntek West. The management of ART's hotels is
subcontracted to Regis Hotel Corporation which is a subsidiary of Carmel Realty,
Inc., which is an affiliate of BCM.
Affiliates of BCM provide real estate brokerage services to ART and receive
brokerage commissions in accordance with the advisory agreement.
ART owns an equity interest in each of IORI, TCI and NRLP. In addition, TCI
and NRLP own an equity interest in ART. See "BUSINESS OF ART--Investments in
Real Estate Investment Trusts and Real Estate Partnerships" on page __.
Related Party Transactions
BCM has entered into put agreements with some holders of the Class A limited
partner units of Ocean Beach Partners, L.P. These Class A units are convertible
into Series D Cumulative Preferred Stock of ART. The put price of the Series D
Preferred Stock is $20.00 per share plus accrued but unpaid dividends.
BCM has entered into a put agreement with the holder of the Class A limited
partner units of Valley Ranch Limited Partnership. These Class A units are
convertible into Series E Cumulative Convertible Preferred Stock of ART which is
further convertible into common stock of ART. The put price for the Class A
units is $1.00 per unit and the put price for either the Series E Preferred
Stock or ART's common stock is 80% of the average daily closing price of ART's
common stock for the prior 20 trading days. ART has entered into an agreement
with the Class A unit holder to acquire its Class A units for $1.00 per unit.
Currently, ART has purchased 3 million Class A units, with 5 million units
remaining to be purchased.
BCM has entered into put agreements with the holders of the Class A units of
ART Palm Limited Partnership. These Class A units are convertible into Series H
Cumulative Convertible Preferred Stock of ART. The put price for the Class A
units is $1.00 per unit and the put price for either the Series H Preferred
Stock or ART's common stock is 90% of the average daily closing price of ART's
common stock for the prior 20 trading days.
In August 1996, ART obtained a $2.0 million loan from a financial institution
secured by a pledge of equity securities of IORI and TCI owned by ART and common
stock of ART owned by BCM with a market value at the time of $4.0 million. ART
received $2.0 million in net cash after the payment of various closing costs
associated with the loan. The loan was paid in full from the proceeds of a new
$4.0 million loan from another financial institution secured by a pledge of
equity securities of IORI and TCI owned by ART and common stock of ART owned by
BCM with a market value at the time of $10.4 million. ART received $2.0 million
in net cash after the payoff of the $2.0
142
<PAGE>
million loan. In January 1998, lender made a second $2.0 million loan. This loan
is also secured by a pledge of common stock of ART owned by BCM with a market
value at the time of $4.7 million. ART received $2.0 million in net cash. The
loans mature in February 2000.
In September 1996, ART obtained a $2.0 million loan from a financial
institution secured by a pledge of equity securities of IORI and TCI owned by
ART and common stock of ART owned by BCM with a market value, at the time, of
$9.1 million. ART received $2.0 million in net cash after the payment of various
closing costs. In October 1998, the lender advanced an additional $1.0 million,
increasing the loan balance to $3.0 million. The loan matures in January 2000.
In October 1997, ART entered into leases with BCM and Carmel Realty, Inc.,
an affiliate of BCM, for space at the One Hickory Centre office building,
construction of which was completed in December 1998. The BCM lease, effective
upon ART obtaining permanent financing of the building, is for 50,574 sq. ft.
(approximately 50% of the building), has a term of ten years and provides for
annual base rent of $974,000 per year for the first year or $19.25 per sq. ft.
increasing to $1.3 million in the tenth year or $24.90 per sq. ft. The Carmel
Realty lease, also effective upon ART obtaining permanent financing of the
building, is for 25,278 sq. ft. (approximately 25% of the building) has a term
of 15 years, and provides for annual base rent of $487,050 per year for the
first year or $19.25 per sq. ft. increasing to $964,000 in the fifteenth year or
$38.15 per sq. ft. Rent under the leases has not commenced.
In 1998 and the first nine months of 1999, GCLP funded $94.7 million of a
then $95.0 million loan commitment to ART. The loan is secured by:
(1) second liens on an office building in Minnesota, three apartments in
Mississippi and one in Texas, and 130.54 acres of land in Texas;
(2) the stock of ART Holding, Inc., a wholly owned subsidiary of ART that
owned 3,268, 535 units of NRLP as of October 31, 1999; and
(3) the stock of NMC.
The loan bears interest at 12.0% per annum, requires monthly payments of
interest only and matures in November 2003. In September 1999, the board of
GCLP approved an increase in the loan commitment to $125.0 million. In February
1999, GCLP received a $999,000 paydown on the loan. In October 1999, GCLP
funded an additional $5.5 million and received a paydown of $150,000.
In 1998, ART paid BCM and its affiliates $3.8 million in advisory and
mortgage servicing fees; $7.5 million in real estate brokerage commissions;
$804,000 in loan arrangement fees and $1.6 million in property and construction
management fees and leasing commissions, net of property management fees paid to
subcontractors, other than Carmel Realty. In addition, as provided in the
advisory agreement, in 1998 BCM received cost reimbursements from ART of $1.8
million.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF NRLP
Certain Business Relationships
NRLP is the sole limited partner of NOLP and owns 99% of the beneficial
interest in NOLP. NMC is the general partner of, and owner of a 1% beneficial
interest in, each of NRLP and NOLP.
143
<PAGE>
On December 18, 1998, NMC was elected general partner of NRLP and NOLP,
replacing SAMLP. NMC is a wholly owned subsidiary of ART. SAMLP resigned as
general partner of NRLP and NOLP on December 18, 1998.
Since February 1, 1990, affiliates of NMC have provided property management
services to NRLP. Currently, Triad, Ltd. provides property management services
for a fee of 5% of the monthly gross rents collected on the properties under its
management. Triad, Ltd. subcontracts with other entities for the property-level
management services to NRLP at various rates. The general partner of Triad, Ltd.
is BCM. The limited partners of Triad, Ltd. are (1) Syntek West, a company owned
by Gene E. Phillips and (2) Gene E. Phillips. BCM is a company which is owned by
a trust for the benefit of the children of Mr. Phillips. BCM performs some
administrative and other functions for NRLP. See "BUSINESS OF NRLP--The Manager"
on page __.
Messrs. Blaha, Endendyk, Holland, Johnson and Starowicz serve as executive
officers of BCM. Mr. Phillips served as a director until December 1989 and chief
executive officer until September 1, 1992, of BCM. Messrs. Blaha, Endendyk,
Holland, Johnson and Starowicz serve as executive officers of IORI, TCI and ART.
BCM serves as advisor to IORI, TCI and ART.
Related Party Transactions
NRLP has engaged in business transactions with some related parties and may
continue to do so. NRLP believes that all of the related party transactions
were at least as advantageous to NRLP as could have been obtained from unrelated
third parties.
NRLP has paid and pays cost reimbursements, property management fees or
other cash compensation to the general partner and its affiliates and other
related parties as described in "EXECUTIVE COMPENSATION OF NRLP" on page ___ and
"BUSINESS OF NRLP--The Manager" on page __. BCM, an affiliate of NMC, performs
administrative functions for NRLP on a cost reimbursement basis. The Fairness
Committee has approved the formula for computing NRLP's proportionate share of
some of BCM's reimbursable costs. Since February 1, 1990, affiliates of NMC have
provided property management services to NRLP. Currently, Triad, Ltd., provides
property management services. Triad, Ltd. subcontracts with other entities for
the property-level management services to NRLP. Triad, Ltd. subcontracts the
property-level management and leasing of nine of NRLP's commercial properties to
Regis Realty, which is a company owned by Syntek West. Regis Realty is entitled
to receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with Triad,
Ltd. Triad, Ltd. and Regis Realty also perform similar services for ART, IORI
and TCI.
NRLP's Fairness Committee periodically reviewed some transactions between
NRLP and its affiliates. See "BUSINESS OF NRLP--The Manager" on page __. The
Fairness Committee approved the terms of NRLP's contracts and terms for services
and reimbursements with affiliates. The Fairness Committee has had no members
since August 1995.
In 1998 and the first nine months of 1999, GCLP funded $94.7 million of a
then $95.0 million loan commitment to ART. The loan is secured by:
(1) second liens on an office building in Minnesota, three apartments in
Mississippi and one in Texas, and 130.54 acres of land in Texas;
144
<PAGE>
(2) the stock of ART Holdings, Inc., a wholly owned subsidiary of ART that
owned 3,268,535 units of NRLP as of October 31, 1999; and
(3) the stock of NMC.
The loan bears interest at 12.0% per annum, requires monthly payments of
interest only and matures in November 2003. In September 1999, the board of
GCLP approved an increase in the loan commitment to $125.0 million. In February
1999, GCLP received a $999,000 paydown on the loan. In October 1999, GCLP
funded an additional $5.5 million and received a paydown of $150,000.
In December 1998, in connection with a litigation settlement, NMC assumed
responsibility for repayment to NRLP of the $12.2 million paid by NRLP to the
class members and legal counsel. The loan bears interest at the 90 day LIBOR
(London InterBank Offered Rate) plus 2.0% per annum, currently 7.30875% per
annum, adjusted every 90 days and requires annual payments of accrued interest
plus principal payments of $500,000 in each of the first three years, $750,000
in each of the next three years, $1.0 million in each of the next three years,
with payment in full of the remaining balance in the tenth year. The note is
guaranteed by ART. The note matures upon the earlier of (1) the liquidation or
dissolution of NRLP, (2) NMC ceasing to be the general partner or (3) ten years
from March 31, 1999, the date of the first cash distribution to the class
members in connection with a litigation settlement.
Beginning in 1997 and through January 1999, NRLP funded a $1.6 million loan
commitment to Bordeaux. The loan is secured by the following:
(1) a 100% membership interest in Bordeaux, which owns a shopping center
in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5
acres of undeveloped land in Oklahoma City, Oklahoma; and
(3) the personal guarantees of the Bordeaux members.
The loan bears interest at 14.0% per annum. Until November 1998, the loan
required monthly payments of interest only at 12.0% per annum, with the deferred
interest payable at maturity in January 1999. In November 1998, the loan was
modified to allow payments based on monthly cash flow of the collateral property
and the maturity date was extended to December 1999. In the second quarter of
1999, the loan was again modified, increasing the loan commitment to $2.1
million and NRLP funded an additional $33,000. In the third quarter of 1999,
NRLP funded an additional $213,000. In October 1999, NRLP received a $724,000
paydown on the loan, which was applied first to accrued but unpaid interest due
of $216,000 then to principal, reducing the loan balance to $1.4 million. In
October 1999, Richard D. Morgan, a Bordeaux member, was elected a director of
NMC, the general partner of NRLP.
During 1998, NRLP funded a $1.8 million loan to Warwick of Summit Square,
Inc. The loan is secured by a second lien on a shopping center in Rhode Island,
by 100% of the stock of the borrower and by the personal guarantee of the
principal shareholder of the borrower. The loan bears interest at 14% per annum
and matures in December 1999. All principal and interest are due at maturity.
During 1999, NRLP funded an additional $314,000, increasing the loan balance to
$2.1 million. In October 1999, Richard D. Morgan, the principal shareholder of
Warwick of Summit Square, Inc., was elected a director of NMC, the general
partner of NRLP.
145
<PAGE>
In February 1999, GCLP funded a $5.0 million unsecured loan to One Realco
Corporation, which at September 30, 1999 owned approximately 15.8% of the
outstanding shares of ART's common stock. The loan bears interest at 12.0% per
annum and matures in February 2000. All principal and interest are due at
maturity. The loan is guaranteed by BCM.
In October 1999, GCLP funded a $4.7 million loan to Realty Advisors, Inc.,
the corporate parent of BCM. The loan is secured by a pledge of 100% of Realty
Advisors, Inc.'s interest in American Reserve Life Insurance Company. The loan
bears interest at a variable rate, currently 10.25% per annum, and matures in
November 2001. All principal and interest are due at maturity.
Indebtedness of Management
In return for its 1% interest in NRLP, SAMLP was required to make aggregate
capital contributions to NRLP in an amount equal to 1.01% of the total initial
capital contributions to NRLP. NMC contributed $500,000 cash with the remaining
portion evidenced by a promissory note in the principal amount of $4.2 million,
bearing interest at the rate of 10% per annum compounded semi- annually and
payable on the earlier of September 18, 2007, liquidation of NRLP or a
termination of NMC's interest in NRLP. As of December 31, 1998, no payments had
been received on the note. At December 31, 1998, accrued and unpaid interest on
the note totaled $7.2 million. In connection with the election and taking office
of NMC as the new general partner on December 18, 1998, NMC assumed liability
under the note.
INTEREST OF CERTAIN PERSONS
IN MATTERS TO BE ACTED UPON
Newco will enter into an advisory agreement with BCM similar to the one
currently in place with ART.
CONFLICTS OF INTEREST
The determinations by the boards of directors of NMC and ART to participate
in the merger may have been affected by a number of conflicts of interest.
ART is the sole shareholder of NMC, which is the general partner of NRLP.
As the sole shareholder of NMC, ART has approved the general partner's approval
of the merger of NRLP with NRLP Acquisition Corp. ART also owns approximately
56.2% of the outstanding partnership units of NRLP. ART will vote all of its
units in favor of the NRLP merger.
The board of directors of NMC, as general partner of NRLP, has approved the
merger of NRLP with NRLP Acquisition Corp. Furthermore, the board of directors
of NMC consists of Karl L. Blaha, who is also an officer and director of ART,
and Collene C. Currie, who is also a director of ART, as well as one member who
is not otherwise affiliated with ART. In taking its actions in connection with
the merger, the board of NMC has fiduciary duties to both the shareholders of
NMC and the unitholders of NRLP.
ART owns 56.2% of the units of NRLP. Furthermore, Mr. Blaha and Ms. Currie
are members of the board of directors of both NMC and ART. The board of
directors of ART also
146
<PAGE>
includes four members who are not otherwise affiliated with NRLP. To address the
fiduciary duties of ART's board to the shareholders of ART, the ART board
authorized the independent representative of ART to consider and recommend
whether ART should participate in the merger. Acting under this authority, the
ART independent representative engaged legal and financial advisors to assist it
in its consideration.
Under the terms of the agreement and plan of reorganization, all
outstanding options to purchase shares of ART common stock will be converted in
the business combination into options to purchase shares of Newco common stock.
As of December 31, 1999, the following directors and executive officers of ART
hold options to acquire ART common stock:
<TABLE>
<CAPTION>
Name Title No. of Options
- -----------------------------------------------------------------------------
<S> <C> <C>
Karl L. Blaha.................. Director, President 50,000
Roy E. Bode.................... Director 1,000
Al Gonzalez.................... Director 1,000
Cliff Harris................... Director 1,000
Thomas A. Holland.............. Executive Vice President and
Chief Financial Officer 15,000
Bruce A. Endendyk.............. Executive Vice President 15,000
Steven K. Johnson.............. Executive Vice President -
Residential Asset Management.. Residential Asset Management 10,000
David W. Starowicz............. Executive Vice President -
Commercial Asset Management 5,000
</TABLE>
If these options are not exercised prior to the completion of the business
combination, they will be converted in the business combination into options to
acquire that number of shares of Newco common stock equal to the number of
shares of ART common stock for which the options are currently exercisable
multiplied by the 0.91 exchange rate.
Although the boards of directors of both NMC and ART have attempted to
resolve all conflicts of interest in a manner that would not adversely affect
either the unitholders or the shareholders, if these conflicts did not exist it
is possible that the merger would not have been approved or would have been
approved on a basis that would be more favorable to the unitholders, the
shareholders or both.
MARKET FOR ART'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
ART's common stock is traded on the New York Stock Exchange using the
symbol "ARB". The following table sets forth the high and low sales prices as
reported in the consolidated reporting system of the New York Stock Exchange.
147
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------ -----
<S> <C> <C>
March 31, 1999 ...................................... $ 17 3/8 $ 15 1/2
June 30, 1999......................................... 16 3/4 15 7/16
September 30, 1999.................................... 16 1/8 14 7/8
December 31, 1999 (through December 10, 1999) ........ 17 5/8 16 1/8
March 31, 1998........................................ 15 14
June 30, 1998......................................... 15 1/16 14 1/4
September 30, 1998.................................... 16 1/4 13 7/8
December 31, 1998..................................... 16 3/8 14 3/4
March 31, 1997........................................ 22 1/4 9 3/4
June 30, 1997......................................... 16 5/8 11 1/2
September 30, 1997.................................... 13 1/4 12 1/8
December 31, 1997..................................... 15 1/2 12 5/8
</TABLE>
As of December 28, 1999, the closing market price of ART's common stock on the
New York Stock Exchange was $17 per share.
As of October 31, 1999, ART's common stock was held by 1,611 stockholders of
record.
In the second quarter of 1996, ART resumed the payment of quarterly dividends
on its common stock. In August, 1999, the ART board of directors announced that
dividend declarations will be determined on an annual basis following the end of
each fiscal year. Future distributions to stockholders will be dependent upon
ART's realized income, financial condition, capital requirements and other
factors deemed relevant by the board of directors.
ART declared quarterly dividends in 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
Amount
Date Declared Record Date Payment Date Per Share
- ------------- ------------------ ------------------ ---------
<S> <C> <C> <C>
March 4, 1999 March 22, 1999 April 5, 1999 $.05
March 5, 1998 March 16, 1998 March 31, 1998 .05
May 27, 1998 June 4, 1998 June 19, 1998 .05
August 28, 1998 September 15, 1998 September 30, 1998 .05
December 10, 1998 December 21, 1998 January 4, 1999 .05
February 26, 1997 March 14, 1997 March 31, 1997 .05
June 5, 1997 June 13, 1997 September 30, 1997 .05
September 3, 1997 September 15, 1997 September 30, 1997 .05
December 1, 1997 December 15, 1997 December 31, 1997 .05
</TABLE>
ART reported to the Internal Revenue Service that 100% of the dividends paid
in 1998 represented a return of capital and 100% of the dividends paid in 1997
represented ordinary income.
In April 1996, ART filed articles of amendment to its articles of
incorporation creating and designating a Series B 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series B Preferred Stock consisted of a maximum of 4,000
shares, all of which were outstanding at December 31, 1997. Dividends were
payable at the rate of $10.00 per year or $2.50 per quarter to shareholders of
record on the 15th day of each March, June, September and December when and as
declared by the board of directors. The Series B Preferred Stock was convertible
into common stock of ART between May 8, 1998 and June 8, 1998, at 90% of the
average daily closing price of the common stock on the prior 30 trading days. In
June 1998, the 4,000 outstanding shares of Series B Preferred Stock were
converted into 30,211 shares of ART's common stock. On May 27, 1998, ART filed
articles of amendment to its articles of
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<PAGE>
incorporation reducing the number of shares of Series B Preferred Stock to zero
and eliminating this designation.
In June 1996, ART filed articles of amendment to its articles of incorporation
creating and designating a Series C 10% Cumulative Convertible Preferred Stock,
par value $2.00 per share, with a liquidation preference of $100.00 per share.
The Series C Preferred Stock consisted of a maximum of 16,681 shares, all of
which were outstanding at December 31, 1997. Dividends were payable at the rate
of $10.00 per year or $2.50 per quarter to shareholders of record on the 15th
day of each March, June, September and December when and as declared by the
board of directors. The Series C Preferred Stock was convertible into common
stock of ART between November 25, 1998 and February 23, 1999, at 90% of the
average daily closing price of the common stock on the prior 30 trading days. In
November 1998, the 16,681 outstanding shares of Series C Preferred Stock were
redeemed at their liquidation preference of $100.00 per share plus accrued and
unpaid dividends. On January 11, 1999, ART filed articles of amendment to its
articles of incorporation reducing the number of shares of Series C Preferred
Stock to zero and eliminating this designation.
In August 1996, ART filed articles of amendment to its articles of
incorporation, creating and designating a Series D 9.50% Cumulative Preferred
Stock, par value of $2.00 per share, with a liquidation preference of $20.00 per
share. The Series D Preferred Stock consists of a maximum of 91,000 shares, none
of which were outstanding at December 31, 1998. Dividends are payable at the
rate of $1.90 per year or $.475 per quarter to shareholders of record on the
last day of each March, June, September and December when and as declared by the
board of directors. The Series D Preferred Stock is reserved for the conversion
of the Class A limited partner units of Ocean Beach Partners, L.P. The Class A
units may be exchanged for Series D Preferred Stock at the rate of 20 Class A
units for each share of Series D Preferred Stock. No more than one-third of the
Class A units may be exchanged prior to May 31, 2001. Between June 1, 2001 and
May 31, 2006 all unexchanged Class A units are exchangeable.
In December 1996, ART filed articles of amendment to its articles of
incorporation, creating and designating a Series E 10% Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series E Preferred Stock consists of a maximum of 80,000
shares, none of which were outstanding at December 31, 1998. Dividends are
payable at the rate of $10.00 per year or $2.50 per quarter to shareholders of
record on the last day of each March, June, September and December when and as
declared by the board of directors, for periods prior to November 4, 1999 and
$11.00 per year, $2.75 per quarter thereafter. The Series E Preferred Stock is
reserved for the conversion of the Class A limited partner units of Valley
Ranch, L.P. The Class A units may be exchanged for Series E Preferred Stock at
the rate of 100 Class A units for each share of Series E Preferred Stock. The
Series E Preferred Stock is convertible into common stock of ART at 80% of the
average daily closing price of ART's common stock on the prior 20 trading days.
Only 37.50% of the Series E Preferred Stock may be converted prior to November
3, 1999. Between November 4, 1999 and November 3, 2001 an additional 12.50% of
the Series E Preferred Stock may be converted, and the remainder can be
converted on or after November 4, 2001. In April 1999, ART entered into an
agreement with the Class A unit holder to acquire its Class A units for $1.00
per unit. Currently, ART has purchased 3 million Class A units, with 5 million
units remaining to be purchased.
In August 1997, ART filed articles of amendment to its articles of
incorporation creating and designating a Series F Cumulative Convertible
Preferred Stock, par value $2.00 per share, with a liquidation preference of
$10.00 per share. In October 1998, ART filed articles of amendment to its
articles of incorporation increasing the number of authorized shares of Series F
Preferred Stock to
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<PAGE>
15,000,000. At December 31, 1998, 3,350,000 shares were outstanding and
1,948,797 shares were reserved for issuance as future consideration in various
business transactions. Dividends are payable at the rate of $1.00 per share or
$.25 per quarter to shareholders of record on the last day of each March, June,
September and December when and as declared by the board of directors. The
Series F Preferred Stock may be converted, after August 15, 2003, into common
stock of ART at 90% of the average daily closing price of ART's common stock for
the prior 20 trading days. At December 1, 1999, 2,600,000 shares of the Series F
Preferred stock were outstanding.
In September 1997, ART filed articles of amendment to its articles of
incorporation creating and designating a Series G 10% Cumulative Convertible
Preferred Stock; par value $2.00 per share, with a liquidation preference of
$100.00 per share. The Series G Preferred Stock consists of a maximum of 12,000
shares, of which 1,000 shares were outstanding at December 31, 1998. Dividends
are payable at the rate of $10.00 per year or $2.50 per quarter to shareholders
of record on the last day of each March, June, September and December when and
as declared by the board of directors. There are 11,000 shares of the Series G
Preferred Stock reserved for the conversion of the Class A limited partner units
of Grapevine American, Ltd. The Class A units may be exchanged for Series G
Preferred Stock at the rate of 100 Class A units for each share of Series G
Preferred Stock after October 6, 1999 and after October 6, 2000, into common
stock of ART at 90% of the average closing price of ART's common stock for the
prior 20 trading days. In October 1999, ART entered into an agreement to
purchase all 1,100,000 of the Class A limited partner units for a purchase price
of $935,000.
In June 1998, ART filed articles of amendment to its articles of incorporation
creating and designating a Series H 10% Cumulative Convertible Preferred Stock;
par value $2.00 per share, with a liquidation preference of $10.00 per share.
The Series H Preferred Stock consists of a maximum of 231,750 shares, none of
which were outstanding at December 31, 1998. Dividends are payable quarterly at
the rate of $.70 per year until September 30, 1999, $.80 from July 1, 1999
through September 30, 2000, $.90 per year from July 1, 2000 through September
30, 2001 and $.10 per year July 1, 2001 and thereafter, to shareholders of
record on the last day of each March, June, September and December when and as
declared by the board of directors. The Series H Preferred Stock is reserved for
the conversion of the Class A limited partner units of ART Palm Limited
Partnership. The Class A units may be exchanged for Series H Preferred Stock at
the rate of 100 Class A units for each share of Series H Preferred Stock at any
time after July 13, 1999. The Series H Preferred Stock may be converted into
25,000 shares of ART's common stock after December 31, 2000, 25,000 shares on or
after September 30, 2002, 25,000 shares on or after September 30, 2003, 25,000
shares on or after December 31, 2005 and all remaining outstanding shares on or
after December 31, 2006 at 90% of the average daily closing price of ART's
common stock for the prior 20 trading days.
MARKET FOR NRLP'S UNITS OF LIMITED PARTNER INTEREST AND RELATED
SECURITY HOLDER MATTERS
NRLP's units of limited partner interest are traded on the American Stock
Exchange using the symbol "NLP."
The following table sets forth high and low sale prices of NRLP's units of
limited partner interest as reported by the American Stock Exchange:
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<PAGE>
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ -------
<S> <C> <C>
March 31, 1999................................. $23 3/4 $21 3/4
June 30, 1999.................................. 22 7/8 21 3/4
September 30, 1999............................. 22 1/8 21 1/4
December 31, 1999 (through December 10, 1999).. 21 3/8 18 5/8
March 31, 1998................................. 24 1/8 19 3/8
June 30, 1998.................................. 20 1/16 18 1/2
September 30, 1998............................. 22 19
December 31, 1998.............................. 23 19 3/4
March 31, 1997................................. 19 1/8 12 7/8
June 30, 1997.................................. 19 1/2 16 3/8
September 30, 1997............................. 24 19
December 31, 1997.............................. 24 3/4 24 3/8
</TABLE>
As of December 28, 1999, the closing price of NRLP's units of limited
partner interest on the American Stock Exchange was $17.75 per unit.
As of October 31, 1999, NRLP's units of limited partner interest were held
by 4,911 holders of record.
NRLP has paid quarterly distributions since the fourth quarter of 1993.
During 1998, NRLP declared quarterly distributions of $.125 per unit, a total of
$.50 per unit or $3.2 million.
The distributions declared by NRLP in 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Date Declared Record Date Payable Date Amount
- ----------------- ----------------- ----------------- ----------
<S> <C> <C> <C>
March 4, 1999 March 22, 1999 April 5, 1999 $.125
June 2, 1999 June 14, 1999 June 30, 1999 .125
September 9, 1999 September 20, 1999 October 30, 1999 .125
November 22, 1999 December 15, 1999 January 5, 2000 .125
March 2, 1998 March 13, 1998 March 31, 1998 .125
May 27, 1998 June 4, 1998 June 19, 1998 .125
September 15, 1998 September 25, 1998 September 30, 1998 .125
December 2, 1998 December 15, 1998 January 4, 1999 .125
February 26, 1997 March 14, 1997 March 31, 1997 .10
June 5, 1997 June 13, 1997 September 30, 1997 .10
September 3, 1997 September 15, 1997 September 30, 1997 .10
December 1, 1997 December 15, 1997 January 5, 1998 1.50*
December 1, 1997 December 15, 1997 January 5, 1998 .10
</TABLE>
________
*Special distribution.
In March 1999, the board of directors of NMC affirmed NRLP's unit
repurchase program which was established in 1987. The board also established a
new authorization for the repurchase of up to 500,000 additional units in open-
market transactions. Through September 30, 1999, NRLP had purchased a total of
402,960 units under the prior authorization at a total cost of $5.1 million.
NRLP has not purchased any units under the purchase program since January 1993.
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DESCRIPTION OF THE CAPITAL STOCK OF NEWCO
The description of Newco's capital stock set forth below is only a summary
and is not intended to be complete. For a complete description of Newco's
capital stock, we urge you to read Newco's articles of incorporation and bylaws
and the certificate of designation of the Series A Preferred Stock, which are
filed as an exhibit to the registration statement of which this document forms a
part.
Description of Common Stock
Newco has the authority to issue up to 100,000,000 shares of Newco common
stock, par value $0.01 per share. Newco is expected to issue approximately 12.4
million shares of its common stock in the mergers, which will be all of the
shares of Newco common stock then outstanding.
Voting Rights. Holders of Newco common stock will be entitled to one vote
-------------
per share on all matters voted on by stockholders, including the election of
directors. The Newco charter does not provide for cumulative voting in the
election of directors of Newco.
Dividends. After giving effect to any preferential rights of any series of
---------
preferred stock outstanding, including the Newco preferred stock to be issued in
the ART merger, the holders of Newco common stock are entitled to participate in
dividends, if any, as may be declared from time to time by the Newco board of
directors and, upon liquidation, are entitled to receive a pro-rata share of all
the assets of Newco that are available for distribution to these holders. All
of the Newco common stock will, when issued in connection with the mergers, be
fully paid and nonassessable. Holders of Newco common stock will have no
preemptive rights with respect to future issuances of Newco capital stock.
Description of Preferred Stock
The board of directors is authorized to issue up to 50,000,000 shares of
preferred stock from time to time, in one or more series, without stockholder
approval, and to fix the designation, preferences, conversion or other rights,
voting powers, restriction, limitations as to dividends, qualifications and
terms and conditions of redemption of any series that may be established by the
Newco board. As a result, without stockholder approval, the Newco board could
authorize the issuance of preferred stock with voting, conversion and other
rights that could dilute the voting power and other rights of the holders of
Newco common stock. In addition, shares issued after the consolidation may have
the effect, under some circumstances, alone or in combination with other
provisions of the Newco charter of rendering more difficult or discouraging an
acquisition of Newco considered undesirable by the Newco board of directors.
The Newco preferred stock will be exchangeable as follows:
. Newco Series A shall be exchanged for ART Series F
. Newco Series B shall be exchanged for ART Series E
. Newco Series C shall be exchanged for ART Series H
. Newco Series D shall be exchanged for ART Series D
Series A Preferred Stock. There are authorized a total of 15,000,000
------------------------
shares of Series A Cumulative Convertible Preferred Stock (the Series A
Preferred Stock) with a par value of $2.00 per
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<PAGE>
share and an Adjusted Liquidation Value of $10.00 per share plus payment of
accrued and unpaid dividends. The Series A Preferred Stock is non-voting except:
(i) as provided by law,
(ii) with respect to an amendment to Newco's articles of incorporation or
bylaws that would materially alter or change the existing terms of
the Series A Preferred Stock, and
(iii) at any time or times when all or any portion of the dividends on the
Series A Preferred Stock for any six quarterly dividends, whether or
not consecutive, shall be in arrears and unpaid.
In the latter event, the number of directors constituting the board of
directors of Newco shall be increased by two and the holders of Series A
Preferred Stock, voting separately as a class, shall be entitled to elect two
directors to fill the newly created directorships with each holder being
entitled to one vote in the election for each share of Series A Preferred Stock
held. Newco is not obligated to maintain a sinking fund with respect to the
Series A Preferred Stock.
The Series A Preferred Stock is convertible, at the option of the holder,
into common stock at any time and from time to time, in whole or in part, after
the earliest to occur of
(i) August 15, 2003;
(ii) the first business day, if any, occurring after a Quarterly Dividend
Payment Date (as defined below), on which an amount equal to or in
excess of 5% of the $10.00 liquidation value (i.e., $.50 per share of
Series A Preferred Stock) is accrued and unpaid, or
(iii) when Newco becomes obligated to mail a statement, signed by an
officer of Newco, to the holders of record of each of the shares of
Series A Preferred Stock because of a proposal by Newco at any time
before all of the shares of Series A Preferred Stock have been
redeemed by or converted into common stock, to merge or consolidate
with or into any other corporation (unless Newco is the surviving
entity and holders of common stock continue to hold the shares of
common stock without modification and without receipt of any
additional consideration), or to sell, lease, or convey all or
substantially all its property or business, or to liquidate, dissolve
or wind up.
The Series A Preferred Stock is convertible into that number of shares of
common stock obtained by multiplying the number of shares being converted by
$10.00, then adding all accrued and unpaid dividends, then dividing those sums
by the Conversion Price. Notwithstanding the foregoing, Newco, at its option,
may elect to redeem any shares of Series A Preferred Stock sought to be so
converted by paying the holder of the Series A Preferred Stock cash in an amount
equal to the Conversion Price.
The Series A Preferred Stock bears a cumulative compounded dividend per
share equal to 10% per annum of the Adjusted Liquidation Value, payable on each
Quarterly Dividend Payment Date, and commencing accrual on the date of issuance
to and including the date on which the redemption price of the shares is paid,
whether or not those dividends have been declared and whether or not there are
profits, surplus or other funds of Newco legally available for the payment of
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<PAGE>
those dividends. Dividends on the Series A Preferred Stock are in preference to
and with priority over dividends upon the common stock. Except as provided in
the following sentence, the Series A Preferred Stock ranks on a parity as to
dividends and upon liquidation, dissolution or winding up with all other
Preferred Stock issued by Newco. Newco will not issue any shares of Preferred
Stock of any series which are superior to the Series A Preferred Stock as to
dividends or rights upon liquidation, dissolution or winding up of Newco as long
as any shares of Series A Preferred Stock are issued and outstanding, without
the prior written consent of the holders of at least 66 2/3% of the shares of
the Series A Preferred Stock then outstanding voting separately as a class.
In addition to Newco's redemption rights described above upon a conversion
of Series A Preferred Stock, Newco may redeem any or all of the Series A
Preferred Stock at any time and from time to time, at its option, for cash upon
no less than twenty (20) days nor more than thirty (30) days prior notice
thereof. The redemption price of the Series A Preferred Stock shall be an amount
per share equal to 103% of the Adjusted Liquidation Value.
The Series A Preferred Stock has certain restrictions with regard to
transfer. ART is a partner in certain partnerships with unitholders whose units
are currently exchangeable for ART Series F Preferred Stock and after the
business combination will be exchangeable for Newco Series A Preferred Stock.
Holders of shares of Series A Preferred Stock who acquire the stock (i) pursuant
to the business combination or (ii) within six months after the effective date
of the business combination as a result of an exchange of one or more units for
the shares of stock of the Company may not sell, transfer or otherwise dispose
of the shares prior to the second anniversary of the business combination, and
any attempt to effect a sale, transfer or disposition will be void ab initio,
unless (i) the transferor obtains the express written consent of Newco to effect
the transfer, (ii) both the transferor and the transferee represent to Newco
that there were no discussions prior to the business combination concerning the
proposed transfer and there was no binding commitment or agreement (whether
written or oral) prior to the business combination to effect the transfer, (iii)
the transferor represents that, at the time of the business combination, it had
no plan or intention to sell, transfer or otherwise dispose of the Series A
Preferred Stock it received pursuant to the business combination or upon an
exchange of units and (iv) the transferor delivers to Newco an opinion of a
reputable tax counsel, acceptable to Newco, that the transfer will not have an
adverse impact on the ability of the business combination to be treated as part
of a transaction that satisfies the requirements of Section 351 of the Internal
Revenue Code.
At the option of the holder, each share of Series A Preferred Stock will be
convertible into fully paid and non assessable shares of common stock beginning
August 15, 2003. There are reserved 1,998,797 shares of Series A Preferred Stock
for issuance as future consideration in various business transactions of Newco.
Series B Preferred Stock. There are designated 80,000 shares of Series B
------------------------
10% Cumulative Convertible Preferred Stock (the Series B Preferred Stock) with a
par value of $2.00 per share and a preference on liquidation of $100 per share
plus payment of all accrued and unpaid dividends. The Series B Preferred Stock
is non-voting except as required by law. Newco is not required to maintain a
sinking fund for the stock.
Each share of Series B Preferred Stock is convertible into that number of
Newco common shares obtained by multiplying the number of shares being converted
by $100, then adding all accrued and unpaid dividends on the shares, then
dividing the sum by (in most instances) 80% of the Newco common share's then-
recent average trading price for the 20 business days ending on the last
business day of the calendar week immediately preceding the date of conversion
on the principal
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<PAGE>
stock exchange on which the Newco common shares are then listed or admitted to
trading as determined by Newco. The schedule pursuant to which shares of Series
B Preferred Stock may be so converted is as follows: up to 30,000 shares of the
Series B Preferred Stock may be converted beginning as of November 4, 1998 and
thereafter; up to an additional 10,000 shares of the Series B Preferred Stock
may be converted beginning as of November 4, 1999; and up to an additional
40,000 shares of the Series B Preferred Stock may be converted beginning as of
November 4, 2001.
The Series B Preferred Stock bears a cumulative dividend per share equal to
$11.00 per annum ($2.75 per quarter). Dividends on the Series B Preferred Stock
are in preference to and with priority over dividends upon the Newco common
shares. The Series B Preferred Stock ranks on a parity as to dividends and upon
liquidation, dissolution or winding up with all other shares of preferred stock.
Newco may redeem any or all of the shares of Series B Preferred Stock from
time to time upon payment of $100.00 per share plus all accrued and unpaid
dividends. There is no restriction on the repurchase or redemption of the Series
B Preferred Stock by Newco while there is any arrearage in payment of dividends
except that at the time of the repurchase or redemption Newco must pay all
accrued and unpaid dividends on the shares being redeemed. As of September 30,
1999, there were no shares of Series B Preferred Stock issued or outstanding.
The Series B Preferred Stock has certain restrictions with regard to
transfer. ART is a partner in a partnership with a unitholder whose units are
currently exchangeable for ART Series E Preferred Stock and after the business
combination will be exchangeable for Newco Series B Preferred Stock. Holders of
shares of Series B Preferred Stock who acquire the stock within six months after
the effective date of the business combination as a result of an exchange of one
or more units for the shares of stock of Newco may not sell, transfer or
otherwise dispose of the shares prior to the second anniversary of the business
combination, and any attempt to effect a sale, transfer or disposition will be
void ab initio, unless (i) the transferor obtains the express written consent of
Newco to effect the transfer, (ii) both the transferor and the transferee
represent to Newco that there were no discussions prior to the business
combination concerning the proposed transfer and there was no binding commitment
or agreement (whether written or oral) prior to the business combination to
effect the transfer, (iii) the transferor represents that, at the time of the
business combination, it had no plan or intention to sell, transfer or otherwise
dispose of the Series B Preferred Stock it received upon an exchange of units
and (iv) the transferor delivers to Newco an opinion of a reputable tax counsel,
acceptable to Newco, that the transfer will not have an adverse impact on the
ability of the business combination to be treated as part of a transaction that
satisfies the requirements of Section 351 of the Internal Revenue Code.
Series C Preferred Stock. There are designated 231,750 shares of Series C
------------------------
Cumulative Convertible Preferred Stock (the Series C Preferred Stock) with a par
value of $2.00 per share and a preference on liquidation of $10 per share plus
all accrued and unpaid dividends. The Series C Preferred Stock is non-voting
except as required by the Georgia Business Code. The Georgia Business Code
grants the holders of the outstanding shares of a class the authority to vote as
a separate voting group on a proposed amendment if that amendment would effect a
detrimental reclassification of the existing shares, create a new class with
preferences over the existing shares, or cancel or otherwise affect the rights
to distributions and dividends. Newco is not required to maintain a sinking fund
for the stock.
Each share of Series C Preferred Stock is convertible at the option of the
holders thereof in the following amounts at any time on or after the respective
dates:
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<PAGE>
(1) 25,000 shares on or after December 31, 2000;
(2) 25,000 shares on or after September 30, 2002;
(3) 25,000 shares on or after September 30, 2003;
(4) 25,000 shares on or after December 31, 2005; and
(5) all remaining outstanding shares on or after December 31, 2006.
These shares are convertible into that number of Newco common shares obtained by
multiplying the number of shares of Series C Preferred Stock being converted by
$10 and then dividing the sum by (in most instances) 90% of the simple average
of the daily closing price of the Newco common shares for the 20 trading days
ending on the last trading day of the calendar week immediately preceding the
conversion on the market where the Newco common shares are then regularly
traded. The right of conversion shall terminate upon receipt of the notice of
redemption from Newco and on the earlier of (1) the commencement of any
liquidation, dissolution or winding up of Newco or (2) the adoption of any
resolution authorizing the commencement thereof. Newco may elect to redeem the
shares of Series C Preferred Stock sought to be converted instead of issuing
shares of Newco common stock.
The Series C Preferred Stock bears a cumulative quarterly dividend per
share in an amount equal to:
(1) 7% per annum during the period from issuance to June 30, 1999;
(2) 8% per annum during the period from July 1, 1999 to September 30,
2000;
(3) 9% per annum during the period from July 1, 2000 to September 30,
2001; and
(4) 10% per annum from July 1, 2001 and thereafter.
In each case, the dividend per share is calculated on the basis of the adjusted
liquidation value of the Series C Preferred Stock, payable in arrears in cash on
each Quarterly Dividend Payment Date, and commencing accrual on the date of
issuance to and including the date on which the redemption price of the shares
is paid. Dividends on the Series C Preferred Stock are in preference to and with
priority over dividends upon the Newco common shares. The Series C Preferred
Stock ranks on a parity as to dividends and upon liquidation, dissolution or
winding up with all other shares of Preferred Stock.
Newco may redeem all or a portion of the shares of the Series C Preferred
Stock issued and outstanding at any time after January 1, 1999 and from time to
time, at its option, for cash upon no less than twenty (20) days nor more than
thirty (30) days prior notice thereof. The redemption price of the shares of the
Series C Preferred Stock shall be an amount per share equal to the sum of (1):
(a) 105% of liquidation value during the period from issuance through
December 31, 1999;
(b) 104% of liquidation value during the period from January 1, 2000
through December 31, 2000;
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<PAGE>
(c) 103% of liquidation value during the period from January 1, 2001
through December 31, 2001;
(d) 102% of liquidation value during the period from January 1, 2002
through December 31, 2002;
(e) 101% of liquidation value during the period from January 1, 2003
through December 31, 2003; and
(f) 100% of liquidation value from January 1, 2004 and thereafter,
and (2) all accrued and unpaid dividends on the shares through the
redemption date. The right of Newco to redeem shares of Series C Preferred Stock
remains effective notwithstanding prior receipt by Newco of notice by any holder
of Series C Preferred Stock of the holder's intent to convert shares of Series C
Preferred Stock.
The Series C Preferred Stock has certain restrictions with regard to
transfer. ART is a partner in certain partnerships with unitholders whose units
are currently exchangeable for ART Series H Preferred Stock and after the
business combination will be exchangeable for Newco Series C Preferred Stock.
Holders of shares of Series C Preferred Stock who acquire the stock within six
months after the effective date of the business combination as a result of an
exchange of one or more units for the shares of stock of Newco may not sell,
transfer or otherwise dispose of the shares prior to the second anniversary of
the business combination, and any attempt to effect a sale, transfer or
disposition will be void ab initio, unless (i) the transferor obtains the
express written consent of Newco to effect the transfer, (ii) both the
transferor and the transferee represent to Newco that there were no discussions
prior to the business combination concerning the proposed transfer and there was
no binding commitment or agreement (whether written or oral) prior to the
business combination to effect the transfer, (iii) the transferor represents
that, at the time of the business combination, it had no plan or intention to
sell, transfer or otherwise dispose of the Series C Preferred Stock it received
upon an exchange of units and (iv) the transferor delivers to Newco an opinion
of a reputable tax counsel, acceptable to Newco, that the transfer will not have
an adverse impact on the ability of the business combination to be treated as
part of a transaction that satisfies the requirements of Section 351 of the
Internal Revenue Code.
Series D Preferred Stock. There were 91,000 shares of Series D 9.50%
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Cumulative Preferred Stock (the Series D Preferred Stock) designated with a par
value of $2.00 per share and a preference on liquidation of $20.00 per share
plus payment of accrued and unpaid dividends. The Series D Preferred Stock is
non-voting except as required by law and is not convertible. Newco is not
required to maintain a sinking fund for the stock.
Each Share of Series D Preferred Stock has a cumulative dividend per share
of 9.50% per annum of the $20.00 liquidation preference, payable quarterly in
equal installments of $0.475. Dividends on the Series D Preferred Stock are in
preference to and with priority over dividends upon the Newco common shares. The
Series D Preferred Stock ranks on a parity as to dividends and upon liquidation,
dissolution or winding up with all other shares of Preferred Stock.
Newco may from time to time after June 1, 2001 redeem any or all of the
Series D Preferred Stock upon payment of the liquidation value of $20.00 per
share plus all accrued and unpaid dividends. There is no restriction on the
repurchase or redemption of the Series D Preferred Stock by
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Newco while there is any arrearage in payment of dividends except that at the
time of the repurchase or redemption Newco must pay all accrued and unpaid
dividends on the shares being redeemed. As of September 30, 1999, there were no
shares of Series D Preferred Stock issued or outstanding.
The Series D Preferred Stock has certain restrictions with regard to
transfer. ART is a partner in certain partnerships with unitholders whose units
are currently exchangeable for ART Series D Preferred Stock and after the
business combination will be exchangeable for Newco Series D Preferred Stock.
Holders of shares of Series D Preferred Stock who acquire such stock within six
months after the effective date of the business transaction as a result of an
exchange of one or more units for such shares of stock of Newco may not sell,
transfer or otherwise dispose of such shares prior to the second anniversary of
the business combination, and any attempt to effect such sale, transfer or
disposition will be void ab initio, unless (i) the transferor obtains the
express written consent of Newco to effect such transfer, (ii) both the
transferor and the transferee represent to Newco that there were no discussions
prior to the business combination concerning the proposed transfer and there was
no binding commitment or agreement (whether written or oral) prior to the
business combination to effect such transfer, (iii) the transferor represents
that, at the time of the business combination, it had no plan or intention to
sell, transfer or otherwise dispose of the Series D Preferred Stock it received
upon an exchange of units and (iv) the transferor delivers to Newco an opinion
of a reputable tax counsel, acceptable to Newco, that such transfer will not
have an adverse impact on the ability of the business combination to be treated
as part of a transaction that satisfies the requirements of Section 351 of the
Code.
The description of the foregoing provisions of each series of the Preferred
Stock does not purport to be complete and is subject to and qualified in its
entirety by reference to the definitive articles of amendment of the articles of
incorporation relating to the series of Preferred Stock.
CHARTER AND BYLAWS OF NEWCO
The following is a summary of the terms of Newco's articles of
incorporation and bylaws. The summary contains all material terms, but does not
set forth all the provisions of the articles of incorporation or bylaws. For
additional information, you should read the entire text of these documents which
are attached as exhibits 3.1 and 3.2 to this joint proxy statement and
prospectus.
Authorized Stock
Newco's charter authorizes it to issue 150,000,000 shares of capital stock,
consisting of 100,000,000 shares of common stock, par value $.01 per share, and
50,000,000 shares of preferred stock, par value $2.00 per share. Shares of
preferred stock may be issued from time to time, in one or more series, each
having specific voting powers, designations, preferences and restrictions as
approved by the Newco board.
Directors
The bylaws provide that the number of directors serving on Newco's board
will be not less than three nor more than twelve. The exact number of directors
will be fixed by the board from time to time. The bylaws provide that, unless
otherwise provided by law or the charter, a quorum consists of a majority of the
entire board. The act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board. Cumulative voting is not
authorized in the
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election of directors to the board. Vacancies and any newly-created
directorships resulting from an increase in the authorized number of directors
may be filled by a majority of the directors then in office, even if less than a
quorum.
Stockholder Meetings and Special Voting Requirements
The annual meetings of stockholders are held on a date established by the
board. Special meetings of stockholders may be called only by the chairman of
the board, the president or by a resolution adopted by a majority of the board
of directors. In general, the presence of a majority of stockholders in person
or by proxy entitled to vote constitutes a quorum at any stockholders' meeting.
Amendments to the charter or the bylaws must be approved by stockholders holding
a majority of the shares outstanding and entitled to be cast thereon.
Directors may be removed for cause and only by the affirmative vote of the
holders of not less than 80% of the outstanding stock of Newco entitled to vote
for the election of the director.
Amendment of the Charter and Bylaws
The charter provides that approval of 51% of the stockholders entitled to
vote is required to amend the articles. A bylaw may be amended or repealed, or a
new bylaw adopted, by the affirmative vote of 51% of the stock entitled to vote
or by a majority of the board.
Transactions with Interested Officers or Directors
The charter provides that Newco shall not, directly or indirectly, contract
or engage in any transaction with any advisor of Newco, any director, officer or
employee of Newco or any advisor or any affiliate or associate of any director,
officer or employee of Newco or any advisor, unless:
. the material facts as to the relationship or interest are disclosed or
are known to the board and the board authorizes the contract or
transaction in good faith;
. the contract or transaction is deemed fair by the board; and
. the board simultaneously authorizes or ratifies the transaction by the
affirmative vote of a majority of independent directors entitled to
vote on the matter.
Anti-Takeover Effect of Authorized but Undesignated Preferred Stock
As described below, the board is authorized to provide for the issuance of
shares of preferred stock, in one or more series, and fix the terms and
conditions of each series. Management believes that the availability of
preferred stock will provide Newco with increased flexibility in structuring
financings and acquisitions and in meeting other corporate needs. Authorized but
unissued shares of preferred stock and common stock will be available for
issuance without further action by stockholders, unless required by applicable
law or the rules of any stock exchange or automated quotation system.
Although the board has no present intention of doing so, it will be able to
issue a series of preferred stock that could either impede or facilitate the
completion of a merger, tender offer or other takeover attempt. For instance,
these new shares might impede a business combination by including class voting
rights which would enable the holder to block the transaction. The board will
make any
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determination to issue these shares based on its judgment as to the best
interests of Newco and its stockholders. The board will be able to issue
preferred stock having terms which would discourage an acquisition attempt or
other transaction that a majority of the stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock.
Liability for Monetary Damages
No director will be personally liable to Newco or its stockholders for
monetary damages arising out of a breach of fiduciary duty as a director. A
director's liability, however, is not limited (1) for acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law, or (2) for
the payment of dividends in violation of Nevada law. If Nevada law is amended to
permit additional limitation or elimination of a director's personal liability,
the liability of a director will be eliminated or limited to the fullest extent
permitted by the amended Nevada law. Any repeal or modification of the existing
Nevada law provisions will not increase the personal liability of any director
for any act or occurrence taking place prior to the repeal or modification, or
otherwise adversely affect any right or protection of a director existing at the
time of the repeal or modification.
Indemnification and Advancement of Expenses
Present and former directors and officers of Newco and persons serving as
directors, officers, employees or agents of another corporation or entity at the
request of Newco are indemnified to the fullest extent permitted by Nevada law.
The Newco charter and the bylaws specifically indemnify these persons for
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them (1) in connection with a
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director or officer of Newco or is or was serving as a director, officer,
employee or agent of another corporation or entity at the request of Newco, or
(2) in connection with the defense or settlement of a threatened, pending or
completed action or suit by or in the right of Newco, provided that the party is
adjudged to be liable to Newco. To be indemnified a person must have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of Newco and, with respect to any criminal action or proceeding,
must have had no reasonable cause to believe his conduct was unlawful.
Indemnification is only available if the applicable standard of conduct has
been met by the indemnified party. Indemnification is mandatory where a
director or officer is successful in the defense of an action, suit or
proceeding or any claim or matter asserted against the person. A determination
of the availability of indemnification may be made by the majority vote of a
quorum of directors not a party to the suit, action or proceeding, by a written
opinion of independent legal counsel or by the stockholders.
In the event that a determination is made that a director or officer is not
entitled to indemnification, the director or officer may seek a judicial
determination of his right to indemnification. If successful, a director or
officer is entitled to indemnification for all expenses, including attorney's
fees, incurred in any proceeding seeking to collect an indemnity claim under the
indemnification provisions. Other than proceedings to enforce rights to
indemnification, Newco is not obligated to indemnify any person in connection
with a proceeding initiated by that person.
Newco will pay expenses incurred by a director or officer of Newco, or a
former director of officer, in advance of the final disposition of an action,
suit or proceeding, if he undertakes to repay amounts advanced in the event it
is ultimately determined that indemnification is not available.
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The indemnification provisions and provisions for advancing expenses in the
Newco charter and bylaws are not exclusive of any other similar rights pursuant
to any agreement, vote of the stockholders or disinterested directors or
pursuant to judicial direction.
ANTI-TAKEOVER PROVISIONS OF THE ORGANIZATIONAL
DOCUMENTS OF NEWCO
The Newco articles of incorporation and bylaws contain a number of
provisions that may inhibit or impede the acquisition or attempted acquisition
of control of Newco by means of a tender offer, proxy contest or otherwise.
These provisions are expected to discourage coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
Newco to negotiate first with the Newco board. These provisions may increase the
likelihood that proposals initially will be on more attractive terms than would
be the case in their absence and increase the likelihood of negotiations. This
might outweigh the potential disadvantages of discouraging these proposals
because, among other things, negotiation of the proposals might result in an
improvement of their terms. The discussion below highlights some of these anti-
takeover provisions in the Newco charter documents. Because it is a summary, it
may not contain all of the information that might be important to you. We urge
you to read the Newco articles of incorporation and bylaws which have been filed
as exhibits to the registration statement of which this document is a part, as
well as the Nevada General Corporation Law for a complete description of these
anti-takeover provisions.
Number of Directors; Removal; Filling Vacancies
After giving preference to any rights of holders of preferred shares of
Newco to elect additional directors under specified circumstances, the Newco
articles of incorporation and bylaws provide that the number of directors must
not be less than three nor more than twelve. In addition, the Newco bylaws
provide that, after giving preference to rights of holders of preferred stock,
any vacancies will be filled by majority of the remaining directors, even though
less than a quorum, or by a sole director, and any vacancies created by an
increase in the total number of directors may be filled only by the Newco board.
Accordingly, the Newco board could temporarily prevent any stockholder from
enlarging the Newco board and then filling the new positions with the
stockholder's own nominees.
The Newco articles of incorporation and bylaws also provide that, after
giving preference to any rights of holders of preferred shares, directors may be
removed only for cause, and only upon the affirmative vote of holders of eighty
percent 80% of the then outstanding shares entitled to vote in the election of
directors.
Advance Notice Provisions for Director Nominations and Stockholder Proposals
The Newco bylaws provide for an advance notice procedure for stockholders
to make nominations of candidates for director or to bring other business before
the annual meeting of stockholders. According to this procedure (1) only persons
who are nominated by, or at the direction of, the Newco board, or by a
stockholder who has given timely written notice containing specified information
to the secretary of Newco prior to the meeting at which directors are to be
elected, will be eligible to nominate candidates for directors of Newco, and (2)
at an annual meeting, only that business may be conducted as has been brought
before the meeting by, or at the direction of, the Newco board or by a
stockholder who has given timely written notice to the secretary of Newco of
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his intention to bring the business before the meeting. In general, for notice
of stockholder nominations or proposed business to be conducted at an annual
meeting to be timely, the notice must be received by Newco not less than 60 days
nor more than 90 days prior to the scheduled date of the meeting.
The purpose of requiring stockholders to give advance notice of nominations
and other business is to afford the Newco board a meaningful opportunity to
consider the qualifications of the proposed nominees or the advisability of the
other proposed business. To the extent necessary or considered desirable by the
Newco board, the advance notice provision will allow the Newco board to inform
stockholders and make recommendations about the nominees or business, as well as
to ensure an orderly procedure for conducting meetings of stockholders. Although
the Newco bylaws do not give the Newco board power to block stockholder
nominations for the election of directors or proposals for action, the advance
notice procedure may have the effect of discouraging a stockholder from
proposing nominees or business, precluding a contest for the election of
directors or the consideration of stockholder proposals if procedural
requirements are not met. This might also deter third parties from soliciting
proxies for a non-management proposal or slate of directors, without regard to
the merits of the proposal or slate.
Any action required or permitted to be taken by the Newco stockholders must
be taken at a properly called annual or special meeting of the Newco
stockholders and may not be taken by written consent. Special meetings of the
Newco stockholders may be called at any time, but only by the chairman of the
board, the president, or by a majority of the directors then in office.
Business Combinations Under Nevada Law
Newco's articles expressly elect not to be governed by the Nevada
"Corporate Combinations Law" contained in Sections 78.411 to 78.444, inclusive,
of the Nevada General Corporate Law and the Nevada "Control Shares Statute"
contained in the Nevada Revised Statutes 78.378-78.3792.
DESCRIPTION OF THE CAPITAL STOCK OF ART
General
ART is authorized by its articles of incorporation, as amended, to issue up
to 100,000,000 ART common shares and 20,000,000 shares of a special class of
stock, $2.00 par value per share, which may be designated by the ART board from
time to time.
Common Stock
All shares of the ART common stock are entitled to share equally in
dividends from funds legally available therefor, when declared by the ART board,
and upon liquidation or dissolution of ART, whether voluntary or involuntary
(subject to any prior rights of holders of the special stock), and to share
equally in the assets of ART available for distributions to shareholders. Each
holder of ART common stock is entitled to one vote for each share held on all
matters submitted to the shareholders. There is no cumulative voting, redemption
right, sinking fund provision or right of conversion with respect to the ART
common stock. The holders of ART common stock do not have any preemptive rights
to acquire additional ART common stock when issued. All outstanding shares of
ART common stock are fully paid and nonassessable. As of October 31, 1999,
10,563,720 shares of ART common stock were outstanding.
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Special Stock
The following is a description of some general terms and provisions of the
special stock, including the Series D Preferred Stock, the Series E Preferred
Stock, the Series F Preferred Stock, the Series G Preferred Stock and the Series
H Preferred Stock, as defined below.
ART's charter authorizes the issuance of up to 20,000,000 shares of special
stock in one or more series with whatever preferences, limitations and rights as
the ART board determines. In particular, the ART board may:
. fix and determine, among other things, the dividend payable with
respect to the shares of special stock (including whether and in what
manner the dividend shall be accumulated)
. whether the shares shall be redeemable, and if so, the prices, terms
and conditions of the redemption
. the amount payable on the shares in the event of voluntary or
involuntary liquidation
. the nature of any purchase, retirement or sinking fund provisions
. the nature of any conversion rights with respect to the shares
. the extent of the voting rights, if any, of the shares
Some provisions of the special stock may, under some circumstances,
adversely affect the rights or interests of holders of ART common shares. For
example, the ART board could, without shareholder approval, issue a series of
special stock with voting and conversion rights which could adversely affect the
voting power of the common shareholders. In addition, the special stock may be
issued under some circumstances as a defensive device to thwart an attempted
hostile takeover of ART.
Through the date of this joint proxy statement and prospectus, ART has
amended its articles of incorporation to designate eight series of the special
stock as described below. Each outstanding series of special stock ranks on a
parity as to dividends and upon liquidation, dissolution or winding up with all
other shares of special stock.
Series A Preferred Stock; Terminated Rights Plan. On April 11, 1990, the
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ART board designated 500,000 shares of the Series A Cumulative Participating
Preferred Stock (the Series A Preferred Stock), adopted a preferred share
purchase rights plan and approved the distribution to shareholders of a dividend
of one preferred share purchase right on each outstanding ART common share. On
February 27, 1997, ART filed articles of amendment to its articles of
incorporation reducing the number of authorized shares of Series A Preferred
Stock to zero and eliminating the designation.
Series B Preferred Stock. On April 3, 1996, the ART board designated 4,000
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shares of Series B 10% Cumulative Convertible Preferred Stock (the Series B
Preferred Stock) with a par value of $2.00 per share and a preference on
liquidation of $100 per share plus payment of accrued and unpaid dividends. On
May 27, 1998, ART filed articles of amendment to its articles of
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incorporation reducing the number of authorized shares of Series B Preferred
Stock to zero and eliminating the designation.
Series C Preferred Stock. On May 23, 1996, the ART board designated 16,681
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shares of Series C 10% Cumulative Convertible Preferred Stock (the Series C
Preferred Stock) with a par value of $2.00 per share and a preference on
liquidation of $100 per share plus all accrued and unpaid dividends.
ART redeemed all of the outstanding shares of Series C Preferred Stock at
their liquidation value of $100 per share plus all accrued and unpaid dividends
on November 24, 1998. On January 11, 1999, ART filed articles of amendment to
its articles of incorporation reducing the number of authorized shares of Series
C Preferred Stock to zero and eliminating the designation.
Series D Preferred Stock. The ART board designated 91,000 shares of Series
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D 9.50% Cumulative Preferred Stock (the Series D Preferred Stock) on August 2,
1996, with a par value of $2.00 per share and a preference on liquidation of
$20.00 per share plus payment of accrued and unpaid dividends. The Series D
Preferred Stock is non-voting except as required by law and is not convertible.
ART is not required to maintain a sinking fund for the stock.
Each share of Series D Preferred Stock has a cumulative dividend per share
of 9.50% per annum of the $20.00 liquidation preference, payable quarterly in
equal installments of $0.475. Dividends on the Series D Preferred Stock are in
preference to and with priority over dividends upon the ART common shares. The
Series D Preferred Stock ranks on a parity as to dividends and upon liquidation,
dissolution or winding up with all other shares of special stock.
ART may from time to time after June 1, 2001 redeem any or all of the
Series D Preferred Stock upon payment of the liquidation value of $20.00 per
share plus all accrued and unpaid dividends. There is no restriction on the
repurchase or redemption of the Series D Preferred Stock by ART while there is
any arrearage in payment of dividends except that at the time of the repurchase
or redemption ART must pay all accrued and unpaid dividends on the shares being
redeemed. As of September 30, 1999, there were no shares of Series D Preferred
Stock issued or outstanding.
The Series D Preferred Stock is reserved for issuance upon the conversion
Class A units held by the limited partners of Ocean Beach Partners L.P.
Series E Preferred Stock. On December 3, 1996, the ART board designated
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80,000 shares of Series E 10% Cumulative Convertible Preferred Stock (the Series
E Preferred Stock) with a par value of $2.00 per share and a preference on
liquidation of $100 per share plus payment of all accrued and unpaid dividends.
The Series E Preferred Stock is non-voting except as required by law. ART is not
required to maintain a sinking fund for the stock.
Each share of Series E Preferred Stock is convertible into that number of
ART common shares obtained by multiplying the number of shares being converted
by $100, then adding all accrued and unpaid dividends on the shares, then
dividing the sum by (in most instances) 80% of the ART common share's then-
recent average trading price for the 20 business days ending on the last
business day of the calendar week immediately preceding the date of conversion
on the principal stock exchange on which the ART common shares are then listed
or admitted to trading as determined by ART. The schedule pursuant to which
shares of Series E Preferred Stock may be so converted is as follows: up to
30,000 shares of the Series E Preferred Stock may be converted beginning as of
November 4, 1998 and thereafter; up to an additional 10,000 shares of the Series
E
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Preferred Stock may be converted beginning as of November 4, 1999; and up to an
additional 40,000 shares of the Series E Preferred Stock may be converted
beginning as of November 4, 2001.
The Series E Preferred Stock bears a cumulative dividend per share equal to
$10.00 per annum, payable quarterly in equal installments of $2.50 for the
period from date of issuance to November 4, 1999, and $11.00 per annum ($2.75
per quarter) thereafter. Dividends on the Series E Preferred Stock are in
preference to and with priority over dividends upon the ART common shares. The
Series E Preferred Stock ranks on a parity as to dividends and upon liquidation,
dissolution or winding up with all other shares of special stock.
ART may redeem any or all of the shares of Series E Preferred Stock from
time to time upon payment of $100.00 per share plus all accrued and unpaid
dividends. There is no restriction on the repurchase or redemption of the Series
E Preferred Stock by ART while there is any arrearage in payment of dividends
except that at the time of the repurchase or redemption ART must pay all accrued
and unpaid dividends on the shares being redeemed. As of September 30, 1999,
there were no shares of Series E Preferred Stock issued or outstanding.
The Series E Preferred Stock is reserved for issuance upon the conversion
of Class A units held by the limited partners in the Valley Ranch Limited
Partnership.
In February 1999, the Class A unitholder notified ART that it intended to
convert 100,000 Class A units into 1,000 shares of Series E Preferred Stock. In
March 1999, ART purchased the 100,000 Class A units for $100,000. ART has
subsequently reached agreement with the Class A unitholder to acquire the
remaining 7,900,000 Class A units for $1.00 per unit. In 1999, an additional
2,900,000 units were purchased and 1 million units will be purchased in January
2000 and 2 million units will be purchased in May 2001 and May 2002.
Series F Preferred Stock. On August 13, 1997, the board of directors of ART
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designated and authorized the issuance of a total of 7,500,000 shares of Series
F Preferred Stock (the Series F Preferred Stock) with a par value of $2.00 per
share and an Adjusted Liquidation Value of $10.00 per share plus payment of
accrued and unpaid dividends. On October 23, 1998, the board of directors of
ART authorized the issuance of an additional 7,500,000 shares of Series F
Preferred Stock, thereby increasing the total number of authorized and issued
shares of Series F Preferred Stock to 15,000,000. The Series F Preferred Stock
is non-voting except
(i) as provided by law,
(ii) with respect to an amendment to ART's articles of incorporation or
bylaws that would materially alter or change the existing terms of
the Series F Preferred Stock, and
(iii) at any time or times when all or any portion of the dividends on the
Series F Preferred Stock for any six quarterly dividends, whether or
not consecutive, shall be in arrears and unpaid.
In the latter event, the number of directors constituting the board of directors
of ART shall be increased by two and the holders of Series F Preferred Stock,
voting separately as a class, shall be entitled to elect two directors to fill
the newly created directorships with each holder being entitled to one vote in
the election for each share of Series F Preferred Stock held. ART is not
obligated to maintain a sinking fund with respect to the Series F Preferred
Stock.
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The Series F Preferred Stock is convertible, at the option of the holder,
into common stock at any time and from time to time, in whole or in part, after
the earliest to occur of
(i) August 15, 2003;
(ii) the first business day, if any, occurring after a Quarterly Dividend
Payment Date (as defined below), on which an amount equal to or in
excess of 5% of the $10.00 liquidation value (i.e., $.50 per share of
Series F Preferred Stock) is accrued and unpaid, or
(iii) when the Company becomes obligated to mail a statement, signed by an
officer of ART, to the holders of record of each of the shares of
Series F Preferred Stock because of a proposal by ART at any time
before all of the shares of Series F Preferred Stock have been
redeemed by or converted into common stock, to merge or consolidate
with or into any other corporation (unless ART is the surviving
entity and holders of common stock continue to hold the shares of
common stock without modification and without receipt of any
additional consideration), or to sell, lease, or convey all or
substantially all its property or business, or to liquidate, dissolve
or wind up.
The Series F Preferred Stock is convertible into that number of shares of common
stock obtained by multiplying the number of shares being converted by $10.00,
then adding all accrued and unpaid dividends, then dividing those sums by the
Conversion Price. Notwithstanding the foregoing, ART, at its option, may elect
to redeem any shares of Series F Preferred Stock sought to be so converted by
paying the holder of the Series F Preferred Stock cash in an amount equal to the
Conversion Price.
The Series F Preferred Stock bears a cumulative compounded dividend per
share equal to 10% per annum of the Adjusted Liquidation Value, payable on each
Quarterly Dividend Payment Date, and commencing accrual on the date of issuance
to and including the date on which the redemption price of the shares is paid,
whether or not those dividends have been declared and whether or not there are
profits, surplus or other funds of ART legally available for the payment of
those dividends. Dividends on the Series F Preferred Stock are in preference to
and with priority over dividends upon the common stock. Except as provided in
the following sentence, the Series F Preferred Stock ranks on a parity as to
dividends and upon liquidation, dissolution or winding up with all other special
stock issued by ART. ART will not issue any shares of special stock of any
series which are superior to the Series F Preferred Stock as to dividends or
rights upon liquidation, dissolution or winding up of ART as long as any shares
of Series F Preferred Stock are issued and outstanding, without the prior
written consent of the holders of at least 66 2/3%of the shares of the Series F
Preferred Stock then outstanding voting separately as a class.
In addition to ART's redemption rights described above upon a conversion of
Series F Preferred Stock, ART may redeem any or all of the Series F Preferred
Stock at any time and from time to time, at its option, for cash upon no less
than twenty (20) days nor more than thirty (30) days prior notice thereof. The
redemption price of the Series F Preferred Stock shall be an amount per share
equal to
(i) 104% of the Adjusted Liquidation Value during the period from August
16, 1998 through August 15, 1999; and
(ii) 103% of the Adjusted Liquidation Value at any time on or after August
16, 1999.
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As of October 31, 1999, 2,600,000 shares of the Series F Preferred Stock were
issued and outstanding. Each share of Series F Preferred Stock will be
convertible, at the option of the holder, into fully paid and non assessable
shares of common stock. There are reserved 1,998,797 shares of Series F
Preferred Stock reserved for issuance as future consideration in various
business transactions of ART.
Series G Preferred Stock. On September 18, 1997, the ART board designated
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11,000 shares of Series G Cumulative Convertible Preferred Stock (the Series G
Preferred Stock) with a par value of $2.00 per share and a preference on
liquidation of $100 per share plus all accrued and unpaid dividends. On May 27,
1998, ART filed articles of amendment to its articles of incorporation
increasing the number of authorized shares of Series G Preferred Stock from
11,000 to 12,000. The Series G Preferred Stock is non-voting except as required
by the Georgia Business Code. The Georgia Business Code grants the holders of
the outstanding shares of a class the authority to vote as a separate voting
group on a proposed amendment if that amendment would effect a detrimental
reclassification of the existing shares, create a new class with preferences
over the existing shares, or cancel or otherwise affect the rights to
distributions and dividends. ART is not required to maintain a sinking fund for
the stock.
Each share of Series G Preferred Stock is convertible, but only after
October 6, 2000, into that number of ART common shares obtained by multiplying
the number of shares of Series G Preferred Stock being converted by $100 and
then dividing the sum by (in most instances) 90% of the simple average of the
daily closing price of the ART common shares for the 20 trading days ending on
the last trading day of the calendar week immediately preceding the conversion
on the market where the ART common shares are then regularly traded. The right
of conversion shall terminate upon receipt of the notice of redemption from ART
and on the earlier of (i) the commencement of any liquidation, dissolution or
winding up of ART or (ii) the adoption of any resolution authorizing the
commencement thereof. ART may elect to redeem the shares of Series G Preferred
Stock sought to be converted instead of issuing shares of ART common stock.
The Series G Preferred Stock bears a cumulative dividend per share equal to
$10.00 per annum, payable in arrears in quarterly equal installments of $2.50,
and commencing accrual on the date of issuance to and including the date on
which the redemption price of the shares is paid. Dividends on the Series G
Preferred Stock are in preference to and with priority over dividends upon the
ART common shares. The Series G Preferred Stock ranks on a parity as to
dividends and upon liquidation, dissolution or winding up with all other shares
of special stock.
ART may redeem any or all of the shares of the Series G Preferred Stock at
any time and from time to time, at its option, for cash upon no less than twenty
(20) days nor more than thirty (30) days prior notice thereof. The redemption
price of the shares of the Series G Preferred Stock shall be an amount per share
equal to the $100 liquidation value plus all accrued and unpaid dividends on the
shares through the redemption date. The right of ART to redeem shares of Series
G Preferred Stock remains effective notwithstanding prior receipt by ART of
notice by any holder of Series G Preferred Stock of the holder's intent to
convert shares of Series G Preferred Stock. As of September 30, 1999 there were
1,000 issued and outstanding shares of Series G Preferred Stock.
There are 11,000 shares of Series G Preferred Stock reserved for issuance
upon the conversion of Class A units held by the limited partner in Grapevine
American, Ltd. ART has entered into an agreement to purchase all of the Class A
units.
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Series H Preferred Stock. On June 26, 1998, the ART board designated
------------------------
231,750 shares of Series H Cumulative Convertible Preferred Stock (the Series H
Preferred Stock) with a par value of $2.00 per share and a preference on
liquidation of $10 per share plus all accrued and unpaid dividends. The Series H
Preferred Stock is non-voting except as required by the Georgia Business Code.
The Georgia Business Code grants the holders of the outstanding shares of a
class the authority to vote as a separate voting group on a proposed amendment
if that amendment would effect a detrimental reclassification of the existing
shares, create a new class with preferences over the existing shares, or cancel
or otherwise affect the rights to distributions and dividends. ART is not
required to maintain a sinking fund for the stock.
Each share of Series H Preferred Stock is convertible at the option of the
holders thereof in the following amounts at any time on or after the respective
dates:
(1) 25,000 shares on or after December 31, 2000;
(2) 25,000 shares on or after September 30, 2002;
(3) 25,000 shares on or after September 30, 2003;
(4) 25,000 shares on or after December 31, 2005; and
(5) all remaining outstanding shares on or after December 31, 2006.
These shares are convertible into that number of ART common shares obtained by
multiplying the number of shares of Series H Preferred Stock being converted by
$10 and then dividing the sum by (in most instances) 90% of the simple average
of the daily closing price of the ART common shares for the 20 trading days
ending on the last trading day of the calendar week immediately preceding the
conversion on the market where the ART common shares are then regularly traded.
The right of conversion shall terminate upon receipt of the notice of redemption
from ART and on the earlier of (1) the commencement of any liquidation,
dissolution or winding up of ART or (2) the adoption of any resolution
authorizing the commencement thereof. ART may elect to redeem the shares of
Series H Preferred Stock sought to be converted instead of issuing shares of ART
common stock.
The Series H Preferred Stock bears a cumulative quarterly dividend per
share in an amount equal to:
(1) 7% per annum during the period from issuance to June 30, 1999;
(2) 8% per annum during the period from July 1, 1999 to September 30,
2000;
(3) 9% per annum during the period from July 1, 2000 to September 30,
2001; and
(4) 10% per annum from July 1, 2001 and thereafter.
In each case, the dividend per share is calculated on the basis of the adjusted
liquidation value of the Series H Preferred Stock, payable in arrears in cash on
each Quarterly Dividend Payment Date, and commencing accrual on the date of
issuance to and including the date on which the redemption price of the shares
is paid. Dividends on the Series H Preferred Stock are in preference to and with
priority over dividends upon the ART common shares. The Series H Preferred Stock
ranks on a parity as to dividends and upon liquidation, dissolution or winding
up with all other shares of special stock.
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ART may redeem all or a portion of the shares of the Series H Preferred
Stock issued and outstanding at any time after January 1, 1999 and from time to
time, at its option, for cash upon no less than twenty (20) days nor more than
thirty (30) days prior notice thereof. The redemption price of the shares of the
Series H Preferred Stock shall be an amount per share equal to the sum of (1):
(a) 105% of liquidation value during the period from issuance through
December 31, 1999;
(b) 104% of liquidation value during the period from January 1, 2000
through December 31, 2000;
(c) 103% of liquidation value during the period from January 1, 2001
through December 31, 2001;
(d) 102% of liquidation value during the period from January 1, 2002
through December 31, 2002;
(e) 101% of liquidation value during the period from January 1, 2003
through December 31, 2003; and
(f) 100% of liquidation value from January 1, 2004 and thereafter,
and (2) all accrued and unpaid dividends on the shares through the redemption
date. The right of ART to redeem shares of Series H Preferred Stock remains
effective notwithstanding prior receipt by ART of notice by any holder of Series
H Preferred Stock of the holder's intent to convert shares of Series H Preferred
Stock. As of September 30, 1999 there were no issued or outstanding shares of
Series H Preferred Stock.
The Series H Preferred Stock is reserved for issuance upon the conversion
of Class A units held by the limited partners in ART Palm Limited Partnership.
The description of the foregoing provisions of each series of the Preferred
Stock does not purport to be complete and is subject to and qualified in its
entirety by reference to the definitive articles of amendment of the articles of
incorporation relating to the series of special stock.
DESCRIPTION OF THE PARTNERSHIP UNITS OF NRLP
General
As of October 31, 1999, there were outstanding 6,321,524 units of limited
partner interest.
Under the Partnership Agreement, NMC has the sole authority to issue
additional limited partner units or other securities of NRLP. Issuance of
additional securities may dilute the interest of a holder of limited partner
units in NRLP. In the event of a liquidation, dissolution and winding up of
NRLP, holders of the units will be entitled to receive pro rata, to the extent
of positive balances in their respective capital accounts, any assets remaining
after satisfaction of NRLP liabilities and establishment of necessary reserves.
Limited partner units are evidenced by certificates (the certificates), and are
freely transferable by assignment of the certificates except as restricted by
169
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federal or state securities laws. NRLP will be entitled to treat the record
holder as the owner for all purposes. No partner is entitled to preemptive
rights in respect of issuances of securities by NRLP. The transfer agent and
registrar for the limited partner units is American Stock Transfer & Trust Co.,
40 Wall Street, New York, New York, 10005.
Participation in Net Income, Net Loss and Distributions
The limited partners of NRLP have a 99% interest and NMC has 1% interest in
the net income or net loss of NRLP. The 1% general partner interest in each of
NRLP and NOLP is equal to a 1.99% interest on a combined basis. NOLP has a 99.3%
limited partner interest and GNRI has a 0.7% general partner interest in the net
income or net loss and distributions of GCLP. GCLP has a 99% interest and GNRI
has a 1% interest in the net income or net loss and distributions of the single
asset partnerships. GNRI's 0.7% general partner interest in GCLP and its 1%
general partner interest in the single asset partnerships is equal to a 1.68%
interest on a combined basis. For tax purposes limited partners are allocated
their proportionate share of net income or net loss commencing with the calendar
month subsequent to their entry into NRLP. NMC receives base compensation equal
to ten percent (10%) of the distributions to unitholders from NRLP's cash from
operations.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the current policies of ART and NRLP with
respect to investments, financing, affiliate transactions and other activities,
and these policies will be adopted by the board of Newco as their policies for
transactions undertaken after the business combination. Once adopted by Newco,
these policies may be amended or waived from time to time at the discretion of
the Newco board without a vote of the Newco stockholders. No assurance can be
given that these investment objectives will be attained or that the value of
Newco will not decrease.
Newco intends to purchase or lease properties for long-term investment,
develop or redevelop its properties or sell these properties, in whole or in
part, when circumstances warrant. Newco may participate with other entities in
property ownership, through joint ventures or other types of co-ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness that have priority over Newco's equity interest.
Newco may repurchase or otherwise reacquire shares of Newco common stock,
or other Newco securities and may also invest in securities of other entities
including those engaged in real estate. Newco may invest in the securities of
other issuers in connection with acquisitions of indirect interests in real
estate, consisting generally of general or limited partnership interests in
special purpose partnerships owning one or more properties. Newco may acquire
all or substantially all of the securities or assets of real estate investment
trusts, management companies or similar entities where these investments would
be consistent with its investment policies. Newco may also invest in securities
of other issuers from time to time for the purpose of exercising control. It is
not intended that Newco's investments in securities will require it to register
as an "investment company" under the Investment Company Act of 1940, as amended,
and it is intended that Newco would divest securities before any registration
would be required.
The Newco board may devote available assets to particular investments or
types of investments, without restriction. Newco's investment objectives and
policies may be changed at any time by the Newco board without the approval of
Newco's stockholders.
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Additional capital may be raised through additional equity offerings, debt
financing or retention of cash flow, or a combination of these methods. If the
Newco board determines to raise additional equity capital, it may, without
stockholder approval, issue additional shares of common stock or preferred stock
up to the amount of its authorized capital in any manner and on whatever terms
and for whatever consideration as it deems appropriate, including in exchange
for property. These securities may be senior to the outstanding Newco common
stock and may include additional series of preferred stock which may be
convertible into Newco common stock. Existing stockholders of Newco will have no
preemptive right to purchase Newco shares in any subsequent securities offering
by Newco, and any offering of this type could cause a dilution of a
stockholder's investment in Newco.
To the extent that the Newco board determines to obtain additional debt
financing, Newco intends to do so generally by mortgaging its existing
properties. These mortgages may be recourse, non-recourse or cross-
collateralized. Although Newco does not have a policy limiting the number or
amount of mortgages that may be placed on any particular property, mortgage
financing instruments typically limit additional indebtedness on these
properties. Newco may also borrow funds through bank borrowings, publicly and
privately placed debt instruments or purchase money obligations, any of which
indebtedness may be secured by Newco's assets or the assets of any entity in
which Newco holds an interest.
Newco may seek to obtain unsecured or secured lines of credit or may
determine to issue debt securities, which may be convertible into common stock
or preferred stock or be accompanied by warrants to purchase stock, or to sell
or securitize its receivables. The proceeds from any borrowings may be used for
the following purposes:
. to finance acquisitions
. to develop or redevelop properties
. to refinance existing indebtedness for working capital or capital
improvements
. the payment of distributions
. to refinance existing indebtedness
Newco may make loans to joint ventures or other entities in which it
participates. Newco does not intend to engage in (1) trading, underwriting or
agency distribution or sale of securities of other issuers or (2) the active
trade of loans and investments.
The specific composition of Newco's real estate and mortgage notes
receivable portfolios following the merger will depend largely on the judgment
of Newco's management as to changing investment opportunities and the level of
risk associated with specific investments. Newco's management intends to
maintain real estate and mortgage notes receivable portfolios diversified by
location and type of property.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES
At the effective time of the merger, NRLP unitholders and ART shareholders
will become stockholders of Newco. Accordingly, after the merger, the rights of
ART shareholders will cease to be governed by Georgia law applicable to
corporations and ART's charter and bylaws and the rights of NRLP unitholders
will cease to be governed by Delaware law applicable to partnerships and the
NRLP partnership agreement and in each case will be governed by Nevada law
applicable to corporations and Newco's charter and bylaws. The following
summarizes some of the differences
171
<PAGE>
between the current rights of ART shareholders and NRLP unitholders and those of
stockholders of Newco following the merger.
<TABLE>
<CAPTION>
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NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
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MANAGEMENT
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<S> <C> <C>
Under the General Corporate Under the Georgia Business The NRLP partnership agreement
Law of Nevada (GCLN), the Corporation Code (GBCC), the provides that, with limited
business and affairs of a business and affairs of a exceptions, NRLP's general
Nevada corporation are Georgia corporation are partner has full and exclusive
managed by or under the managed by or under the discretion to manage and
direction of its board of direction of its board of control the business and
directors, whose members are directors, whose members are affairs of NRLP. The general
generally elected by a generally elected by a partner may be removed upon
majority vote of plurality vote of stockholders the affirmative vote of a
stockholders at which a at which a quorum is present. majority of the limited
quorum is present. The The ART bylaws provide for a partners holding fifty percent
Newco bylaws provide for a classified board consisting of (50%) or more of the then
board consisting of not less not less than 3 nor more than outstanding units. Under the
than 3 nor more than 12 9 members. Each class shall partnership agreement a
members. The Newco bylaws be as equal in number as successor to the general
also provide that all possible. The ART bylaws also partner must be voted upon by
vacancies, including those provide that all vacancies, a majority of the limited
caused by an increase in the including those caused by an partners. The general partner
number of directors, may be increase in the number of may not be removed unless his
filled by a majority of the directors, may be filled by a successor has been selected
remaining directors then in majority of the remaining and approved prior to the
office or by a sole directors remaining in office. effective date of removal. If
remaining director. In Any director or the entire ART the general partner gives
order to remove a director, board may be removed, with or notice of withdrawal a
Newco's articles provide without cause, by the vote of successor must be chosen prior
that a director may only be the holders of two-thirds to the effective date of the
removed for cause, and only (2/3rds) of all of the shares withdrawal or the partnership
with the approval of at of common stock entitled to must dissolve.
least eighty percent (80%) vote.
of the outstanding shares Under the partnership
entitled to vote. Each share of ART common stock agreement, limited partners
entitles its holder to cast have only limited voting
Each share of Newco common one vote on matters as to rights on matters affecting
stock entitles its holder to which voting is permitted or NRLP's business. Limited
cast one vote on matters as required by Georgia law, partners have no right to
to which voting is permitted including the election of elect the general partner on
or required by Nevada law, directors, amendments to the an annual or other ongoing
including the election of ART articles of incorporation, basis. Limited partners have
directors, amendments to the mergers and other voting rights with respect to:
Newco articles of extraordinary transactions.
incorporation, mergers and Shareholders are not entitled (1) the removal and
other extraordinary to cumulate their votes for replacement of the general
transactions. Stockholders the election of directors. partner;
are not entitled to cumulate
their votes for the election (2) the amendment of the
of directors.
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</TABLE>
172
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<TABLE>
<CAPTION>
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NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
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<S> <C> <C>
Generally, matters requiring Generally, matters requiring partnership agreement, with
the vote of the common stock the vote of the common stock some exceptions;
are approved by the vote of are approved by the vote of
the holders of a majority of the holders of a majority of (3) the purchase price of a
the shares of common stock the shares of common stock withdrawing general partner's
voting in favor of the voting in favor of the matter interest;
matter at a meeting of at a meeting of shareholders
stockholders at which a at which a quorum is present. (4) an election to
quorum is present. As reconstitute the partnership
provided by Nevada law, an The ART articles of under the laws of another
amendment to the bylaws of incorporation permit the state;
Newco requires the vote of issuance of "Preferred Stock."
at least fifty-one percent Issuances of classes or series (5) the sale or other
(51%) of the outstanding of preferred stock that have disposition of all or
shares entitled to vote. the right to elect a substantially all of NRLP's
designated director or assets; and
The Newco articles of directors could adversely
incorporation permit the affect the ability of the (6) the dissolution of NRLP.
issuance of preferred stock. holders of common stock to
Issuances of preferred stock elect a majority of the ART Each limited partner has a
that have the right to elect board of directors. ART's vote equal to his percentage
a designated director or charter documents, as interest in NRLP. Generally,
directors could adversely permitted by Georgia law, approval of matters submitted
affect the ability of the permit shareholders to request to limited partners requires
holders of common stock to an annual or special meeting. the affirmative vote of a
elect a majority of the majority-in-interest of the
Newco board of directors. holders of the outstanding
Newco's bylaws do not permit units.
stockholders to request a
special meeting. Meetings of the limited
partners may be called by the
general partner or by limited
partners owning at least ten
percent (10%) of the
outstanding units.
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VOTING RIGHTS
- ------------------------------------------------------------------------------------------------
In general, the GCLN requires In general, the GBCC requires Under the partnership
that a majority of the that a majority of the agreement, the limited
outstanding shares entitled outstanding shares entitled to partners have the right, by
to vote are necessary to vote are necessary to approve majority vote, to approve the
approve some mergers. The some mergers. The board of merger, consolidation or
board of directors need not directors need not submit a combination of the business
submit a plan of merger to plan of merger to the operations of the partnership
the stockholders of the shareholders of the surviving with those of any person;
surviving corporation if: corporation if: provided, however, that no
vote or approval shall be
(a) the merger does not amend (a) the merger does not amend required with respect to any
the articles of the articles of incorporation transaction of this type
incorporation of the of the surviving corporation; which, in the sole and
surviving corporation; absolute
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</TABLE>
173
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<TABLE>
<CAPTION>
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NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
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<S> <C> <C>
discretion of the
(b) each stockholder whose (b) each shareholder whose general partner:
shares of the surviving shares of the surviving
corporation were outstanding corporation were outstanding (i) is primarily for the
immediately prior to the immediately prior to the purpose of acquiring
effectiveness of the merger effectiveness of the merger properties or assets;
retains the same number of retains the same number of
shares with identical shares with identical (ii) combines the ongoing
designations, preferences, designations, preferences, business operations of the
limitations and relative limitations and relative entities with the partnership
rights after the merger: and rights after the merger; and as the surviving entity; or
(c) the number and kind of (c) the number and kind of (iii) is between the
shares outstanding after the shares outstanding after the partnership and the operating
merger will not exceed the merger will not exceed the partnership.
total number and kind of total number and kind of
shares of the surviving shares of the surviving
corporation authorized corporation authorized before
before the merger. the merger.
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BUSINESS COMBINATIONS/REORGANIZATIONS
- ------------------------------------------------------------------------------------------------
Sections 78.411 to 78.444 of The GBCC contains provisions Neither Delaware law nor the
the GCLN, inclusive, that restrict some business partnership agreement contain
restrict the ability of a combinations with interested any special provisions that
resident domestic shareholders (the "Georgia apply to combinations,
corporation to engage in any Business Combination Statute") takeover attempts or other
combination with an and require that some fair transactions with persons who
interested stockholder and price criteria be satisfied have acquired a significant
require that some procedures with respect to some business percentage of units. In
be satisfied before such a combinations with interested addition, removal of the
combination is allowed. In shareholders (the "Georgia general partner requires a
accordance with the Fair Price Statute"). In majority vote of the
provisions of these accordance with the provisions unitholders.
sections, the restrictions of these statutes, the
imposed by these sections do restrictions imposed by these
not apply to any combination statutes do not apply unless
involving a resident the corporation elects to be
domestic corporation whose covered by the statutes. ART
original articles of has not elected to be covered
incorporation expressly by the statutes, but it could
elect not to be governed by do so at any time by amending
Sections 78.411 to 78.444 of the ART bylaws.
Nevada law. Newco's
articles expressly elect not
to be governed by Section
78.411 to 78.444.
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AMENDMENTS
- ------------------------------------------------------------------------------------------------
Under the Newco articles, Generally, the GBCC requires a Amendments to the partnership
amendments to the articles majority vote of the agreement may be proposed by
of outstanding
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</TABLE>
174
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<TABLE>
<CAPTION>
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NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
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<S> <C> <C>
incorporation require the shares of each the general partner or by
approval of the holders of voting group entitled to vote unitholders owning at least
fifty-one percent (51%) of to amend the articles of ten percent (10%) of the
the outstanding stock incorporation of a Georgia limited partner interests of
entitled to vote offers. corporation. NRLP. In general, amendments
to the partnership agreement
Under the GCLN, subject to Under the ART bylaws, the may be made by a majority vote
any bylaws adopted by the board of directors may amend, of the limited partners.
stockholders, the directors adopt or repeal the bylaws; However, this voting power may
may make the bylaws of the however, the shareholders have not be exercised unless the
corporation. Newco's the right to amend, repeal or general partner receives a
articles provide that the adopt these same bylaws. legal opinion that the
bylaws may be altered, Furthermore, the bylaws allow proposed amendment would not
amended or new bylaws may the shareholders to restrict result in the loss of limited
be adopted by a vote of the right of the board of liability to any unitholder or
fifty-one percent (51%) of directors to amend, alter or cause NRLP to be taxed as a
the outstanding shares repeal a particular bylaw. corporation. The general
entitled to vote or by the partner may make amendments to
board of directors. the partnership agreement
without the approval of the
unitholders if, among other
things, those amendments:
(1) are necessary to conform
the partnership agreement to
Delaware law;
(2) change the name of NRLP or
the location of its principal
place of business; or
(3) are necessary to qualify
NRLP as a limited partnership
or a limited liability
partnership or to ensure that
NRLP will not be taxed as a
corporation.
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DIVIDENDS AND DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------
Pursuant to Nevada law, Under the GBCC and its Under the partnership
distributions may be made to articles, ART is permitted to agreement, distributions on
stockholders unless (a) pay dividends or make other the units may be paid in the
Newco would not be able to distributions with respect to sole discretion of the general
pay its debts as they become its stock unless, after giving partner in accordance with
due in the usual course of effect to the dividend or each limited partners'
business, or (b) Newco's other distribution, either ART percentage interest. Any
total assets would be would distributions may be made
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</TABLE>
175
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<TABLE>
<CAPTION>
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NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
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<S> <C> <C>
less than the sum of its total not be able to pay its from NRLP's revenues, capital
liabilities plus any amount debts as they become due in contributions or borrowings.
owed, if it would be the usual course of business, The general partner may not
dissolved at the time of or ART's total assets would be make a distribution if, at the
distribution, to less than the sum of its total time of the distribution and
stockholders with liabilities plus the amount after giving effect to the
preferential rights superior that would be needed if ART distribution, some types of
to those receiving the were to be dissolved at the liabilities of NRLP would
distribution. time of the dividend or other exceed the fair value of
distribution, to satisfy the NRLP's assets.
preferential rights upon
dissolution of shareholders
whose preferential rights are
superior to those receiving
the dividend or other
distribution. The ART
articles of incorporation do
not contain a provision
restricting dividends on ART
common stock.
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INDEMNIFICATION
- ------------------------------------------------------------------------------------------------
As permitted by Nevada law, The GBCC permits, and the ART The partnership agreement
Newco's articles of bylaws provide, that ART may provides that NRLP will
incorporation limit the indemnify any director or indemnify and hold harmless
personal liability of its officer of ART for any the general partner, its
directors and officers to liability and expense that may affiliates and all officers,
the corporation and its be incurred in connection with directors, employees and
stockholders for damages for or resulting from any agents of the general partner
breach of fiduciary duty. threatened, pending or and its affiliates; the
However, it excludes any completed civil, criminal, organizational limited
limitation on liability for administrative or partner; and each member, past
acts or omissions which investigative action, suit or or present, of the Fairness
involve intentional proceeding (whether brought by Committee; provided that the
misconduct, fraud, a knowing or in the right of ART or party's conduct did not
violation of law or the otherwise), in which he may constitute gross negligence or
unlawful payment of become involved by reason of willful or wanton misconduct
distributions in violation his being or having been a and provided further that the
of Section 78.300 of the director officer of ART; party's action was in good
GCLN. provided, that the person faith and in a manner believed
acted in a manner he believed to be in, or not opposed to,
The Newco articles of in good faith to be in or not the best interests of NRLP.
incorporation and bylaws opposed to the best interests With respect to any criminal
provide for limitation of of ART, and, with respect to proceeding, these parties are
liability and any criminal action or indemnified if the party had
indemnification to the proceeding, had no reasonable no reasonable cause to believe
fullest extent possible cause to believe his conduct the conduct was unlawful.
under Nevada law. was unlawful.
Section 78.751 of the GCLN Except where the indemnified
provides that a corporation
may indemnify any person
made a
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</TABLE>
176
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<TABLE>
<CAPTION>
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NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
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<S> <C> <C>
party or threatened individual is successful on
to be made a party to any the merits or otherwise in
type of proceeding, other defense of any the action,
than some actions by or in suit or proceeding, in which
right of the corporation, case indemnification is as of
because he or she is or was right, indemnification is at
a director, officer, the discretion of ART, as
employee or agent of the determined by the ART board,
corporation or was serving the shareholders, or legal
at the request of the counsel in accordance with the
corporation as a director, GBCC.
officer, employee or agent
of another corporation, Under the GBCC, directors may
against expenses, judgments, not be indemnified in
fines and amounts paid in connection with (a) any
settlement actually and proceeding by or in the right
reasonably incurred in of the corporation in which
connection with the the individual is adjudged
proceeding if the person liable to ART or (b) any other
acted in good faith and in a proceeding in which the
manner he or she reasonably individual is adjudged liable
believed to be in or not on the basis that the
opposed to the best individual received an
interests of the improper personal benefit.
corporation; or in a
criminal proceeding, if he
or she had no reasonable
cause to believe his or her
conduct was unlawful.
Expenses incurred by an
officer or director, or
other employee or agent as
deemed appropriate by the
board of directors, in
defending civil or criminal
proceedings may be paid by
the corporation in advance
of the final disposition of
the proceeding upon receipt
of an undertaking by or on
behalf of the person to
repay the amount if it is
ultimately determined that
the person is not entitled
to be indemnified by the
corporation.
To indemnify a party, the
corporation must determine
that the party met the
applicable standards of
conduct.
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INSPECTION RIGHTS
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177
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<TABLE>
<CAPTION>
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NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
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<S> <C> <C>
Under the GCLN and Newco's The GBCC provides that a On written request and at
bylaws, any person who has shareholder, after giving reasonable times and, at his
been a stockholder of record advance notice, is entitled to own expense, a unitholder may
of Newco for at least six inspect and copy, among other inspect or copy any of NRLP's
months, or any person things, the corporation's books, provided that there is
holding or representing at articles of incorporation, a valid business purpose
least five percent (5%) of bylaws, some board of related to that unitholder's
its outstanding shares, upon directors' and shareholders' interest in NRLP. Unitholders
at least five days' written resolutions, and minutes of may also inspect and copy a
demand, to inspect, in shareholders' meetings by list of the names and amounts
person or by an agent, right, and, among other in interest of all unitholders.
during usual business hours, things, the corporation's
its stock ledger and to make minutes of board of directors'
copies. Newco must allow meetings and accounting
stockholders of record who records only if
own or represent at least
15% of its shares the right, (a) its demand is made in good
upon at least five days' faith and for a proper purpose
written demand, to inspect, that is reasonably relevant to
in person or by an agent, its legitimate interest as a
during normal business shareholder,
hours, its books of account
and financial records, to (b) it describes with
make copies and to conduct reasonable particularity its
an audit. purpose ;and the records it
desires to inspect,
(c) the records are directly
connected with its purpose and
(d) the records are to be used
only for the stated purpose;
provided, however, that the
right to inspect the latter
set of records may be limited
by a corporation's articles of
incorporation or bylaws for
shareholders owning two
percent or less of the
corporation's outstanding
shares.
The ART bylaws do not provide
that the ART board has the
authority to so limit the
inspection rights of
shareholders owning two
percent or less of the
- ------------------------------------------------------------------------------------------------
</TABLE>
178
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
outstanding shares of ART.
- ------------------------------------------------------------------------------------------------
VOTING PROCEDURES
- ------------------------------------------------------------------------------------------------
Special Meetings
- ------------------------------------------------------------------------------------------------
The GCLN does not As permitted by the GBCC, Meetings of limited partners
specifically address who may ART's bylaws permit special may be called for any purpose
call special meetings of meetings of shareholders to be with respect to which the
stockholders. The Newco called by the chairman of the limited partners are entitled
bylaws provide that special board, the president, the to vote. These meetings may
meetings of stockholders may board of directors or upon the be called by the general
be called only by the written request of the holders partner or by limited partners
chairman of the board, the of twenty-five percent (25%) holding at least ten percent
president or by the board of or more of the outstanding (10%) of the issued and
directors. stock of ART. outstanding units.
- ------------------------------------------------------------------------------------------------
Action Without Meeting
- ------------------------------------------------------------------------------------------------
As permitted by the GCLN, The GBCC permits shareholders The partnership agreement
Newco's bylaws allow the of a Georgia corporation to permits the limited partners
stockholders to act without act without a meeting only by of NRLP to act without a
a meeting by written consent unanimous written consent of meeting only by unanimous
upon the signing of a all shareholders entitled to written consent of a majority
consent by all stockholders vote on the action, unless of limited partners, or some
entitled to vote thereon otherwise provided by the other minimum number of
setting forth the action to articles of incorporation. limited partners as would be
be taken. The bylaws do not The ART articles provide for necessary to authorize or take
permit stockholders to act action by the holders of the the action at a meeting at
without a meeting by ART common stock by less than which all limited partners
telephone. unanimous written consent. entitled to vote were present
and voted.
- ------------------------------------------------------------------------------------------------
DISSENTERS' OR APPRAISAL RIGHTS
- ------------------------------------------------------------------------------------------------
The GCLN permits that unless The GBCC provides, subject to Delaware law provides that a
otherwise provided in the the exception below, that partnership agreement may
articles of incorporation or shareholders who comply with provide contractual appraisal
the bylaws, that any some procedural requirements rights with respect to a
stockholder of record, other of the GBCC are entitled to partnership interest; however,
than an acquiring person, assert dissenters' rights with the partnership agreement of
who complies with certain respect to the shareholder's NRLP does not provide any
procedural requirements of shares upon the merger of a contractual appraisal rights
the GCLN, is entitled to corporation, the consummation to its unitholders.
demand payment for the fair of a plan of share exchange to
value of his shares if he which the corporation is the
did not vote in favor of
authorizing voting rights
- ------------------------------------------------------------------------------------------------
</TABLE>
179
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
for the control shares upon acquired party, the sale or
the offer for an acquisition other disposition of all or
of controlling interest in substantially all of the
the corporation. The Newco corporation's assets, an
articles of incorporation do amendment of the articles of
not permit appraisal rights. incorporation of the
corporation that materially
and adversely affects rights
in respect of the
shareholder's shares in ways
specified in the GBCC, or any
corporate action taken
pursuant to a shareholder vote
to the extent that the
articles of incorporation,
bylaws or a resolution of the
board of directors of the
corporation provides that
shareholders are entitled to
rights of appraisal. The ART
articles do not currently
provide for dissenters' rights
in any situation other than
those enumerated above.
Unless the articles of
incorporation or resolution of
the board of directors of the
corporation provides
otherwise, however, holders of
any class of shares which are
listed on a "national
securities exchange" or are
held of record by more than
2,000 shareholders are not
entitled to assert dissenters'
rights under Georgia law if
the shareholder receives
shares of the surviving
corporation or another
corporation whose shares are
listed on a national
securities exchange or are
held of record by at least
2,000 shareholders. The ART
board has not, by resolution,
granted dissenters' rights to
the holders of common stock
with respect to the Newco
merger. However, dissenters'
rights will be available to
the holders of ART preferred
stock as provided under GBCC
Section
- ------------------------------------------------------------------------------------------------
</TABLE>
180
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
14-2-1302.
- ------------------------------------------------------------------------------------------------
LIQUIDATION/DISSOLUTION
- ------------------------------------------------------------------------------------------------
Under the GCLN a dissolution Under the GBCC a dissolution The partnership agreement of
must be initiated by the must be initiated by the board NRLP provides for dissolution
board of directors and of directors and approved by upon the occurrence of one of
approved by the holders of a the holders of a majority of the following:
majority of the outstanding the outstanding voting shares
voting shares of the of the corporation unless the (1) the general partner ceases
corporation. board of directors requires a to be a general partner,
greater vote. unless the partnership elects
to continue;
(2) the limited partners elect
by majority vote, with or
without the consent of the
general partner, to dissolve
or wind up;
(3) sale or other disposition
of all or substantially all of
the assets;
(4) judicial dissolution; or
(5) the expiration of its term.
In the event of liquidation,
dissolution or winding up of
NRLP, holders of all units and
the general partner would be
entitled to share ratably, in
accordance with their
percentage interests, in any
assets remaining after the
satisfaction of obligations to
creditors.
- ------------------------------------------------------------------------------------------------
LIMITATIONS OF LIABILITY OF MANAGEMENT
- ------------------------------------------------------------------------------------------------
The GCLN allows a corporation The GBCC allows a corporation The partnership agreement
to limit or eliminate the to limit the personal provides that neither the
personal liability of liability of directors with general partner nor its
directors and officers to some exceptions. As permitted affiliates nor any partners,
the corporation and its by the GBCC, the ART articles shareholders, directors,
stockholders with some provide that no director shall officers, employees or agents
exceptions. As be of the general partner or
- ------------------------------------------------------------------------------------------------
</TABLE>
181
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
- ------------------------------------------------------------------------------------------------
TRANSFERABILITY
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
permitted by the GCLN, the personally liable to ART or its affiliates shall be liable,
Newco articles provide that its shareholders for monetary for monetary damages or
no director shall be damages for breach of duty of otherwise, to the partnership,
personally liable to Newco or care or other duty as a the operating partnership or
its stockholders for monetary director, except for liability the limited partners for
damages for breach of (a) for any appropriation, in errors in judgment or for
fiduciary duties, except for violation of his duties, of breach of fiduciary duty as
liability (a) for acts or any business opportunity of the general partner of the
omissions which involve ART, (b) for acts or omissions partnership, except for
intentional misconduct, fraud not in good faith or which liability (i) for any breach
or a knowing violation of law, involve intentional misconduct of the duty of loyalty to the
or (b) for unlawful or a knowing violation of law, partnership; (ii) for acts or
distributions. (c) for unlawful distributions omissions not in good faith
or (d) for any transaction which involve intentional
from which the director misconduct or knowing
derived an improper personal violation of law; or (iii) for
benefit. any transaction from which the
general partner or its
affiliates has derived an
improper benefit.
- ------------------------------------------------------------------------------------------------
DERIVATIVE ACTIONS
- ------------------------------------------------------------------------------------------------
The GCLN does not Under the GBCC, a minority In accordance with Delaware
specifically address stockholder may institute an law, a unitholder may
derivative actions by action on behalf of himself institute legal action on
stockholders. and other stockholders against behalf of NRLP, to recover
the corporation, its officers, damages from a third party or
and third persons in collusion from the general partner if
with its officers, for fraud the general partner has failed
or ultra vires acts which to institute the action. In
operate to injure or damage addition, a unitholder may
the corporation. institute legal action on
behalf of himself and other
similarly situated
unitholders, in a class
action, to recover damages
from the general partner for
violations of its fiduciary
duties to the unitholders.
- ------------------------------------------------------------------------------------------------
</TABLE>
182
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NEWCO ART NRLP UNITS
COMMON STOCK COMMON STOCK
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares of Newco common stock Shares of ART common stock are The partnership agreement
will be freely transferable, freely transferable provided permits the transfer of units
except for shares of Newco that the transferor provides in accordance with applicable
common stock issued to written direction to ART and law, provided that the
"affiliates" of ART and the transferor surrenders the transferee executes and
NRLP. Transfers of shares certificates representing the delivers a satisfactory
of stock held by affiliates shares, properly endorsed. transfer application to a
are restricted by federal The shares are listed on the transfer agent. The units are
and state securities laws. New York Stock Exchange under traded on the American Stock
Upon official notice of the symbol "ARB." Exchange under the symbol
issuance, the Newco common "NLP."
stock will be listed on the
New York Stock Exchange
under the symbol "____."
- ------------------------------------------------------------------------------------------------
FIDUCIARY DUTIES
- ------------------------------------------------------------------------------------------------
Under Nevada law, directors Under Georgia law, the Under Delaware law, the
are charged with the duty to directors of ART owe fiduciary general partner owes fiduciary
exercise their powers in duties of good faith, loyalty duties of good faith, loyalty
good faith and with a view and fair dealing to its and fair dealing to the
to the interests of the stockholders in its management unitholders in its management
corporation. Directors must of ART's affairs. of NRLP's affairs. The duty
use reasonable diligence to of good faith requires the
protect corporate property. ------------------------------- general partner to deal fairly
and with candor with the
unitholders. The duty of
loyalty requires that, without
the limited partners' consent,
the general partner may not
have any improper business or
other interests that are
adverse to the interests of
NRLP. The duty of fair
dealing requires that all
transactions between the
general partner and NRLP be
fair both in the manner by
which they are conducted and
in the amount of the
consideration received by NRLP
in the transaction.
- ------------------------------------------------------------------------------------------------
</TABLE>
183
<PAGE>
LEGAL MATTERS
The validity of Newco common stock to be issued in connection with the
business combination will be passed upon by Locke Liddell & Sapp LLP.
EXPERTS
The financial statements and schedules of ART and NRLP incorporated by
reference in this joint proxy statement/prospectus have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their reports incorporated herein by reference, and
such reports are incorporated herein in reliance upon the authority of said firm
as experts in auditing and accounting.F-1
184
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS OF AMERICAN REALTY TRUST, INC.:
Interim Financial Statements For Nine Months Ended September 30, 1999 (Unaudited):
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998............................................................... F-2
Consolidated Statements of Operations -
Nine Months Ended September 30, 1999 and 1998.......................................................... F-3
Consolidated Statements of Stockholders' Equity -
Nine Months Ended September 30, 1999................................................................... F-4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998.......................................................... F-5
Notes to Consolidated Financial Statements.................................................................. F-7
Financial Statements For Year Ended December 31, 1998 (Audited):
Report of Independent Certified Public Accountants.......................................................... F-23
Consolidated Balance Sheets -
December 31, 1998 and 1997............................................................................. F-24
Consolidated Statements of Operations -
Years Ended December 31, 1998, 1997 and 1996........................................................... F-25
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996........................................................... F-26
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997 and 1996........................................................... F-27
Notes to Consolidated Financial Statements.................................................................. F-29
FINANCIAL STATEMENTS OF NATIONAL REALTY, L.P.:
Interim Financial Statements For Nine Months Ended September 30, 1999 (Unaudited):
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998...................................................................................... F-57
Consolidated Statements of Operations -
Nine Months ended September 30, 1999 and 1998.......................................................... F-59
Consolidated Statements of Partners' Equity (Deficit) -
Nine Months ended September 30, 1999 and 1998.......................................................... F-60
Consolidated Statements of Cash Flows -
Nine Months ended September 30, 1999 and 1998.......................................................... F-61
Notes to Consolidated Financial Statements.................................................................. F-63
Financial Statements For Year Ended December 31, 1998 (Audited):
Report of Independent Certified Public Accountants.......................................................... F-72
Consolidated Balance Sheets at December 31, 1998 and 1997................................................... F-73
Consolidated Statements of Operations -
Years Ended December 31, 1998, 1997 and 1996........................................................... F-74
Consolidated Statements of Partners' Equity (Deficit) -
Years Ended December 31, 1998, 1997 and 1996........................................................... F-75
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997 and 1996........................................................... F-76
Notes to Consolidated Financial Statements.................................................................. F-78
</TABLE>
F-1
<PAGE>
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants but in the opinion of the management
of American Realty Trust, Inc. (the "Company"), all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of consolidated
results of operations, consolidated financial position and consolidated cash
flows at the dates and for the periods indicated, have been included.
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(dollars in thousands)
<S> <C> <C>
Assets
Notes and interest receivable
Performing ($14,331 in 1999 and $594 in 1998 from
affiliates)..................................... $ 52,171 $ 47,823
Nonperforming.................................... 14,925 6,807
-------- --------
67,096 54,630
Less--allowance for estimated losses............... (2,577) (2,577)
-------- --------
64,519 52,053
Real estate held for sale.......................... 314,273 282,301
Real estate held for investment, net of accumulated
depreciation ($183,757 in 1999 and $208,396 in
1998)............................................. 462,690 452,606
Pizza parlor equipment, net of accumulated depreci-
ation ($2,294 in 1999 and $1,464 in 1998)......... 6,935 6,859
Marketable equity securities, at market value...... 740 2,899
Cash and cash equivalents.......................... 1,839 11,523
Investments in equity investees.................... 40,665 34,433
Intangibles, net of accumulated amortization
($1,652 in 1999 and $1,298 in 1998)............... 14,422 14,776
Other assets....................................... 33,249 61,155
-------- --------
$939,332 $918,605
======== ========
Liabilities and Stockholders' Equity
Liabilities........................................
Notes and interest payable ($13,477 in 1999 and
$12,600 in 1998 to affiliates).................... $754,931 $768,272
Margin borrowings.................................. 36,507 35,773
Accounts payable and other liabilities (including
$12,409 in 1999 and $8,900 in 1998 to affili-
ates)............................................. 36,765 38,321
-------- --------
828,203 842,366
Minority interest.................................. 72,723 37,967
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
Series F, 3,400,000 shares in 1999 and 3,350,000
in 1998 (liquidation preference $34,000)........ 6,200 6,100
Series G, 1,000 shares in 1999 and 1998
(liquidation preference $100)................... 2 2
Common stock, $.01 par value; authorized
100,000,000 shares, issued 13,496,688 shares in
1999 and 13,479,348 in 1998....................... 135 133
Paid-in capital.................................... 84,348 83,945
Accumulated (deficit).............................. (52,251) (51,880)
Treasury stock at cost, 2,737,216 shares in 1999
and 1998.......................................... (28) (28)
-------- --------
38,406 38,272
-------- --------
$939,332 $918,605
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C>
Revenues
Sales................... $ 7,800 $ 7,259 $ 22,753 $ 21,344
Rents................... 40,260 15,531 122,125 45,098
Interest................ 1,331 15 5,029 169
Other................... 300 486 (740) (454)
----------- ----------- ----------- -----------
49,691 23,291 149,167 66,157
Expenses
Cost of sales........... 6,711 6,324 19,509 18,329
Property operations..... 27,377 12,032 80,778 34,192
Interest................ 22,988 12,396 68,528 35,676
Advisory and servicing
fees to affiliate...... 1,472 1,058 3,958 2,767
General and
administrative......... 3,839 1,712 12,689 5,939
Depreciation and
amortization........... 4,479 1,496 13,496 4,683
Provision for loss...... 45 3,000 2,072 3,000
Litigation settlement... -- -- 275 --
Minority interest....... 23,188 658 38,561 1,591
----------- ----------- ----------- -----------
90,099 38,676 239,866 106,177
----------- ----------- ----------- -----------
(Loss) from operations.... (40,408) (15,385) (90,699) (40,020)
Equity in income of
investees................ 1,874 6,099 5,270 27,429
Gain on sale of real
estate................... 48,590 5,718 87,307 14,692
----------- ----------- ----------- -----------
Net income (loss)......... 10,056 (3,568) 1,878 2,101
Preferred dividend
requirement.............. (570) (502) (1,704) (595)
----------- ----------- ----------- -----------
Net income (loss)
applicable to Common
shares................... $ 9,486 $ (4,070) $ 174 $ 1,506
=========== =========== =========== ===========
Earnings per share
Net income (loss)
applicable to Common
shares................. $ .88 $ (.38) $ .02 $ .14
=========== =========== =========== ===========
Weighted average Common
shares used in computing
earnings per share....... 10,759,309 10,755,584 10,753,600 10,741,137
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Series F Series G
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- ------ -------- ------- ----------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1999................... $6,100 $ 2 $133 $(28) $83,945 $(51,880) $38,272
Dividends
Common Stock ($.05 per
share)............... -- -- -- -- -- (545) (545)
Series F Preferred
Stock ($.75 per
share)............... -- -- -- -- -- (1,696) (1,696)
Series G Preferred
Stock ($7.50 per
share)............... -- -- -- -- -- (8) (8)
Sale of Common Stock
under dividend
reinvestment plan...... -- -- 2 -- 3 -- 5
Issuance of Series F
Preferred Stock........ 100 -- -- -- 400 -- 500
Net income.............. -- -- -- -- -- 1,878 1,878
------ --- ---- ---- ------- -------- -------
Balance, September 30,
1999................... $6,200 $ 2 $135 $(28) $84,348 $(52,251) $38,406
====== === ==== ==== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------
1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Pizza parlor sales collected........................ $ 23,445 $ 21,252
Rents collected..................................... 120,986 44,350
Interest collected.................................. 3,716 381
Distributions from equity investees' operating cash
flow............................................... 935 9,246
Payments for pizza parlor operations................ (20,092) (20,045)
Payments for property operations.................... (93,939) (31,325)
Interest paid....................................... (54,754) (23,928)
Advisory and servicing fees paid to affiliate....... (3,958) (2,767)
General and administrative expenses paid............ (12,738) (5,856)
Other............................................... 5,500 (3,071)
----------- ----------
Net cash (used in) operating activities........... (30,899) (11,763)
Cash Flows From Investing Activities
Collections on notes receivable..................... 19,187 7,901
Funding of notes receivable......................... (40,942) (381)
Pizza parlor equipment purchase..................... (740) (787)
Proceeds from sale of real estate................... 166,907 44,140
Proceeds from sale of marketable equity securities.. 2,648 4,570
Purchases of marketable equity securities........... (2,180) (7,605)
Investment in real estate entities.................. (366) (5,034)
Distributions from equity investees' investing
activities......................................... -- 16,427
Acquisition of real estate.......................... (48,094) (91,308)
Deposits............................................ 18,944 565
Real estate improvements............................ (20,005) (7,267)
----------- ----------
Net cash provided by (used in) investing
activities....................................... 95,359 (38,779)
=========== ==========
Cash Flows From Financing Activities
Proceeds from notes payable......................... $ 112,730 $ 135,696
Payments on notes payable........................... (175,048) (77,077)
Deferred borrowing costs............................ (5,947) (8,214)
Net advances from affiliates........................ 3,489 15,330
Margin borrowings, net.............................. (3,814) (14,998)
Common dividends paid............................... (545) (1,710)
Preferred dividends paid............................ (1,704) (418)
Sale of Preferred Stock............................. 500 --
Distributions to minority interest holders.......... (3,805) (1,590)
Sale of Common Stock sold under dividend
reinvestment plan.................................. -- 197
----------- ----------
Net cash provided by (used in) financing
activities....................................... (74,144) 47,216
Net (decrease) in cash and cash equivalents....... (9,684) (3,326)
Cash and cash equivalents, beginning of period........ 11,523 5,347
----------- ----------
Cash and cash equivalents, end of period.............. $ 1,839 $ 2,021
=========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Nine
Months
Ended September
30,
------------------
1999 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Reconciliation of net income to net cash (used in)
operating activities
Net income............................................... $ 1,878 $ 2,101
Adjustments to reconcile net income to net cash (used in)
operating activities
Depreciation and amortization.......................... 13,496 4,683
Amortization of deferred borrowing cost................ 9,857 5,471
Provision for loss..................................... 2,072 3,000
Gain on sale of real estate............................ (87,307) (14,692)
Distributions from equity investees' operating cash
flow.................................................. 935 9,246
Equity in (income) of investees........................ (5,270) (27,430)
(Increase) decrease in marketable equity securities.... 2,159 (1,529)
(Increase) decrease in accrued interest receivable..... (1,605) 333
Decrease in other assets............................... 13,817 3,336
Increase (decrease) in accrued interest payable........ (6,640) 1,179
Increase in accounts payable and other liabilities..... 25,709 1,760
Other.................................................. -- 779
-------- --------
Net cash (used in) operating activities.............. $(30,899) $(11,763)
======== ========
Schedule of noncash investing and financing activities
Notes payable from acquisition of real estate.............. $ 70,133 $ 17,119
Notes receivable canceled on reacquisition of property..... -- 1,300
Issuance of Series F Preferred Stock....................... -- 2,100
Dividend obligation on conversion of Series F Preferred
Stock..................................................... -- 134
Issuance of Series G Preferred Stock....................... -- 100
Investment in properties reacquired........................ -- 5,270
Real estate obtained through foreclosure of mortgage note
receivable................................................ -- 22,715
Provision for loss......................................... 2,072 3,000
Notes payable assumed by buyer upon sale of properties..... 6,776 --
Conversion of note receivable to partnership interest...... 22,678 --
Dividend obligation discharged on conversion of Series B
Preferred Stock........................................... -- 44
Acquisition of IGI Properties
Issuance of Class A partnership units.................... -- 6,568
Carrying value of mortgages assumed...................... -- 43,421
Carrying value of other assets........................... -- (441)
Carrying value of accounts payable and other
liabilities............................................. -- 292
Investment in partnerships............................... -- 1,980
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. ("ART") and consolidated entities (the "Company") have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the nine month period ended
September 30, 1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the Consolidated Financial Statements and Notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the
"1998 Form 10-K").
Certain balances for 1998 have been reclassified to conform to the 1999
presentation.
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.
ART owns a 96% limited partner interest in Syntek Asset Management, L.P.
("SAMLP"). Until December 18, 1998, SAMLP was the general partner of National
Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the operating
partnership of NRLP (collectively the "Partnership"). Gene E. Phillips, a
Director and Chairman of the Board of the Company until November 16, 1992, is
also a general partner of SAMLP. As of September 30, 1999, the Company owned
approximately 56% of the outstanding limited partner units of the Partnership.
The Partnership, SAMLP and Gene E. Phillips were among the defendants in a
class action lawsuit arising from the formation of the Partnership (the
"Moorman Litigation"). An agreement settling such lawsuit (the "Settlement
Agreement") for the above named defendants became effective on July 5, 1990.
The Settlement Agreement provided for, among other things, the appointment of
the Partnership oversight committee for the Partnership and the establishment
of specified annually increasing targets for five years relating to the price
of the Partnership's units of limited partner interest.
The Settlement Agreement provided for the resignation and replacement of
SAMLP as general partner if the unit price targets were not met for two
consecutive anniversary dates. The Partnership did not meet the unit price
targets for the first and second anniversary dates.
On July 15, 1998, the Partnership, SAMLP and the Partnership oversight
committee executed an Agreement for Cash Distribution and Election of
Successor General Partner (the "Cash Distribution Agreement") which provided
for the nomination of an entity affiliated with SAMLP to be the successor
general partner of the Partnership, for the distribution of $11.4 million to
the plaintiff class members and for the resolution of all related matters
under the Settlement Agreement. On October 23, 1998, the Court entered an
order granting final approval of the Cash Distribution Agreement. The Court
also entered orders requiring the Partnership to pay $404,000 in attorney's
fees to Joseph B. Moorman's legal counsel, $30,000 to Joseph B. Moorman and
$404,000 in attorney's fees to Robert A. McNeil's legal counsel.
Pursuant to the order, $11.4 million was deposited by the Partnership into
an escrow account and then transferred to the control of an independent
administrator. The distribution of cash was placed under the control of the
independent settlement administrator. On March 24, 1999, the initial
distribution of cash was made to the plaintiff class members.
The proposal to elect NRLP Management Corp. ("NMC"), a wholly-owned
subsidiary of ART, as the successor general partner was submitted to the
unitholders of the Partnership for a vote at a special meeting of unitholders
held on December 18, 1998. NMC was elected by a majority of the Partnership
unitholders. The
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AMERICAN REALTY TRUST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Settlement Agreement remained in effect until December 18, 1998, when SAMLP
resigned as general partner and NMC was elected successor general partner and
took office.
Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's
note for its original capital contribution to the Partnership. In addition,
NMC assumed liability for the note which requires the repayment of the $11.4
million paid by the Partnership under the Cash Distribution Agreement, plus
the $808,000 in court ordered attorneys' fees and $30,000 paid to Joseph B.
Moorman. This note requires repayment over a 10--year period, bears interest
at a variable rate, currently 7.3% per annum, and is guaranteed by ART. The
liability assumed under the Cash Distribution Agreement was expensed as a
litigation settlement. An additional $184,000 was expensed as a litigation
settlement in the first quarter of 1999.
As of December 31, 1998, ART discontinued accounting for its investment in
the Partnership under the equity method upon the election of NMC as general
partner of the Partnership and the settlement of the Moorman Litigation. The
Company began consolidation of the Partnership's accounts at that date and its
operations subsequent to that date.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In January 1999, the Partnership collected in full a mortgage note
receivable with a principal balance of $350,000. In May 1999, the Partnership
collected in full a mortgage note receivable with a principal balance of $1.5
million. In both cases, the monies received were applied to paydown a note
payable partially secured by the mortgage notes receivable.
In July 1999, the Partnership received $1.3 million in full payment of a
mortgage note receivable, including a $400,000 participation fee.
In June 1999, a mortgage note receivable from an affiliate of JNC
Enterprises, Ltd. ("JNC") in the amount of $4.2 million matured. The note is
secured by (1) a first lien on approximately 1,000 acres of land in Huerfano
County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) an
assignment of a $2.0 million promissory note which is secured by approximately
2,623 acres of land in Taos County, New Mexico, known as Ski Rio Resort; and
(3) a pledge of all related partnership interests. In August 1999, the
Partnership received a paydown of $2.3 million on the note receivable, a
portion of the proceeds from the loan funding described in the following
paragraph. In September 1999, the Partnership received a paydown of $1.0
million in exchange for extending the note's maturity to October 1999.
In August 1999, the Partnership funded a $2.6 million loan to JNC. The loan
is secured by second liens on a 3.55 acre parcel and a 1.2561 acre parcel of
land in Dallas, Texas, and the personal guaranty of JNC's principal partner.
The loan bears interest at 16.0% per annum and matures in February 2000. All
principal and interest are due at maturity.
Also in August 1999, a mortgage note receivable in the amount of $942,000
matured. The loan was secured by 4.5 acres of land in Abilene, Texas,
collateral assignment of a $220,000 note receivable and the personal
guarantees of the principal owners of the borrower. The loan bore interest at
14.0% per annum, and all principal and interest were due at maturity. The
borrower did not make the required payments of principal and interest and the
loan is classified as nonperforming in the September 30, 1999 Consolidated
Balance Sheet. The Partnership is negotiating a modification/extension with
the borrower. If such negotiation is not successful, and the Partnership
forecloses, it expects to incur no loss as the fair value of the collateral
property, less estimated costs of sale, exceeds the carrying value of the
note.
During 1998, the Partnership funded a $1.8 million loan to Warwick of
Summit, Inc. The loan is secured by a second lien on a shopping center in
Rhode Island, by 100% of the stock of the borrower and by the personal
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
guarantee of the principal shareholder of the borrower. The loan bears
interest at 14.0% per annum and matures in December 1999. All principal and
interest are due at maturity. During 1999, the Partnership funded an
additional $314,000, increasing the loan balance to $2.1 million.
During 1998 and through August 1999, the Partnership funded a total of $2.1
million of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The
loan is secured by 129.77 acres of land in Riverside County, California and a
pledge of the stock of the borrower. The loan bears interest at 15.0% per
annum and matures in November 1999. All principal and interest are due at
maturity.
During 1998 and 1999, the Partnership funded a total of $31.0 million of a
$52.5 million loan commitment to Centura Tower, Ltd. ("Centura"). The loan was
secured by 2.2 acres of land and an office building under construction in
Farmers Branch, Texas. The loan bore interest at 12.0% per annum, required
monthly payments based on net revenues after development of the land and
building and matured in January 2003. In August 1999, the Partnership
exercised a participation option included in the loan agreement. The
Partnership obtained a combined 80% general and limited partnership interest
in Centura in exchange for a $24.1 million capital contribution through
conversion of a portion of the Partnership's note receivable. The $8.3 million
balance of the note receivable continues as a loan to Centura from the
Partnership, bears interest at a rate of 18.0% per annum and is payable from
cash flows of the project. Centura's other partners will earn a 12% preferred
return on their respective capital accounts. In conjunction with the exercise
of the participation, Centura obtained a construction loan commitment in the
total amount of $30.0 million, which was finalized in October 1999. The loan
bears interest at a variable rate, currently 9.4725% per annum, and matures in
June 2001. Interest is payable monthly, with the first $2.0 million of
interest being drawn from the loan proceeds. The loan is guaranteed by NOLP,
NRLP, Garden Capital, L.P. ("GCLP") and Basic Capital Management, Inc.
("BCM"), the Company's advisor. In October 1999, Centura received its first
draw of $5.0 million under the loan agreements. GCLP is a partnership in which
NOLP is the sole limited partner with a 99.3% limited partner interest and a
wholly--owned subsidiary of ART is the general partner with .7% general
partner interest. The Partnership consolidates Centura for financial statement
purposes.
In June 1998, the Partnership funded a $365,000 loan to RB Land & Cattle,
L.L.C. The loan is secured by a pledge of a note secured by 7,200 acres of
undeveloped land near Crowell, Texas, and the personal guarantee of the
borrower. The loan bore interest at 10.0% per annum and matured in December
1998. All principal and interest were due at maturity. The borrower did not
make the required payments and the loan was classified as nonperforming. The
Partnership has begun foreclosure proceedings and expects to incur no loss on
foreclosure as the fair value of the collateral property, less estimated costs
of sale, exceeds the carrying value of the note.
In August 1998, the Partnership funded a $6.0 million loan to Centura
Holdings, L.L.C., a subsidiary of Centura Tower, Ltd. The loan is secured by
6.4 acres of land in Farmers Branch, Texas, bears interest at 15.0% per annum
and matures in August 2000. All principal and interest are due at maturity. In
February 1999, the Partnership funded an additional $37,500.
Also in August 1998, the Partnership funded a $3.7 million loan to JNC. The
loan was secured by a contract to purchase 387 acres of land in Collin County,
Texas, and the personal guaranty of JNC's principal partner. The loan bore
interest at 12.0% per annum and matured the earlier of termination of the
purchase contract or February 1999. All principal and interest were due at
maturity. This loan was cross--collateralized with other JNC loans. In January
1999, ART purchased the contract from JNC and acquired the land. In connection
with the purchase, GCLP funded $6.0 million on a then $95.0 million loan
commitment to ART. A portion of the funds were used to payoff the $3.7 million
JNC note to the Partnership, including accrued but unpaid interest, paydown
$1.3 million on the JNC line of credit and paydown $820,000 on the JNC Frisco
Panther Partners, Ltd. loan, discussed below. See NOTE 7. "NOTES PAYABLE."
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Further in August 1998, the Partnership funded a $635,000 loan to La Quinta
Partners, L.L.C. The loan is secured by interest bearing accounts prior to
being used as escrow deposits toward the purchase of a total of 956 acres of
land in La Quinta, California. The loan bore interest at 10.0% per annum and
matured in November 1998. All principal and interest were due at maturity. In
November and December 1998, the Partnership received a total of $250,000 in
principal paydowns. In the first quarter of 1999, the Partnership received an
additional $25,000 paydown. In the second quarter of 1999, the loan was
modified, increasing the interest rate to 15.0% per annum and extending the
maturity date to November 1999. Accrued but unpaid interest was added to the
principal balances increasing it by $42,000 to $402,000.
In 1997 and 1998, the Partnership funded a $3.8 million loan to Stratford &
Graham Developers, L.L.C. The loan is secured by 1,485 acres of unimproved
land in Riverside County, California. In the first nine months of 1999, the
Partnership funded an additional $316,000, increasing the loan balance to $4.1
million. The loan bore interest at 15.0% per annum and matured in June 1999.
All principal and interest were due at maturity. The borrower did not make the
required payments of principal and interest at the loan's maturity and the
loan was classified as nonperforming. The Partnership has begun foreclosure
proceedings. No loss is expected on foreclosure as the fair value of the
collateral property, less estimated costs of sale, exceeds the carrying value
of the note.
In October 1998, the Partnership funded three loans to JNC or affiliated
entities. The first JNC loan of $1.0 million was secured by a second lien on
3.5 acres of land in Dallas, Texas, and the personal guaranty of JNC's
principal partner. The loan bore interest at 14.0% per annum and matured in
October 1999. All principal and interest were due at maturity. This loan was
paid in full in July 1999. The second loan, also $1.0 million, was secured by
a second lien on 2.9 acres of land in Dallas, Texas, and the personal guaranty
of JNC's principal partner. The loan bore interest at 14.0% per annum and
matured in October 1999. All principal and interest were due at maturity. This
loan was paid in full in March 1999. The third loan, in the amount of $2.1
million was to Frisco Panther Partners, Ltd. The loan is secured by a second
lien on 408.2 acres of land in Frisco, Texas, and the personal guaranty of
JNC's principal partner. The loan bears interest at 14.0% per annum and
matures in October 1999. All principal and interest are due at maturity. This
loan is cross--collateralized with other JNC loans funded by the Partnership.
In January 1999, the Partnership received a paydown of $820,000 on the Frisco
Panther Partners, Ltd. loan.
In March 1998, the Partnership ceased receiving the required payments on a
$3.0 million note receivable secured by an office building in Dallas, Texas.
In October 1998, the Partnership began foreclosure proceedings. In March 1999,
the Partnership received payment in full, including accrued but unpaid
interest.
In December 1998, the Partnership funded $3.3 million of a $5.0 million loan
commitment to JNC. The loan is secured by a second lien on 1,791 acres of land
in Denton County, Texas, and a second lien on 220 acres of land in Tarrant
County, Texas. The loan bears interest at 12.0% per annum and matures in
December 1999. All principal and interest are due at maturity. The loan is
cross--collateralized with other JNC loans funded by the Partnership. In
January 1999, the Partnership received a $1.3 million paydown. In the first
half of 1999, the Partnership funded an additional $3.0 million, increasing
the loan balance to $5.0 million.
At December 1998, the Partnership's one wraparound mortgage note receivable
was in default. The Partnership has been vigorously pursuing its rights under
the loan agreement. If the Partnership should be unsuccessful, and the
underlying lien holder forecloses the collateral property, the Partnership
will incur no loss in excess of previously established reserves.
Related Party. In February 1999, GCLP funded a $5.0 million unsecured loan
to Davister Corp., which at September 30, 1999, owned approximately 15.8% of
the outstanding shares of the Company's Common Stock.
F-10
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The loan bears interest at 12.0% per annum and matures in February 2000. All
principal and interest are due at maturity. The loan is guaranteed by BCM, the
Company's advisor.
Beginning in 1997 and through January 1999, the Partnership funded a $1.6
million loan commitment to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The
loan is secured by (1) a 100% interest in Bordeaux, which owns a shopping
center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux
Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma
City, Oklahoma; and (3) the personal guarantees of the Bordeaux partners. The
loan bears interest at 14.0% per annum. Until November 1998, the loan required
monthly payments of interest only at the rate of 12.0% per annum, with the
deferred interest payable at maturity in January 1999. In November 1998, the
loan was modified to allow payments based on monthly cash flow of the
collateral property and the maturity date was extended to December 1999. In
the second quarter of 1999, the loan was again modified, increasing the loan
commitment to $2.1 million and the Partnership funded an additional $33,000.
In the third quarter of 1999, the Partnership funded an additional $213,000.
The property has had no cash flow, therefore, the Partnership ceased accruing
interest in the second quarter of 1999. In October 1999, the Partnership
received a $724,000 paydown on the loan, which was applied first to accrued
but unpaid interest of $261,000 then to principal, reducing the loan balance
to $1.4 million. In October 1999, Richard D. Morgan, a Bordeaux shareholder,
was elected a director of NMC, the General Partner of the Partnership.
Beginning in April and through September 30, 1999, ART funded $1.7 million
of a $2.0 million loan commitment to Lordstown, L.P. The loan is secured by a
second lien on land in Ohio and Florida, by 100% of the general and limited
partner interest in Partners Capital, Ltd. and a 50% profits interest in
subsequent land sales. A corporation controlled by Richard D. Morgan, is the
general partner of Lordstown, L.P.
Also, beginning in April through September 30, 1999, ART funded $1.5 million
of a $2.4 million loan commitment to 261, L.P. The loan is secured by 100% of
the general and limited partner interest in Partners Capital, Ltd. and a
profits interest in subsequent land sales. A corporation controlled by Richard
D. Morgan, is the general partner of 261, L.P.
NOTE 4. REAL ESTATE
In January 1999, GCLP sold the 199 unit Olde Town Apartments in Middleton,
Ohio, for $4.6 million, receiving net cash of $4.4 million after the payment
of various closing costs, including a real estate brokerage commission of
$136,000 to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of BCM, the
Company's advisor. A gain of $2.2 million was recognized on the sale.
In February 1999, ART purchased Frisco Bridges land, a 336.8 acre parcel of
unimproved land in Collin County, Texas, for $46.8 million, paying $7.8
million in cash and obtaining mortgage financing totaling $39.0 million.
Seller financing in the amount of $22.0 million, secured by 191.5 acres of the
parcel, bears interest at prime plus 2.0%, currently 10.25% per annum,
requires monthly interest only payments and matures in January 2000. A
mortgage in the amount of $15.0 million, secured by 125.0 acres of the parcel,
bears interest at the prime rate plus 4.5%, currently 12.75% per annum,
required principal reduction payments of $1.0 million on each of May 1, June
1, and July 1, in addition to monthly payments of interest and matures in
February 2000. Another mortgage in the amount of $2.0 million, secured by 13.5
acres of the parcel, bore interest at 14% per annum, required monthly interest
only payments and matured in January 2000. The loan was paid in full in June
1999. ART's Double O land in Las Colinas, Texas, and its Desert Wells land in
Palm Desert, California, are pledged as additional collateral for these loans.
ART drew down $6.0 million under its line of credit with the GCLP for a
portion of the cash requirement. See NOTE 7. "NOTES PAYABLE." A real estate
brokerage commission of $1.4 million was paid to Carmel Realty.
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also in February 1999, ART sold a 4.6 acre tract of its Plano Parkway land
parcel for $1.2 million. ART received net cash of $1.1 million after the
payment of various closing costs, including a real estate brokerage commission
of $36,000 to Carmel Realty. Simultaneously with the sale, the mortgage debt
secured by such land parcel was refinanced in the amount of $7.1 million. The
new mortgage bears interest at the prime rate plus 4.5%, currently 12.75% per
annum, requires monthly interest only payments and matures in January 2000.
The net cash from the sale and refinancing along with an additional $921,000
was used to payoff the $8.9 million seller financing secured by the land
parcel. A mortgage brokerage and equity refinancing fee of $71,000 was paid to
BCM. A gain of $473,000 was recognized on the sale.
Further in February 1999, GCLP sold the 225 unit Santa Fe Apartments in
Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million
after the payment of various closing costs, including a real estate brokerage
commission of $137,000 to Carmel Realty. A gain of $706,000 was recognized on
the sale.
In February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa,
Arizona, for $19.5 million, receiving net cash of $793,000 after the payment
of various closing costs, including a real estate brokerage commission of
$585,000 to Carmel Realty and remitting $17.8 million to the lender to hold in
escrow pending a substitution of collateral. In May 1999, the 259 unit
Bavarian Woods Apartments and the 149,855 sq. ft. Westwood Shopping Center
were approved as substitute collateral. GCLP received net cash of $7.8 million
after paying off $7.2 million in mortgage debt secured by the Bavarian Woods
Apartments and Westwood Shopping Center, funding required escrows and closing
costs on the two properties and paying off $2.2 million on the Mesa Ridge
debt, including a $133,000 prepayment penalty. A gain of $10.2 million was
recognized on the sale.
In March 1999, ART sold a 13.0 acre tract of its Rasor land parcel for $1.6
million, receiving no net cash after paying down by $1.5 million the mortgage
debt secured by such land parcel and the payment of various closing costs,
including a real estate brokerage commission of $48,000 to Carmel Realty. A
gain of $979,000 was recognized on the sale.
Also in March 1999, ART sold two tracts totaling 9.9 acres of its
Mason/Goodrich land parcel for $956,000, receiving net cash of $33,000 after
paying down by $860,000 the mortgage debt secured by such land parcel and the
payment of various closing costs, including a real estate brokerage commission
of $29,000 to Carmel Realty. A gain of $432,000 was recognized on the sale.
Further in March 1999, ART sold, in a single transaction, a 13.7 acre tract
of its McKinney II land parcel and a 20.0 acre tract of its McKinney IV land
parcel for a total of $7.7 million, receiving no net cash after paying down by
$5.5 million the mortgage debt secured by such land parcel, the funding of
required escrows and the payment of various closing costs, including a real
estate brokerage commission of $231,000 to Carmel Realty. A gain of $2.9
million was recognized on the sale.
In April 1999, GCLP sold the 166 unit Horizon East Apartments in Dallas,
Texas, for $4.0 million, receiving net cash of $1.2 million after paying off
$2.6 million in mortgage debt and the payment of various closing costs,
including a real estate brokerage commission of $79,000 to Carmel Realty. A
gain of $1.8 million was recognized on the sale.
Also in April 1999, GCLP sold the 120 unit Lantern Ridge Apartments in
Richmond, Virginia, for $3.4 million, receiving net cash of $880,000 after the
payment of various closing costs, including a real estate brokerage commission
of $103,000 to Carmel Realty. The purchaser assumed the $2.4 million mortgage
secured by the property. A gain of $2.3 million was recognized on the sale.
In May 1999, ART sold a 15.0 acre tract of its Vista Ridge land parcel for
$2.6 million, receiving net cash of $552,000 after paying down by $1.8 million
the mortgage debt secured by such land parcel and the payment
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of various closing costs, including a real estate brokerage commission of
$79,000 to Carmel Realty. A gain of $913,000 was recognized on the sale.
Also in May 1999, ART purchased Rowlett Creek land, a 80.4 acre parcel of
unimproved land in Collin County, Texas, for $1.6 million. ART paid $400,000
in cash and obtained seller financing of the remaining $1.2 million of the
purchase price. The seller financing bears interest at 8.75% per annum,
requires quarterly interest only payments and matures in May 2004. A real
estate brokerage commission of $94,000 was paid to Carmel Realty.
Further in May 1999, ART purchased Leone land, a 8.2 acre parcel of
unimproved land in Irving, Texas, for $1.5 million. ART paid $300,000 in cash
and obtained seller financing of the remaining $1.2 million of the purchase
price. The seller financing bears interest at 8.0% per annum, requires
quarterly interest only payments and matures in May 2003. A real estate
brokerage commission of $91,000 was paid to Carmel Realty.
In May 1999, a newly-formed controlled partnership in which a wholly--owned
subsidiary of ART is the 1.0% managing general partner and ART is the 99%
Class B limited partner, purchased the 177,211 sq. ft. Encino Executive Plaza
in Los Angeles, California, for $40.1 million. The partnership paid $2.8
million in cash, assumed $34.6 million in mortgage debt, obtained $1.1 million
in seller financing and issued 1.6 million Class A limited partner units. The
mortgage bears interest at 7.74% per annum, requires monthly payments of
principal and interest of $247,500 and matures in May 2008. The seller
financing bears interest at 7.0% per annum, requires interest only payments in
July and January, requires semiannual principal payments of $369,000 in May
2000 and May 2001 and matures in May 2002. The Class A units accrue a
preferred return of $.05 per Class A unit per annum for the first year, $.06
per annum per Class A unit for the second year, $.07 per Class A unit per
annum for the third year and $.09 per Class A unit per annum thereafter, paid
quarterly.
Also in May 1999, ART sold two tracts of its Plano Parkway land parcel
totaling 24.5 acres for $4.9 million. ART received no net cash after paying
down by $4.7 million the mortgage debt secured by such land parcel and the
payment of various closing costs, including a real estate brokerage commission
of $147,000 to Carmel Realty. A gain of $1.1 million was recognized on the
sale.
Further in May 1999, ART acquired the remaining joint venture interest in
its 3.6 acre Atlanta land parcel for $1.3 million in cash. Subsequently, ART
exchanged the Atlanta land parcel for 147.4 acres of land in Nashville,
Tennessee and $1.3 million in cash. No gain or loss was recognized on the
exchange.
In May 1999, the Partnership purchased the 27,000 sq. ft. Cooley Office
Building in Farmers Branch, Texas, for $3.5 million, paying $1.5 million in
cash and obtaining mortgage financing of $2.0 million. The mortgage bears
interest at a variable rate, currently 9.0% per annum, requires monthly
payments of principal and interest of $17,875 and matures in May 2019. A real
estate brokerage commission of $35,000 was paid to Carmel Realty.
In June 1999, ART sold two tracts of its Frisco Bridges land parcel totaling
77.6 acres for $16.9 million. ART received net cash of $2.7 million after
paying off $2.0 million in mortgage debt secured by such land parcel, paying
down by $11.0 million another mortgage secured by such land parcel and the
payment of various closing costs, including a real estate brokerage commission
of $507,000 to Carmel Realty. A gain of $4.2 million was recognized on the
sale.
Also in June 1999, ART sold a 6.0 acre tract of its Plano Parkway land
parcel for $1.6 million. ART received no net cash after paying down by $1.6
million the mortgage debt secured by such land parcel and the payment of
various closing costs, including a real estate brokerage commission of $47,000
to Carmel Realty. A gain of $615,000 was recognized on the sale.
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Further in June 1999, ART sold its Continental Hotel for $25.0 million,
receiving a nonrefundable deposit of $5.0 million and providing short term
financing of $20.0 million, which matures in November 1999. A gain of $7.9
million was recognized on the sale. In the third quarter of 1999, ART received
$1.5 million in principal payments.
In June 1999, ART purchased Vineyards II land, a 18.6 acre parcel of
unimproved land in Tarrant County, Texas, for $6.3 million. ART paid $2.3
million in cash and obtained seller financing of the remaining $4.0 million of
the purchase price. The seller financing bears interest at 14.5% per annum,
requires monthly interest only payments and matures in June 2002. A real
estate brokerage commission of $190,000 was paid to Carmel Realty.
Also in June 1999, the Partnership purchased the Lake Houston land, a 33.58
acre parcel of unimproved land in Harris County, Texas, for $2.5 million in
cash. A real estate brokerage commission of $75,000 was paid to Carmel Realty.
The Partnership obtained a $13.7 million construction loan and began
development of a 312 unit apartment complex on the site in July 1999.
Construction costs are expected to approximate $16.7 million and completion is
anticipated in the third quarter of 2000. Through October 1999, the
Partnership has invested $1.9 million on construction of the apartments and
received $1.8 million in loan and escrow proceeds.
Further in June 1999, GCLP sold the 368 unit Barcelona Apartments in Tampa,
Florida, for $9.8 million, receiving net cash of $2.2 million after paying off
$7.0 million in mortgage debt and the payment of various closing costs,
including a real estate brokerage commission of $294,000 to Carmel Realty. A
gain of $2.2 million was recognized on the sale.
In July 1999, the Partnership purchased the Stone Meadows land, a 13.5 acre
parcel of unimproved land in Harris County, Texas, from ART at the land's
carrying value of $2.2 million, paying $1.3 million in cash and assuming
$974,000 in mortgage debt. The mortgage bore interest at 10.0% per annum,
required quarterly payments of principal and interest of $100,000 and matured
in October 1999. The mortgage was paid in full at maturity. The land was
acquired as a future apartment development site.
Also in July 1999, ART sold a .13 acre tract of its JHL Connell land parcel
for $53,000. ART received no net cash after paying down by $49,000 the
mortgage debt secured by such land parcel and the payment of various closing
costs, including a real estate brokerage commission of $2,000 to Carmel
Realty. A gain of $23,000 was recognized on the sale.
Further in July 1999, ART sold two tracts totaling 11.8 acres of its Plano
Parkway land parcel for $3.8 million. ART received net cash of $1.7 million
after paying down by $2.0 million the mortgage debt secured by such land
parcel and the payment of various closing costs, including a real estate
brokerage commission of $112,000 to Carmel Realty. A gain of $1.9 million was
recognized on the sales.
In July 1999, ART sold two tracts totaling 6.7 acres of its Vista Ridge land
parcel for $1.4 million. ART received net cash of $329,000 after paying down
by $975,000 the mortgage debt secured by such land parcel and the payment of
various closing costs, including a real estate brokerage commission of $43,000
to Carmel Realty. A gain of $584,000 was recognized on the sale.
Also in July 1999, ART purchased Monterey land, a 85.0 acre parcel of
unimproved land in Riverside County, California, for $5.6 million. ART paid
$1.1 million in cash and obtained seller financing of the remaining $4.5
million of the purchase price. The seller financing bears interest at 9.0% per
annum, requires quarterly interest only payments and matures in June 2002. A
real estate brokerage commission of $338,000 was paid to Carmel Realty.
F-14
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Further in July 1999, ART purchased Wakefield land, a 70.0 acre parcel of
unimproved land in Allen, Texas, for $1.3 million. ART paid $688,000 in cash
and obtained seller financing for the remaining $612,000 of the purchase
price. The seller financing bears interest at 8.5% per annum, requires
quarterly interest only payments and matures in July 2004. A real estate
brokerage commission of $78,000 was paid to Carmel Realty.
In July 1999, ART sold a 1.4 acre tract of its Valley Ranch land parcel for
$163,000. ART received net cash of $159,000 after the payment of various
closing costs, including a real estate brokerage commission of $5,000 to
Carmel Realty. A gain of $128,000 was recognized on the sale.
In August 1999, the Partnership sold the 152 unit Country Place Apartments
in Round Rock, Texas, for $6.0 million, receiving net cash of $1.3 million
after the payment of various closing costs, including a real estate brokerage
commission of $179,000 paid to Carmel Realty. The purchaser assumed the $4.3
million mortgage secured by the property. A gain of $3.3 million was
recognized on the sale.
Also in August 1999, the Partnership sold the 588 unit Lake Nora Apartments
and the 336 unit Fox Club Apartments in Indianapolis, Indiana, to a single
buyer for a total of $29.1 million. The Partnership received net cash of $2.7
million, after paying off $24.5 million in mortgage debt, including an
$889,000 prepayment penalty, and the payment of various closing costs,
including a real estate brokerage commission of $873,000 to Carmel Realty. A
gain totaling $12.7 million was recognized on the sale.
Further in August 1999, ART sold a 2.1 acre tract of its Keller land parcel
for $185,000, receiving net cash of $91,000 after paying down by $90,000 the
mortgage debt secured by such land parcel and the payment of various closing
costs, including a real estate brokerage commission of $6,000 to Carmel
Realty. A gain of $158,000 was recognized on the sale.
In August 1999, ART sold its Sun City lots for $260,000, receiving net cash
of $240,000 after the payment of various closing costs, including a real
estate brokerage commission of $8,000 to Carmel Realty. A gain of $180,000 was
recognized on the sale.
Also in August 1999, ART sold a 121.2 acre tract of its Katrina land parcel
for $6.6 million, receiving net cash of $5.5 million after the payment of
various closing costs, including a real estate brokerage commission of
$198,000 to Carmel Realty. A gain of $186,000 was recognized on the sale.
In September 1999, the Partnership sold the 409 unit Oakhollow Apartments
and the 408 unit Windridge Apartments in Austin, Texas, to a single buyer for
a total of $35.5 million. The Partnership received net cash of $7.8 million
after paying off $22.2 million in mortgage debt, including a $912,000
prepayment penalty and the payment of various closing costs, including a real
estate brokerage commission of $1.1 million paid to Carmel Realty. In
conjunction with the sale, the partnership provided $2.1 million in purchase
money financing secured by limited partnership units in two limited
partnerships owned by the buyer. The financing bears interest at 16.0% per
annum, requires monthly payments of interest only at 6.0%, beginning in
February 2000 and a $200,000 principal paydown in December 1999, and matures
in August 2000. The Partnership has an option to obtain the buyer's general
and limited partnership interests in full satisfaction of the financing. A
gain of $24.2 million was recognized on the sale.
Further in September 1999, ART sold a 13.6 acre tract of its Frisco Bridges
land parcel for $2.6 million, receiving no net cash after paying down by $2.1
million the mortgage debt secured by such land parcel and the payment of
various closing costs, including a real estate brokerage commission of $61,000
to Carmel Realty. A gain of $403,000 was recognized on the sale.
F-15
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1999, ART sold a 6.2 acre tract of its Plano Parkway land
parcel for $900,000 receiving net cash of $208,000 after paying down by
$650,000 the mortgage debt secured by such land parcel and the payment of
various closing costs, including a real estate brokerage commission of $27,000
to Carmel Realty. A loss of $40,000 was recognized on the sale.
Also in September 1999, ART sold four tracts totaling 185.6 acres of its
Keller, Scout and Scoggins land parcels for $3.5 million, receiving net cash
of $758,000 after paying down by $2.5 million the mortgage debt secured by
such land parcels and the payment of various closing costs, including a real
estate brokerage commission of $105,000 to Carmel Realty. A gain of $1.8
million was recognized on the sale.
Further in September 1999, ART sold a 1.3 acre tract of its Vista Ridge land
parcel for $715,000, receiving net cash of $665,000 after the payment of
various closing costs, including a real estate brokerage commission of $21,000
to Carmel Realty. A gain of $538,000 was recognized on the sale.
In November 1998, a newly-formed controlled partnership with ART as the
Class B limited partner and a wholly-owned subsidiary of ART as the 1%
Managing General Partner, purchased two apartments with a total of 423 units
in Indianapolis, Indiana, for $7.2 million, paying $14,000 in cash, assuming
$5.9 million in mortgage debt and issuing $1.3 million in Class A limited
partner units. In June 1999, ART relinquished it's general and Class B limited
partner interests. A provision for loss of $2.0 million was recognized.
NOTE 5. INVESTMENT IN EQUITY INVESTEES
Real estate entities. The Company's investment in equity investees at
September 30, 1999, included equity securities of three publicly traded Real
Estate Investment Trusts (collectively the "REITs"), Continental Mortgage and
Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI") and
Transcontinental Realty Investors, Inc. ("TCI"), and interests in real estate
joint ventures and partnerships. BCM, the Company's advisor, also serves as
advisor to the REITs.
The Company accounts for its investment in the REITs and the joint venture
partnerships using the equity method. Substantially all of the equity
securities of the REITs are pledged as collateral for borrowings. See NOTE 8.
"MARGIN BORROWINGS."
The Company's investment in real estate entities, accounted for using the
equity method, at September 30, 1999, was as follows:
<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of Value of Investee Market Value
Ownership Investment Book Value of Investment
at at at at
September 30, September 30, September 30, September 30,
Investee 1999 1999 1999 1999
- -------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CMET.................... 41.3% $16,108 $36,074 $24,488
IORI.................... 30.4 3,269 7,203 2,439
TCI..................... 31.4 13,680 32,145 14,851
------- -------
33,057 $41,778
=======
Other................... 7,608
-------
$40,665
=======
</TABLE>
The difference between the carrying value of the Company's investment and
the equivalent investee book value is being amortized over the life of the
properties held by each investee.
F-16
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management continues to believe that the market value of each of the REITs
undervalues their assets and the Company may, therefore, continue to increase
its ownership in these entities in 1999.
Set forth below is summarized results of operations of equity investees for
the nine months ended September 30, 1999:
<TABLE>
<S> <C>
Revenues........................................................... $120,044
Equity in income of partnerships................................... 3,454
Property operating expenses........................................ 74,412
Depreciation....................................................... 16,818
Interest expense................................................... 38,928
--------
(Loss) before gains on sale of real estate......................... (6,660)
Gains on sale of real estate....................................... 22,601
--------
Net income......................................................... $ 15,941
========
</TABLE>
The Company's share of equity investees' loss before gains on the sale of
real estate was $2.2 million for the nine months ended September 30, 1999, and
its share of equity investees' gains on sale of real estate was $7.5 million
for the nine months ended September 30, 1999.
The Company's cash flow from the REITs is dependent on the ability of each
of them to make distributions. In the first nine months of 1999, distributions
totaling $935,000 were received from the REITs.
In the first nine months of 1999, ART purchased a total of $366,000 of
equity securities of the REITs.
NOTE 6. MARKETABLE EQUITY SECURITIES--TRADING PORTFOLIO
Since 1994, the Company has been purchasing equity securities of entities
other than those of the REITs and NRLP to diversify and increase the liquidity
of its margin accounts. In the first nine months of 1999, the Company
purchased $2.2 million and sold $2.5 million of such securities. These equity
securities are considered a trading portfolio and are carried at market value.
At September 30, 1999, the Company recognized an unrealized decrease in the
market value of its trading portfolio securities of $1.8 million. Also in the
first nine months of 1999, the Company realized a net gain of $130,000 from
the sale of trading portfolio securities and received $4,000 in dividends.
Unrealized and realized gains and losses on trading portfolio securities are
included in other income in the accompanying Consolidated Statements of
Operations.
NOTE 7. NOTES PAYABLE
In February 1999, the Partnership obtained mortgage financing secured by the
unencumbered 124,200 sq. ft. Melrose Business Park in Oklahoma City, Oklahoma,
in the amount of $900,000, receiving net cash of $870,000 after the payment of
various closing costs, including a mortgage brokerage and equity refinancing
fee of $9,000 to BCM. The mortgage bears interest at a variable rate,
currently 8.75% per annum, requires monthly payments of principal and interest
of $8,000 and matures in February 2019.
Also in February 1999, the Partnership obtained mortgage financing secured
by the unencumbered 54,649 sq. ft. 56 Expressway Office Building in Oklahoma
City, Oklahoma, in the amount of $1.7 million, receiving net cash of $1.7
million after the payment of various closing costs, including a mortgage
brokerage and equity refinancing fee of $17,000 to BCM. The mortgage bears
interest at a variable rate, currently 8.75% per annum, requires monthly
payments of principal and interest of $15,000 and matures in February 2019.
F-17
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1999, ART obtained second mortgage financing on its Frisco Bridges
land parcel in the amount of $2.0 million. The mortgage bears interest at
12.5% per annum with interest and principal due at maturity in November 1999.
Also in March 1999, the Las Colinas I term loan lender provided additional
financing on ART's Stagliano, Dalho, Bonneau and Valley Ranch III land parcels
in the amount of $2.2 million. The proceeds from this financing along with an
additional $1.4 million in cash were used to pay off the $3.1 million in
mortgage debt secured by such land parcels. A mortgage brokerage and equity
refinancing fee of $22,000 was paid to BCM.
At March 31, 1999, the mortgage debt secured by ART's McKinney I, II, III,
IV, V and Dowdy land parcels in the amount of $15.2 million matured. ART and
the lender reached an agreement to extend the mortgage's maturity to September
1999 in exchange for, among other things, ART's payment of an extension fee.
In October 1999, ART refinanced its McKinney Corners land for a total of $8.6
million. The Las Colinas I term loan lender provided $4.1 million of mortgage
financing secured by 283.3 acres of McKinney Corners land and a second lender
provided $4.5 million of mortgage financing secured by 82.0 acres of the
McKinney Corners land. The net financing proceeds and $6.6 million in cash
were used to payoff the $15.2 million mortgage debt secured by such land
parcels and the payment of various closing costs. The new $4.5 million
mortgage bears interest at 14.0% per annum, requires monthly payments of
interest only and matures in October 2000.
In April 1999, ART refinanced the matured mortgage debt secured by its
Yorktown land in the amount of $4.8 million, receiving net cash of $580,000
after paying off $4.0 million in mortgage debt and the payment of various
closing costs, including a mortgage brokerage and equity refinancing fee of
$48,000 to BCM. The mortgage bears interest at prime plus 4.5%, currently
12.75% per annum, requires monthly interest only payments, a principal payment
of $368,000 in July 1999 and matures in April 2000.
In May 1999, the Partnership obtained mortgage financing secured by the
unencumbered 257 unit Pines Apartments in Little Rock, Arkansas, and by a $5.0
million note receivable secured by second liens on two parcels of land in
Denton County and Tarrant County, Texas, in the amount of $4.0 million. The
Partnership received net cash of $3.9 million after the payment of various
closing costs, including a mortgage brokerage and equity refinancing fee of
$40,000 to BCM. The mortgage bears interest at 14.0% per annum, requires
monthly payments of interest only and matures in May 2000. In September 1999,
the Partnership refinanced the mortgage debt in the amount of $3.1 million.
The Partnership used the net refinancing proceeds and cash of $1.1 million to
pay off the $4.0 million of mortgage debt and the payment of various closing
costs, including a mortgage brokerage and equity refinancing fee of $31,000
paid to BCM. The new mortgage bears interest at a variable rate, currently
8.3% per annum, requires monthly payments of principal and interest of $24,552
and matures in April 2001.
Also in May 1999, the Las Colinas I term loan lender provided additional
financing secured by ART's Plano Parkway land parcel in the amount of $2.0
million. The proceeds from this financing along with an additional $831,000 in
cash were used to payoff the remaining $2.7 million in mortgage debt secured
by such land parcel and the payment of various closing costs.
In June 1999, the Partnership obtained mortgage financing secured by the
unencumbered 100 unit Stonebridge Apartments in Florissant, Missouri, in the
amount of $3.0 million. The Partnership received net cash of $2.9 million
after the payment of various closing costs, including a mortgage brokerage and
equity refinancing fee of $30,000 to BCM. The mortgage bears interest at 8.33%
per annum, requires monthly payments of principal and interest of $23,814 and
matures in July 2002.
In July 1999, the Partnership obtained mortgage financing secured by the
unencumbered 76 unit Bridgestone Apartments in Friendswood, Texas, in the
amount of $2.1 million. The Partnership received net cash of $2.0
F-18
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million after the payment of various closing costs, including a mortgage
brokerage and equity refinancing fee of $21,000 to BCM. The mortgage bears
interest at 7.72% per annum, requires monthly payments of principal and
interest of $15,144 and matures in August 2009.
In August 1999, the Partnership refinanced the mortgage debt secured by the
102 unit Whispering Pines Apartments in Canoga Park, California, in the amount
of $3.5 million, receiving net cash of $1.1 million after paying off $2.2
million in mortgage debt, the funding of required escrows and the payment of
various closing costs, including a mortgage brokerage and equity refinancing
fee of $35,000 to BCM. The new mortgage bears interest at 7.84% per annum,
requires monthly payments of principal and interest of $24,931 and matures in
September 2009.
Also in August 1999, ART received an additional $2.7 million from its Las
Colinas I lender on a 56.0 acre tract of its Katrina land parcel. ART received
net cash of $2.6 million after the payment of various closing costs.
Further in August 1999, ART refinanced the mortgage debt secured by its
Mason/Goodrich land in the amount of $4.1 million. ART received net cash of
$710,000 after paying off $1.8 million in mortgage debt secured by such land
parcel, paying down by $1.0 million its mortgage debt secured by its Frisco
Bridges land parcel and the payment of various closing costs, including a
mortgage brokerage and equity refinancing fee of $41,000 to BCM. The new
mortgage bears interest at prime plus 4.5%, currently 12.75% per annum,
requires monthly interest only payments and matures in August 2000.
In September 1999, the Partnership obtained mortgage financing secured by
the unencumbered 209 unit Blackhawk Apartments in Indianapolis, Indiana, in
the amount of $4.1 million. The Partnership received net cash of $4.0 million,
after the payment of various closing costs, including a mortgage brokerage and
equity refinancing fee of $41,000 to BCM. The mortgage bears interest at a
variable rate, currently 8.38% per annum, requires monthly payments of
principal and interest of $32,923 and matures in April 2001.
Related Party. In 1998 and the first nine months of 1999, GCLP funded $94.7
million of a then $95.0 million loan commitment to ART. The loan is secured
by: (1) second liens on an office building in Minnesota, three apartments in
Mississippi and 130.54 acres of land in Texas, (2) by the stock of ART
Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,268,535 units of
NRLP as of October 29, 1999 and (3) the stock of NMC. The loan bears interest
at 12.0% per annum, requires monthly payments of interest only and matures in
November 2003. In September 1999, the board of GCLP approved an increase in
the loan commitment to $125.0 million. In February 1999, ART made a $999,000
paydown on the loan. In October 1999, GCLP funded an additional $5.5 million
and received a paydown of $150,000. The loan balance is eliminated in
consolidation.
In December 1998, as required by the Cash Distribution Agreement, NMC, the
general partner of the Partnership, assumed responsibility for repayment to
the Partnership of the $12.2 million paid by the Partnership to the Moorman
Litigation plaintiff class members and legal counsel. The loan bears interest
at the 90 day LIBOR (London InterBank Offered Rate) plus 2.0% per annum,
currently 7.3% per annum, adjusted every 90 days and requires annual payments
of accrued interest plus principal payments of $500,000 in each of the first
three years, $750,000 in each of the next three years, $1.0 million in each of
the next three years, with payment in full of the remaining balance in the
tenth year. The note is guaranteed by ART. The note matures upon the earlier
of the liquidation or dissolution of the Partnership, NMC ceasing to be
general partner or ten years from March 24, 1999, the date of the first cash
distribution to the Moorman Litigation plaintiff class members. The loan
balance is eliminated in consolidation.
NOTE 8. MARGIN BORROWINGS
The Company has margin arrangements with various brokerage firms which
provide for borrowing of up to 50% of the market value of the Company's
marketable equity securities. The borrowings under such margin
F-19
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
arrangements are secured by equity securities of the REITs, NRLP and the
Company's trading portfolio and bear interest rates ranging from 7.0% to
11.0%. Margin borrowing totaled $36.5 million at September 30, 1999.
In August 1996, the Company consolidated its then existing NRLP margin debt
held by various brokerage firms into a single loan. At December 1998, the loan
had a principal balance of $5.0 million. In February 1999, the loan was paid
off.
NOTE 9. INCOME TAXES
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated
losses. The Company had no taxable income or provision for income taxes in the
nine months ended September 30, 1999, due to operating loss carryforwards.
NOTE 10. OPERATING SEGMENTS
Significant differences among the accounting policies of the Company's
operating segments as compared to the Company's consolidated financial
statements principally involve the calculation and allocation of general and
administrative expenses. Management evaluates the performance of the operating
segments and allocates resources to each of them based on their operating
income and cash flow. A reconciliation of expenses that are not reflected in
the segments is $12.6 million and $5.9 million of general and administrative
expenses for the nine months ended September 30, 1999 and 1998, respectively.
There are no intersegment revenues and expenses and the Partnership conducts
all of its business within the United States.
Presented below is the operating income of the reportable operating segments
for the nine months ended September 30, and segment assets at September 30.
<TABLE>
<CAPTION>
Commercial Pizza
1999 Properties Apartments Hotels Land Parlors Receivables Total
---- ---------- ---------- ------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenue.......... $ 22,136 $ 74,727 $24,965 $ 297 $22,753 $ -- $144,878
Operating expenses......... 11,887 44,711 17,716 6,464 19,509 -- 100,287
Interest income............ -- -- -- -- -- 5,029 5,029
Interest expense--notes
receivable................ -- -- -- -- -- 784 784
-------- -------- ------- -------- ------- ------- --------
Operating income (loss).... $ 10,249 $ 30,016 $ 7,249 $ (6,167) $ 3,244 $ 4,245 $ 48,836
======== ======== ======= ======== ======= ======= ========
Depreciation/amortization.. $ 3,086 $ 7,558 $ 1,884 $ -- $ 968 $ -- $ 13,496
Interest on debt........... 7,404 24,427 3,582 17,640 695 -- 53,748
Capital expenditures....... 6,726 408 1,279 1,149 740 -- 10,302
Assets..................... 176,388 214,310 71,939 314,210 21,357 64,519 862,723
Property Sales:
<CAPTION>
Apartments Hotels Land Total
---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales price................ $116,350 $25,000 $66,998 $208,348
Cost of sales.............. 54,338 17,122 49,581 121,041
-------- ------- -------- --------
Gain on sales.............. $ 62,012 $ 7,878 $17,417 $ 87,307
======== ======= ======== ========
</TABLE>
F-20
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Commercial Pizza
1998 Properties Apartments Hotels Land Parlors Receivables Total
---- ---------- ---------- -------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenue.......... $12,042 $ 7,930 $ 24,541 $ 585 $21,344 $ -- $ 66,442
Operating expenses......... 7,097 4,847 18,114 4,134 18,329 -- 52,521
Interest income............ -- -- -- -- -- 169 169
Interest expense--notes
receivable................ -- -- -- -- -- -- --
------- ------- -------- -------- ------- ----- --------
Operating income (loss).... $ 4,945 $ 3,083 $ 6,427 $ (3,549) $ 3,015 $ 169 $ 14,090
======= ======= ======== ======== ======= ===== ========
Depreciation/amortization.. $ 1,148 $ 1,198 $ 1,597 $ -- $ 740 $ -- $ 4,683
Interest on debt........... 2,568 3,099 3,571 14,016 341 -- 23,595
Capital expenditures....... 5,985 -- 1,142 141 787 -- 8,055
Assets..................... 35,085 69,908 111,148 255,836 22,421 298 494,696
<CAPTION>
Land Total
-------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales price................ $ 47,343 $ 47,343
Cost of sales.............. 32,651 32,651
-------- --------
Gain on sale............... $ 14,692 $ 14,692
======== ========
</TABLE>
NOTE 11. COMMITMENTS AND CONTINGENCIES
In 1996, ART was admitted to the Valley Ranch, L.P. partnership as general
partner and Class B limited partner. The existing general and limited partners
converted their general and limited partner interests into 8,000,000 Class A
limited partner units. The units are exchangeable into shares of the Company's
Series E Cumulative Convertible Preferred Stock at the rate of 100 Class A
units for each share of Series E Preferred Stock. In February 1999, the Class
A limited partner notified the Company that it intended to convert 100,000
Class A units into 1,000 shares of Series E Preferred Stock. In March 1999,
ART purchased the 100,000 Class A units for $100,000. ART subsequently reached
an agreement with the other Class A limited partners to acquire the remaining
7,900,000 Class A units for $1.00 per unit. In April 1999, 900,000 units were
purchased and an additional 1.0 million units were purchased in July 1999, and
1.0 million units were purchased in October 1999, with 1.0 million units to be
purchased in January 2000 and 2.0 million units in May 2001 and May 2002.
Litigation. The Company is involved in various lawsuits arising in the
ordinary course of business. In the opinion management, the outcome of these
lawsuits will not have a material impact on the Company's financial condition,
results of operations or liquidity.
NOTE 12. SUBSEQUENT EVENTS
In October 1999, the Partnership sold the 838 unit Tanglewood Apartments in
Arlington Heights, Illinois, for $41.0 million. The Partnership received net
cash of $8.4 million, after paying off $28.9 million in mortgage debt,
including a $1.2 million prepayment penalty, and the payment of various
closing costs, including a real estate brokerage commission of $1.1 million to
Triad Realty, Inc. ("Triad"), an affiliate of BCM, the Company's advisor. A
gain will be recognized on the sale.
Also in October 1999, the Partnership collected in full a mortgage note
receivable with a principal balance of $740,000.
Further in October 1999, GCLP funded a $4.7 million loan to Realty Advisors,
Inc., the corporate parent of BCM. The loan is secured by a pledge of 100% of
Realty Advisors, Inc.'s interest in American Reserve Life
F-21
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Insurance Company. The loan bears interest at a variable rate, currently
10.25% per annum and matures in November 2001. All principal and interest are
due at maturity.
In October 1999, ART sold the 140 unit Edgewater Gardens Apartments in
Biloxi, Mississippi, for $5.7 million. ART received net cash of $2.7 million,
after paying off $2.9 million in mortgage debt and the payment of various
closing costs, including a real estate brokerage commission of $171,000 to
Triad. A gain will be recognized on the sale.
Also in October 1999, ART sold a 12.4 acre tract of its Frisco Bridges land
parcel for $2.0 million. The proceeds from the sale of $1.1 million plus an
additional $800,000 in cash were used to paydown by $1.9 million the mortgage
debt secured by such land parcel and the payment of various closing costs,
including a real estate brokerage commission of $61,000 to Triad. ART also
provided purchase money financing of $813,000. The purchase money financing
bears interest at 7.0% per annum, and matures in January 2000. All principal
and interest are due at maturity. A gain will be recognized on the sale.
Further in October 1999, ART obtained a construction loan of $7.2 million on
Two Hickory Centre, a 96,126 sq. ft. office building under construction in
Farmers Branch, Texas. ART received net cash of $1.9 million after the payment
of various closing costs, including a mortgage brokerage and equity
refinancing fee of $72,000 to BCM.
In October 1999, ART received an additional funding of $2.0 million under
the terms of the mortgage loan secured by the Williamsburg Hospitality House.
F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors of
American Realty Trust, Inc.
We have audited the accompanying consolidated balance sheets of American
Realty Trust, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. We have
also audited the schedules listed in the accompanying index. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conduct 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 and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
presentation of the financial statements and schedules. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Realty Trust, Inc. and Subsidiaries as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedules referred to above present fairly, in
all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Dallas, Texas
March 30, 1999
F-23
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(dollars in thousands,
except per share)
<S> <C> <C>
Assets
Notes and interest receivable
Performing ($594 in 1998 and $1,307 in 1997 from
affiliate)......................................... $ 47,823 $ 9,300
Nonperforming....................................... 6,807 18,624
----------- -----------
54,630 27,924
Less--allowance for estimated losses................. (2,577) (2,398)
----------- -----------
52,053 25,526
Real estate held for sale............................ 282,301 178,938
Real estate held for investment net of accumulated
depreciation ($208,396 in 1998 and $5,380 in 1997).. 452,606 123,515
Pizza parlor equipment, net of accumulated
depreciation ($1,464 in 1998 and $905 in 1997)...... 6,859 6,693
Marketable equity securities, at market value........ 2,899 6,205
Cash and cash equivalents............................ 11,523 5,347
Investments in equity investees...................... 34,433 45,851
Intangibles, net of accumulated amortization ($1,298
in 1998 and $704 in 1997)........................... 14,776 15,230
Other assets......................................... 61,155 26,494
----------- -----------
$ 918,605 $ 433,799
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ($12,600 in 1998 and
$11,400 in 1997 to affiliates)...................... $ 768,272 $ 261,986
Margin borrowings.................................... 35,773 53,376
Accounts payable and other liabilities ($8,900 in
1998 and $22,900 in 1997 to affiliate).............. 38,321 34,442
----------- -----------
842,366 349,804
Minority interest.................................... 37,967 20,542
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized
20,000,000 shares, issued and outstanding
Series B, 4,000 shares in 1997..................... -- 8
Series C, 16,681 shares in 1997.................... -- 33
Series F, 3,350,000 shares in 1998 and 2,000,000 in
1997 (liquidation preference $33,500)............. 6,100 4,000
Series G, 1,000 shares in 1998 (liquidation
preference $100).................................. 2 --
Common Stock, $.01 par value, authorized 100,000,000
shares; issued 13,298,802 shares in 1998 and
13,479,348 in 1997.................................. 133 135
Paid-in capital...................................... 83,945 84,943
Accumulated (deficit)................................ (51,880) (25,638)
Treasury stock at cost, 2,737,216 shares in 1998 and
2,767,427 shares in 1997............................ (28) (28)
----------- -----------
38,272 63,453
----------- -----------
$ 918,605 $ 433,799
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-24
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C>
Income
Sales............................ $ 28,883 $ 24,953 $ 14,386
Rents............................ 63,491 29,075 20,658
Interest ($39 in 1998, $230 in
1997 and $539 in 1996 from
affiliates)..................... 188 2,835 4,751
Other............................ (5,476) 168 1,727
------------- ------------- -------------
87,086 57,031 41,522
Expenses
Cost of sales.................... 24,839 19,964 11,036
Property operations ($1,752 in
1998, $865 in 1997 and $892 in
1996 to affiliates)............. 49,193 24,195 15,874
Interest ($1,082 in 1998, $433 in
1997 and $418 in 1996 to
affiliates)..................... 51,624 30,231 16,489
Advisory and servicing fees to
affiliate....................... 3,845 2,657 1,539
General and administrative
($1,832 in 1998, $1,809 in 1997
and $691 in 1996 to affiliate).. 8,521 7,779 3,930
Depreciation and amortization.... 6,990 3,542 2,367
Litigation settlement............ 13,026 -- --
Provision for loss on real
estate.......................... 3,916 -- --
Minority interest................ 3,157 1,884 1,366
------------- ------------- -------------
165,111 90,252 52,601
------------- ------------- -------------
(Loss) from operations............ (78,025) (33,221) (11,079)
Equity in income of investees..... 37,966 10,497 1,485
Gain on sale of real estate....... 17,254 20,296 3,659
------------- ------------- -------------
(Loss) before income taxes........ (22,805) (2,428) (5,935)
Income tax expense................ -- -- --
------------- ------------- -------------
(Loss) before extraordinary gain.. (22,805) (2,428) (5,935)
Extraordinary gain................ -- -- 381
------------- ------------- -------------
Net (loss)........................ (22,805) (2,428) (5,554)
Preferred dividend requirement.... (1,177) (206) (113)
------------- ------------- -------------
Net (loss) applicable to Common
shares........................... $ (23,982) $ (2,634) $ (5,667)
============= ============= =============
Earnings per share
(Loss) before extraordinary gain.. $ (2.24) $ (.22) $ (.46)
Extraordinary gain................ -- -- .03
------------- ------------- -------------
Net (loss) applicable to Common
shares........................... $ (2.24) $ (.22) $ (.43)
============= ============= =============
Weighted average Common shares
used in computing earnings per
share............................ 10,695,388 11,710,013 12,765,082
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-25
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B Series C Series F Series G
Preferred Preferred Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- --------- --------- ------ -------- ------- ----------- -------------
(dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... $-- $-- $ -- $-- $117 $-- $66,661 $(13,720) $ 53,058
Common Stock issued..... -- -- -- -- 18 -- (18) -- --
Series B Preferred Stock
issued................. 8 -- -- -- -- -- 392 -- 400
Series C Preferred Stock
issued................. -- 30 -- -- -- -- 1,469 -- 1,499
Common Stock cash
dividend
($.15 per share)....... -- -- -- -- -- -- -- (1,491) (1,491)
Redemption of share
purchase rights ($.01
per right)............. -- -- -- -- -- -- -- (101) (101)
Series B Preferred Stock
cash dividend ($6.46
per share)............. -- -- -- -- -- -- -- (25) (25)
Series C Preferred Stock
stock dividend ($5.74
per share)............. -- 2 -- -- -- -- 85 (87) --
Treasury stock, at
cost................... -- -- -- -- -- (6) 6 -- --
Net (loss).............. -- -- -- -- -- -- -- (5,554) (5,554)
---- ---- ------ ---- ---- ---- ------- -------- --------
Balance, December 31,
1996................... 8 32 -- -- 135 (6) 68,595 (20,978) 47,786
Series F Preferred Stock
issued................. -- -- 4,000 -- -- -- 16,000 -- 20,000
Common Stock cash
dividend
($.20 per share)....... -- -- -- -- -- -- -- (2,026) (2,026)
Series B Preferred Stock
cash dividend ($10.00
per share)............. -- -- -- -- -- -- -- (40) (40)
Series C Preferred
Stock, stock
and cash dividend
($10.00 per share)..... -- 1 -- -- -- -- 81 (166) (84)
Sale of Common Stock.... -- -- -- -- -- -- 245 -- 245
Treasury stock, at
cost................... -- -- -- -- -- (22) 22 -- --
Net (loss).............. -- -- -- -- -- -- -- (2,428) (2,428)
---- ---- ------ ---- ---- ---- ------- -------- --------
Balance, December 31,
1997................... 8 33 4,000 -- 135 (28) 84,943 (25,638) 63,453
Repurchase of Common
Stock issued........... -- -- -- -- (2) -- (267) -- (269)
Series G Preferred Stock
issued................. -- -- -- 2 -- -- 98 -- 100
Series F Preferred Stock
issued................. -- -- 2,100 -- -- -- 529 -- 2,629
Common Stock cash
dividend
($.20 per share)....... -- -- -- -- -- -- -- (2,261) (2,261)
Series B Preferred Stock
cash dividend ($2.50
per share)............. -- -- -- -- -- -- -- (54) (54)
Series C Preferred Stock
cash dividend ($7.50
per share)............. -- -- -- -- -- -- -- (148) (148)
Series F Preferred Stock
cash dividend ($.625
per share)............. -- -- -- -- -- -- -- (966) (966)
Series G Preferred Stock
cash dividend ($7.50
per share)............. -- -- -- -- -- -- -- (8) (8)
Sale of Common Stock
under dividend
reinvestment plan...... -- -- -- -- -- -- 224 -- 224
Conversion of Series B
Preferred Stock to
Common Stock........... (8) -- -- -- -- -- 53 -- 45
Series C Preferred Stock
redeemed............... -- (33) -- -- -- -- (1,635) -- (1,668)
Net (loss).............. -- -- -- -- -- -- -- (22,805) (22,805)
---- ---- ------ ---- ---- ---- ------- -------- --------
Balance, December 31,
1998................... $-- $-- $6,100 $ 2 $133 $(28) $83,945 $(51,880) $ 38,272
==== ==== ====== ==== ==== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-26
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended December 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Pizza parlor sales collected............. $ 28,173 $ 24,953 $ 14,386
Rents collected.......................... 64,029 28,199 19,013
Interest collected ($262 in 1997 and $385
in 1996 from affiliates)................ 188 2,592 4,331
Distributions from equity investees'
operating activities.................... 10,274 5,689 9,054
Interest paid............................ (34,139) (19,092) (9,640)
Payments for property operations ($1,752
in 1998, $865 in 1997 and $892 in 1996
to affiliate)........................... (42,551) (22,821) (15,034)
Payments for pizza parlor operations..... (25,765) (19,964) (11,036)
Advisory fee paid to affiliate........... (3,845) (2,657) (1,539)
Distributions to minority interest
holders................................. (3,157) (2,088) (1,366)
Purchase of marketable equity
securities.............................. (7,670) (15,147) (22,613)
Proceeds from sale of marketable equity
securities.............................. 5,502 10,588 23,557
General and administrative expenses paid
($1,832 in 1998, $1,809 in 1997 and $691
in 1996 to affiliate)................... (8,489) (7,764) (4,313)
Other.................................... (5,538) (537) (642)
---------- ----------- ----------
Net cash provided by (used in) operating
activities.............................. (22,988) (18,049) 4,158
Cash Flows From Investing Activities
Collections on notes receivable ($3,503
in 1997 and $1,166 in 1996 from
affiliates)............................. 3,121 4,489 1,495
Proceeds from sale of notes receivable... 599 16,985 --
Notes receivable funded.................. (594) (8,716) (250)
Proceeds from sale of real estate........ 51,602 38,169 7,718
Contributions from minority interest
holders................................. -- 9,799 2,571
Distributions from equity investees
activities.............................. 14,429 -- --
Acquisitions of real estate.............. (106,884) (123,074) (41,636)
Real estate improvements................. (4,070) (10,993) (2,862)
Pizza parlor equipment purchased......... (166) (2,695) (2,942)
Earnest money deposits................... (577) (6,221) 577
Investment in real estate entities....... (6,116) (1,331) (15,471)
---------- ----------- ----------
Net cash (used in) investing
activities.............................. (48,656) (83,588) (50,800)
Cash Flows From Financing Activities
Proceeds from notes payable.............. 237,895 161,103 86,490
Margin borrowings (payments), net........ (21,908) 8,914 2,981
Proceeds from issuance of Preferred
Stock................................... -- -- 400
Payments on notes payable................ (120,394) (81,639) (30,003)
Deferred borrowing costs................. (10,156) (5,174) (5,028)
Net advances (payments) to/from
affiliates.............................. (2,913) 23,274 (4,979)
Redemption of Preferred Stock............ (1,668) -- --
Sale of Common Stock under dividend
reinvestment plan....................... 224 -- --
Dividends................................ (3,260) (2,150) (1,617)
---------- ----------- ----------
Net cash provided by financing
activities.............................. 77,820 104,328 48,244
---------- ----------- ----------
Net increase in cash and cash
equivalents.............................. 6,176 2,691 1,602
Cash and cash equivalents, beginning of
year..................................... 5,347 2,656 1,054
---------- ----------- ----------
Cash and cash equivalents, end of year $ 11,523 $ 5,347 $ 2,656
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-27
<PAGE>
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of net (loss) to net cash
provided by (used in) operating
activities
Net (loss)............................... $ (22,805) $ (2,428) $ (5,554)
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating
activities Extraordinary gain........... -- -- (381)
Gain on sale of real estate............. (17,254) (20,296) (3,659)
Depreciation and amortization........... 6,990 3,542 2,367
Amortization of deferred borrowing
costs.................................. 8,916 4,042 2,692
Provision for loss...................... 3,916 -- --
Litigation settlement................... 13,076 -- --
Equity in (income) of investees......... (37,966) (10,497) (1,485)
Distributions from equity investees'
operating activities................... 10,274 5,689 9,054
Increase (decrease) in marketable equity
securities............................. (3,306) (4,559) 944
(Increase) decrease in accrued interest
receivable............................. (2,269) 66 (117)
(Increase) decrease in other assets..... 20,201 634 (4,103)
Increase in accrued interest payable.... 2,537 1,019 1,417
Increase in accounts payable and other
liabilities............................ (5,716) 4,978 2,908
Other................................... 418 (239) 75
----------- ----------- ----------
Net cash provided by (used in)
operating activities................. $ (22,988) $ (18,049) $ 4,158
=========== =========== ==========
Schedule of noncash investing and
financing activities
Notes payable from acquisition of real
estate................................. $ 45,632 $ 44,151 $ 9,099
Stock dividends on Series C Preferred
Stock.................................. -- 82 31
Issuance of Series G Preferred Stock.... 100 -- --
Series F Preferred Stock issued for real
estate................................. 2,100 20,000 --
Dividend obligation on conversion of
Series F Preferred Stock............... 134 -- --
Current value of property obtained
through foreclosure of note
receivable............................. 20,985 20,226 --
Note receivable cancelled on acquisition
of property............................ 1,300 2,737 --
Issuance of partnership units........... 24,474 -- --
Note payable assumed on property
obtained through foreclosure........... -- 11,867 --
Carrying value of real estate
exchanged.............................. -- 7,882 --
Notes payable from acquisition of
minority interest in subsidiary........ -- 5,000 --
Conversion of Series B Preferred Stock
into Common Stock...................... 45 -- --
Consolidation of National Realty, L.P.
Carrying value of notes receivable...... 52,168 -- --
Carrying value of real estate........... 228,042 -- --
Carrying value of investment in equity
investee eliminated.................... 41,182 -- --
Carrying value of other assets.......... 32,571 -- --
Carrying value of minority interest..... 15,600 -- --
Carrying value of the Company Common
Stock eliminated....................... 269 -- --
Carrying value of notes and interest
payable................................ 295,743 -- --
Carrying value of accounts payable and
other liabilities...................... 751 -- --
Acquisition of IGI properties -- --
Carrying value of real estate........... 51,820 -- --
Issuance of partnership units........... 6,568 -- --
Carrying value of other assets.......... (1,122) -- --
Carrying value of notes payable and
other liabilities...................... 43,713 -- --
Investment in partnerships.............. 1,980 -- --
Acquisition of Pizza World Supreme, Inc.
Carrying value of intangible............ -- -- 9,768
Carrying value of pizza parlor
equipment.............................. -- -- --
Carrying value of note receivable
retired................................ -- -- 10,286
Carrying value of accounts payable and
other liabilities...................... -- -- 2,834
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-28
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of American Realty Trust,
Inc. and consolidated entities (the "Company") have been prepared in conformity
with generally accepted accounting principles, the most significant of which
are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." These,
along with the remainder of the Notes to Consolidated Financial Statements, are
an integral part of the Consolidated Financial Statements. The data presented
in the Notes to Consolidated Financial Statements are as of December 31 of each
year and for the year then ended, unless otherwise indicated. Dollar amounts in
tables are in thousands, except per share amounts.
Certain balances for 1996 and 1997 have been reclassified to conform to the
1998 presentation. Shares and per share data have been restated for a 2 for 1
forward Common Stock split effected February 17, 1997.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and company business. American Realty Trust, Inc. ("ART"), a
Georgia corporation, is successor to a District of Columbia business trust,
that primarily invests in real estate and real estate-related entities and
purchases and originates mortgage loans.
Basis of consolidation. The Consolidated Financial Statements include the
accounts of ART, and all controlled subsidiaries and partnerships other than
National Realty, L.P. ("NRLP") prior to December 31, 1998. The Company used the
equity method to account for its investment in NRLP prior to December 31, 1998,
and prior to May 1997. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P.". All
significant intercompany transactions and balances have been eliminated.
Accounting estimates. In the preparation of the Company's Consolidated
Financial Statements in conformity with generally accepted accounting
principles it was necessary for 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 Consolidated Financial
Statements and the reported amounts of revenues and expense for the year then
ended. Actual results could differ from these estimates.
Interest recognition on notes receivable. It is the Company's policy to
cease recognizing interest income on notes receivable that have been delinquent
for 60 days or more. In addition, accrued but unpaid interest income is only
recognized to the extent that the net realizable value of the underlying
collateral exceeds the carrying value of the receivable.
Allowance for estimated losses. Valuation allowances are provided for
estimated losses on notes receivable considered to be impaired. Impairment is
considered to exist when it is probable that all amounts due under the terms of
the note will not be collected. Valuation allowances are provided for estimated
losses on notes receivable to the extent that the Company's investment in the
note exceeds management's estimate of fair value of the collateral securing
such note.
Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") requires that a property be considered impaired, if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the property. If impairment
exists, an impairment loss is recognized by a charge against earnings, equal to
the amount by which the carrying amount of the property exceeds the fair value
of the property. If impairment of a property is recognized, the carrying amount
of the property is reduced by the amount of the impairment, and a new cost for
the property is established. Such new cost is depreciated over the property's
remaining useful life. Depreciation is provided by the straight-line method
over estimated useful lives, which range from 10 to 40 years.
F-29
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Real estate held for sale. Foreclosed real estate is initially recorded at
new cost, defined as the lower of original cost or fair value minus estimated
costs of sale. SFAS No. 121 also requires that properties held for sale be
reported at the lower of carrying amount or fair value less costs of sale. If a
reduction in a held for sale property's carrying amount to fair value less
costs of sale is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale property's estimated fair value less costs of sale is recorded as an
adjustment to the property's carrying amount, but not in excess of the
property's carrying amount when originally classified as held for sale. A
corresponding charge against or credit to earnings is recognized. Properties
held for sale are not depreciated.
Investments in equity investees. Because the Company may be considered to
have the ability to exercise significant influence over the operating and
investment policies of certain of its investees, they are accounted for by the
equity method. Under the equity method, the Company's initial investment,
recorded at cost, is increased by its proportionate share of the investee's
operating income and any additional investment and decreased by the Company's
proportionate share of the investee's operating losses and distributions
received.
Present value premiums/discounts. The Company provides for present value
premiums and discounts on notes receivable or payable that have interest rates
that differ substantially from prevailing market rates and amortizes such
premiums and discounts by the interest method over the lives of the related
notes. The factors considered in determining a market rate for notes receivable
include the borrower's credit standing, nature of the collateral and payment
terms of the note.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment, the cost recovery, the financing or other method, whichever is
appropriate.
Operating segments. Management has determined that the Company's reportable
operating segments are those that are based on the Company's method of internal
reporting, which disaggregates its operations by type of real estate.
Fair value of financial instruments. The Company used the following
assumptions in estimating the fair value of its notes receivable, marketable
equity securities and notes payable. For performing notes receivable, the fair
value was estimated by discounting future cash flows using current interest
rates for similar loans. For nonperforming notes receivable the estimated fair
value of the Company's interest in the collateral property was used. For
marketable equity securities fair value was based on the year end closing
market price of each security. For notes payable the fair value was estimated
using current rates for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Loss per share. Loss per share is presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Loss per share is
computed based upon the weighted average number of shares of Common Stock
outstanding during each year, adjusted for a two for one forward Common Stock
split effected February 17, 1997.
F-30
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2. SYNTEK ASSET MANAGEMENT, L.P.
The Company owns a 96% limited partner interest in Syntek Asset Management,
L.P. ("SAMLP"). Until December 18, 1998, SAMLP was the general partner of
National Realty, L.P. ("NRLP") and National Operating, L.P. ("NOLP"), the
operating partnership of NRLP, (collectively the "Partnership"). Gene E.
Phillips, a Director and Chairman of the Board of the Company until November
16, 1992, is also a general partner of SAMLP. As of December 31, 1998, the
Company owned approximately 55.0% of the outstanding limited partner units of
NRLP.
NRLP, SAMLP and Mr. Phillips were among the defendants in a class action
lawsuit arising from the formation of NRLP. An agreement settling such lawsuit
(the "Settlement Agreement") for the above named defendants became effective on
July 5, 1990. The Settlement Agreement provided for, among other things, the
appointment of an NRLP oversight committee and the establishment of specified
annually increasing targets for five years relating to the price of NRLP's
units of limited partner interest.
The Settlement Agreement provided for the resignation and replacement of
SAMLP as general partner if the unit price targets were not met for two
consecutive anniversary dates. NRLP did not meet the unit price targets for the
first and second anniversary dates. On July 8, 1992, SAMLP notified the NRLP
oversight committee of the failure of NRLP to meet the unit price targets for
two successive years and that it expected to resign as general partner of NRLP
and NOLP.
The Settlement Agreement provided that the withdrawal of SAMLP as general
partner would require NRLP to purchase SAMLP's general partner interest (the
"Redeemable General Partner Interest") at its then fair value, and to pay
certain fees and other compensation as provided in the NRLP partnership
agreement. Syntek Asset Management, Inc. ("SAMI"), the managing general partner
of SAMLP, calculated the fair value of such Redeemable General Partner Interest
to be $49.6 million at December 31, 1997, before reduction for the principal
balance ($4.2 million at December 31, 1997) and accrued interest ($7.2 million
at December 31, 1997) on the note receivable from SAMLP for its original
capital contribution to the partnership.
On July 15, 1998, NRLP, SAMLP and the NRLP oversight committee executed an
Agreement for Cash Distribution and Election of Successor General Partner (the
"Cash Distribution Agreement") which provides for the nomination of an entity
affiliated with SAMLP to be the successor general partner of NRLP, for the
distribution of $11.4 million to the plaintiff class members and for the
resolution of all related matters under the Settlement Agreement. The Cash
Distribution Agreement was submitted to the Court on July 23, 1998. On August
4, 1998, the Court entered an order granting preliminary approval of the Cash
Distribution Agreement. On September 9, 1998, a notice was mailed to the
plaintiff class members describing the Cash Distribution Agreement. On October
16, 1998, a hearing was held to consider any objections to the Cash
Distribution Agreement. On October 23, 1998, the Court entered an order
granting final approval of the Cash Distribution Agreement. The Court also
entered orders requiring NRLP to pay $404,000 in attorney's fees to Joseph B.
Moorman's legal counsel, $30,000 to Joseph B. Moorman and $404,000 in
attorney's fees to Robert A. McNeil's legal counsel.
Pursuant to the order, $11.4 million was deposited by NRLP into an escrow
account and then transferred to the control of an independent settlement
administrator. The distribution of the cash shall be made to the plaintiff
class members pro rata based upon the number of units originally issued to each
plaintiff class member upon the formation of NRLP in 1987. The distribution of
cash is under the control of the independent settlement administrator. On March
10, 1999, the Court entered an order providing for the initial distribution of
the cash not later than March 31, 1999.
The proposal to elect NRLP Management Corp. ("NMC"), a wholly-owned
subsidiary of the Company, as the successor general partner was submitted to
the unitholders of NRLP for a vote at a special meeting of unitholders held on
December 18, 1998. All units of NRLP owned by the Company and affiliates of
SAMLP
F-31
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(approximately 61.5% of the outstanding units of NRLP as of the November 27,
1998 record date) were voted pro rata with the vote of the other limited
partners. NMC was elected by a majority of the NRLP unitholders. The Settlement
Agreement remained in effect until December 18, 1998, when SAMLP resigned as
general partner and NMC was elected successor general partner and took office.
Under the Cash Distribution Agreement, SAMLP waived its right under the
Settlement Agreement to receive any payment from NRLP for its Redeemable
General Partner Interest and fees it was entitled to receive upon the election
of a successor general partner. As of December 31, 1997, the Redeemable General
Partner Interest was calculated to be $49.6 million. In addition, pursuant to
the Cash Distribution Agreement, the NRLP partnership agreement was amended to
provide that, upon voluntary resignation of the general partner, the resigning
general partner shall not be entitled to the repurchase of its general partner
interest under Paragraph 17.9 of the NRLP partnership agreement.
Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's
note for its original capital contribution to NRLP. In addition, NMC assumed
liability for the note which requires the repayment of the $11.4 million paid
by NRLP under the Cash Distribution Agreement, plus the $808,000 in court
ordered attorney's fees and $30,000 paid to Joseph B. Moorman. This note
requires repayment over a ten-year period, bears interest at a variable rate,
currently 7.0% per annum, and is guaranteed by the Company, the parent of NMC.
The liability assumed under the Cash Distribution Agreement was expensed as a
"litigation settlement" in the accompanying Consolidated Statement of
Operations.
As of December 31, 1998, the Company discontinued accounting for its
investment in the Partnership under the equity method upon the election of NMC
as general partner of the Partnership and the settlement of the class action
lawsuit. The Company began consolidation of the Partnership's accounts at that
date and its operations subsequent to that date. The consolidation of the
accounts of the Company with those of the Partnership (after intercompany
eliminations) resulted in an increase in the Partnership's net real estate of
$60.6 million. This amount was allocated to the individual real estate assets
based on their relative individual fair market value.
The Partnership's operating results for 1998 were as follows:
<TABLE>
<S> <C>
Revenues........................................................... $113,834
Property operating expenses........................................ 75,699
Interest........................................................... 26,722
Depreciation....................................................... 9,691
General and administrative expenses................................ 6,820
--------
118,932
--------
(Loss) from operations............................................. (5,098)
Gain on sales of real estate....................................... 52,589
--------
Net income......................................................... $ 47,491
========
</TABLE>
F-32
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3. NOTES AND INTEREST RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Notes Receivable
Performing (including $594 in 1998 and
$1,307 in 1997 from affiliates)........ $44,488 $45,310 $ 9,217 $ 9,340
Nonperforming........................... 9,200 9,200 26,344 23,212
------- ------- ------- -------
$53,688 54,510 $35,561 32,552
======= =======
Interest receivable..................... 2,648 380
Unamortized premiums/(discounts)........ (72) (124)
Deferred gains.......................... (2,456) (4,884)
------- -------
$54,630 $27,924
======= =======
</TABLE>
The Company recognizes interest income on nonperforming notes receivable on
a cash basis. For the years 1998, 1997 and 1996 unrecognized interest income on
such nonperforming notes receivable totaled $716,000, $2.2 million and $1.6
million, respectively.
Notes receivable at December 31, 1998, mature from 1999 to 2009 with
interest rates ranging from 7.2% to 18.0% per annum and a weighted average rate
of 11.9% per annum. Notes receivable are generally collateralized by real
estate or interests in real estate and personal guarantees of the borrower. A
majority of the notes receivable provide for interest to be paid at maturity.
Scheduled principal maturities of $37.0 million are due in 1999 of which $3.2
million is due on nonperforming notes receivable.
In December 1997, the Company sold its Pin Oak land, a 567.6 acre parcel of
unimproved land in Houston, Texas, for $11.4 million, receiving net cash of
$3.5 million and providing $6.9 million in short-term purchase money financing.
The purchase money financing was collected in full in January 1998, the Company
receiving net cash of $1.5 million after paying off $5.2 million in underlying
mortgage debt and the payment of various closing costs.
In December 1997, the Company sold a 25.1 acre tract of its Valley Ranch
land parcel, for $3.3 million, receiving net cash of $2.2 million and providing
$891,000 of short-term purchase money financing. The Company received a
$624,000 paydown on the purchase money financing in January 1998 with the
remaining $267,000 being received in February 1998.
In June 1992, the Company sold the Continental Hotel and Casino in Las
Vegas, Nevada for, among other consideration, a $22.0 million wraparound
mortgage note. The Company recorded a deferred gain of $4.6 million on the sale
resulting from a disputed third lien mortgage being subordinated to the
Company's wraparound mortgage note. In March 1997, the wraparound note was
modified and extended in exchange for the borrower's commitment to invest $2.0
million in improvements to the hotel and casino within four months of March
1997, and an additional $2.0 million prior to December 1997. The borrower
stopped making the payments required by the note in April 1997, and did not
make the required improvements. In December 1997, the borrower filed for
bankruptcy protection. In February 1998, a hearing was held to allow
foreclosure of the hotel and casino. At the hearing, the bankruptcy court
allowed the borrower 90 days to submit a reorganization plan and beginning
March 2, 1998 required the borrower to make monthly payments of $175,000. The
Company received only the first such payment. The wraparound mortgage note had
a principal balance of $22.7 million at March 31, 1998. In April 1998, the
bankruptcy court allowed the foreclosure of the hotel and casino. No loss was
incurred on foreclosure as the fair market value of the property exceeded the
carrying value of the mortgage note. The property is included in real estate
held for investment in the accompanying Consolidated Balance Sheet.
F-33
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, the Company sold to Basic Capital Management, Inc.
("BCM"), the Company's advisor, three matured mortgage notes at their carrying
value of $628,000. No gain or loss was recognized on the sale. See NOTE 11.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The borrower on a $1.7 million mortgage note receivable secured by land in
Osceola, Florida failed to pay the note on its November 1, 1993 maturity. The
Company instituted foreclosure proceedings and was awarded summary judgment in
January 1994. In April 1995, the borrower filed for bankruptcy protection. In
August 1996, the bankruptcy court's stay was lifted allowing foreclosure to
proceed. In February 1997, the Company sold its mortgage note receivable for
$1.8 million in cash. A gain of $171,000 was recognized on the sale.
In September 1997, the Company sold its $16.3 million wraparound mortgage
note receivable secured by the Las Vegas Plaza Shopping Center in Las Vegas,
Nevada, for $15.0 million. The Company received net cash of $5.5 million after
paying off $9.2 million in underlying debt. No loss was incurred on the sale in
excess of the reserve previously established.
In September 1997, the Company foreclosed on its $8.9 million junior
mortgage note receivable secured by the Williamsburg Hospitality House in
Williamsburg, Virginia. The Company obtained the property through foreclosure
subject to the first mortgage of $12.0 million. No loss was incurred on
foreclosure as the fair value of the property exceeded the carrying value of
the Company's mortgage note receivable and assumed mortgage debt. The property
is included in real estate held for investment in the accompanying Consolidated
Balance Sheet.
NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES
Activity in the allowance for estimated losses on notes and interest
receivable was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Balance January 1,.................................... $2,398 $ 3,926 $ 7,254
Partnership allowance................................ 1,910 -- --
Amounts charged off.................................. -- (1,528) --
Writedown of property................................ (1,731) -- (3,328)
------ ------- -------
Balance December 31,.................................. $2,577 $ 2,398 $ 3,926
====== ======= =======
</TABLE>
NOTE 5. REAL ESTATE
In January 1998, in separate transactions, the Company purchased (1) El
Dorado Parkway land, a 8.5 acre parcel of unimproved land in Collin County,
Texas, for $952,000, consisting of $307,000 in cash, assumption of the existing
mortgage of $164,000 which bears interest at 10% per annum, requires semi-
annual payments of principal and interest of $18,000 and matures in May 2005
and seller financing of the remaining $481,000 of the purchase price which
bears interest at 8% per annum, requires semi-annual payments of principal and
interest of $67,000 and matures in January 2000; (2) Valley Ranch IV land, a
12.3 acre parcel of unimproved land in Irving, Texas, for $2.0 million,
consisting of $500,000 in cash and seller financing of the remaining $1.5
million of the purchase price which bears interest at 10% per annum, requires
quarterly payments of interest only and matures in December 2000; and, (3) JHL
Connell land, a 7.7 acre parcel of unimproved land in Carrollton, Texas, for
$1.3 million in cash.
In February 1998, in separate transactions, the Company purchased (1)
Scoggins land, a 314.5 acre parcel of unimproved land in Tarrant County, Texas,
for $3.0 million, consisting of $1.5 million in cash and mortgage financing of
$1.5 million which bore interest at 14% per annum, required quarterly payments
of interest only and matured in February 1999; and, (2) Bonneau land, a 8.4
acre parcel of unimproved land in Dallas County, Texas, for $1.0 million in
mortgage financing which bore interest at 18.5% per annum with principal and
interest due at maturity in February 1999. The Scoggins land was refinanced in
May 1998 and the Bonneau land was refinanced in March 1999.
F-34
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1994, the Company and an affiliate of BCM, sold five apartments
with a total of 880 units to a newly formed limited partnership in exchange for
$3.2 million in cash, a 27% limited partner interest and two mortgage notes
receivable, secured by one of the properties. The Company had the option to
reacquire the properties at any time after September 1997 for their original
sales prices. Accordingly, a deferred gain of $5.6 million was offset against
the Company's investment in the partnership. In February 1998, three of the
properties, one of which secured the two notes receivable, were reacquired, for
$7.7 million. The Company paid $4.0 million in cash and assumed the existing
mortgages of $3.7 million. Simultaneously, the Company refinanced the three
properties for a total of $7.8 million, receiving net cash of $3.9 million
after paying off $3.7 million in mortgage debt and the payment of various
costs. The new mortgage bears interest at 9.5% per annum, require monthly
principal and interest payments totaling $66,000 and mature in February 2008.
In June 1998, the remaining two properties were reacquired for $8.6 million.
The Company paid $2.1 million in cash and assumed the existing mortgages
totaling $6.5 million. The mortgages bear interest at 8.73% per annum, require
monthly principal and interest payments totaling $49,000 and mature in January
2019.
In March 1998, the Company purchased Desert Wells land, a 420 acre parcel of
unimproved land in Palm Desert, California, for $12.0 million. The Company paid
$400,000 in cash, obtained mortgage financing of $10.0 million and obtained
seller financing of the remaining $1.6 million of the purchase price. The
mortgage bore interest at the prime rate plus 4.5%, currently 12.25% per annum,
required monthly payments of interest only and matured in March 1999. The
lender has agreed to an extension of its matured mortgage to March 2000. All
other terms would remain unchanged. The seller financing bore interest at 10%
per annum, required monthly payments of interest only and matured in July 1998.
The debt was paid in full at maturity.
In April 1998, the Company purchased Yorktown land, a 325.8 acre parcel of
unimproved land in Harris County, Texas, for $7.4 million. The Company paid
$3.0 million in cash and obtained seller financing of the remaining $4.4
million of the purchase price. The seller financing bore interest at 8.5% per
annum, required monthly interest only payments and matured in February 1999.
The Company has received a written commitment from a lender to refinance the
matured mortgage in the approximate amount of $5.0 million. The new mortgage is
scheduled to close on or about April 15, 1999.
Also in April 1998, the Company sold a 77.7 acre tract of its Lewisville
land parcel for $6.8 million, receiving net cash of $153,000 after paying off
first and second lien mortgages totaling $5.9 million and the payment of
various closing costs. A gain of $1.9 million was recognized on the sale.
In May 1998, but effective April 1, 1998, the Company purchased, in a single
transaction, twenty-nine apartments with a total of 2,441 units (collectively
the "IGI properties") in Florida and Georgia for $56.1 million. The properties
were acquired through three newly-formed controlled limited partnerships. The
partnerships paid a total of $6.1 million in cash, assumed $43.4 million in
mortgage debt and issued a total of $6.6 million in Class A limited partner
units in the acquiring partnerships, which have the Company as the Class B
Limited Partner and a wholly-owned subsidiary of the Company as the Managing
General Partner. The Class A limited partners were entitled to a preferred
return of $.08 per unit in 1998 and are entitled to an annual preferred return
of $.09 per unit in 1999 and $.10 per unit in 2000 and thereafter. The Class A
units are exchangeable after April 1, 1999 into shares of Series F Preferred
Stock on the basis of ten Class A units for each preferred share. The assumed
mortgages bear interest at rates ranging from 7.86% and 11.22% per annum,
require monthly principal and interest payments totaling $384,000 and mature
between June 1, 2000 and September 2017. See NOTE 13. "PREFERRED STOCK."
Also in May 1998, the Company purchased the FRWM Cummings land, a 6.4 acre
parcel of unimproved land in Farmers Branch, Texas, for $1.2 million in cash.
Further in May 1998, in separate transactions, the Company sold (1) a 21.3
acre tract of the Parkfield land parcel, for $1.3 million, receiving no net
cash after paying down by $1.1 million the mortgage secured by such land parcel
and the payment of various costs and, (2) a 15.4 acre tract of the Valley Ranch
land parcel, for $1.2
F-35
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million, receiving no net cash after paying down by $1.1 million the mortgage
secured by such land parcel and the payment of various closing costs. A gain
of $670,000 was recognized on the Parkfield sale and a gain of $663,000 was
recognized on the Valley Ranch sale.
In June 1998, in separate transactions, the Company sold (1) a 21.6 acre
tract of the Chase Oaks land parcel, for $3.3 million, receiving net cash of
$418,000 after paying down by $2.0 million the mortgage secured by such land
parcel and the payment of various closing costs; (2) a 150.0 acre tract of the
Rasor land parcel, for $6.8 million, receiving net cash of $1.4 million after
paying down by $5.3 million the mortgage secured by such land parcel and the
payment of various closing costs; and, (3) the entire 315.2 acre Palm Desert
land parcel, for $17.2 million, receiving net cash of $8.6 million after
paying off $7.2 million in mortgage debt and the payment of various closing
costs. A gain of $848,000 was recognized on the Chase Oaks sale, a gain of
$789,000 was recognized on the Rasor sale and a gain of $3.9 million was
recognized on the Palm Desert sale.
In July 1998, in separate transactions, the Company purchased (1) the
Thompson II land, a 3.5 acre parcel of unimproved land in Dallas County,
Texas, for $471,000 in cash; and (2) the Walker land, a 132.6 acre parcel of
unimproved land in Dallas County, Texas, for $12.6 million in cash.
Also in July 1998, the Company purchased the Katrina land, a 454.8 acre
parcel of undeveloped land in Palm Desert, California, for $38.2 million. The
purchase was made by a newly formed controlled partnership of which a wholly-
owned subsidiary of the Company is the general partner and Class B limited
partner. The partnership issued $23.2 million Class A limited partnership
units and obtained mortgage financing of $15.0 million. The mortgage bears
interest at 15.5% per annum, requires monthly payments of interest only and
matures in July 1999. The Class A limited partners were entitled to an annual
preferred return of $.07 per unit in 1998, and are entitled to an annual
preferred return of $.08 per unit in 1999, $.09 per unit in 2000 and $.10 per
unit in 2001 and thereafter. The Class A units may be converted into a total
of 231,750 shares of Series H Cumulative Convertible Preferred Stock after
July 13, 1999, on the basis of 100 Class A units for each preferred share. See
NOTE 13. "PREFERRED STOCK."
In July 1998, the Company sold a 2.5 acre tract of its Las Colinas I land
parcel, for $1.6 million, receiving net cash of $605,000 after paying down by
$750,000 the Las Colinas I term loan secured by such land parcel and the
payment of various closing costs. A gain of $869,000 was recognized on the
sale.
In September 1998, a newly formed controlled limited partnership, in which
the Company has a combined 95% general and limited partner interest, purchased
Messick land, a 72.0 acre parcel of unimproved land in Palm Springs,
California, for $3.5 million, paying $1.0 million in cash and obtaining seller
financing of the remaining $2.5 million of the purchase price. The seller
financing bears interest at 8.5% per annum, requires quarterly payments of
interest only, principal payments of $300,000 in July 1999 and July 2000, and
matures in August 2001.
Also in September 1998, in separate transactions, the Company sold (1) a
60.0 acre tract of the Parkfield land parcel, for $1.5 million, receiving no
net cash after paying down by $1.4 million the mortgage secured by such land
parcel and the payment of various closing costs; (2) the remaining 10.5 acres
of the BP Las Colinas land parcel for $4.7 million, receiving net cash of $1.8
million after paying off the $2.7 million mortgage secured by such land parcel
and the payment of various closing costs; (3) the entire 30.0 acre Kamperman
land parcel for $2.4 million, receiving net cash of $584,000 after paying down
by $1.6 million the Las Colinas I term loan secured by such parcel and the
payment of various closing costs; and (4) a 1.1 acre tract of the Santa
Clarita land parcel for $543,000, receiving net cash of $146,000 after paying
down by $350,000 the Las Colinas I term loan secured by such land parcel and
the payment of various closing costs. A gain of $44,000 was recognized on the
Parkfield sale, a gain of $3.4 million was recognized on the BP Las Colinas
sale, a gain of $969,000 was recognized on the Kamperman sale and a gain of
$409,000 was recognized on the Santa Clarita sale.
F-36
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Further in September 1998, in separate transactions, the Company purchased
(1) the HSM land, a 6.2 acre parcel of unimproved land in Farmers Branch,
Texas, for $2.2 million in cash; (2) the Vista Ridge land, a 160.0 acre parcel
of unimproved land in Lewisville, Texas, for $15.6 million, consisting of $3.1
million in cash and mortgage financing of $12.5 million which bears interest at
15.5% per annum, requires monthly interest only payments at a rate of 12.5% per
annum, with the deferred interest and principal due at maturity in July 1999;
and (3) the Marine Creek land, a 54.2 acre parcel of unimproved land in Fort
Worth, Texas, for $2.2 million in cash.
In October 1998, in separate transactions, the Company purchased (1) Vista
Business Park land, a 41.8 acre parcel of unimproved land in Travis County,
Texas, for $3.0 million, consisting of $730,000 in cash and mortgage financing
of $2.3 million which bears interest at 8.9% per annum, requires monthly
payments of interest only and matures in September 2000; (2) Mendoza land, a
.35 acre parcel of unimproved land in Dallas, Texas, for $180,000, consisting
of $27,000 in cash and seller financing of the remaining $153,000 of the
purchase price which bears interest at 10% per annum, requires quarterly
payments of interest only and matures in October 2001; (3) Croslin land, a .8
acre parcel of unimproved land in Dallas, Texas, for $306,000, consisting of
$46,000 in cash and seller financing of the remaining $260,000 of the purchase
price which bears interest at 10% per annum, requires quarterly payments of
interest only and matures in October 2001; and (4) Stone Meadows land, a 13.5
acre parcel of unimproved land in Houston, Texas, for $1.6 million, consisting
of $491,000 in cash and seller financing of the remaining $1.1 million of the
purchase price, which bears interest at 10% per annum, requires quarterly
principal and interest payments of $100,000 and matures in October 1999.
In November 1998, the Company purchased Mason/Goodrich land, a 265.5 acre
parcel of unimproved land in Houston, Texas, for $10.9 million, consisting of
$3.7 million in cash and mortgage financing of $7.2 million. The mortgage bore
interest at 8.9% per annum, required monthly interest only payments and matured
in February 1999. The lender has agreed to extend its matured mortgage to
September 1999, for a $500,000 principal paydown. All other terms would remain
unchanged.
In November 1998, the Company purchased two apartments with a total of 423
units in Indianapolis, Indiana for $7.2 million. The properties were acquired
through a newly-formed controlled partnership. The partnership paid a total of
$14,000 in cash, assumed $5.9 million in mortgage debt and issued $1.3 million
in Class A limited partner units in the acquiring partnership, in which the
Company is the Class B limited partner and a wholly-owned subsidiary of the
Company is the Managing General Partner. The Class A limited partners are
entitled to a preferred return of $.07 per annum per unit. The Class A units
are exchangeable after November 18, 1999, into shares of Series F Cumulative
Convertible Preferred Stock on the basis of ten units for each preferred share.
The assumed mortgages bear interest at 9.95% per annum and 10.75% per annum,
one requires monthly payments of interest and principal of $25,000 and matures
October 2012 and the other requires monthly interest only payments and matures
in June 1999.
In December 1998, in separate transactions, the Company purchased (1) Plano
Parkway land, a 81.2 acre parcel of unimproved land in Plano, Texas, for $11.0
million, consisting of $2.2 million in cash and seller financing of the
remaining $8.9 million of the purchase price, which bore interest at 10% per
annum and required the payment of principal and interest at maturity in January
1999; and, (2) Van Cattle land, a 126.6 acre parcel of unimproved land in
McKinney, Texas, for $2.0 million, consisting of $500,000 in cash and seller
financing of the remaining $1.5 million of the purchase price, which bears
interest at 10% per annum, requires interest only payments and matures in
December 2000.
Also in December 1998, the Company sold two tracts totaling 63.1 acres of
the Valley Ranch land parcel for a total of $4.2 million, receiving net cash of
$135,000 after paying down by $3.0 million the mortgage secured by such land
parcel and the payment of various closing costs. No gain or loss was recognized
on the sales.
At December 31, 1997, the Company had under construction One Hickory Center,
a 102,615 sq. ft office building in Farmers Branch, Texas. Construction was
completed in December 1998, at cost of $7.8 million.
F-37
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the third and fourth quarters of 1998, provisions for loss of $3.0
million and $916,000, respectively, were recorded to write down the Valley
Ranch land to its estimated realizable value less estimated costs of sale. Such
write down was necessitated by an increase in the acreage designated as flood
plain.
In September 1997, the Company purchased the Collection, a 267,812 sq. ft.
retail and commercial center in Denver, Colorado, for $19.5 million. The
Company paid $791,000 in cash, assumed existing mortgages totaling $14.7
million and issued 400,000 shares of Series F Cumulative Convertible Preferred
Stock. See NOTE 13. "PREFERRED STOCK." A first mortgage in the amount of $14.2
million bears interest at 8.64% per annum, requires monthly principal and
interest payments of $116,000 and matures in May 2017. A second lien mortgage
in the amount of $580,000 bears interest at 7% per annum until April 2001, 7.5%
per annum from May 2001 to April 2006, and 8% per annum from May 2006 to May
2010, requires monthly principal and interest payments of $3,000 and matures in
May 2010.
In October 1997, the Company contributed its Pioneer Crossing land in
Austin, Texas, to a limited partnership in exchange for $3.4 million in cash, a
1% managing general partner interest in the partnership, all of the Class B
limited partner units in the partnership and the partnership's assumption of
the $16.1 million mortgage debt secured by the property. The existing general
and limited partners converted their general and limited partner interests into
Class A limited partner units in the partnership. The Class A limited partner
units have an agreed value of $1.00 per unit and are entitled to a fixed
preferred return of 10% per annum, paid quarterly. The Class A units may be
converted into a total of 360,000 shares of Series F Cumulative Convertible
Preferred Stock at any time prior to the sixth anniversary of the closing, on
the basis of one share of Series F Preferred Stock for each ten Class A units.
See NOTE 13. "PREFERRED STOCK."
Also in October 1997, the Company contributed its Denver Merchandise Mart in
Denver, Colorado, to a limited partnership in exchange for $6.0 million in
cash, a 1% managing general partner interest in the partnership, all of the
Class B limited partner units in the partnership and the partnership's
assumption of the $23.0 million in mortgage debt secured by the property. The
existing general and limited partners converted their general and limited
partner interests into Class A limited partner units in the partnership. The
Class A units have an agreed value of $1.00 per unit and are entitled to a
fixed preferred return of 10% per annum, paid quarterly. The Class A units may
be converted into a total of 529,000 shares of Series F Cumulative Convertible
Preferred Stock at any time prior to the sixth anniversary of the closing, on
the basis of one share of Series F Preferred Stock for each ten Class A units.
See NOTE 13. "PREFERRED STOCK."
Further in October 1997, the Company purchased the Piccadilly Inns, four
hotels in Fresno, California, with a total of 697 rooms, for $33.0 million. The
Company issued 1.6 million shares of its Series F Cumulative Convertible
Preferred Stock for $16.0 million of the purchase price and obtained mortgage
financing of $19.8 million. See NOTE 13. "PREFERRED STOCK." The Company
received net financing proceeds of $2.2 million after the payment of various
closing costs. The mortgage bears interest at 8.40% per annum, requires monthly
principal and interest payments of $158,000 and matures in November 2012.
In October 1997, a newly formed controlled partnership, of which the Company
is the general partner and Class B limited partner, purchased Vineyards land, a
15.8 acre parcel of unimproved land in Tarrant County, Texas, for $4.5 million.
The partnership paid $800,000 in cash, assumed the existing mortgage of $2.5
million and issued the seller $1.1 million of Class A limited partner units in
the partnership as additional consideration. The Class A units have an agreed
value of $1.00 per unit and are entitled to a fixed preferred return of 10% per
annum, paid quarterly. The Class A units may be exchanged for either shares of
the Company's Series G Preferred Stock on or after the second anniversary of
the closing at the rate of one share of Series G Preferred Stock for each 100
Class A units exchanged, or on or after the third anniversary of the closing,
the Class A units may be exchanged for shares of the Company's Common Stock.
The assumed mortgage bore interest at 12.95% per annum required quarterly
payments of interest only and matured in June 1998. See NOTE 13. "PREFERRED
STOCK."
F-38
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also in October 1997, the Company sold a 11.6 acre tract of its Valley Ranch
land parcel for $1.2 million. The net cash proceeds of $990,000, after the
payment of various closing costs, were deposited in a certificate of deposit
for the benefit of the lender, in accordance with the term loan secured by such
land parcel. The certificate of deposit was released to the lender in December
1997, in conjunction with the payoff of the loan. A gain of $629,000 was
recognized on the sale.
In November 1997, the Company sold two tracts of its Valley Ranch land,
totaling 8 acres, for $577,000. The net cash proceeds of $451,000, after the
payment of various closing costs, were deposited in a certificate of deposit
for the benefit of the lender, in accordance with the term loan secured by such
land parcel. The certificate of deposit was released to the lender in December
1997 in conjunction with the payoff of the loan. A gain of $216,000 was
recognized on the sale.
Also in December 1997, the Company exchanged a 43.0 acre tract of its Valley
Ranch land parcel for Preston Square, a 35,508 sq. ft. shopping center in
Dallas, Texas. In accordance with the provisions of the term loan securing the
Valley Ranch land parcel, the Company paid $2.8 million to the lender in
exchange for the lender's release of its collateral interest in such land.
Simultaneously, the Company obtained new mortgage financing of $2.5 million
secured by the shopping center. The mortgage bears interest at 8.2% per annum,
requires monthly payments of interest only and matures in December 1999. The
Company recognized no gain or loss on the exchange.
Also in 1997, the Company purchased 25 parcels of unimproved land; Scout,
546 acres in Tarrant County, Texas; Katy Road, 130.6 acres in Harris County,
Texas; McKinney Corners I, 30.4 acres in Collin County, Texas; McKinney Corners
II, 173.9 acres in Collin County, Texas; McKinney Corners III, 15.5 acres in
Collin County, Texas; Lacy Longhorn, 17.1 acres in Farmers Branch, Texas; Chase
Oaks, 60.5 acres in Plano, Texas; Pioneer Crossing, 1,448 acres in Austin,
Texas; Kamperman, 129.6 acres in Collin County, Texas; Keller, 811.8 acres in
Tarrant County, Texas; McKinney Corners IV, 31.3 acres in Collin County, Texas;
Pantex, 182.5 acres in Collin County, Texas; Dowdy/McKinney V, 174.7 acres in
Collin County, Texas; Perkins, 645.4 acres in Collin County, Texas; LBJ, 10.4
acres in Dallas County, Texas; Palm Desert, 315.2 acres in Palm Desert,
California; Thompson, 4 acres in Dallas County, Texas; Santa Clarita, 20.6
acres in Santa Clarita, California; Tomlin, 9.2 acres in Dallas County, Texas;
Rasor, 378.2 acres in Plano, Texas; Dalho, 3.4 acres in Farmers Branch, Texas;
Hollywood Casino, 51.7 acres in Farmers Branch, Texas; Valley Ranch III, 12.5
acres in Irving, Texas; and, Stagliano, 3.2 acres in Farmers Branch, Texas. The
Company paid a total of $44.4 million in cash and either obtained mortgage
financing or assumed existing mortgage debt for the remaining $77.2 million of
the purchase prices. In conjunction with the Rasor purchase, the Company
transferred its Perkins land to the seller as part of the purchase price.
In September 1997, the Company sold the Mopac Building, a 400,000 sq. ft.
office building, in St. Louis, Missouri, for $1.0 million, receiving net cash
of $1.0 million after the payment of various closing costs. In accordance with
the provisions of the Las Colinas I term loan, the Company applied $350,000 of
the net cash received to paydown the term loan in exchange for the lender's
release of its collateral interest in the property. A gain of $481,000 was
recognized on the sale.
In December 1997, the Company sold Park Plaza, a 105,507 sq. ft. shopping
center in Manitowoc, Wisconsin, for $4.9 million, receiving net cash of $1.6
million, after paying off $3.1 million in mortgage debt and the payment of
various closing costs. A gain of $105,000 was recognized on the sale.
Also in 1997, the Company sold all or portions of six land parcels; 12.6
acres of Las Colinas I in Irving, Texas; 40.2 acres of BP Las Colinas in Las
Colinas, Texas; 73.8 acres of Valley Ranch in Irving, Texas; 86.5 acres of
Rasor in Plano, Texas; 32.0 acres of Parkfield in Denver, Colorado; and 567.6
acres of Pin Oak in Houston, Texas. The Company received $14.2 million in net
cash after paying off $15.7 million in mortgage debt and the payment of various
closing costs. Gains totaling $16.5 million were recognized on the sales.
In 1991, the Company purchased all of the capital stock of a corporation
which owned 198 developed residential lots in Fort Worth, Texas. Through
December 31, 1998, 197 of the residential lots had been sold.
F-39
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6. INVESTMENTS IN EQUITY INVESTEES
The Company's investment in equity investees at December 31, 1998, included
(1) equity securities of three publicly traded real estate investment trusts,
Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty
Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI")
(collectively the "REITs"); and (2) interests in real estate joint venture
partnerships. BCM, the Company's advisor, serves as advisor to the REITs, and
performs certain administrative and management functions for NRLP and NOLP on
behalf of NMC. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."
The Company accounts for its investment in the REITs, the joint venture
partnerships and accounted for its investment in NRLP and NOLP prior to
December 31, 1998, using the equity method as more fully described in NOTE 1.
"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Investments in equity investees."
As of December 31, 1998, the accounts of NRLP and NOLP are consolidated with
those of the Company. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."
Substantially all of the Company's equity securities of the REITs and NRLP
are pledged as collateral for borrowings. See NOTE 10. "MARGIN BORROWINGS."
The Company's investment in equity investees accounted for using the equity
method, at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee December 31, 1998 December 31, 1998 December 31, 1998 December 31, 1998
- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
CMET.................... 40.9% $15,550 $35,727 $25,052
IORI.................... 30.0 3,132 7,068 3,034
TCI..................... 31.0 10,291 28,251 15,398
------- -------
28,973 $43,484
=======
Other................... 5,460
-------
$34,433
=======
</TABLE>
The Company's investment in equity investees accounted for using the equity
method, at December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NRLP.................... 54.4% $11,479 $ * $ 83,018
CMET.................... 40.6 14,939 35,745 25,733
IORI.................... 29.7 3,511 7,439 5,176
TCI..................... 30.6 8,378 26,652 20,664
------- --------
38,307 $134,591
========
General partner interest
in NRLP and NOLP....... 6,230
Other................... 1,314
-------
$45,851
=======
</TABLE>
- --------
* At December 31, 1997, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity, however, was $198.9 million.
Revaluation equity is defined as the difference between the estimated
current value of the partnership's real estate, adjusted to reflect the
partnership's estimate of disposition costs, and the amount of the mortgage
notes payable and accrued interest encumbering such property as reported in
NRLP's Annual Report on Form 10-K for the year ended December 31, 1997.
F-40
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's management continues to believe that the market value of each
of the REITs and NRLP undervalues their assets and the Company has, therefore,
continued to increase its ownership in these entities in 1998, as its liquidity
has permitted.
In April 1996, the Company purchased a 28% general partner interest in
Campbell Center Associates, Ltd. ("Campbell Associates"), which in turn had a
56.25% interest in Campbell Centre Joint Venture, which owned a 413,175 sq. ft.
office building in Dallas, Texas, for $550,000 in cash and a $500,000 note. In
January 1997, the Company exercised its option to purchase an additional 28%
general partner interest in Campbell Associates, for $300,000 in cash and a
$750,000 note. In July 1997, the Company purchased an additional 9% general
partner interest in Campbell Associates, for $868,000 in cash. In March 1998,
Consolidated Equity Properties, Inc., a wholly-owned subsidiary of the Company,
acquired a 30% limited partner interest in Campbell Associates for $500,000 in
cash. In June 1998, the Company purchased the remaining 5% general partner
interest in Campbell Associates for $1.1 million in cash. In June 1998,
Campbell Centre Joint Venture sold the office building for $32.2 million in
cash. Campbell Associates, as a partner, received net cash of $13.2 million
from the sales proceeds and escrowed an additional $190,000 for pending parking
lot issues. Campbell Associates recognized a gain of $8.2 million on the sale.
In June 1996, a newly formed limited partnership, of which the Company is a
1% general partner, purchased 580 acres of unimproved land in Collin County,
Texas, for $5.7 million in cash. The Company contributed $100,000 in cash to
the partnership with the remaining $5.6 million being contributed by the
limited partner. The partnership agreement provided that the limited partner
receive a 12% preferred cumulative return on his investment before any sharing
of partnership profits occurs. In April 1997, the partnership sold a 35.0 acre
tract for $1.3 million. Net cash of $1.2 million was distributed to the limited
partner. The partnership recognized a gain of $884,000 on the sale. In July
1997, the partnership sold a 24.6 acre tract for $800,000. Net cash of $545,000
was distributed to the limited partner. The partnership recognized a gain of
$497,000 on the sale. In September 1997, the partnership sold a 77.2 acre tract
for $1.5 million. No net cash was received. The partnership recognized a gain
of $704,000 on the sale. In October 1997, the partnership sold a 96.5 acre
tract for $1.7 million. Net cash of $1.1 million was distributed to the limited
partner in accordance with the partnership agreement. The partnership
recognized a gain of $691,000 on the sale. In December 1997, the partnership
sold a 94.4 acre tract for $2.5 million. Of the net cash $1.8 million was
distributed to the limited partner and $572,000 was distributed to the Company
as general partner in accordance with the partnership agreement. The
partnership recognized a gain of $1.4 million on the sale. In January 1998, the
partnership sold a 155.4 acre tract for $2.9 million, receiving $721,000 in
cash and providing financing of an additional $2.2 million. Of the net cash,
$300,000 was distributed to the limited partner and $300,000 was distributed to
the Company as general partner. The seller financing was collected at maturity,
in July 1998, with the net cash distributed $1.1 million to the limited partner
and $1.1 million to the Company as general partner. The partnership recognized
a gain of $1.2 million on the sale. In September 1998, the partnership sold the
remaining 96.59 acres for $1.3 million. Of the net cash $587,000 was
distributed to the limited partner and $587,000 was distributed to the Company
as general partner. The partnership recognized a gain of $128,000 on the sale.
In September 1997, a newly formed limited partnership, of which the Company
is a 1% general partner and 21.5% limited partner, purchased a 422.4 acre
parcel of unimproved land in Denton County, Texas, for $16.0 million in cash.
The Company contributed $3.6 million in cash to the partnership with the
remaining $12.4 million being contributed by the other limited partners. In
September 1997, the partnership obtained financing of $6.5 million secured by
the land. The mortgage bears interest at 10% per annum, requires quarterly
payments of interest only and matures in September 2001. The net financing
proceeds were distributed to the partners, the Company receiving a return of
$2.9 million of its initial investment. The partnership agreement also provides
that the limited partners receive a 12% preferred cumulative return on their
investment before any sharing of partnership profits occurs. One of the limited
partners in the partnership was, at the time, a limited partner in a
partnership that owned approximately 15.8% of the Company's outstanding shares
of Common Stock. See NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
F-41
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1992, the Company entered into a partnership agreement with an
entity affiliated with, at the time, a limited partner in a partnership that
owned approximately 15.8% of the Company's outstanding shares of Common Stock,
that acquired 287 developed residential lots adjacent to the Company's other
residential lots in Fort Worth, Texas. The partnership agreement also provides
each of the partners with a guaranteed 10% return on their respective
investments. Through December 31, 1997, 214 of the residential lots had been
sold. During 1998, an additional 52 lots were sold with 21 lots remaining to be
sold at December 31, 1998. During 1997 and 1998, each partner received $21,000
and $418,000 in return of capital distributions and $12,000 and $493,000 in
profit distributions.
Set forth below are summary financial data for equity investees owned over
50%:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Property and notes receivable, net............................... $ 236,367
Other assets..................................................... 43,213
Notes payable.................................................... (339,102)
Other liabilities................................................ (17,311)
---------
Equity........................................................... $ (76,833)
=========
</TABLE>
The above table includes the accounts of NRLP in 1997. In 1998, NRLP's
accounts are included in the accompanying Consolidated Balance Sheet. See NOTE
2. "SYNTEK ASSET MANAGEMENT, L.P."
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues..................................... $113,834 $117,461 $109,501
Depreciation................................. (9,691) (10,214) (10,783)
Interest..................................... (26,722) (34,481) (34,601)
Operating expenses........................... (82,519) (74,195) (65,789)
-------- -------- --------
Income (loss) before gains on sale of real
estate and extraordinary gains.............. (5,098) (1,429) (1,672)
Gains on sale of real estate................. 52,589 8,356 61
-------- -------- --------
Net income................................... $ 47,491 $ 6,927 $ (1,611)
======== ======== ========
</TABLE>
The difference between the carrying value of the Company's investment and
the equivalent investee book value is being amortized over the life of the
properties held by each investee.
The Company's equity share of:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ -----
<S> <C> <C> <C>
Income (loss) before gains on sale of real estate... $(2,794) $ 654 $(249)
Gains on sale of real estate........................ 34,055 3,022 --
------- ------ -----
Net income.......................................... $31,261 $3,676 $(249)
======= ====== =====
</TABLE>
Set forth below are summary financial data for equity investees owned less
than 50%:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Property and notes receivable, net..................... $ 734,857 $ 631,825
Other assets........................................... 69,829 80,789
Notes payable.......................................... (577,167) (483,064)
Other liabilities...................................... (25,474) (28,326)
--------- ---------
Equity................................................. $ 202,045 $ 201,224
========= =========
</TABLE>
F-42
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues..................................... $150,163 $129,531 $101,246
Depreciation................................. (20,954) (17,429) (14,408)
Provision for losses......................... 506 (1,337) 844
Interest..................................... (49,915) (38,537) (30,401)
Operating expenses........................... (91,868) (85,387) (69,698)
-------- -------- --------
(Loss) before gains on sale of real estate
and extraordinary gains..................... (12,068) (13,159) (12,417)
Gains on sale of real estate................. 18,642 34,297 11,701
Extraordinary gains.......................... -- -- 1,068
-------- -------- --------
Net income (loss)............................ $ 6,574 $ 21,138 $ 352
======== ======== ========
</TABLE>
The Company's equity share of:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
(Loss) before gains on sale of real estate and
extraordinary gains............................ $ (686) $(3,703) $(3,292)
Gains on sale of real estate.................... 7,391 -- 4,645
Extraordinary gains............................. -- 10,524 381
------ ------- -------
Net income (loss)............................... $6,705 $ 6,821 $ 1,734
====== ======= =======
</TABLE>
The Company's cash flow from the REITs and NRLP is dependent on the ability
of each of the entities to make distributions. CMET and IORI have been making
quarterly distributions since the first quarter of 1993, NRLP since the fourth
quarter of 1993 and TCI since the fourth quarter of 1995. In 1998, the Company
received distributions totaling $3.0 million from the REITs and $7.2 million
from NRLP, including distributions accrued at December 31, 1997, but not
received until 1998. In 1997, the Company received total distributions from the
REITs of $1.4 million and $1.4 million from NRLP and accrued an additional $6.7
million in NRLP and TCI distributions that were not received until January
1998.
The Company's investments in the REITs and NRLP were initially acquired in
1989. In 1998, the Company purchased an additional $1.1 million of equity
securities of the REITs and NRLP.
NOTE 7. MARKETABLE EQUITY SECURITIES--TRADING PORTFOLIO
In 1994, the Company began purchasing equity securities of entities other
than those of the REITs and NRLP to diversify and increase the liquidity of its
margin accounts. In 1998, the Company purchased $15.1 million and sold $5.2
million of such securities. These equity securities are considered a trading
portfolio and are carried at market value. At December 31, 1998, the Company
recognized an unrealized decline in the market value of the equity securities
in its trading portfolio of 6.1 million. In 1998, the Company realized a net
loss of $112,000 from the sale of trading portfolio securities and received
79,000 in dividends. At December 31, 1997, the Company recognized an unrealized
decline in the market value of the equity securities in its trading portfolio
of $850,000. In 1997, the Company realized a net gain of $154,000 from the sale
of trading portfolio securities and received $107,000 in dividends. In 1996,
the Company realized a net gain of $29,000 from the sale of trading portfolio
securities and received $163,000 in dividends. At December 31, 1996, the
Company recognized an unrealized decline in the market value of the equity
securities in its trading portfolio of $486,000. Unrealized and realized gains
and losses in the trading portfolio are included in other income in the
accompanying Consolidated Statements of Operations.
F-43
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8. ACQUISITION OF PIZZA WORLD SUPREME, INC.
In April 1996, a wholly-owned subsidiary of the Company purchased, for $10.7
million in cash, 80% of the common stock of Pizza World Supreme, Inc. ("PWSI"),
which in turn had acquired 26 operating pizza parlors in various communities in
California's San Joaquin Valley. Concurrent with the purchase, the Company
granted to an individual an option to purchase 36.25% of the Company's
subsidiary at any time for the Company's net investment in such subsidiary. In
May 1997, the Company acquired the remaining 20% of PWSI for $5.0 million, the
sellers providing purchase money financing in the form of two $2.5 million term
loans. The term loans bear interest at 8% per annum, require quarterly payments
of interest only and mature in May 2007.
NOTE 9. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Notes payable
Mortgage loans..................... $723,567 $736,320 $ 84,050 $ 96,654
Borrowings from financial
institutions...................... 17,546 17,074 170,491 153,369
Notes payable to affiliates........ 5,519 5,049 7,342 4,570
-------- -------- -------- --------
$746,632 758,443 $261,883 254,593
======== ========
Interest payable ($5,440 in 1998
and $4,836 in 1997 to
affiliates)...................... 9,829 7,393
-------- --------
$768,272 $261,986
======== ========
</TABLE>
Scheduled principal payments on notes payable are due as follows:
<TABLE>
<S> <C>
1999................................................................ $167,955
2000................................................................ 77,920
2001................................................................ 41,855
2002................................................................ 34,090
2003................................................................ 151,097
Thereafter.......................................................... 285,526
--------
$758,443
========
</TABLE>
Stated interest rates on notes payable ranged from 6.2% to 18.5% per annum
at December 31, 1998, and mature in varying installments between 1999 and 2017.
At December 31, 1998, notes payable were collateralized by mortgage notes
receivable with a net carrying value of $22.7 million and by deeds of trust on
real estate with a net carrying value of $636.3 million. Excluded from interest
expense in the accompanying Consolidated Statement of Operations is capitalized
interest of $67,000 in 1997.
In February 1998, the Company financed its unencumbered Kamperman land in
the amount of $1.6 million, receiving net cash of $1.5 million after the
payment of various closing costs. The mortgage bears interest at 9.0% per
annum, requires monthly payments of interest only and matures in February 2000.
F-44
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also in February 1998, the Company refinanced its Vineyards land in the
amount of $3.4 million, receiving net cash of $2.3 million, after paying off
$540,000 in mortgage debt and the payment of various closing costs. The new
mortgage bears interest at 9% per annum, requires monthly payments of interest
only and matures in February 2000.
Further in February 1998, the Company financed its unencumbered Valley Ranch
land in the amount of $4.3 million, receiving net cash of $4.1 million after
the payment of various closing costs. The mortgage bears interest at 9.0% per
annum, requires monthly payments of interest only and matures in February 2000.
In March 1998, the Company financed its unencumbered Stagliano and Dalho
land in the amount of $800,000, receiving net cash of $790,000 after the
payment of various closing costs. The mortgage bore interest at 18.5% per
annum, with principal and interest due at maturity in February 1999. The JHL
Connell land was pledged as additional collateral for this loan. In March 1999,
the Company refinanced the mortgage debt secured by these properties along with
the mortgage debt secured by its Bonneau land parcel under the Las Colinas I
term loan in the amount of $703,000. The Company paid an additional $1.5
million in cash to pay off the $2.1 million in mortgage debt and accrued but
unpaid interest.
Also in March 1998, the Company refinanced the mortgage debt secured by its
McKinney Corners I, II, III, IV and V and Dowdy land in the amount of $20.7
million, receiving net cash of $5.9 million after paying off $2.5 million in
mortgage debt, the paydown of $10.2 million on the Las Colinas I term loan and
the payment of various closing costs. The mortgage bore interest at 12.0% per
annum, required monthly payments of interest only and matured in March 1999.
The lender has agreed to extend its mature mortgage to January 2000, for a 2%
fee and a paydown of any net refinancing proceeds received by the Company from
refinancing the Williamsburg Hospitality House. All other terms would remain
unchanged.
In April 1998, the Company obtained a second lien mortgage of $2.0 million
secured by its BP Las Colinas land from the limited partner, at the time, in a
partnership that owned approximately 15.8% of the outstanding shares of the
Company's Common Stock. The second lien mortgage bore interest at 12% per annum
with principal and interest paid at maturity in October 1998. See NOTE 11.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Also in April 1998, the Company refinanced the mortgage debt secured by its
Parkfield land in the amount of $7.3 million, receiving net cash of $1.2
million after paying off $5.0 million in mortgage debt and the payment of
various closing costs. The new mortgage bears interest at 9.5% per annum,
requires monthly payments of interest only and matures in April 2000.
In May 1998, the Company refinanced the mortgage debt secured by its Scout
and Scoggins land in the amount of $10.4 million under the Las Colinas I term
loan, receiving net cash of $6.6 million after paying off mortgage debt of $1.4
million on the Scout land and $1.5 million on the Scoggins land, a pay down of
$250,000 on the Keller land mortgage, and the payment of various closing costs.
The Company also pledged 250,000 shares of its Common Stock and BCM, the
Company's advisor, pledged 177,000 shares of the Company's Common Stock as
additional collateral on the term loan.
In July, the Company financed its unencumbered Walker land in the amount of
$13.3 million, receiving net cash of $12.8 million after the payment of various
closing costs. The mortgage bears interest at 15.5% per annum, requires monthly
payments of interest only and matures in July 1999. The mortgage is also
secured by the FRWM Cummings land.
In August 1998, the Company financed its unencumbered Keller land in the
amount of $5.0 million under the Las Colinas I term loan, receiving net cash of
$4.9 million after the payment of various closing costs.
F-45
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1998, the Company obtained second lien financing of $5.0
million secured by its Katy Road land from the limited partner, at the time, in
a partnership that owned approximately 15.8% of the outstanding shares of the
Company's Common Stock. The second lien mortgage bears interest at 12.5% per
annum, compounded monthly, with principal and interest due at maturity in April
1999. See NOTE 11. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In October 1998, the Company financed its unencumbered Rasor land in the
amount of $15.0 million, receiving net cash of $13.5 million after the payment
of various closing costs. Portions of the Company's Las Colinas and Valwood
land parcels are included as additional collateral. The Company used the
proceeds from this loan along with an additional $1.8 million to payoff the
$15.8 million in mortgage debt secured by its Las Colinas I and Valwood land
parcels. The new mortgage bears interst at 14% per annum, required a principal
reduction payment of $3.0 million in November 1998, requires monthly interest
only payments and matures in September 1999.
Also in October 1998, the Company financed its unencumbered Marine Creek and
HSM land in the amount of $2.8 million under the Las Colinas I term loan,
receiving net cash of $2.7 million after the payment of various closing costs.
In December 1998, the Company financed its unencumbered Valwood land in the
amount of $12.0 million, receiving net cash of $4.7 million after paying down
by $5.5 million the Rasor land mortgage and the payment of various closing
costs. The mortgage bears interest at 13% per annum, requires monthly interest
only payments and matures in December 2000.
Notes payable to affiliates at December 31, 1997 included a $4.2 million
note due to NRLP as payment for the general partner interest in NRLP. The note
bears interest at 10% per annum compounded semi-annually and matures in
September 2007. See NOTE 2. "SYNTEK ASSET MANAGEMENT, L.P."
In 1997, the Company financed six unencumbered properties and refinanced an
additional four properties in the total amount of $80.5 million, receiving net
cash of $32.7 million after paying off $42.7 million in debt. The mortgages
bore interest at rates ranging from 9.0% to 18.5% per annum and matured from
February 1999 to December 2000.
NOTE 10. MARGIN BORROWINGS
The Company has margin arrangements with various brokerage firms which
provide for borrowings of up to 50% of the market value of marketable equity
securities. The borrowings under such margin arrangements are secured by equity
securities of the REITs, NRLP and the Company's trading portfolio of marketable
equity securities and bear interest rates ranging from 7.0% to 11.0% per annum.
Margin borrowings were $35.8 million at December 31, 1998, and $53.4 million at
December 31, 1997, 43.9% and 39.7%, respectively, of the market values of such
equity securities at such dates.
In August 1996, the Company consolidated its existing NRLP margin debt held
by various brokerage firms into a single loan of $20.3 million. In July 1997,
the lender advanced an additional $3.7 million, increasing the loan balance to
$24.0 million. The loan was secured by the Company's NRLP units with a market
value of at least 50% of the principal balance of the loan. The Company paid
down the loan by $14.0 million in September 1998 and an additional $5.0 million
in October 1998. At December 31, 1998, the loan had a principal balance of $5.0
million. In February 1999, the loan was paid off.
F-46
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1998, the Company obtained a $95.0 million line of credit from
Garden Capital, L.P. ("GCLP"), which is a partnership controlled by NOLP. The
Company received fundings of $18.9 million in November 1998, $31.1 million in
December 1998, and an additional $26.7 million in the first quarter of 1999.
The line of credit is secured by second liens on the Company's Waters Edge III,
Edgewater Gardens, Chateau Bayou, and Sunset Apartments, its Rosedale Towers
Office Building, Katy Road land and the stock of its wholly-owned subsidiaries,
NMC, the general partner of Partnership, and ART Holdings, Inc., which owns
3,349,535 NRLP units of limited partner interest. The loan bears interest at
12% per annum, requires monthly interest only payments and matures in November
2003. The Company accounted for its investment in the Partnership under the
equity method until December 1998 when NMC was elected general partner of the
Partnership. As of December 31, 1998, the accounts of the Partnership are
consolidated with those of the Company. The line of credit is eliminated in
consolidation. See NOTE 2 "SYNTEK ASSET MANAGEMENT, L.P."
In August 1996, the Company obtained a $2.0 million loan from a financial
institution secured by a pledge of equity securities of the REITs owned by the
Company and Common Stock of the Company owned by BCM, with a market value at
the time of $4.0 million. The Company received net cash of $2.0 million after
the payment of various closing costs. The loan was paid in full from the
proceeds of a new $4.0 million loan from another financial institution secured
by a pledge of equity securities of the REITs owned by the Company and Common
Stock of the Company owned by BCM with a market value at the time of $10.4
million. The Company received net cash of $2.0 million after paying off the
$2.0 million loan. In January 1998, the lender made an additional $2.0 million
loan. This loan is also secured by a pledge of Common Stock of the Company
owned by BCM with a market value at the time of $4.7 million. The Company
received net cash of $2.0 million. The loans mature in February 2000.
In September 1996, the Company obtained a $2.0 million loan from a financial
institution secured by a pledge of equity securities of the REITs owned by the
Company and Common Stock of the Company owned by BCM with a market value, at
the time, of $9.1 million. The Company received net cash of $2.0 million after
the payment of various closing costs. In October 1998, the lender advanced an
additional $1.0 million, increasing the loan balance to $3.0 million. The loan
matures in January 2000.
In May, June and July 1997, the Company obtained a total of $8.0 million in
mortgage loans from entities and trusts affiliated with the limited partner, at
the time, in a partnership that owned approximately 15.8% of the Company's
outstanding shares of Common Stock. See NOTE 9. "NOTES AND INTEREST PAYABLE."
In January 1998, one of the loans in the amount of $2.0 million was paid off
and in April 1998, a second loan in the amount of $3.0 million was also paid
off. In April 1998, the Company obtained an additional $2.0 million loan from
such entities. In July 1998, the third loan of $3.0 million loan was paid off.
In September 1998, the Company obtained a $5.0 million loan from such entities.
In October 1998, the April $2.0 million loan was paid off. In December 1998,
the Company obtained a $2.0 million loan from such entities. At December 31,
1998, loans with a principal balance of $7.0 million were outstanding, they
bear interest at 12.5% per annum compounded monthly and mature in April 1999
and May 1999. See NOTE 9. "NOTES AND INTEREST PAYABLE."
As of December 31, 1998, the Company sold to BCM three matured mortgage
notes, at their carrying value of $628,000. No gain or loss was recognized on
the sale. See NOTE 3. "NOTES AND INTEREST RECEIVABLE."
NOTE 12. DIVIDENDS
In June 1996, the Board of Directors resumed the payment of quarterly
dividends on the Company's Common Stock. Common dividends totaling $2.3 million
or $.20 per share were declared in 1998, $2.0 million
F-47
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or $.20 per share in 1997 and $1.5 million or $.15 per share in 1996. The
Company reported to the Internal Revenue Service that 100% of the dividends
paid in 1998 and 1996 represented a return of capital and 100% of the dividends
paid in 1997 represented ordinary income.
NOTE 13. PREFERRED STOCK
The Company's Series B 10% Cumulative Convertible Preferred Stock consisted
of a maximum of 4,000 shares with a par value of $2.00 per share and a
liquidation preference of $100.00 per share. Dividends were payable at the rate
of $10.00 per year or $2.50 per quarter to stockholders of record on the 15th
day of each March, June, September and December when and as declared by the
Board of Directors. The Series B Preferred Stock was convertible between May 8,
1998 and June 8, 1998, into Common Stock of the Company at 90% of the average
daily closing price of the Company's Common Stock on the prior 30 trading days.
In May 1998, the 4,000 shares of Series B Preferred Stock outstanding were
converted into 30,211 shares of the Company's Common Stock.
The Company's Series C 10% Cumulative Convertible Preferred Stock consisted
of a maximum of 16,681 shares with a par value of $2.00 per share and a
liquidation preference of $100.00 per share. Dividends were payable at the rate
of $10.00 per year or $2.50 per quarter to stockholders of record on the 15th
day of each March, June, September and December when and as declared by the
Board of Directors. The Series C Preferred Stock was convertible between
November 25, 1998 and February 23, 1999, into Common Stock of the Company at
90% of the average daily closing price of the Company's Common Stock on the
prior 30 trading days. In November 1998, the 16,681 outstanding shares of
Series C Preferred Stock were redeemed at their liquidation preference of
$100.00 per share plus accrued and unpaid dividends.
The Company's Series D 9.5% Cumulative Preferred Stock consists of a maximum
of 91,000 shares with a par value of $2.00 per share and a liquidation
preference of $20.00 per share. Dividends are payable at the rate of $1.90 per
year or $.475 per quarter to stockholders of record on the last day of each
March, June, September and December when and as declared by the Board of
Directors. The Series D Preferred Stock is reserved for the conversion of the
Class A limited partner units of Ocean Beach Partners, L.P. The Class A units
may be exchanged for Series D Preferred Stock at the rate of 20 Class A units
for each share of Series D Preferred Stock. No more than one-third of the Class
A units may be exchanged prior to May 31, 2001. Between June 1, 2001 and May
31, 2006 all unexchanged Class A units are exchangeable. At December 31, 1998,
none of the Series D Preferred Stock was issued.
The Company's Series E 10% Cumulative Convertible Preferred Stock consists
of a maximum of 80,000 shares with a par value of $2.00 per share and a
liquidation preference of $100.00 per share. Dividends are payable at the rate
of $10.00 per year or $2.50 per quarter to stockholders of record on the last
day of each March, June, September and December when and as declared by the
Board of Directors, for periods prior to November 4, 1999 and $11.00 per year
or $2.75 per quarter thereafter. The Series E Preferred Stock is reserved for
the conversion of the Class A limited partner units of Valley Ranch, L.P. The
Class A units may be exchanged for Series E Preferred Stock at the rate of 100
Class A units for each share of Series E Preferred Stock. The Series E
Preferred Stock is convertible into Common Stock of the Company at 80% of the
average daily closing price of the Company's Common Stock on the prior 20
trading days. Only 37.50% of the Series E Preferred Stock may be converted
prior to November 3, 1999. Between November 4, 1999 and November 3, 2001 an
additional 12.50% of the Series E Preferred Stock may be converted, and the
remainder may be converted on or after November 4, 2001. At December 31, 1998,
none of the Series E Preferred Stock was issued.
The Company's Series F 10% Cumulative Convertible Preferred Stock consists
of a maximum of 15,000,000 shares with a par value of $2.00 per share and a
liquidation preference of $10.00 per share. Dividends are payable at the rate
of $1.00 per year or $.25 per quarter to stockholders of record on the last day
of each
F-48
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March, June, September and December when and as declared by the Board of
Directors. The Series F Preferred Stock may be converted, after August 15,
2003, into Common Stock of the Company at 90% of the average daily closing
price of the Company's Common Stock for the prior 20 trading days. At December
31, 1998, 3,350,000 shares of Series F Preferred Stock were issued and
outstanding and 1,948,797 shares were reserved for issuance as future
consideration in various business transactions.
The Company's Series G 10% Cumulative Convertible Preferred Stock consists
of a maximum of 11,000 shares with a par value of $2.00 per share, and a
liquidation preference of $100.00 per share. Dividends are payable at the rate
of $10.00 per year or $2.50 per quarter to stockholders of record on the last
day of each March, June, September and December when and as declared by the
Board of Directors. 10,000 shares of the Series G Preferred Stock are reserved
for the conversion of the Class A limited partner units of Grapevine American,
L.P. The Class A units may be exchanged for Series G Preferred Stock at the
rate of 100 Class A units for each share of Series G Preferred Stock, on or
after October 6, 1999. The Series G Preferred Stock may be converted, after
October 6, 2000, into Common Stock of the Company at 90% of the average daily
closing price of the Company's Common Stock for the 20 prior trading days. At
December 31, 1998, 1,000 shares of the Series G Preferred Stock was issued.
The Company's Series H 10% Cumulative Convertible Preferred Stock consists
of a maximum of 231,750 shares with a par value of $2.00 per share, and a
liquidation preference of $10.00 per share. Dividends are payable quarterly at
the rate of $.70 per year until June 30, 1999, $.80 from July 1, 1999 through
June 30, 2000, $.90 per year from July 1, 2000 through June 30, 2001 and $.10
per year from July 1, 2001 and thereafter, to stockholders of record on the
last day of each March, June, September and December when and as declared by
the Board of Directors. The Series H Preferred Stock is reserved for the
conversion of the Class A limited partner units of ART Palm, L.L.C. The
Class A units may be exchanged for Series H Preferred Stock at the rate of 100
Class A units for each share of Series H Preferred Stock at any time after
July 13, 1999. The Series H Preferred Stock may be converted into 25,000
shares of the Company's Common Stock after December 31, 2000, 25,000 shares on
or after June 30, 20002, 25,000 shares on or after June 30, 2003, 25,000
shares on or after December 31, 2005 and all remaining outstanding shares on
or after December 31, 2006 at 90% of the average daily closing price of the
Company's Common Stock for the 20 prior trading days. At December 31, 1998,
none of the Series H Preferred Stock was issued.
NOTE 14. STOCK OPTIONS
In January 1998, the Company's shareholders approved the 1997 Stock Plan
("Option Plan"). Under the Option Plan, options have been granted to certain
Company officers and key employees of BCM and its affiliates. The Option Plan
provides for options to purchase up to 300,000 shares of the Company's Common
Stock. All grants are determined by the Option Committee of the Board of
Directors. Options granted pursuant to the Option Plan are exercisable
beginning one year after the date of grant and expire the earlier of three
months after termination of employment or ten years from the date of grant.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Options
Exercise -----------------------
Price Outstanding Exercisable
-------- ----------- -----------
<S> <C> <C> <C>
January 1, 1998............................. $ -- -- --
Options granted............................. 15.00 293,750 --
Options forfeited........................... 15.00 ( 17,000) --
------- -------- ---
December 31, 1998........................... $ 15.00 276,750 --
======= ======== ===
</TABLE>
In January 1999, the Company's stockholders approved the Director's Stock
Option Plan ("Director's Plan") which provides for options to purchase up to
40,000 shares of the Company's Common Stock. Options
F-49
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
granted pursuant to the Director's Plan are immediately exercisable and expire
on the earlier of the first anniversary of the date on which a Director ceases
to be a Director or ten years from the date of grant. Each Independent
Director was granted an option to purchase 1,000 shares at an exercise price
of $16.25 per share on January 11, 1999, the date stockholders approved the
plan. Each Independent Director will be awarded an option to purchase an
additional 1,000 shares on January 1 of each year.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its Option Plans. All share options issued by the Company have exercise prices
equal to the market price of the shares at the dates of grant. Accordingly, no
compensation cost has been recognized for its option plans. Had compensation
cost for the Company's option plans been determined based on the fair value at
the grant dates consistent with the method of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation,", the
Company's net loss and loss per share would have been increased to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
1998
---------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Net (loss) applicable to common shares............... $(23,982) $(24,374)
Net (loss) applicable to common shares, per share ... (2.24) (2.38)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Dividend yield......................................................... 1.25%
Expected volatility.................................................... 30%
Risk-free interest rate................................................ 5.35%
Expected lives (in years).............................................. 7
Forfeitures............................................................ 10%
</TABLE>
The weighted average fair value per share of options granted in 1998 was
$5.67.
NOTE 15. ADVISORY AGREEMENT
Although the Board of Directors is directly responsible for managing the
affairs of the Company and for setting the policies which guide it, the day-
to-day operations of the Company are performed by BCM, a contractual advisor
under the supervision of the Board of Directors. The duties of the advisor
include, among other things, locating, investigating, evaluating and
recommending real estate and mortgage loan investment and sales opportunities
as well as financing and refinancing sources. BCM as advisor also serves as a
consultant in connection with the Company's business plan and investment
policy decisions made by the Board of Directors.
BCM has been providing advisory services to the Company since February 6,
1989. BCM is a company owned by a trust for the benefit of the children of
Gene E. Phillips. Mr. Phillips served as Chairman of the Board and as a
Director of the Company until November 16, 1992. Mr. Phillips also served as a
director of BCM until December 22, 1989, and as Chief Executive Officer of BCM
until September 1, 1992. Mr. Phillips serves as a representative of the trust
for the benefit of his children that owns BCM and, in such capacity, has
substantial contact with the management of BCM and input with respect to BCM's
performance of advisory services to the Company. Karl L. Blaha, President and
a Director of the Company serves as Executive Vice President--Commercial Asset
Management of BCM.
The Advisory Agreement provides that BCM shall receive base compensation at
the rate of 0.125% per month (1.5% on an annualized basis) of the Company's
Average Invested Assets. On October 23, 1991, based
F-50
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on the recommendation of BCM, the Board of Directors approved a reduction in
BCM's base advisory fee by 50% effective October 1, 1991. This reduction
remains in effect until the Company's earnings for the four preceding quarters
equals or exceeds $.50 per share.
In addition to base compensation, the Advisory Agreement provides that BCM,
or an affiliate of BCM, receive an acquisition fee for locating, leasing or
purchasing real estate for the Company; a disposition fee for the sale of each
equity investment in real estate; a loan arrangement fee; an incentive fee
equal to 10% of net income for the year in excess of a 10% return on
stockholders' equity, and 10% of the excess of net capital gains over net
capital losses, if any; and a mortgage placement fee, on mortgage loans
originated or purchased.
The Advisory Agreement further provides that BCM shall bear the cost of
certain expenses of its employees not directly identifiable to the Company's
assets, liabilities, operations, business or financial affairs; and
miscellaneous administrative expenses relating to the performance of its duties
under the Advisory Agreement.
If and to the extent that the Company shall request BCM, or any director,
officer, partner or employee of BCM, to render services to the Company other
than those required to be rendered by BCM under the Advisory Agreement, such
additional services, if performed, will be compensated separately on terms
agreed upon between such party and the Company from time to time. The Company
has requested that BCM perform loan administration functions, and the Company
and BCM have entered into a separate agreement, as described below.
The Advisory Agreement automatically renews from year to year unless
terminated in accordance with its terms. Management believes that the terms of
the Advisory Agreement are at least as fair as could be obtained from
unaffiliated third parties. Since October 4, 1989, BCM has acted as loan
administration/servicing agent for the Company, under an agreement terminable
by either party upon thirty days' notice, under which BCM services the
Company's mortgage notes and receives as compensation a monthly fee of .125% of
the month-end outstanding principal balances of the mortgage notes serviced.
NOTE 16. PROPERTY MANAGEMENT
Since February 1, 1990, affiliates of BCM have provided property management
services to the Company. Currently, Carmel Realty Services, Ltd. ("Carmel,
Ltd.") provides property management services for a fee of 5% or less of the
monthly gross rents collected on the properties under its management. Carmel,
Ltd. subcontracts with other entities for property-level management services to
the Company at various rates. The general partner of Carmel, Ltd. is BCM. The
limited partners of Carmel, Ltd. are (1) First Equity Properties, Inc. ("First
Equity"), which is 50% owned by a subsidiary of BCM, (2) Gene E. Phillips and
(3) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd.
subcontracts the property-level management of 15 of the Company's commercial
properties (office buildings, shopping centers and a merchandise mart) and its
hotels to Carmel Realty, Inc. ("Carmel Realty"), which is a company owned by
First Equity. Carmel Realty is entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Carmel, Ltd.
F-51
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to BCM and its affiliates were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Fees
Advisory and mortgage servicing.................... $ 3,845 $ 2,657 $1,539
Loan arrangement................................... 804 592 806
Brokerage commissions.............................. 7,450 7,586 1,889
Property and construction management and leasing
commissions*...................................... 1,752 865 892
------- ------- ------
$13,851 $11,700 $5,126
======= ======= ======
Cost reimbursements................................. $ 1,832 $ 1,809 $ 691
======= ======= ======
</TABLE>
- --------
*Net of property management fees paid to subcontractors, other than Carmel
Realty.
F-52
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 18. OPERATING SEGMENTS
Significant differences among the accounting policies of the segments as
compared to the Company's consolidated financial statements principally involve
the calculation and allocation of administrative expenses. Management evaluates
the performance of its operating segments and allocates resources to them based
on net operating income and cash flow. The Company based reconciliation of
expenses that are not reflected in the segments is $8.2 million of
administrative expenses. There are no intersegment revenues and expenses and
the Company conducts all of its business within the United States.
The table below presents information about the reported operating income of
the Company for 1998 and 1997. Asset information by operating segment is also
presented below.
<TABLE>
<CAPTION>
Commercial
Properties Apartments Hotels Land PWSI Receivables Other Total
---------- ---------- ------- -------- ------- ----------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
- ----
Operating revenue....... $16,539 $ 14,230 $32,221 $ 501 $28,883 $ -- $-- $ 92,374
Operating expenses...... 9,727 8,755 24,361 6,349 24,840 -- -- 74,032
Interest income......... -- -- -- -- -- 188 -- 188
------- -------- ------- -------- ------- ------ ----- --------
Net operating income
(loss)................. 6,812 5,475 7,860 (5,848) 4,043 188 -- 18,530
Depreciation and
amortization........... 1,574 1,412 2,320 -- 1,273 -- 411 6,990
Interest on debt........ 3,803 4,396 7,560 29,058 579 -- 6,228 51,624
Capital expenditures.... 110 -- 1,383 2,577 166 -- -- 4,236
Segment assets.......... 87,581 286,317 78,455 282,300 24,449 52,053 253 811,408
</TABLE>
<TABLE>
<CAPTION>
Land
-------
<S> <C>
Property sales:
Sales price..................................................... $51,602
Cost of sales................................................... 34,348
-------
Gain on sale.................................................... $17,254
=======
</TABLE>
<TABLE>
<CAPTION>
Commercial
Properties Hotels Land PWSI Receivables Other Total
---------- ------- ------- ------- ----------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
- ----
Operating revenue....... $13,842 $14,944 $ 289 $24,953 $ -- $ -- $54,028
Operating expenses...... 10,006 11,232 2,957 19,964 -- -- 44,159
Interest income......... -- -- -- -- 2,835 -- 2,835
------- ------- ------- ------- ------ ----- -------
Net operating income
(loss)................. 3,836 3,712 (2,668) 4,989 2,835 -- 12,704
Depreciation and
amortization........... 1,266 973 -- 677 626 3,542
Interest on debt........ 3,252 2,698 20,573 935 -- 2,773 30,231
Capital expenditures.... 8,855 1,568 570 2,695 -- -- 13,688
Segment assets.......... 50,185 73,072 178,938 18,271 25,526 258 346,250
</TABLE>
<TABLE>
<CAPTION>
Commercial
Properties Land
---------- -------
<S> <C> <C>
Property sales:
Sales price.................................................. $10,986 $52,970
Cost of sales................................................ 10,400 36,427
------- -------
Gain on sale................................................. $ 586 $16,543
======= =======
</TABLE>
F-53
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19. INCOME TAXES
Financial statement loss varies from federal tax return loss, principally
due to the accounting for income and losses of investees, gains and losses from
asset sales, depreciation on owned properties, amortization of discounts on
notes receivable and the difference in the allowance for estimated losses. At
December 31, 1998, the Company had tax net operating loss carryforwards of
$29.0 million expiring through 2018.
At December 31, 1998, the Company had a deferred tax benefit of $8.0 million
due to tax deductions available to it in future years. However, due to, among
other factors, the Company's inconsistent earnings history, the Company was
unable to conclude that the future realization of such deferred tax benefit,
which requires the generation of taxable income, was more likely than not.
Accordingly, a valuation allowance for the entire amount of the deferred tax
benefit has been recorded.
NOTE 20. EXTRAORDINARY GAIN
In 1996, the Company recognized an extraordinary gain of $381,000
representing its equity share of equity investees' extraordinary gains from the
early payoff of debt and from an insurance settlement.
NOTE 21. RENTS UNDER OPERATING LEASES
The Company's operations include the leasing of commercial properties
(office buildings, shopping centers and a merchandise mart). The leases thereon
expire at various dates through 2013. The following is a schedule of minimum
future rents under non-cancelable operating leases as of December 31, 1998:
<TABLE>
<S> <C>
1999................................................................. $11,248
2000................................................................. 9,390
2001................................................................. 7,273
2002................................................................. 6,518
2003................................................................. 5,833
Thereafter........................................................... 16,294
-------
$56,556
=======
</TABLE>
PWSI conducts its operations from leased facilities which includes an
office, warehouse, and 57 pizza parlor locations for which a lease was signed
and the pizza parlor was either open at December 31, 1998 or scheduled to open
thereafter. The leases expire over the next 14 years. PWSI also leases vehicles
under operating leases. The following is a schedule of minimum future rent
commitments under operating leases as of December 31, 1998:
<TABLE>
<S> <C>
1999................................................................. $ 2,318
2000................................................................. 2,271
2001................................................................. 2,130
2002................................................................. 2,039
2003................................................................. 1,922
Thereafter........................................................... 9,187
-------
$19,867
=======
</TABLE>
Total facilities and automobile rent expense relating to these leases was
$2.7 million in 1998 and $1.3 million in 1997.
F-54
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 22. QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the Company's quarterly results of
operations for the years 1998 and 1997 (unaudited):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1998
Revenue....................... $ 18,249 $ 22,690 $ 23,291 $ 22,856
Expense....................... 29,744 35,830 38,676 60,861
-------- -------- -------- ---------
(Loss) from operations........ (11,495) (13,140) (15,385) (38,005)
Equity in income of
investees.................... 2,387 18,943 6,099 10,537
Gains on sale of real estate.. -- 8,974 5,718 2,562
-------- -------- -------- ---------
Net income (loss)............. (9,108) 14,777 (3,568) (24,906)
Preferred dividend
requirement.................. (51) (84) (502) (540)
-------- -------- -------- ---------
Net income (loss) applicable
to Common shares............. $ (9,159) $ 14,693 $ (4,070) $ (25,446)
======== ======== ======== =========
Earnings per share
Net income (loss)............. $ (.86) $ 1.38 $ (.38) $ (2.38)
======== ======== ======== =========
<CAPTION>
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1997
Revenue....................... $ 12,126 $ 12,100 $ 15,039 $ 17,766
Expense....................... 16,288 18,364 24,296 31,304
-------- -------- -------- ---------
(Loss) from operations........ (4,162) (6,264) (9,257) (13,538)
Equity in income of
investees.................... 146 4,941 (145) 5,555
Gains on sale of real estate.. 4,287 3,863 3,205 8,941
-------- -------- -------- ---------
Net income (loss)............. 271 2,540 (6,197) 958
Preferred dividend
requirement.................. (50) (49) (49) (58)
-------- -------- -------- ---------
Net income (loss) applicable
to Common shares............. $ 221 $ 2,491 $ (6,246) $ 900
======== ======== ======== =========
Earnings per share
Net income (loss)............. $ .02 $ .21 $ (.52) $ .07
======== ======== ======== =========
</TABLE>
NOTE 23. COMMITMENTS AND CONTINGENCIES
Liquidity. Although the Company anticipated that it would generate excess
cash from operations in 1998, such excess cash did not materialize and,
therefore, was not sufficient to discharge all of the Company's debt
obligations as they became due. The Company relied on additional borrowings
and, to a lesser extent, land sales to meet its cash requirements. In 1999, the
Company expects that it will generate excess cash from operations, due to
increased rental rates and occupancy at its properties, however, such excess
will not be sufficient to discharge all of the Company's debt obligations as
they mature. The Company will also rely on aggressive land sales, selected
property sales and, to the extent necessary, additional borrowings to meet its
cash requirements.
Litigation. The Company is involved in various lawsuits arising in the
ordinary course of business. In the opinion of the Company's management the
outcome of these lawsuits will not have a material impact on the Company's
financial condition, results of operations or liquidity.
F-55
<PAGE>
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24. SUBSEQUENT EVENTS
In January 1999, the Partnership sold the 199 unit Olde Towne Apartments in
Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after the
payment of various closing costs. A gain will be recognized on the sale.
In February 1999, the Company purchased Frisco Bridges land, a 336.8 parcel
of unimproved land in Collin County, Texas, for $46.8 million. The Company paid
$7.8 million in cash and obtained mortgage financing totaling $39.0 million.
Seller financing in the amount of $22.0 million, secured by 191.5 acres of the
parcel, bears interest at 14% per annum, requires monthly interest only
payment, and matures in January 2000. A mortgage in the amount of $15.0
million, secured by 125.0 acres of the parcel, bears interest at the prime rate
plus 4.5%, currently 12.25% per annum, requires three quarterly principal
reduction payments of $3.0 million on each of May 1, August 1 and November 1,
1999 in addition to monthly interest payments and matures in February 2000.
Another mortgage in the amount of $2.0 million, secured by 13.5 acres of the
parcel, bears interest at 14% per annum, requires monthly interest only
payments and matures in January 2000. The Company's Double O land in Las
Colinas, Texas and its Desert Wells land in Palm Desert, California are pledged
as additional collateral for these loans. The Company drew down $6.0 million
under its line of credit with the CCLP, for a portion of the cash requirement.
Also in February 1999, the Company sold a 4.6 acre tract of its Plano
Parkway land parcel, for $1.2 million. Simultaneously with the sale, the
mortgage debt secured by such land parcel was refinanced in the amount of $7.1
million. The new mortgage bears interest at the prime rate plus 4.5%, currently
12.25% per annum, requires monthly interest only payments and matures in
January 2000. The net cash from the sale and refinancing along with an
additional $921,000 were used to payoff the $8.9 million mortgage secured by
the land parcel.
Further in February 1999, the Partnership sold the 225 unit Santa Fe
Apartments in Kansas City, Missouri, for $4.6 million, receiving net cash of
$4.3 million after the payment of various closing costs. A gain will be
recognized on the sale.
In February 1999, the Partnership sold the 480 unit Mesa Ridge Apartments in
Mesa, Arizona, for $19.5 million, receiving net cash of $793,000 after the
payment of various closing costs and remitting $17.8 million to the lender to
hold in escrow pending a substitution of collateral. Such funds will be
released when substitute collateral is approved. If substitute collateral is
not provided by August 1999, $13.0 million of the escrow will be applied
against the mortgage's principal balance, approximately $885,000 will be
retained by the lender as a prepayment penalty and the remaining $3.9 million
will be returned to the Partnership. A gain will be recognized on the sale.
Also in February 1999, GCLP funded a $5.0 million unsecured loan to Davister
Corp., which at December 31, 1998, owned approximately 15.8% of the outstanding
shares of the Company's Common Stock. The loan bears interest at 12.0% per
annum and matures in February 2000. All principal and interest are due at
maturity. The loan is guaranteed by BCM.
In March 1999, the Company sold two tracts totaling 9.9 acres of its
Mason/Goodrich land parcel, for $956,000, receiving net cash of $33,000 after
paying down by $860,000 the mortgage secured by such land parcel and the
payment of various closing costs. A gain will be recognized on the sale.
Also in March 1999, the Company sold a 13.7 acre tract of its McKinney
Corners II and IV land parcels, for $7.7 million, receiving no net cash after
paying down by $5.5 million the mortgage debt secured by such land parcels, the
funding of required escrows and the payment of various closing costs. A gain
will be recognized on the sale.
F-56
<PAGE>
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of National Realty, L.P., all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of consolidated results of
operations, consolidated financial position and consolidated cash flows at the
dates and for the periods indicated, have been included.
NATIONAL REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(dollars in thousands)
<S> <C> <C>
Assets
Real estate held for investment
Land............................................. $ 37,462 $ 39,400
Buildings and improvements....................... 302,381 325,779
--------- ---------
339,843 365,179
Less--accumulated depreciation................... (167,550) (197,770)
--------- ---------
172,293 167,409
Notes and interest receivable
Performing (including $116,889 in 1999 and
$62,357 in 1998 from affiliates)................ 139,946 109,628
Nonperforming.................................... 13,936 6,807
--------- ---------
153,882 116,435
Less--allowance for estimated losses............. (1,910) (1,910)
--------- ---------
151,972 114,525
Cash and cash equivalents.......................... 705 9,025
Accounts receivable (including $8,748 in 1999 and
$11,046 in 1998 from affiliates).................. 11,316 12,316
Prepaid expenses................................... 832 1,230
Escrow deposits and other assets (including $730 in
1998 from affiliates)............................. 7,146 20,506
Marketable equity securities of affiliate, (at
market)........................................... 3,156 3,205
Deferred financing costs........................... 8,728 9,566
--------- ---------
$ 356,148 $ 337,782
========= =========
</TABLE>
F-57
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED BALANCE SHEETS--(Continued)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Partners' Equity (Deficit)
Liabilities
Notes and interest payable........................ $297,975 $358,100
Accrued property taxes............................ 4,923 7,121
Accounts payable and other liabilities (including
$1,114 in 1999 to affiliates).................... 2,407 1,757
Tenant security deposits.......................... 2,444 2,919
-------- --------
307,749 369,897
Commitments and contingencies
Partners' equity (deficit)
General Partner................................... 1,242 (408)
Limited Partners (6,321,524 units in 1999 and
6,321,609 in 1998)............................... 44,271 (34,642)
Unrealized gain on marketable equity securities of
affiliate........................................ 2,886 2,935
-------- --------
48,399 (32,115)
-------- --------
$356,148 $337,782
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-58
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
1999 1998 1999 1998
---------- ---------- --------- ---------
(dollars in thousands, except per unit)
<S> <C> <C> <C> <C>
Revenues
Rents............................ $ 21,884 $ 26,036 $ 69,039 $ 81,197
Interest......................... 4,610 1,861 13,182 4,464
---------- ---------- --------- ---------
26,494 27,897 82,221 85,661
Expenses
Interest......................... 7,324 6,572 21,398 23,483
Deferred borrowing costs......... -- 2,607 -- 10,346
Depreciation..................... 1,951 2,618 6,051 7,432
Property taxes & insurance....... 2,227 2,584 7,015 8,196
Utilities........................ 2,122 2,601 6,557 8,247
Property-level payroll costs..... 1,404 1,656 3,972 4,944
Repairs and maintenance.......... 5,545 7,351 15,477 18,821
Other operating expenses......... 777 1,022 2,755 3,365
Property management fees......... 1,097 1,294 3,446 3,668
General and administrative....... 1,529 1,524 5,492 5,075
General partner incentive
disposition fee................. 200 -- 1,148 --
---------- ---------- --------- ---------
24,176 29,829 73,311 93,577
---------- ---------- --------- ---------
Income (loss) from operations...... 2,318 (1,932) 8,910 (7,916)
Gain on sale of real estate........ 49,614 5,583 74,019 34,216
---------- ---------- --------- ---------
Net income......................... $ 51,932 $ 3,651 $ 82,929 $ 26,300
========== ========== ========= =========
Earnings per unit
Net income......................... $ 8.05 $ .57 $ 12.86 $ 4.08
========== ========== ========= =========
Weighted average units of limited
partner interest used in computing
earnings per unit................. 6,321,525 6,321,622 6,321,533 6,322,528
========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-59
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Accumulated Accumulated
Other Partners'
General Limited Comprehensive Equity
Partner Partners Income (Deficit)
------- -------- ------------- -----------
(dollars in thousands, except per unit)
<S> <C> <C> <C> <C>
Balance, January 1, 1999........... $ (408) $(34,642) $2,935 $(32,115)
Comprehensive income
Unrealized (loss) on marketable
equity securities of affiliate.. -- -- (49) (49)
Net income....................... 1,650 81,279 -- 82,929
--------
82,880
Distributions ($.375 per unit)..... -- (2,366) -- (2,366)
------ -------- ------ --------
Balance, September 30, 1999........ $1,242 $ 44,271 $2,886 $ 48,399
====== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-60
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
-------------------
1999 1998
-------- ---------
(dollars in
thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Rents collected.......................................... $ 69,404 $ 78,897
Interest collected....................................... 8,189 2,768
Interest paid............................................ (19,707) (22,145)
Payments for property operations......................... (40,974) (50,765)
General and administrative expenses paid................. (4,228) (5,045)
Other.................................................... (173) --
-------- ---------
Net cash provided by operating activities.............. 12,511 3,710
Cash Flows From Investing Activities
Proceeds from sale of real estate........................ 102,559 51,995
Acquisition of real estate............................... (7,248) --
Real estate improvements................................. (13,092) (1,650)
Collections on notes receivable.......................... 18,365 22,632
Funding of notes receivable.............................. (83,310) (24,539)
General partner incentive disposition fee................ (1,148) --
-------- ---------
Net cash provided by investing activities.............. 16,126 48,438
Cash Flows From Financing Activities
Proceeds from notes payable.............................. 53,376 327,057
Payments on notes payable................................ (96,240) (332,822)
Escrow refunds........................................... 8,204 --
Reimbursements from (advances to) affiliates............. 2,298 (7,319)
Distributions to unitholders............................. (2,366) (2,373)
Distributions to Garden Capital, L.P. general partners... (934) (1,098)
Deferred financing costs................................. (1,025) (10,143)
Deposits on pending financings........................... (270) (425)
-------- ---------
Net cash (used in) financing activities................ (36,957) (27,123)
-------- ---------
Net increase (decrease) in cash and cash equivalents... (8,320) 25,025
Cash and cash equivalents at beginning of period........... 9,025 17,180
-------- ---------
Cash and cash equivalents at end of period................. $ 705 $ 42,205
======== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-61
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
------------------
1999 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities
Net income................................................. $ 82,929 $ 26,300
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................. 6,051 7,432
Amortization of deferred borrowing costs................. 1,772 2,649
Deferred borrowing costs written off..................... -- 10,346
Gain on sale of real estate.............................. (74,019) (34,216)
(Increase) in other assets............................... (1,678) (2,273)
(Increase) in interest receivable........................ (4,671) (924)
(Decrease) in interest payable........................... (81) (1,572)
Increase (decrease) in other liabilities................. 2,208 (4,032)
-------- --------
Net cash provided by operating activities.............. $ 12,511 $ 3,710
======== ========
Schedule of noncash financing activities:
Unrealized gain (loss) on marketable equity securities... $ (49) $ 172
Notes payable assumed by buyer upon sale of properties... 6,776 8,584
Conversion of note receivable to partnership interest.... 22,678 --
Note payable from acquisition of real estate............. 974 --
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-62
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements of National Realty, L.P.
and consolidated entities (the "Partnership") have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the nine month period ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K").
Certain balances for 1998 have been reclassified to conform to the 1999
presentation.
NOTE 2. ORGANIZATION
National Realty, L.P. ("National Realty") is a limited partnership which
commenced operations on September 18, 1987, when National Operating, L.P. (the
"Operating Partnership" or "NOLP") acquired all of the assets and assumed all
of the liabilities, of 35 public and private limited partnerships.
National Realty is the sole limited partner of the Operating Partnership and
owns 99% of the beneficial interest in the Operating Partnership. The general
partner and owner of 1% of the beneficial interest in each of National Realty
and the Operating Partnership is NRLP Management Corp. (the "General Partner"
or "NMC"). NMC is a wholly-owned subsidiary of American Realty Trust, Inc.
("ART"), a publicly held real estate investment company. As of October 29,
1999, ART owned approximately 56.2% of National Realty's outstanding units of
limited partner interest.
In November 1992, the Partnership refinanced 52 of its apartments and a
wraparound mortgage note receivable with a financial institution. To facilitate
the refinancing, the Operating Partnership transferred those assets to Garden
Capital, L.P. ("GCLP"). The Operating Partnership is the sole limited partner
with a 99.3% limited partner interest in GCLP. GCLP transferred the acquired
apartment net assets, in exchange for a 99% limited partner interest in single
asset limited partnerships which were formed for the purpose of operating,
refinancing and holding title to the apartments. Each of the remaining single
asset limited partnerships has no significant assets other than an apartment
encumbered by mortgage debt. Garden National Realty, Inc. ("GNRI"), a wholly-
owned subsidiary of ART, is the .7% general partner of GCLP and 1% general
partner of the single asset partnerships.
NOTE 3. EARNINGS PER UNIT
Income per unit of limited partner interest (per "unit") is presented in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share". Income per unit is computed based upon the weighted average number
of units outstanding during each period. The limited partners of National
Realty have a 99% interest and the general partner, NMC, has a 1% interest in
the net income, net loss and distributions of National Realty. National Realty
is allocated 99% of the net income or net loss of NOLP, and the General Partner
is allocated 1% of the net income or net loss of the Operating Partnership. The
1% General Partner interest in each of National Realty and the Operating
Partnership is equal to a 1.99% interest on a combined basis. Accordingly,
income per unit of limited partner interest is derived by multiplying the
Partnership's net income by 98.01% and dividing the result by the weighted
average number of units outstanding in each period.
F-63
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. NOTES RECEIVABLE
In January 1999, the Partnership collected in full a mortgage note
receivable with a principal balance of $350,000. In May 1999, the Partnership
collected in full a mortgage note receivable with a principal balance of $1.5
million. In both cases, the monies were applied to paydown a note payable
partially secured by the mortgage notes.
In July 1999, the Partnership received $1.3 million in full payment of a
mortgage note receivable, including a $400,000 participation fee.
In June 1999, a mortgage note receivable from an affiliate of JNC
Enterprises, Ltd. ("JNC"), in the amount of $4.2 million, matured. The note is
secured by (1) a first lien on approximately 450 acres of land in Huerfano
County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) an
assignment of a $2.0 million promissory note which is secured by approximately
2,623 acres of land in Taos County, New Mexico, known as Ski Rio Resort; and
(3) a pledge of all related partnership interests. In August 1999, the
Partnership received a paydown of $2.3 million on the note receivable, a
portion of the proceeds from the loan funding described in the following
paragraph. In September 1999, the Partnership received a paydown of
$1.0 million in exchange for extending the note's maturity to October 1999.
In August 1999, the Partnership funded a $2.6 million loan to JNC. The loan
is secured by second liens on a 3.55 acre parcel and a 1.2561 acre parcel of
land in Dallas, Texas, and the personal guaranty of JNC's principal partner.
The loan bears interest at 16.0% per annum and matures in February 2000. All
principal and interest are due at maturity.
Also in August 1999, a mortgage note receivable in the amount of $942,000
matured. The loan was secured by 4.5 acres of land in Abilene, Texas,
collateral assignment of a $220,000 note receivable and the personal guarantees
of the principal owners of the borrower. The loan bore interest at 14.0% per
annum and all principal and interest were due at maturity. The borrower did not
make the required payments of principal and interest and the loan is classified
as nonperforming in the September 30, 1999 Consolidated Balance Sheet. The
Partnership is negotiating a modification/extension with the borrower. If such
negotiation is not successful, and the Partnership forecloses, it expects to
incur no loss as the fair value of the collateral property, less estimated
costs of sale, exceeds the carrying value of the note.
During 1998 and through August 1999, the Partnership funded a total of $2.1
million of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The
loan is secured by 129.77 acres of land in Riverside County, California, and a
pledge of the stock of the borrower. The loan bears interest at 15.0% per annum
and matures in November 1999. All principal and interest are due at maturity.
During 1998 and 1999, the Partnership funded a total of $31.0 million of a
$52.5 million loan commitment to Centura Tower, Ltd ("Centura"). The loan was
secured by 2.244 acres of land and an office building under construction in
Farmers Branch, Texas. The loan bore interest at 12.0% per annum, required
monthly payments based on net revenues after development of the land and
building and matured in January 2003. In August 1999, the Partnership exercised
a participation option included in the loan agreement. The Partnership
F-64
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. NOTES RECEIVABLE (Continued)
obtained a combined 80% general and limited partnership interest in Centura in
exchange for a $24.1 million capital contribution through conversion of a
portion of the Partnership's note receivable. The $8.3 million balance of the
note receivable continues as a loan to Centura from the Partnership, bears
interest at a rate of 18.0% per annum, and is payable from cash flows of the
project. Centura's other partners will earn a 12% preferred return on their
respective capital accounts. In conjunction with the exercise of the
participation, Centura obtained a construction loan commitment in the total
amount of $30.0 million, which was finalized in October 1999. The loan bears
interest at a variable rate, currently 9.4725% per annum, and matures in
June 2001. Interest is payable monthly, with the first $2.0 million of interest
being drawn from the loan proceeds. The loan is guaranteed by NOLP, NRLP, GCLP
and Basic Capital Management, Inc, ("BCM"), an affiliate of the General
Partner. In October 1999, Centura received its first draw of $5.0 million under
the loan agreement. The Partnership consolidates Centura for financial
statement purposes.
In June 1998, the Partnership funded a $365,000 loan to RB Land & Cattle,
L.L.C. The loan is secured by 7,200 acres of undeveloped land near Crowell,
Texas, and the personal guarantee of the borrower. The loan bore interest at
10.0% per annum and matured in December 1998. All principal and interest were
due at maturity. The borrower did not make the required payments and the loan
was classified as nonperforming. The Partnership has begun foreclosure
proceedings. The Partnership expects to incur no loss on foreclosure as the
fair value of the collateral property, less estimated costs of sale, exceeds
the carrying value of the note.
In August 1998, the Partnership funded a $6.0 million loan to Centura
Holdings, LLC, a subsidiary of Centura Tower, Ltd. The loan is secured by
6.4109 acres of land in Farmers Branch, Texas, bears interest at 15.0% per
annum and matures in August 2000. All principal and interest are due at
maturity. In February 1999, the Partnership funded an additional $37,500.
Also in August 1998, the Partnership funded a $3.7 million loan to JNC. The
loan was secured by a contract to purchase 387 acres of land in Collin County,
Texas, and the personal guaranty of JNC's principal partner. The loan bore
interest at 12.0% per annum and matured the earlier of termination of the
purchase contract or February 1999. All principal and interest were due at
maturity. This loan was cross-collateralized with the other JNC loans. In
January 1999, ART purchased the contract from JNC and acquired the land. In
connection with the purchase, GCLP funded $6.0 million on a then $95.0 million
loan commitment to ART. A portion of the funds were used to payoff the $3.7
million JNC note to the Partnership, including accrued but unpaid interest,
paydown $1.3 million on the JNC line of credit and paydown $820,000 of the JNC
Frisco Panther Partners, Ltd. loan discussed below. See "Related Party."
Further in August 1998, the Partnership funded a $635,000 loan to La Quinta
Partners, LLC. The loan is secured by interest bearing accounts prior to being
used as escrow deposits toward the purchase of a total of 956 acres of land in
La Quinta, California. The loan bore interest at 10.0% per annum and matured in
November 1998. All principal and interest were due at maturity. In November and
December 1998, the Partnership received a total of $250,000 in principal
paydowns. In the first quarter of 1999, the Partnership received an additional
$25,000 paydown. In the second quarter of 1999, the loan was modified,
increasing the interest rate to 15.0% per annum and extending the maturity date
to November 1999. Accrued but unpaid interest was added to the principal
balance, increasing it by $42,000 to $402,000.
In 1997 and 1998, the Partnership funded a $3.8 million loan to Stratford &
Graham Developers, L.L.C. The loan is secured by 1,485 acres of unimproved land
in Riverside County, California. In the first nine months of 1999, the
Partnership funded an additional $316,000, increasing the loan balance to $4.1
million. The loan bore interest at 15.0% per annum and matured in June 1999.
All principal and interest were due at maturity. The borrower did not make the
required payments at the loan's maturity and the loan was classified as
F-65
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. NOTES RECEIVABLE (Continued)
nonperforming. The Partnership has begun foreclosure proceedings. No loss is
expected on foreclosure as the fair value of the collateral property, less
estimated costs of sale, exceeds the carrying value of the note.
In October 1998, the Partnership funded three loans to JNC or affiliated
entities. The first JNC loan of $1.0 million was secured by a second lien on
3.5 acres of land in Dallas, Texas, and the personal guaranty of JNC's
principal partner. The loan bore interest at 14.0% per annum and matured in
October 1999. All principal and interest were due at maturity. This loan was
paid in full in July 1999. The second loan, also $1.0 million, was secured by a
second lien on 2.92 acres of land in Dallas, Texas, and the personal guaranty
of JNC's principal partner. The loan bore interest at 14.0% per annum and
matured in October 1999. All principal and interest were due at maturity. This
loan was paid in full in March 1999. The third loan, in the amount of
$2.1 million, was to Frisco Panther Partners, Ltd. The loan is secured by a
second lien on 408.23 acres of land in Frisco, Texas, and the personal guaranty
of JNC's principal partner. The loan bears interest at 14.0% per annum and
matured in October 1999. All principal and interest are due at maturity. This
loan is cross-collateralized with the other JNC loans funded by the
Partnership. In January 1999, the Partnership received a paydown of $820,000 on
the Frisco Panther Partners, Ltd. loan, as discussed above.
In March 1998, the Partnership ceased receiving the required payments on a
$3.0 million note receivable secured by an office building in Dallas, Texas. In
October 1998, the Partnership began foreclosure proceedings. In March 1999, the
Partnership received payment in full, including accrued but unpaid interest.
In December 1998, the Partnership funded $3.3 million of a $5.0 million loan
commitment to JNC. The loan is secured by a second lien on 1,791 acres of land
in Denton County, Texas, and a second lien on 220 acres of land in Tarrant
County, Texas. The loan bears interest at 12.0% per annum and matures in
December 1999. All principal and interest are due at maturity. The loan is
cross-collateralized with the other JNC loans funded by the Partnership. In
January 1999, the Partnership received a $1.3 million paydown. In the first
half of 1999, the Partnership funded an additional $3.0 million, increasing the
loan balance to $5.0 million.
At December 1998, the Partnership's one wraparound mortgage note receivable
was in default. The Partnership has been vigorously pursuing its rights
regarding the loan. If the Partnership should be unsuccessful, and the
underlying lien holder forecloses the collateral property, the Partnership will
incur no loss in excess of previously established reserves.
Related Party. In 1998 and the first nine months of 1999, GCLP funded $94.7
million of a then $95.0 million loan commitment to ART. The loan is secured by:
(1) second liens on an office building in Minnesota, three apartments in
Mississippi and one in Texas, and 130.54 acres of land in Texas, (2) the stock
of ART Holdings, Inc., a wholly-owned subsidiary of ART that owned 3,268,535
National Realty units of limited partnership as of October 29, 1999, and (3)
the stock of NMC. The loan bears interest at 12.0% per annum, requires monthly
payments of interest only and matures in November 2003. In September 1999, the
board of GCLP approved an increase in the loan commitment to $125.0 million. In
February 1999, GCLP received a $999,000 paydown on the loan. In October 1999,
GCLP funded an additional $5.5 million and received a paydown of $150,000.
In February 1999, GCLP funded a $5.0 million unsecured loan to Davister
Corp., which at September 30, 1999, owned approximately 15.8% of the
outstanding shares of ART's common stock. The loan bears interest at 12.0% per
annum and matures in February 2000. All principal and interest are due at
maturity. The loan is guaranteed by BCM.
Beginning in 1997 and through January 1999, the Partnership funded a $1.6
million loan commitment to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The
loan is secured by (1) a 100% interest in Bordeaux,
F-66
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4. NOTES RECEIVABLE (Continued)
which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock
of Bordeaux Investments One, Inc., which owns 6.5 acres of unimproved land in
Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux
partners. The loan bears interest at 14.0% per annum. Until November 1998, the
loan required monthly payments of interest only at the rate of 12.0% per annum,
with the deferred interest payable at maturity in January 1999. In November
1998, the loan was modified to allow payments based on monthly cash flow of the
collateral property and the maturity date was extended to December 1999. In the
second quarter of 1999, the loan was again modified, increasing the loan
commitment to $2.1 million and the Partnership funded an additional $33,000. In
the third quarter of 1999, the Partnership funded an additional $213,000. The
property has had no cash flow, therefore, the Partnership ceased accruing
interest in the second quarter of 1999. In October 1999, the Partnership
received a $724,000 paydown on the loan, which was applied first to accrued but
unpaid interest due of $261,000 then to principal, reducing the loan balance to
$1.4 million. In October 1999, Richard D. Morgan, a Bordeaux shareholder, was
elected a director of NMC, the General Partner of the Partnership.
During 1998, the Partnership funded a $1.8 million loan to Warwick of Summit
Square, Inc. ("Warwick"). The loan is secured by a second lien on a shopping
center in Rhode Island, by 100% of the stock of the borrower and by the personal
guarantee of the principal shareholder of the borrower. The loan bears interest
at 14.0% per annum and matures in December 1999. All principal and interest are
due at maturity. During 1999, the Partnership funded an additional $314,000,
increasing the loan balance to $2.1 million. Richard D. Morgan is a Warwick
shareholder.
NOTE 5. REAL ESTATE AND DEPRECIATION
In January 1999, GCLP sold the 199 unit Olde Towne Apartments in Middleton,
Ohio, for $4.6 million, receiving net cash of $4.4 million after the payment of
various closing costs, including a real estate brokerage commission of $136,000
to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of the General Partner.
A gain of $2.7 million was recognized on the sale.
In February 1999, GCLP sold the 225 unit Santa Fe Apartments in Kansas City,
Missouri, for $4.6 million, receiving net cash of $4.3 million after the
payment of various closing costs, including a real estate brokerage commission
of $137,000 to Carmel Realty. A gain of $1.3 million was recognized on the
sale.
Also in February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa,
Arizona, for $19.5 million, receiving net cash of $793,000 after the payment of
various closing costs, including a real estate brokerage commission of $585,000
to Carmel Realty and remitting $17.8 million to the lender to hold in escrow
pending a substitution of collateral. In May 1999, the 259 unit Bavarian Woods
Apartments and the 149,855 sq. ft. Westwood Shopping Center were approved by
the lender as substitute collateral. GCLP received net cash of $7.8 million
after paying off $7.2 million in mortgage debt secured by the Bavarian Woods
Apartments and Westwood Shopping Center, funding required escrows and the
payment of various closing costs on the two properties, and paying off $2.2
million of Mesa Ridge debt, including a $133,000 prepayment penalty. A gain of
$12.4 million was recognized on the sale. NMC earned an incentive disposition
fee of $948,000 in accordance with the partnership agreement.
In April 1999, GCLP sold the 166 unit Horizon East Apartments in Dallas,
Texas, for $4.0 million, receiving net cash of $1.2 million after paying off
$2.6 million in mortgage debt and the payment of various closing costs,
including a real estate brokerage commission of $79,000 to Carmel Realty. A
gain of $2.2 million was recognized on the sale.
Also in April 1999, GCLP sold the 120 unit Lantern Ridge Apartments in
Richmond, Virginia, for $3.4 million, receiving net cash of $880,000 after the
payment of various closing costs, including a real estate brokerage commission
of $103,000 to Carmel Realty. The purchaser assumed the $2.4 million mortgage
secured by the property. A gain of $2.6 million was recognized on the sale.
In May 1999, the Partnership purchased the 27,000 sq. ft. Cooley Office
Building in Farmers Branch, Texas, for $3.5 million, paying $1.5 million in
cash and obtaining mortgage financing of $2.0 million. The
F-67
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5. REAL ESTATE AND DEPRECIATION (Continued)
mortgage bears interest at a variable rate, currently 9.0% per annum, requires
monthly payments of principal and interest of $17,875 and matures in May 2019.
A real estate brokerage commission of $35,000 was paid to Carmel Realty.
In June 1999, the Partnership purchased the Lake Houston land, a 33.58 acre
parcel of unimproved land in Harris County, Texas, for $2.5 million in cash. A
real estate brokerage commission of $75,000 was paid to Carmel Realty. The
Partnership has obtained a construction loan in the amount of $13.7 million to
develop a 312 unit apartment complex on the site. Construction costs are
expected to approximate $16.7 million. Construction was begun in July 1999 and
is expected to be completed in the third quarter of 2000. Through October 1999,
the Partnership has invested $1.9 million in construction of the apartments and
received $1.8 million in loan and escrow proceeds.
Further in June 1999, GCLP sold the 368 unit Barcelona Apartments in Tampa,
Florida, for $9.8 million, receiving net cash of $2.2 million after paying off
$7.0 million in mortgage debt and the payment of various closing costs,
including a real estate brokerage commission of $294,000 to Carmel Realty. A
gain of $3.2 million was recognized on the sale.
In July 1999, the Partnership purchased the Stone Meadows land, a 13.5 acre
parcel of unimproved land in Harris County, Texas, from ART, at its carrying
cost of $2.2 million, paying $1.3 million in cash and assuming $974,000 in
mortgage debt. The mortgage bore interest at 10.0% per annum, required
quarterly payments of principal and interest of $100,000 and matured in October
1999. The mortgage was paid in full at maturity. The land was acquired as a
future apartment development site.
In August 1999, the Partnership sold the 152 unit Country Place Apartments
in Round Rock, Texas, for $6.0 million, receiving net cash of $1.3 million
after the payment of various closing costs, including a real estate brokerage
commission of $179,000 paid to Carmel Realty. The purchaser assumed the $4.3
million mortgage secured by the property. A gain of $3.9 million was recognized
on the sale. NMC earned an incentive disposition fee of $201,000 in accordance
with the partnership agreement.
Also in August 1999, the Partnership sold the 588 unit Lake Nora Apartments
and the 336 unit Fox Club Apartments in Indianapolis, Indiana, to a single
buyer for a total of $29.1 million. The Partnership received net cash of $2.7
million, after paying off $24.5 million in mortgage debt, including an $889,000
prepayment penalty, and the payment of various closing costs, including a real
estate brokerage commission of $873,000 to Carmel Realty. A gain totaling $18.1
million was recognized on the sale.
In September 1999, the Partnership sold the 409 unit Oakhollow Apartments
and the 408 unit Windridge Apartments in Austin, Texas, to a single buyer for a
total of $35.5 million. The Partnership received net cash of $7.8 million,
after paying off $22.2 million in mortgage debt, including a $912,000
prepayment penalty, and the payment of various closing costs, including a real
estate brokerage commission of $1.1 million paid to Carmel Realty. In
conjunction with the sale, the Partnership provided $2.1 million in purchase
money financing secured by limited partnership units in two limited
partnerships owned by the buyer. The financing bears interest at 16.0% per
annum, requires monthly payments of interest only at 6.0%, beginning in
February 2000 and a $200,000 principal paydown in December 1999, and matures in
August 2000. The Partnership has an option to obtain the buyer's general and
limited partnership interests in full satisfaction of the financing. A gain of
$27.7 million was recognized on the sale. NMC earned an incentive disposition
fee of $239,000 in accordance with the partnership agreement, which was paid in
October 1999.
F-68
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6. NOTES AND INTEREST PAYABLE
In February 1999, the Partnership obtained mortgage financing secured by the
unencumbered 54,649 sq. ft. 56 Expressway Office Building in Oklahoma City,
Oklahoma, in the amount of $1.7 million, receiving net cash of $1.7 million
after the payment of various closing costs, including a mortgage brokerage and
equity refinancing fee of $17,000 to BCM. The mortgage bears interest at a
variable rate, currently 8.75% per annum, requires monthly payments of
principal and interest of $15,000 and matures in February 2019.
Also in February 1999, the Partnership obtained mortgage financing secured
by the unencumbered 124,200 sq. ft. Melrose Business Park in Oklahoma City,
Oklahoma, in the amount of $900,000, receiving net cash of $870,000 after the
payment of various closing costs, including a mortgage brokerage and equity
refinancing fee of $9,000 to BCM. The mortgage bears interest at a variable
rate, currently 8.75% per annum, requires monthly payments of principal and
interest of $8,000 and matures in February 2019.
In May 1999, the Partnership obtained mortgage financing secured by the
unencumbered 257 unit Pines Apartments in Little Rock, Arkansas, and by a $5.0
million note receivable secured by second liens on two parcels of land in
Denton County and Tarrant County, Texas, in the amount of $4.0 million. The
Partnership received net cash of $3.9 million after the payment of various
closing costs, including a mortgage brokerage and equity refinancing fee of
$40,000 to BCM. The mortgage bore interest at 14.0% per annum, required monthly
payments of interest only and was scheduled to mature in May 2000. In September
1999, the Partnership refinanced the mortgage debt in the amount of $3.1
million. The Partnership used the net refinancing proceeds and cash of $1.1
million to pay off the $4.0 million of mortgage debt and the payment of various
closing costs, including a mortgage brokerage and equity refinancing fee of
$31,000 to BCM. The new mortgage bears interest at a variable rate, currently
8.3% per annum, requires monthly payments of principal and interest of $24,552
and matures in April 2001.
In June 1999, the Partnership obtained mortgage financing secured by the
unencumbered 100 unit Stonebridge Apartments in Florissant, Missouri, in the
amount of $3.0 million. The Partnership received net cash of $2.9 million after
the payment of various closing costs, including a mortgage brokerage and equity
refinancing fee of $30,000 to BCM. The mortgage bears interest at 8.33% per
annum, requires monthly payments of principal and interest of $23,814 and
matures in July 2002.
In July 1999, the Partnership obtained mortgage financing secured by the
unencumbered 76 unit Bridgestone Apartments in Friendswood, Texas, in the
amount of $2.1 million. The Partnership received net cash of $2.0 million after
the payment of various closing costs, including a mortgage brokerage and equity
refinancing fee of $21,000 to BCM. The mortgage bears interest at 7.72% per
annum, requires monthly payments of principal and interest of $15,144 and
matures in August 2009.
In August 1999, the Partnership refinanced the mortgage debt secured by the
102 unit Whispering Pines Apartments in Canoga Park, California, in the amount
of $3.5 million, receiving net cash of $1.1 million after paying off $2.2
million in mortgage debt, the funding of required escrows and the payment of
various closing costs, including a mortgage brokerage and equity refinancing
fee of $35,000 to BCM. The new mortgage bears interest at 7.84% per annum,
requires monthly payments of principal and interest of $24,931 and matures in
September 2009.
In September 1999, the Partnership obtained mortgage financing secured by
the unencumbered 209 unit Blackhawk Apartments in Indianapolis, Indiana, in the
amount of $4.1 million. The Partnership received net cash of $4.0 million,
after the payment of various closing costs, including a mortgage brokerage and
equity refinancing fee of $41,000 paid to BCM. The mortgage bears interest at a
variable rate, currently 8.38% per annum, requires monthly payments of
principal and interest of $32,923 and matures in April 2001.
F-69
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7. OPERATING SEGMENTS
Significant differences among the accounting policies of the Partnership's
operating segments as compared to the Partnership's consolidated financial
statements principally involve the calculation and allocation of general and
administrative expenses. Management evaluates the performance of each of the
operating segments and allocates resources to each of them based on their
operating income and cash flow. The Partnership based reconciliation of
expenses that are not reflected in the segments is $5.5 million and $5.1
million of general and administrative expenses for the nine months ended
September 30, 1999, and 1998, respectively. There are no intersegment revenues
and expenses, and the Partnership conducts all of its business within the
United States.
Presented below is operating income of each of the Partnership's reportable
operating segments for the nine months ended September 30, and each segment's
assets at September 30.
<TABLE>
<CAPTION>
Commercial
1999 Properties Apartments Receivables Total
- ---- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Rents.............................. $ 7,303 $ 61,736 $ -- $ 69,039
Property operating expenses........ 2,914 36,308 -- 39,222
Interest income.................... -- -- 12,860 12,860
Interest expense--notes
receivable........................ -- -- 784 784
------- -------- -------- --------
Operating income................... $ 4,389 $ 25,428 $ 12,076 $ 41,893
======= ======== ======== ========
Depreciation....................... $ 1,590 $ 4,461 $ -- $ 6,051
Interest on debt................... 1,875 18,739 -- 20,614
Real estate improvements........... 11,615 1,477 -- 13,092
Assets............................. 66,170 106,123 151,972 324,265
<CAPTION>
Apartments Total
Property sales: ---------- --------
<S> <C> <C> <C> <C>
Sales price................................... $116,350 $116,350
Cost of sales................................. 42,331 42,331
-------- --------
Gain on sales................................. $ 74,019 $ 74,019
======== ========
<CAPTION>
Commercial
1998 Properties Apartments Receivables Total
- ---- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Rents.............................. $ 7,741 $ 73,456 $ - $ 81,197
Property operating expenses........ 3,689 43,552 -- 47,241
Interest income.................... -- -- 3,287 3,287
Interest expense--notes
receivable........................ -- -- 1,688 1,688
------- -------- -------- --------
Operating income................... $ 4,052 $ 29,904 $ 1,599 $ 35,555
======= ======== ======== ========
Depreciation....................... $ 1,933 $ 5,499 $ -- $ 7,432
Interest on debt................... 2,962 20,521 -- 23,483
Real estate improvements........... 394 1,256 -- 1,650
Assets............................. 27,041 149,338 39,387 215,766
<CAPTION>
Commercial
Properties Apartments Other Total
Property sales: ---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Sales price........................ $17,932 $ 33,890 $ 800 $ 52,622
Cost of sales...................... 16,789 14,625 28 31,442
------- -------- -------- --------
Gain on sales...................... $ 1,143 $ 19,265 $ 772 $ 21,180
======= ======== ======== ========
</TABLE>
F-70
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8. INCOME TAXES
No federal or state income taxes have been provided for in the accompanying
Consolidated Statements of Operations as the partners include their share of
Partnership income or loss in their respective tax returns. For income or loss
allocation purposes, limited partners are allocated their proportionate share
of income or loss commencing with the calendar month subsequent to their entry
into the Partnership.
NOTE 9. LEGAL PROCEEDINGS
The Partnership is involved in various lawsuits arising in the ordinary
course of business. In the opinion of management, the outcome of these lawsuits
will not have a material effect on the Partnership's financial condition,
results of operations or liquidity.
NOTE 10. SUBSEQUENT EVENTS
In October 1999, the Partnership sold the 838 unit Tanglewood Apartments in
Arlington Heights, Illinois, for $41.0 million. The Partnership received net
cash of $8.4 million, after paying off $28.9 million in mortgage debt,
including a $1.2 million prepayment penalty, and the payment of various closing
costs, including a real estate brokerage commission of $1.1 million to Triad
Realty, Inc., an affiliate of the General Partner. A gain will be recognized on
the sale. NMC earned an incentive disposition fee of $706,000 in accordance
with the partnership agreement.
Also in October 1999, the Partnership collected in full a mortgage note
receivable with a principal balance of $740,000.
Further in October 1999, GCLP funded a $4.7 million loan to Realty Advisors,
Inc., the corporate parent of BCM. The loan is secured by a pledge of 100% of
Realty Advisors, Inc.'s interest in American Reserve Life Insurance Company.
The loan bears interest at a variable rate, currently 10.25% per annum, and
matures in November 2001. All principal and interest are due at maturity.
----------------
F-71
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
National Realty, L.P.
We have audited the accompanying consolidated balance sheets of National
Realty, L.P., a limited partnership, as of December 31, 1998 and 1997, and the
related consolidated statements of operations, partners' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998.
We have also audited the schedules listed in the accompanying index. These
financial statements and schedules are the responsibility of the Partnership's
General Partner. Our responsibility is to express an opinion on these financial
statements and schedules 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 and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedules. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of National Realty, L.P. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules present fairly, in all material
respects, the information set forth therein.
BDO Seidman, LLP
Dallas, Texas
March 24, 1999
F-72
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- --------
(dollars in
thousands)
<S> <C> <C>
Assets
Real estate held for investment
Land..................................................... $ 39,400 $ 48,738
Buildings and improvements............................... 325,779 386,477
--------- --------
365,179 435,215
Less--Accumulated depreciation........................... (197,770) (223,791)
--------- --------
167,409 211,424
Notes and interest receivable
Performing (including $62,357 in 1998 from affiliate).... 109,628 23,893
Nonperforming............................................ 6,807 2,960
--------- --------
116,435 26,853
Less--allowance for estimated losses...................... (1,910) (1,910)
--------- --------
114,525 24,943
Cash and cash equivalents................................. 9,025 17,180
Accounts receivable (including $11,046 in 1998 from
affiliates).............................................. 12,316 3,327
Prepaid expenses.......................................... 1,230 1,069
Escrow deposits and other assets (including $730 in 1998
and $267 in 1997
from affiliate).......................................... 20,506 6,597
Marketable equity securities of affiliate (at market)..... 3,205 2,814
Deferred financing costs.................................. 9,566 12,226
--------- --------
$337,782 $279,580
========= ========
Liabilities and Partners' Equity (Deficit)
Liabilities
Notes and interest payable............................... $358,100 $339,102
Accrued property taxes................................... 7,121 6,906
Tenant security deposits................................. 2,919 3,163
Accounts payable and other liabilities................... 1,757 7,242
--------- --------
369,897 356,413
Commitments and contingencies
Redeemable General Partner Interest....................... -- 45,442
Partners' equity (deficit)
General Partner.......................................... (408) 2,822
Limited Partners (6,321,609 units in 1998 and 6,323,438
units in 1997).......................................... (34,642) (78,024)
Unrealized gain on marketable equity securities of
affiliate............................................... 2,935 2,544
--------- --------
(32,115) (72,658)
Redeemable General Partner Interest....................... -- (49,617)
--------- --------
(32,115) (122,275)
--------- --------
$ 337,782 $279,580
========= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-73
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December
31,
------------------------------
1998 1997 1996
--------- --------- ---------
(dollars in thousands, except
per unit)
<S> <C> <C> <C>
Revenues
Rents......................................... $ 107,127 $ 112,875 $ 109,384
Interest (including $404 in 1998 from
affiliate)................................... 6,707 4,490 3,297
--------- --------- ---------
113,834 117,365 112,681
Expenses
Interest...................................... 26,722 34,189 33,759
Deferred borrowing costs written off.......... 12,963 -- --
Depreciation.................................. 9,691 10,338 10,247
Property taxes & insurance.................... 10,791 12,279 12,511
Utilities..................................... 10,738 12,059 11,712
Repairs and maintenance....................... 25,888 24,735 23,726
Property-level payroll costs.................. 6,070 6,412 6,338
Other property operation expenses............. 4,299 4,344 4,160
Property management fees (including $1,290 in
1998, $826 in 1997
and $811 in 1996 to affiliates).............. 4,950 4,791 4,689
General and administrative (including $3,865
in 1998, $4,448 in 1997
and $3,329 in 1996 to affiliates)............ 6,820 7,856 5,975
--------- --------- ---------
118,932 117,003 113,117
--------- --------- ---------
<CAPTION>
Income (loss) from operations.................. (5,098) 362 (436)
<S> <C> <C> <C>
Gain on sale of real estate.................... 52,589 8,356 61
--------- --------- ---------
Net income (loss).............................. $ 47,491 $ 8,718 $ (375)
========= ========= =========
Earnings per unit
Net income (loss).............................. $ 7.36 $ 1.35 $ (.06)
========= ========= =========
Weighted average units of limited partner
interest used in computing earnings per unit.. 6,321,425 6,327,418 6,387,270
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-74
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated Redeemable
Other General Partners
General Limited Comprehensive Partner Equity
Partner Partner Income Interest (Deficit)
------- -------- ------------- ---------- ---------
(dollars in thousands, except per unit)
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $ 2,656 $(66,204) $ 453 $(36,172) $ (99,267)
Comprehensive income
Unrealized gain on
marketable equity
securities of
affiliate............. -- -- 550 -- 550
Net (loss)............. (7) (368) -- -- (375)
---------
175
Adjustment to Redeemable
General Partner
Interest............... -- -- -- (5,858) (5,858)
Repurchase of units of
limited partner
interest............... -- (954) -- -- (954)
Distributions ($1.10 per
unit).................. -- (7,042) -- -- (7,042)
------- -------- ------ -------- ---------
Balance, December 31,
1996................... 2,649 (74,568) 1,003 (42,030) (112,946)
Comprehensive income
Unrealized gain on
marketable equity
securities of
affiliate............. -- -- 1,541 -- 1,541
Net income............. 173 8,545 -- -- 8,718
------- -------- ------ -------- ---------
10,259
Adjustment to Redeemable
General Partner
Interest............... -- -- -- (7,587) (7,587)
Units issued on exercise
of warrants............ -- 20 -- -- 20
Distributions ($1.90 per
unit).................. -- (12,021) -- -- (12,021)
------- -------- ------ -------- ---------
Balance, December 31,
1997................... 2,822 (78,024) 2,544 (49,617) (122,275)
Comprehensive income
Unrealized gain on
marketable equity
securities of
affiliate............. -- -- 391 -- 391
Net income............. 945 46,546 -- -- 47,491
---------
47,882
Adjustment to Redeemable
General Partner
Interest............... (4,175) -- -- 49,617 45,442
Distributions ($.50 per
unit).................. -- (3,164) -- -- (3,164)
------- -------- ------ -------- ---------
Balance, December 31,
1998................... $ (408) $(34,642) $2,935 $ -- $ (32,115)
======= ======== ====== ======== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-75
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Rents collected................................. $107,135 $113,379 $109,439
Interest collected (including $132 in 1998 from
affiliate)..................................... 4,139 4,111 3,265
Interest paid................................... (27,878) (30,345) (29,238)
Payments for property operations (including
$1,290 in 1998, $826
in 1997 and $811 in 1996 to affiliates)........ (64,244) (62,835) (65,146)
General and administrative expenses paid
(including $3,865 in 1998, $4,448 in 1997 and
$3,329 in 1996 to affiliates).................. (7,810) (9,536) (6,100)
Other........................................... (427) 241 (412)
-------- -------- --------
Net cash provided by operating activities.... 10,915 15,015 11,808
Cash Flows From Investing Activities
Proceeds from sales of real estate.............. 61,025 14,294 61
Real estate improvements........................ (2,820) (5,004) (5,529)
Collections on notes receivable................. 24,160 13,522 500
Funding of notes receivable..................... (98,716) (22,898) (3,500)
-------- -------- --------
Net cash (used in) investing activities...... (16,351) (86) (8,468)
Cash Flows From Financing Activities
Proceeds from notes payable..................... 352,813 36,351 8,116
Payments of notes payable....................... (320,712) (23,047) (10,159)
Payment of pension notes........................ -- (14,645) --
Payments from (to) affiliates, net.............. (11,046) -- (191)
(Deposit to) receipt from escrow................ (5,957) 12,423 --
Deferred financing costs (including $2,674 in
1998 and $332 in 1997
to affiliate).................................. (10,948) (2,346) (1,459)
Deposits on pending financings.................. (2,298) -- --
Purchase of units of limited partner interest... -- -- (954)
Exercise of warrants............................ -- 20 --
Distributions to unitholders.................... (3,164) (12,021) (13,405)
Distributions to Garden Capital, L.P. general
partners....................................... (1,407) (356) (115)
-------- -------- --------
Net cash (used in) financing activities...... (2,719) (3,621) (18,167)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (8,155) 11,308 (14,827)
Cash and cash equivalents at beginning of year... 17,180 5,872 20,699
-------- -------- --------
Cash and cash equivalents at end of year......... $ 9,025 $ 17,180 $ 5,872
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-76
<PAGE>
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Reconciliation of net income (loss) to net
cash provided by operating activities
Net income (loss)........................ $ 47,491 $ 8,718 $ (375)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities
Depreciation............................ 9,691 10,338 10,247
Gain on sale of real estate............. (52,589) (8,356) (61)
Amortization of deferred financing
costs.................................. 2,617 2,950 2,222
Deferred borrowing costs written off.... 10,346 -- --
(Increase) in interest receivable....... (2,568) (36) (32)
(Increase) decrease in other assets..... (419) 443 (357)
(Decrease) increase in interest
payable................................ (1,156) 259 2,299
(Decrease) increase in other
liabilities............................ (2,498) 699 (2,135)
---------- ---------- ----------
Net cash provided by operating
activities......................... $ 10,915 $ 15,015 $ 11,808
========== ========== ==========
Schedule of noncash investing activities
Notes payable assumed by buyer upon sale
of properties........................... $ 17,116 $ -- $ --
Unrealized gain on marketable equity
securities of affiliate................. 391 1,541 550
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-77
<PAGE>
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of National Realty,
L.P. and controlled subsidiaries and partnerships (the "Partnership") have been
prepared in conformity with generally accepted accounting principles, the most
significant of which are described in NOTE 2. "SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES," and are, along with the remainder of the Notes to
Consolidated Financial Statements, an integral part of the Consolidated
Financial Statements. The data presented in the Notes to Consolidated Financial
Statements are as of December 31 of each year or for the year then ended,
unless otherwise indicated. Dollar amounts in tables are in thousands, except
per unit amounts.
Certain balances for 1996 and 1997 have been reclassified to conform to
the 1998 presentation.
NOTE 1. ORGANIZATION
General. National Realty, L.P. ("National Realty") is a Delaware limited
partnership which commenced operations on September 18, 1987 when it acquired
through National Operating, L.P. (the "Operating Partnership" or "NOLP") all of
the assets, and assumed all of the liabilities, of 35 public and private
limited partnerships.
National Realty is the sole limited partner of the Operating Partnership
and owns 99% of the beneficial interest in the Operating Partnership. The
general partner of and owner of 1% of the beneficial interest in each of,
National Realty and the Operating Partnership, is NRLP Management Corp. (the
"General Partner" or "NMC"). NMC is a wholly-owned subsidiary of American
Realty Trust, Inc. ("ART"), a publicly held real estate investment company. As
of March 5, 1999, ART owned approximately 55.4% of National Realty's
outstanding units of limited partner interest.
NMC, as General Partner, manages the affairs of the Partnership. All
decisions relating to the Partnership, including all decisions with respect to
the acquisition, disposition, improvement, financing or refinancing of the
Partnership's properties or other investments, are made by the General Partner.
The executive officers of NMC also serve as executive officers of ART.
In November 1992, the Partnership refinanced 52 of its apartments and a
wraparound mortgage note receivable with a financial institution. To facilitate
the refinancing, the Operating Partnership transferred those assets to Garden
Capital, L.P. ("GCLP"), a Delaware limited partnership. The Operating
Partnership is the sole limited partner with a 99.3% limited partner interest
in GCLP. GCLP transferred the acquired net apartment assets, in exchange for a
99% limited partner interest in each of 52 single asset limited partnerships
which were formed for the purpose of operating, refinancing and holding title
to the apartments. Each of the single asset limited partnerships has no
significant assets other than an apartment encumbered by mortgage debt. Garden
National Realty, Inc. ("GNRI"), a Nevada corporation and wholly-owned
subsidiary of ART, is currently the .7% general partner of GCLP and 1% general
partner of the single asset partnerships. In July 1998, the GCLP debt was
refinanced. See NOTE 7. "NOTES AND INTEREST PAYABLE."
Basic Capital Management, Inc. ("BCM"), performs certain administrative
functions for the Partnership, such as accounting services, mortgage servicing
and portfolio review and analysis, on a cost reimbursement basis. BCM is a
company owned by a trust for the benefit of the children of Gene E. Phillips.
Since February 1, 1990, BCM or affiliates of BCM have provided property
management services for the Partnership. Currently, Carmel Realty Services,
Ltd. ("Carmel, Ltd."), an affiliate of BCM, performs such property management
services for the Partnership. BCM or affiliates of BCM also perform loan
placement services, leasing services and real estate brokerage and acquisition
services and other services for the Partnership for fees and commissions. See
NOTE 10. "GENERAL PARTNER FEES AND COMPENSATION."
F-78
<PAGE>
Participation in net income, net loss and distributions. The limited
partners of National Realty have a 99% interest and the General Partner has 1%
interest in the net income or net loss of National Realty. National Realty has
a 99% and the General Partner has a 1% interest in the net income or net loss
of the Operating Partnership. The 1% General Partner interest in each of
National Realty and the Operating Partnership is equal to a 1.99% interest on a
combined basis. The Operating Partnership has a 99.3% limited partner interest
and GNRI has a .7% general partner interest in the net income or net loss and
distributions of GCLP. GCLP has a 99% interest and GNRI has a 1% interest in
the net income or net loss and distributions of the single asset partnerships.
GNRI's .7% general partner interest in GCLP and its 1% general partner interest
in the single asset partnerships is equal to a 1.68% interest on a combined
basis. For tax purposes limited partners are allocated their proportionate
share of net income or net loss commencing with the calendar month subsequent
to their entry into the Partnership. The General Partner receives base
compensation equal to 10% of the distributions to unitholders from the
Partnership's cash from operations.
General Partner's capital contribution. In return for its 1% interest in
National Realty, the General Partner was required to make aggregate capital
contributions to the Partnership in an amount equal to 1.01% of the total
initial capital contributions to the Partnership. The General Partner
contributed $500,000 in cash with the remaining contribution evidenced by a
promissory note bearing interest at the rate of 10% per annum compounded semi-
annually payable on the earlier of September 18, 2007 or liquidation of the
Partnership or termination of the General Partner's interest in the
Partnership. The principal balance of such promissory note was $4.2 million at
December 31, 1998 and 1997.
In the accompanying December 31, 1997, Consolidated Balance Sheet, the
note receivable from the General Partner is offset against the Redeemable
General Partner Interest as described in NOTE 15. "COMMITMENTS AND
CONTINGENCIES--Moorman Settlement." The General Partner received its 1%
interest in the Operating Partnership in exchange for its agreement to serve as
general partner of the Operating Partnership. If National Realty issues
additional units of limited partner interest, the General Partner is entitled
to maintain its aggregate 1% interest in each of National Realty and the
Operating Partnership without payment of additional consideration.
GNRI received its .7% general partner interest in GCLP in exchange for a
mortgage note receivable. National Realty subsequently purchased the mortgage
note receivable for a $900,000 note payable. GNRI received its 1% general
partner interest in the single asset partnerships in exchange for agreeing to
manage the apartments owned by each of the single asset partnerships.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation. The Consolidated Financial Statements include the
accounts of National Realty, the Operating Partnership, and controlled
partnerships and subsidiaries. All significant intercompany balances and
transactions have been eliminated. Minority interests (which are not
significant) are included in other liabilities.
Accounting estimates. In the preparation of the Partnership's Consolidated
Financial Statements in conformity with generally accepted accounting
principles it was necessary for 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 Consolidated Financial
Statements and the reported amounts of revenues and expenses for the year then
ended. Actual results could differ from these estimates.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No.
66"). Until the requirements of SFAS No. 66 for full profit recognition have
been met, transactions are accounted for using either the deposit, the
installment, the cost recovery or the financing method, whichever is
appropriate.
F-79
<PAGE>
Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
121 ("SFAS No. 121") requires that a property be considered impaired, if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the property. If impairment
exists, an impairment loss is recognized, by a charge against earnings, equal
to the amount by which the carrying amount of the property exceeds the fair
value of the property. If impairment of a property is recognized, the carrying
amount of the property is reduced by the amount of the impairment, and a new
cost for the property is established. Such new cost is depreciated over the
property's remaining useful life. Depreciation is provided by the straight-line
method over estimated useful lives, which range from 5 to 40 years.
Real estate held for sale. Foreclosed real estate is initially recorded at
new cost, defined as the lower of original cost or fair value minus estimated
costs of sale. SFAS No. 121 also requires that properties held for sale be
reported at the lower of carrying amount or fair value less costs of sale. If a
reduction in a held for sale property's carrying amount to fair value less
costs of sale is required, a provision for loss is recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale property's estimated fair value less costs of sale is recorded as an
adjustment to the property's carrying amount, but not in excess of the
property's carrying amount when originally classified as held for sale. A
corresponding charge against or credit to earnings is recognized. Properties
held for sale are not depreciated.
Allowance for estimated losses. A valuation allowance is provided for
estimated losses on notes receivable considered to be impaired. Impairment is
considered to exist when it is probable that all amounts due under the terms of
the note will not be collected. Valuation allowances are provided for estimated
losses on notes receivable to the extent that the Partnership's investment in
the note exceeds the Partnership's estimate of the fair value of the collateral
securing such note.
Interest recognition on notes receivable. It is the Partnership's policy
to cease recognizing interest income on notes receivable that have been
delinquent for 60 days or more. In addition, accrued but unpaid interest income
is only recognized to the extent that the net realizable value of underlying
collateral exceeds the carrying value of the receivable.
Operating segments. Management has determined that the Partnership's
reportable operating segments are those that are based on the Partnership's
method of internal reporting, which disaggregates its operations by type of
real estate.
Deferred financing costs. Deferred financing costs, which include bank,
legal, appraisal and consulting fees, are capitalized and amortized on the
interest method over the term of the related loans.
Present value discounts. The Partnership provides for present value
discounts on notes receivable or payable that have interest rates that differ
substantially from prevailing market rates and amortizes such discounts by the
interest method over the lives of the related notes. The factors considered in
determining a market rate for receivables include the borrower's credit
standing, nature of the collateral and payment terms of the note.
Marketable equity securities of affiliate. Marketable equity securities
are considered to be available-for-sale and are carried at fair value, defined
as period end closing market value. Net unrealized holding gains are reported
as a separate component of partners' equity until realized.
Fair value of financial instruments. The Partnership used the following
assumptions in estimating the fair value of its notes receivable, marketable
equity securities and notes payable. For performing notes receivable, the fair
value was estimated by discounting future cash flows using current interest
rates for similar loans. For nonperforming notes receivable, the estimated fair
value of the Partnership's interest in the collateral property was used. For
marketable equity securities, fair value was the year end closing market price
of each security. For notes payable, the fair value was estimated using current
rates for mortgages with similar terms and maturities, which, at December 31,
1998 and 1997, approximated carrying value.
F-80
<PAGE>
Cash equivalents. For purposes of the Consolidated Statements of Cash
Flows, the Partnership considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
Earnings per unit. Income (loss) per unit is presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Income (loss) per unit of limited partner interest is derived by multiplying
the Partnership's net income (loss) by 98.01% and dividing the result by the
weighted average number of units outstanding in each year, 6,321,425,
6,327,418, 6,387,270 units in 1998, 1997 and 1996, respectively.
NOTE 3. REAL ESTATE AND DEPRECIATION
In 1998, the Partnership sold 10 apartments with a total of 2,581 units:
Brookview Apartments in Smyrna, Georgia; Creekwood Apartments in College Park,
Georgia; Alexandria Apartments in Decatur, Georgia; Lakewood Apartments in St.
Petersburg, Florida; Royal Oaks Apartments in Stone Mountain, Georgia;
Skipper's Pond Apartments and Wisperwood Apartments in Tampa, Florida; Towne
Oaks Apartments and Oakmont Apartments in Monroe, Louisiana; and River Glen
Apartments in Tulsa, Oklahoma; the 184,878 sq. ft. Countryside Plaza Shopping
Center in Clearwater, Florida; and a 338 acre parcel of unimproved land in
Granby, Colorado. The Partnership received $40.5 million in net cash from the
sales after paying off $18.8 million in mortgage debt and the payment of
various closing costs. An aggregate gain of $39.3 million was recognized.
In December 1998, the Partnership acquired an undivided interest in one of
the ground leases under the Westwood Shopping Center for $507,000 in cash.
The Partnership had a 75% general partner interest in Southern Palms
Associates ("Southern Palms"), which owned the Southern Palms Shopping Center.
In December 1997, the Partnership entered into an agreement with the 25%
general partner, which provided the partner with an option to purchase the
Partnership's 75% interest in Southern Palms. The 25% general partner exercised
his option in May 1998 and acquired the Partnership's interest in Southern
Palms for $5.5 million in cash. No gain or loss was recognized.
In 1997, the Partnership sold two office buildings with a total of 128,923
sq. ft.: Tollhill East in Dallas, Texas; and Fondren in Houston, Texas; the
80,679 sq. ft. Crestview Shopping Center in Crestview, Texas; and the 310 unit
Village Square Apartments in Stone Mountain, Georgia. The Partnership received
$8.8 million in net cash from the sales, after paying off $5.0 million in
mortgage debt and the payment of various closing costs. An aggregate gain of
$6.3 million was recognized.
F-81
<PAGE>
NOTE 4. NOTES RECEIVABLE
Notes and interest receivable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ ---------------------
Estimated
Fair Book Estimated
Value Value Fair Value Book Value
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Notes receivable
Performing (including $62,085 in
1998 from affiliate)............. $102,984 $106,893 $36,168 $ 34,927
Nonperforming..................... 9,200 9,200 5,500 5,500
-------- -------- ------- --------
$112,184 116,093 $41,668 40,427
======== =======
Interest receivable (including $272
in 1998 from affiliate)............ 2,882 255
Unamortized (discounts)............. (109) (109)
Deferred gains...................... (2,431) (13,720)
-------- --------
$116,435 $ 26,853
======== ========
</TABLE>
Interest income is recognized on nonperforming notes receivable on a cash
basis. For the years 1998 and 1997, unrecognized interest income on
nonperforming notes receivable totaled $716,000 and $127,000.
Notes receivable mature from 1999 through 2009 with interest rates ranging
from 7.21% to 18.0% with a weighted average interest rate of 11.9% at December
31, 1998. Discounts were based on interest rates at the time of origination.
Notes receivable are generally collateralized by real estate or interests in
real estate and personal guarantees of the borrower. A majority of the notes
receivable provide for interest to be paid at the note's maturity.
Deferred gains result from property sales where the buyer has either made
an inadequate down payment or has not met the continuing investment test of
SFAS No. 66. See NOTE 2. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Revenue
recognition on the sale of real estate."
Effective December 1993, the Partnership ceased accruing interest income
in excess of the "pay rate" (cash received) on the note receivable secured by
the Warner Creek Apartments in Woodland Hills, California, as the carrying
value of the note receivable approximated the fair value of the collateral
securing such note. Unrecognized interest income was $195,000, $598,000 and
$541,000 in 1998, 1997 and 1996, respectively. The note was paid off in 1998.
Beginning in 1997 and through December 1998, the Partnership funded $1.5
million of a $1.6 million loan commitment to Bordeaux Investments Two, L.L.C.
("Bordeaux"). The loan is secured by (1) a 100% limited partnership interest in
Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of
the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of
undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of
the Bordeaux partners. The loan bears interest at 14.0% per annum. Until
November 1998, the loan required monthly payments of interest only at the rate
of 12.0% per annum, with the deferred interest payable at maturity in January
1999. In November 1998, the loan was modified to allow payments based on
monthly cash flow of the collateral property and the maturity date was extended
to December 1999. The property has had no cash flow. The remaining $50,000 of
the loan was funded in January 1999.
During 1998, the Partnership funded a total of $8.0 million of a $23.8
million loan commitment to Centura Tower, Ltd. The loan is secured by 2.244
acres of land and an office building under construction in Dallas, Texas. The
loan bears interest at 12.0% per annum, requires monthly payments based on net
revenues after development of the land and building and matures in January
2003. The borrower has not obtained a construction loan,
F-82
<PAGE>
therefore, the Partnership may be required to fund construction costs in
excess of its loan commitment, in order to preserve its collateral interest.
Estimated cost to construct the office building is in excess of $60.0 million.
Through February 1999, the Partnership funded an additional $2.5 million.
During 1998, the Partnership funded $2.1 million of a $2.2 million loan
commitment to Varner Road Partners, L.L.C. The loan is secured by 129.77 acres
of land in Riverside County, California and a pledge of the stock of the
borrower. The loan bears interest at 15.0% per annum and matures in November
1999. All principal and interest are due at maturity.
During the first and second quarters of 1998, the Partnership funded a
$356,000 loan to Ellis Development Company, Inc. The loan is secured by 4.5
acres of land in Abilene, Texas. The loan bears interest at 14.0% per annum and
had an original maturity of April 1999. All principal and interest are due at
maturity. In August 1998, the loan was modified and extended, increasing the
loan commitment to $946,000, of which $942,000 has been funded and extending
the maturity date to August 1999. In exchange for the modification and
extension the borrower pledged additional collateral consisting of the personal
guarantees of the principal owners of the borrower and a collateral assignment
of a $220,000 note receivable. All other terms of the loan remained unchanged.
In May 1998, the Partnership funded $713,000 of an original $836,000 loan
commitment to Warwick of Summit, Inc., of which $619,000 was used to repay an
affiliate's loan from the Partnership. The new loan is secured by a second lien
on a shopping center in Rhode Island, by 100% of the stock of the borrower and
by the personal guarantee of the principal shareholder of the borrower. The
loan bears interest at 14.0% per annum and matures in December 1999. All
principal and interest are due at maturity. In June 1998, the Partnership
funded the remaining $123,000 of the initial loan commitment and in July 1998,
an additional $301,000 was funded, increasing the loan balance to $1.1 million.
In August 1998, the loan was modified, increasing the commitment to $1.8
million, which has been fully funded. All other terms of the loan remained
unchanged.
In June 1998, the Partnership funded a $365,000 loan to RB Land & Cattle,
L.L.C. The loan is secured by a pledge of a note secured by 7,200 acres of
undeveloped land near Crowell, Texas, and the personal guarantee of the
borrower. The loan bore interest at 10.0% per annum and matured in December
1998. All principal and interest were due at maturity. The borrower did not
make the required payments and the loan was placed in non-accrual. The
Partnership has begun foreclosure proceedings. The Partnership expects to incur
no loss on foreclosure as the fair value of the collateral property less
estimated costs of sale, exceeds the carrying value of the note.
Also in June 1998, the Partnership funded a $2.4 million loan to Cuchara
Partners, Ltd. and Ski Rio Partners, Ltd., affiliates of JNC Enterprises, Ltd.
("JNC"). The loan is secured by (1) a first lien on approximately 1,000 acres
of land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski
Resort; (2) assignment of a $2.0 million promissory note which is secured by
approximately 2,623 acres of land in Taos County, New Mexico, known as Ski Rio
Resort; and (3) a pledge of all related partnership interests. The loan bears
interest at 16.0% per annum and matures in June 1999. All principal and
interest are due at maturity. In July 1998, the Partnership funded an
additional $1.8 million, increasing the loan balance to $4.2 million. All other
terms of the loan remained unchanged. In the fourth quarter of 1998, the
Partnership received $109,000 on the sale of 11 parcels of the collateral
property in Taos, New Mexico. This loan is cross-collateralized with other JNC
loans discussed below.
In the second quarter of 1998, the Partnership received a total of $3.7
million on the collection of two of its mortgage notes receivable. The
Partnership also made a $3.5 million paydown of a mortgage partially secured by
another of the paid off notes.
In June 1998, GCLP collected $18.5 million in full payment of a mortgage
note receivable, receiving net cash of $3.9 million after paying off a $14.6
million underlying lien including a prepayment penalty. GCLP recognized a gain
of $1.0 million on the early collection, as well as a previously deferred gain
of $11.2 million
F-83
<PAGE>
related to the 1988 sale of the property, the gain having been deferred
until the seller provided financing was paid off.
In July 1998, the Partnership paid in full two mortgage loans in the total
amount of $3.5 million secured by six of the Partnership's mortgage notes
receivable.
In August 1998, the Partnership funded a $6.0 million loan to Centura
Holdings, LLC, a subsidiary of Centura Tower, Ltd. The loan is secured by
6.4109 acres of land in Dallas, Texas. The loan bears interest at 15.0% per
annum and matures in August 2000. All principal and interest are due at
maturity.
Also in August 1998, the Partnership funded a $3.7 million loan to JNC.
The loan was secured by a contract to purchase 387 acres of land in Collin
County, Texas, the guaranty of the borrower and the personal guarantees of its
partners. The loan bore interest at 12.0% per annum and matured the earlier of
termination of the purchase contract or February 1999. All principal and
interest were due at maturity. This loan was cross-collateralized with the
Cuchara/Ski Rio loan and other JNC loans. In January 1999, ART purchased the
contract from JNC and acquired the land. In connection with the purchase, GCLP
funded an additional $6.0 million of a $95.0 million loan commitment to ART. A
portion of the funds were used to payoff the $3.7 million loan, including
accrued but unpaid interest, paydown by $1.3 million the JNC line of credit and
paydown a portion of the $820,000 of the JNC Frisco Panther Partners, Ltd.
loan, discussed below. See "Related Party."
Further in August 1998, the Partnership funded a $635,000 loan to La
Quinta Partners, LLC. The loan is secured by interest bearing accounts prior to
being used as escrow deposits toward the purchase of a total of 956 acres of
land in La Quinta, California. The loan bore interest at 10.0% per annum and
matured in November 1998. All principal and interest were due at maturity. In
November and December 1998, the Partnership received $250,000 in principal
paydowns and in the second quarter of 1999, the remaining $385,000 was expected
to be collected.
In September 1998, the Partnership received payment in full of an $800,000
note receivable which had matured.
In December 1997, the Partnership funded a $3.4 million loan to Stratford
& Graham Developers, L.L.C. The loan is secured by 1,485 acres of unimproved
land in Riverside County, California. The loan bears interest at 15.0% per
annum and matures in June 1999. All principal and interest are due at maturity.
In the second, third and fourth quarters of 1998, the Partnership funded an
additional $370,000, increasing the loan balance to $3.8 million. In January
and February 1999, the Partnership funded an additional $105,000, increasing
the loan balance to $3.9 million.
In October 1998, the Partnership funded three loans to JNC or affiliated
entities. The first JNC loan of $1.0 million is secured by a second lien on 3.5
acres of land in Dallas, Texas, the guaranty of the borrower and the personal
guarantees of its partners. The loan bears interest at 14.0% per annum and
matures in October 1999. All principal and interest are due at maturity. The
second loan, also $1.0 million, was secured by a second lien on 2.92 acres of
land in Dallas, Texas, the guaranty of the borrower and the personal guarantees
of its partners. The loan bore interest at 14.0% per annum and matured in
October 1999. All principal and interest were due at maturity. This loan was
paid in full in March 1999. The third loan, in the amount of $2.1 million was
to Frisco Panther Partners, Ltd. The loan is secured by a second lien on 408.23
acres of land in Frisco, Texas, the guaranty of the borrower and the personal
guarantees of its partners. The loan bears interest at 14.0% per annum and
matures in October 1999. All principal and interest are due at maturity. These
loans are cross-collateralized with the Cuchara/Ski Rio and other JNC loans
funded by the Partnership. In January 1999, the Partnership received a paydown
of $820,000 on the Frisco Panther Partners, Ltd. loan.
Also in October 1998, the Partnership funded a $350,000 loan to Four "J"
International Corp., 5J-CTMS, Ltd. and an individual. The loan was secured by
1.1 million Class A limited partnership units in Grapevine American Ltd., which
are convertible into shares of Series G Cumulative Convertible Preferred Stock
of ART.
F-84
<PAGE>
The loan bore interest at 15.0% per annum and matured in February 1999. All
principal and interest were due at maturity. The loan was collected in full in
January 1999.
In March 1998, the Partnership ceased receiving the required payments on a
$3.0 million note receivable secured by an office building in Dallas, Texas. In
October 1998, the Partnership began foreclosure proceedings. In March 1999, the
Partnership received payment in full, including accrued but unpaid interest.
In December 1998, the Partnership funded $3.3 million of a $5.0 million
loan commitment to JNC. The loan is secured by a second lien on 1,791 acres of
land in Denton County, Texas, and a second lien of 220 acres of land in Tarrant
County, Texas. The loan bears interest at 12.0% per annum and matures in
December 1999. All principal and interest are due at maturity. The loan is
cross-collateralized with the Cuchara/Ski Rio and other JNC loans funded by the
Partnership. In January 1999, the Partnership received a $1.3 million paydown
on the loan, as discussed below. In January and February 1999, the Partnership
funded an additional $2.0 million.
At December 31, 1998, the Partnership's one wraparound mortgage note
receivable was in default. The Partnership has been vigorously pursuing its
rights regarding the loan. The Partnership expects to incur no loss in excess
of reserve previously provided if it is unable to collect the balance due.
In July 1997, the Partnership funded a $700,000 loan to an individual. In
February 1998, the Partnership funded an additional $40,000 and the loan was
modified, increasing the principal balance to $740,000. The loan is secured by
a security interest in an oil, gas and mineral lease in Anderson County, Texas
and by a second lien mortgage on a ranch in Henderson County, Texas. The loan
bears interest at 12.0% per annum, requires monthly payments of interest only
and originally matured in December 1998. In October 1998, the loan was
modified, extending the maturity date to September 1999.
In 1997, the Partnership originated 13 mortgage or other loans totaling
$22.9 million, secured by land, an office building, a single-family residence,
a security interest in an oil, gas and mineral lease, partnership interests in
entities owning real property, personal guarantees and by second liens on a
ranch and a shopping center. The loans bore interest rates ranging from 10.0%
to 18.0% per annum, required either monthly, quarterly, or at maturity,
payments of interest, and matured from October 1997 to December 1999.
Also in 1997, the Partnership collected $13.5 million on its mortgage
notes receivable from the payoff of six notes. In connection with one of the
payoffs, the Partnership paid off an underlying note payable in the amount of
$1.0 million and recognized a deferred gain of $2.1 million from the
Partnership's 1986 sale of the property securing such loan.
Related Party. In November and December 1998, GCLP funded $50.0 million of
a $95.0 million loan commitment to ART. The loan is secured by second liens on
(1) an office building in Minnesota, (2) three apartments in Mississippi, and
(3) one apartment and 130.54 acres of land in Texas, (4) by the stock of ART
Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,349,535 National
Realty units of limited partnership, and (5) by the stock of NMC. The loan
bears interest at 12.0% per annum, requires monthly payments of interest only
and matures in November 2003. In January 1999, the Partnership funded an
additional $6.0 million.
In December 1998, in connection with the Moorman lawsuit settlement, NMC,
a wholly-owned subsidiary of ART, and the new general partner of the
Partnership, assumed responsibility for repayment to the Partnership of the
$12.2 million paid by the Partnership to the Moorman Class Members and legal
counsel. The loan bears interest at the 90 day LIBOR (London InterBank Offered
Rate) plus 2.0% per annum, currently 7.0% per annum, adjusted every 90 days and
requires annual payments of accrued interest plus principal payments of
$500,000 in each of the first three years, $750,000 in each of the next three
years, $1.0 million in each of the next three years, with payment in full of
the remaining balance in the tenth year. The note is guaranteed by ART. The
note matures upon the earlier of the liquidation or dissolution of the
Partnership, NMC ceasing to be general partner or ten years from March 31,
1999, the date of the first cash distribution to the Moorman Class Members. See
NOTE 15. "COMMITMENTS AND CONTINGENCIES."
F-85
<PAGE>
NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES
The allowance for estimated losses was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance December 31,....................................... $1,910 $1,910 $1,910
====== ====== ======
</TABLE>
NOTE 6. INVESTMENTS IN MARKETABLE EQUITY SECURITIES OF AFFILIATE
The Partnership owns 195,732 shares of ART common stock, which the
Partnership acquired in open market purchases in 1990 at an adjusted cost of
$269,000. ART is a publicly held real estate investment company. The
Partnership considers the ART common stock to be available-for-sale and the
shares are carried at fair value (period end market value). The market value of
the ART common stock was $3.2 million at December 31, 1998 and $2.8 million at
December 31, 1997. See NOTE 1. "ORGANIZATION."
NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Notes payable............................. $334,076 $357,201 $322,245 $336,830
======== ========
Interest payable.......................... 899 2,272
-------- --------
$358,100 $339,102
======== ========
</TABLE>
Scheduled notes payable principal payments are due as follows:
<TABLE>
<S> <C>
1999............................................................. $ 20,731
2000............................................................. 5,883
2001............................................................. 8,436
2002............................................................. 12,532
2003............................................................. 141,759
Thereafter....................................................... 167,860
--------
$357,201
========
</TABLE>
Notes payable at December 31, 1998 and 1997 are collateralized by land,
buildings and improvements and are generally nonrecourse to the partnership.
The GCLP Phase I mortgage debt, as discussed below, is cross-collateralized and
cross-defaulted among the 18 apartments that serve as collateral for such debt.
Notes payable at December 31, 1998, bear interest at stated rates ranging from
6.2% to 10.0% per annum with a weighted average rate of 8.6% per annum and such
notes have maturities or call dates ranging from one to 25 years.
In 1998, the Partnership refinanced the mortgage debt secured by three
apartments, obtained a second lien mortgage on another apartment and obtained
mortgage financing for four unencumbered apartments and seven notes receivable
in the total amount of $37.4 million. The Partnership received net cash of
$27.8 million after paying off $7.1 million in mortgage debt, the funding of
escrows and the payment of various closing costs. The mortgages bear interest
rates ranging from 6.2% to 14.0% per annum, require monthly payments of
principal and interest of $277,000 and mature from December 1999 to September
2009.
In addition, in July 1998, the Partnership paid in full two mortgage loans
in the total amount of $7.0 million secured by six of the Partnership's
mortgage notes receivable.
F-86
<PAGE>
Also in July 1998, GCLP commenced a three-phase refinancing of the
mortgage debt secured by the 50 properties held by it. Phase I consisted of 18
of the properties, in Arizona, Florida, Illinois, Indiana, Kansas, Missouri,
Oklahoma and Texas, which were refinanced in the total amount of $150.0
million. GCLP received net cash of $33.6 million after paying off $102.9
million in mortgage debt, the funding of required escrows and the payment of
various closing costs. This new mortgage bears interest at 6.88% per annum,
requires monthly payments of principal and interest of $1.0 million and matures
in July 2003. The new $150.0 million mortgage loan requires that the cash flow
from the 18 properties be used to fund various escrow and reserve accounts and
limits the payment of distributions to the Partnership.
Phase II consisted of a bridge financing of 29 of the properties, in
Arizona, Arkansas, California, Colorado, Florida, Georgia, Kansas, Louisiana,
Michigan, Missouri, Nebraska, Ohio, Oklahoma, Tennessee, Texas and Virginia,
which were refinanced in the total amount of $86.2 million. GCLP received net
cash of $1.4 million after paying off $80.0 million in existing mortgage debt,
the funding of required escrows and the payment of various closing costs. This
bridge financing bore interest at a variable rate, required monthly payments of
interest only. Three GCLP properties are unencumbered.
In September 1998, GCLP completed Phase III of the refinancing by
refinancing the properties secured by the Phase II bridge loan. The mortgage
debt secured by 16 of the properties, in Arizona, California, Colorado,
Florida, Georgia, Kansas, Michigan, Missouri, Nebraska, Tennessee, Texas and
Virginia was refinanced in the total amount of $90.7 million. GCLP received net
cash of $1.7 million after paying off $83.4 million of Phase II principal and
interest and funding of required escrows and the payment of various closing
costs. The new mortgages bear interest at rates ranging from 6.535% to 6.77%
per annum, require monthly payments of principal and interest totaling $582,690
and mature in October 2008. Thirteen Phase II properties were unencumbered
after the payoff of the bridge loan.
The Partnership used $13.2 million of the net cash received from the
refinancings to pay off debt secured by NOLP's interest in GCLP.
In 1997, the Partnership refinanced the mortgage debt secured by three
apartments and obtained mortgage financing for four unencumbered office
buildings and six notes receivable in the total amount of $33.1 million. The
Partnership received net cash of $21.7 million after paying off $10.0 million
in mortgage debt, the funding of escrows and the payment of various closing
costs. The mortgages bore interest rates ranging from 7.5% to 13.0% per annum,
required monthly payments of principal and interest of $261,000 and matured
from December 1998 to November 2007. In addition, the Partnership modified and
extended the mortgage secured by the Cross County Mall in Mattoon, Illinois. In
conjunction with the modification, the Partnership made a principal reduction
payment of $137,500. The modified and extended mortgage bears interest at a
variable rate, currently 8.8% per annum, requires monthly payments of principal
and interest of $71,262 and has an extended maturity of April 2002. Also in
1997, the Partnership modified the mortgage debt secured by the Club Mar
Apartments in Sarasota, Florida, under the Housing and Urban Development
("HUD") Partial Payment of Claim ("PPC") program. Under the PPC program,
$736,000 of the original principal balance and $871,000 of accrued but unpaid
interest were rolled into a new second lien mortgage. The first mortgage was
reduced to $5.2 million, the interest rate was reduced to 8.18% per annum, the
monthly payments were reduced to $40,800 and the maturity date of July 2023
remained unchanged. The new second lien mortgage of $1.6 million bears interest
at 6.91% per annum, requires monthly payments of 50% of the property's net cash
flow as defined and matures in July 2023. In conjunction with the modification,
the Partnership funded improvement escrows of $381,000 and paid $345,000 as a
principal paydown on the second lien mortgage from accumulated cash flow that
had been held by the servicer.
In conjunction with the 1997 refinancing of the Pheasant Ridge and Regency
Apartments, the Partnership purchased the Federal National Mortgage Association
("FNMA") insured mortgage backed securities issued by the lender to finance the
loans. These securities bear interest at 6.84% per annum and mature in July
2007. The Partnership borrowed 97% of the face amount of the securities from
FNMA. The effect of these purchases was
F-87
<PAGE>
to lower the effective interest rate on the refinancings. In July 1998, the
Partnership sold the securities for $9.4 million in cash, receiving net cash of
$579,000 after paying off the associated financing.
The Partnership holds a wraparound mortgage note receivable secured by a
shopping center in La Crosse, Wisconsin. The underlying note payable has
matured.
NOTE 8. PENSION NOTES
In connection with its formation, the Partnership issued $4.7 million of
8% subordinated Pension Notes to certain investors in exchange for their
interest in the net assets of certain of the "rolled-up" partnerships. The
Pension Notes were unsecured, subordinated obligations of the Partnership and
bore interest at the rate of 8% compounded annually. Principal and accrued
interest were paid at maturity on September 18, 1997. The 8% stated interest
rate on the Pension Notes was different than the assumed market rate at the
time of issuance. Such discount was amortized over the term of the Pension
Notes using the interest method. Interest expense of $1,167,000 and $1,444,000
was recognized on the Pension Notes in 1997 and 1996, respectively.
NOTE 9. WARRANTS
Pursuant to the Moorman Settlement Agreement, on February 14, 1992, the
Partnership issued warrants to purchase an aggregate of 2,019,579 of its units
of limited partner interest. Each warrant entitled the holder to purchase three
quarters of one unit at the exercise price of $16.00 per unit. The warrants
were exercisable for five years from the date of issuance and expired on
February 14, 1997. Prior to their expiration a total of 1,631 warrants were
exercised for the purchase of 1,226 units. See NOTE 15. "COMMITMENTS AND
CONTINGENCIES--Moorman Settlement."
NOTE 10. GENERAL PARTNER FEES AND COMPENSATION
General. NMC is the general partner of the Partnership. The executive
officers of NMC also serve as officers or directors of various other real
estate entities. These entities may have the same objectives and may be engaged
in activities similar to those of the Partnership.
Property Management Fees. As compensation for providing property
management services to the Partnership's properties, as provided in the
Partnership Agreement, the General Partner or an affiliate of the General
Partner is to receive a reasonable property management fee. Currently, Carmel
Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of the General Partner,
provides such property management services for a fee of 5% of the monthly gross
rents collected on the properties under its management. Carmel, Ltd.
subcontracts with other entities for the property-level management services to
the Partnership at various rates. The general partner of Carmel, Ltd. is BCM.
The limited partners of Carmel, Ltd. are (1) First Equity Properties, Inc.
("First Equity"), which is 50% owned by a subsidiary of BCM, (2) Gene E.
Phillips and (3) a trust for the benefit of the children of Mr. Phillips.
Carmel, Ltd. subcontracts the property-level management and leasing of nine of
the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel
Realty") which is a company owned by First Equity. Carmel Realty is entitled to
receive property and construction management fees and leasing commissions in
accordance with the terms of its property-level management agreement with
Carmel, Ltd.
Leasing Commissions. As compensation for providing leasing and rent-up
services for a Partnership property, as provided in the Partnership Agreement,
the General Partner or an affiliate of the General Partner shall be paid a
reasonable leasing commission.
Reimbursement of Administrative Expenses. To the extent that officers or
employees of the general partner or any of their affiliates participate in the
operation or administration of the Partnership, the general partner and its
affiliates are to be reimbursed under the Partnership Agreement for salaries,
travel, rent, depreciation, utilities and general overhead items incurred and
properly allocable to such services. Such amounts are included in General and
Administrative expense in the accompanying Consolidated Statements of
Operations.
F-88
<PAGE>
General Partner Compensation. As base compensation for providing
administrative and management services under the Partnership Agreement, the
General Partner is entitled to receive from the Partnership, an annual
partnership management fee equal to 10% of distributions made in each calendar
year of Cash from Operations, as defined in the Partnership Agreement, for the
calendar year, payable within 90 days after the end of that calendar year. As
additional incentive compensation, the General Partner is entitled to receive
in each calendar year an amount equal to 1% of the Average Unit Market Price,
as defined in the Partnership Agreement, for that calendar year. Provided,
however, that no incentive compensation is payable unless distributions of Cash
from Operations exceed 6% of the Exchange Value of the original assets, also as
defined in the Partnership Agreement. The General Partner waived its base
compensation during the pendency of the Moorman Settlement Agreement.
Real Estate Brokerage Commissions. The General Partner or an affiliate of
the General Partner may, pursuant to the Partnership Agreement, charge a
reasonable real estate brokerage commission, payable at the time the
Partnership acquires title to, or beneficial ownership in, an acquired
property. Upon the sale of any Property by the Partnership, the General Partner
or an affiliate of the General Partner may, pursuant to the Partnership
Agreement, charge a reasonable real estate brokerage commission, payable at the
time the Partnership transfers title to the property. In each case, such
commissions are payable only if the General Partner or such affiliate actually
performed brokerage services.
Incentive Disposition Fee. Under the Partnership Agreement, the General
Partner or an affiliate of the General Partner is paid a fee equal to 10% of
the amount, if any, by which the Gross Sales Price, as defined in the
Partnership Agreement, of any property sold by the Partnership exceeds 110% of
the Adjusted Cost, also as defined in the Partnership Agreement, of such
property.
Acquisition Fees. As compensation under the Partnership Agreement for
services rendered in structuring and negotiating the acquisition by the
Partnership of any property, other than an Initial Property, as defined in the
Partnership Agreement, the General Partner or an affiliate of the General
Partner is paid a fee in an amount equal to 1% of the Original Cost, also as
defined in the Partnership Agreement, of such property.
Fees For Additional Services. Under the Partnership Agreement, the General
Partner or an affiliate of the General Partner may provide services other than
those set out above for the Partnership in return for reasonable compensation.
Fees and cost reimbursement to NMC and its affiliates:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Property and construction management fees*.............. $ 1,786 $ 826 $ 744
Loan placement fees..................................... 2,735 332 89
Real estate commissions................................. 2,029 414 --
Leasing commissions..................................... 82 96 67
Reimbursement of administrative expenses................ 3,865 4,448 3,329
-------- ------ ------
$ 10,497 $6,116 $4,229
======== ====== ======
</TABLE>
- --------
* Net of property management fees paid to subcontractors, other than Carmel
Realty.
F-89
<PAGE>
NOTE 11. RENTS UNDER OPERATING LEASES
The Partnership's operations include the leasing of commercial properties
(office buildings and shopping centers). The leases thereon expire at various
dates through 2013. The following is a schedule of minimum future rents on non-
cancelable operating leases as of December 31, 1998:
<TABLE>
<S> <C>
1999.................................................................. $ 7,317
2000.................................................................. 5,800
2001.................................................................. 3,958
2002.................................................................. 3,508
2003.................................................................. 3,003
Thereafter............................................................ 7,299
-------
$30,885
=======
</TABLE>
NOTE 12. INCOME TAXES
The Partnership's partners include their share of partnership income or
loss in their respective tax returns and, accordingly, no income taxes have
been provided in the accompanying Consolidated Statements of Operations.
In December 1987, Congress passed legislation requiring that partnership
losses for certain publicly traded partnerships be suspended for limited
partners and carried forward to offset future income or gain from the
partnership's operations or gain upon a limited partner's disposition of all
units held. Any remaining income will be taxed as portfolio income.
NOTE 13. OPERATING SEGMENTS
Significant differences among the accounting policies of the segments as
compared to the Partnership's consolidated financial statements principally
involve the calculation and allocation of administrative expenses. Management
evaluates the performance of its operating segments and allocates resources to
them based on net operating income and cash flow. The Partnership based
reconciliation of expenses that are not reflected in the segments is $6.8
million of administrative expenses. There are no intersegment revenues and
expenses and the Partnership conducts all of its business within the United
States.
The Partnership has not disclosed prior years' operating segment
information on a comparative basis, because it was impractical to obtain the
necessary data.
The table below presents information about the reported operating income
of the Partnership for 1998. Asset information by operating segment is also
presented below.
<TABLE>
<CAPTION>
Commercial
Properties Apartments Receivables Total
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Operating revenue.................. $9,985 $ 97,142 $ -- $107,127
Operating expenses................. 4,566 58,170 -- 62,736
Interest income.................... -- -- 5,235 5,235
Interest expense--notes
receivable........................ -- -- 1,164 1,164
------ -------- ------- --------
Net operating income............... 5,419 38,972 4,071 48,462
Depreciation....................... 2,450 7,241 -- 9,691
Interest on debt................... 3,669 34,435 -- 38,104
Capital expenditures............... 1,150 1,670 -- 2,820
Segment assets at December 31,
1998.............................. 27,279 140,130 116,435 283,844
</TABLE>
F-90
<PAGE>
Property sales:
<TABLE>
<CAPTION>
Commercial
Properties Apartments Other
---------- ---------- -----
<S> <C> <C> <C>
Sales price......................................... $17,900 $62,300 $800
Cost of sales....................................... 16,343 20,867 --
Gain on sale........................................ 831 38,586 772
</TABLE>
NOTE 14. QUARTERLY DATA
The following is a tabulation of the Partnership's quarterly results of
operations for the years 1998 and 1997 (unaudited).
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
1998 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues............................ $29,578 $28,186 $27,897 $28,173
Expenses............................ 29,070 34,678 29,829 25,355
------- ------- ------- -------
Income (loss) from operations....... 508 (6,492) (1,932) 2,818
Gain on sale of real estate......... -- 28,633 5,583 18,373
------- ------- ------- -------
Net income.......................... $ 508 $22,141 $ 3,651 $21,191
======= ======= ======= =======
Earnings per unit
Net income........................ $ .08 $ 3.43 $ .57 $ 3.28
======= ======= ======= =======
</TABLE>
During the second quarter of 1998, the Partnership sold three apartments,
two shopping centers and 338 acres of undeveloped land for gains totaling $16.4
million and recognized a gain of $1.0 million, as well as a deferred gain of
$11.2 million on the payoff of a note receivable. During the third quarter of
1998, the Partnership sold two apartments for gains totaling $5.6 million.
During the fourth quarter of 1998, the Partnership sold five apartments for
gains totaling $18.4 million. See NOTE 3. "REAL ESTATE AND DEPRECIATION" and
NOTE 4. "NOTES RECEIVABLE."
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
1997 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues........................... $28,559 $28,814 $29,797 $30,195
Expenses........................... 28,786 29,080 29,645 29,492
------- ------- ------- -------
Income (loss) from operations...... (227) (266) 152 703
Gain on sale of real estate........ -- 3,587 2,067 2,702
------- ------- ------- -------
Net income (loss).................. $ (227) $ 3,321 $ 2,219 $ 3,405
======= ======= ======= =======
Earnings per unit
Net income (loss)................ $ (.04) $ .51 $ .34 $ .54
======= ======= ======= =======
</TABLE>
In the second quarter of 1997, the Partnership sold an office building for
a gain of $3.6 million. In the third quarter of 1997, the Partnership
recognized a deferred gain of $2.1 million on the payoff of a note receivable.
In the fourth quarter of 1997, the Partnership sold an apartment complex and a
shopping center for gains totaling $2.7 million. See NOTE 3. "REAL ESTATE AND
DEPRECIATION" and NOTE 4. "NOTES RECEIVABLE."
F-91
<PAGE>
NOTE 15. COMMITMENTS AND CONTINGENCIES
Moorman Settlement
The Partnership entered into a settlement agreement, dated as of May 9,
1990, relating to the action entitled Moorman, et al. v. Southmark Corporation,
et al. Such action was filed on September 2, 1987, in the Superior Court of the
State of California, County of San Mateo. The Partnership agreed to settle such
action pursuant to the terms of a written agreement (the "Moorman Settlement
Agreement").
The Moorman Settlement Agreement provided for a plan (the "Moorman
Settlement Plan") consisting of, among other things, the following: (1) the
appointment and operation of a committee (the "Oversight Committee"), to
oversee the implementation of the Moorman Settlement Plan, and (2) the
establishment of specified annually increasing targets (each a "Target") for
each of the five years through May 1995, relating to the price of the units of
limited partner interest.
If the Targets were not met for any two successive years of the Moorman
Settlement Plan or for the final year of the Moorman Settlement Plan, Syntek
Asset Management, L.P. ("SAMLP") was required to withdraw as general partner
effective at the time a successor general partner was elected. The Targets for
the first and second anniversary dates were not met. Since the Targets were not
met for two successive years, the Moorman Settlement Agreement required that
SAMLP resign as general partner, effective upon the election and qualification
of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of
the failure to meet the Target for two successive years.
Upon, among other things, the withdrawal of SAMLP as General Partner and
the due election and taking office of a successor, the Moorman Settlement Plan
would terminate. Withdrawal of SAMLP as general partner pursuant to the Moorman
Settlement Agreement required unitholders to elect a successor general partner
by majority vote.
The Moorman Settlement Agreement provided that withdrawal of SAMLP as
general partner would require the Partnership to acquire its interest in the
Partnership (the "Redeemable General Partner Interest") at its then fair value,
and to pay certain fees and other compensation, as provided in the Partnership
Agreement and the Moorman Settlement Agreement. Under the Moorman Settlement
Agreement, payment for such Redeemable General Partner Interest, fees and other
compensation could have, at the Oversight Committee's option, been paid over a
three year period pursuant to a secured promissory note bearing interest at a
financial institution's prime rate and containing commercially reasonable terms
and collateral. Under the Moorman Settlement Plan, the purchase price for
Redeemable General Partner Interest would have been calculated, as of the time
SAMLP withdrew as general partner under the Partnership's governing documents.
The Redeemable General Partner Interest was calculated at December 31, 1997, to
be $49.6 million. The Partnership would have been entitled to offset against
any such payment the then outstanding principal balance ($4.2 million at
December 31, 1997) plus all accrued but unpaid interest ($7.2 million at
December 31, 1997) on the note receivable from SAMLP described in NOTE 1.
"ORGANIZATION." In the accompanying December 31, 1997, Consolidated Balance
Sheet, the Redeemable General Partner Interest is shown as a reduction of
Partners' Equity, and the note receivable from the General Partner being offset
against the Redeemable General Partner Interest. The Oversight Committee had
previously informed the Partnership that it had calculated the amount of such
Redeemable General Partner Interest to be a lessor amount.
On July 15, 1998, National Realty, SAMLP and the Oversight Committee
executed an Agreement for Cash Distribution and Election of Successor General
Partner (the "Cash Distribution Agreement") which provided for the nomination
of NMC, which is an entity affiliated with SAMLP, to be the successor general
partner of the Partnership, for the distribution of $11.4 million to the
Moorman Class Members and for the resolution of all related matters under the
Moorman Settlement Agreement. The Cash Distribution Agreement was submitted to
the Court on July 23, 1998. On August 4, 1998, the Court entered an order
granting preliminary approval of the Cash Distribution Agreement. On September
9, 1998, a notice was mailed to the Moorman Class Members
F-92
<PAGE>
describing the Cash Distribution Agreement. On October 16, 1998, a hearing
was held to consider any objections to the Cash Distribution Agreement. On
October 23, 1998, the Court entered an order granting final approval of the
Cash Distribution Agreement. The Court also entered orders requiring the
Partnership to pay $404,000 in attorney's fees to Joseph B. Moorman's legal
counsel, $30,000 to Joseph B. Moorman and $404,000 in attorney's fees to Robert
A. McNeil's legal counsel.
Pursuant to the order, $11.4 million was deposited by the Partnership into
an escrow account and then transferred to the control of an independent
settlement administrator. The distribution of the cash shall be made to the
Moorman Class Members pro rata based upon the number of units originally issued
to each Moorman Class Member upon the formation of the Partnership in 1987. On
March 10, 1999, the Court entered an order providing for the initial
distribution of the cash not later than March 31, 1999. The distribution of
cash is under the control of the independent settlement administrator.
The proposal to elect NMC the successor general partner was submitted to
the unitholders of National Realty for a vote. All units of the Partnership
owned by affiliates of SAMLP (approximately 61.8% of the outstanding units of
National Realty as of the November 27, 1998, record date) were voted pro rata
with the vote of the other limited partners. NMC was elected by a majority of
the unitholders. The Moorman Settlement Plan remained in effect until December
18, 1998, when SAMLP resigned as general partner and NMC was elected and took
office.
Under the Cash Distribution Agreement, SAMLP waived its right under the
Moorman Settlement Agreement to receive any payment from the Partnership for
its Redeemable General Partner Interest or fees it was entitled to receive upon
the election of a successor general partner. As of December 31, 1997, the
Redeemable General Partner Interest was calculated to be $49.6 million. In
addition, pursuant to the Cash Distribution Agreement, the Partnership
Agreement was amended to provide that, upon voluntary resignation of the
general partner, the resigning general partner shall not be entitled to the
repurchase of its general partner interest under Paragraph 17.9 of the
Partnership Agreement.
Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's
note for its capital contribution to the Partnership. In addition, NMC assumed
liability for a note receivable which will require the repayment to the
Partnership of the $11.4 million paid by the Partnership under the Cash
Distribution Agreement plus the $808,000 in court ordered attorney's fees and
the $30,000 paid to Joseph B. Moorman. This note requires repayment over a ten-
year period, bears interest at a variable rate, currently 7.0% per annum, and
is guaranteed by ART, which is the parent of NMC, and owns approximately 55.4%
of the outstanding units of the Partnership.
Other Litigation. The Partnership is also involved in various other
lawsuits arising in the ordinary course of business. In the opinion of
management, the outcome of these lawsuits will not have a material effect on
the Partnership's financial condition, results of operations or liquidity.
NOTE 16. SUBSEQUENT EVENTS
In January 1999, GCLP sold the 199 unit Olde Towne Apartments in
Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after the
payment of various closing costs. A gain will be recognized on the sale.
In February 1999, the Partnership obtained mortgage financing secured by
the unencumbered 56 Expressway Office Building in Oklahoma City, Oklahoma, in
the amount of $1.7 million, receiving net cash of $1.7 million after the
payment of various closing costs. The mortgage bears interest at a variable
rate, currently 8.5% per annum, requires monthly payments of principal and
interest of $15,000 and matures in February 2019.
Also in February 1999, the Partnership obtained mortgage financing secured
by the unencumbered Melrose Business Park in Oklahoma City, Oklahoma, in the
amount of $900,000, receiving net cash of $870,000 after the
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payment of various closing costs. The mortgage bears interest at a variable
rate, currently 8.5% per annum, requires monthly payments of principal and
interest of $8,000 and matures in February 2019.
Further in February 1999, GCLP sold the 225 unit Santa Fe Apartments in
Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million
after the payment of various closing costs. A gain will be recognized on the
sale.
In February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa,
Arizona, for $19.5 million, receiving net cash of $793,000 after the payment of
various closing costs, including a real estate brokerage commission of $585,000
to Carmel Realty and remitting $17.8 million to the lender to hold in escrow
pending a substitution of collateral. Such funds will be released when
substitute collateral is approved. If substitute collateral is not provided by
August 1999, $13.0 million of the escrow will be applied against the mortgage's
principal balance, approximately $885,000 will be retained by the lender as a
prepayment penalty and the remaining $3.9 million will be returned to GCLP. A
gain will be recognized on the sale. NMC will earn an incentive sales fee on
the sale in accordance with the partnership agreement.
Also in February 1999, GCLP funded a $5.0 million unsecured loan to
Davister Corp., which at December 31, 1998, owned approximately 15.8% of the
outstanding shares of ART's common stock. The loan bears interest at 12.0% per
annum and matures in February 2000. All principal and interest are due at
maturity. The loan is guaranteed by BCM.
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APPENDIX A
AGREEMENT AND PLAN
OF
REORGANIZATION
dated as of November 3, 1999
by and among
AMERICAN REALTY INVESTORS, INC.,
NATIONAL REALTY, L.P.
and
AMERICAN REALTY TRUST, INC.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of November 3, 1999 (the
"Agreement"), by and among AMERICAN REALTY INVESTORS, INC., a newly-formed
Nevada corporation ("Newco"), NATIONAL REALTY, L.P., a Delaware limited
partnership ("NRLP"), and AMERICAN REALTY TRUST, INC., a Georgia corporation
("ART").
WHEREAS, (i) Newco is a newly formed corporation organized and existing
under the laws of the State of Nevada, (ii) NRLP is a limited partnership
organized and existing under the laws of the State of Delaware and (iii) ART is
a corporation organized and existing under the laws of the State of Georgia;
WHEREAS, Newco has formed a wholly owned subsidiary called ART Acquisition
Corp., a corporation organized under the laws of the State of Georgia ("Sub I"),
and a wholly owned subsidiary called NRLP Acquisition Corp., a corporation
organized under the laws of the State of Delaware ("Sub II"), and all the
outstanding capital stock of each of Sub I and Sub II is owned by Newco;
WHEREAS, the Board of Directors of each of Newco and ART and the general
partner of NRLP deem it advisable and in the best interests of their
stockholders and unitholders, as applicable, that each of NRLP and ART become
subsidiaries of Newco pursuant to the Mergers (as hereinafter defined)
hereinafter provided for, and desire to make certain representations, warranties
and agreements in connection with such Mergers; and
WHEREAS, as part of a single plan to be effectuated pursuant to this
Agreement, the ART Merger Agreement and the NRLP Merger Agreement, it is
intended that the transactions described in such agreements be treated for
federal income tax purposes as an integrated transaction described in Section
351 of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations thereunder (and any similar provision of state law).
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants and agreements set forth herein and such other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE I
CERTAIN DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
Section 1.1 "Acquisition Proposal" shall have the meaning set forth in
Section 7.1.
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Section 1.2 "Affiliate" shall mean, as to any person, any other person that
directly or indirectly controls, or is under common control with or is
controlled by such person.
Section 1.3 "ART Balance Sheet" shall have the meaning set forth in Section
5.5.
Section 1.4 "ART Common Stock" shall have the meaning set forth in Section
2.1.
Section 1.5 "ART Designees" shall have the meaning set forth in Section
2.5.
Section 1.6 "ART Merger" shall have the meaning set forth in Section 2.1.
Section 1.7 "ART Merger Agreement" shall have the meaning set forth in
Section 2.1.
Section 1.8 "ART Plans" shall have the meaning set forth in Section 5.10.
Section 1.9 "ART Preferred Stock" shall have the meaning set forth in
Section 5.2.
Section 1.10 "ART SEC Reports" shall have the meaning set forth in Section
5.5.
Section 1.11 "ART Special Stock" shall have the meaning set forth in
Section 2.1.
Section 1.12 "ART Stock" shall have the meaning set forth in Section 2.1.
Section 1.13 "ART Stock Option" shall have the meaning set forth in Section
7.7.
Section 1.14 "Certificate of Merger" shall have the meaning set forth in
Section 2.3.
Section 1.15 "Code" shall have the meaning set forth in the introductory
clauses hereto.
Section 1.16 "DGCL" shall have the meaning set forth in Section 2.3.
Section 1.17 "DRLPA" shall have the meaning set forth in Section 2.2.
Section 1.18 "Effective Time" shall have the meaning set forth in Section
2.3.
Section 1.19 "ERISA " shall mean the Employee Retirement Income Security
Act of 1974, as amended.
Section 1.20 "ERISA Affiliate" with respect to any party, shall mean any
trade or business, whether or not incorporated, that together with such party
would be deemed a "single employer" within the meaning of section 4001(a)(15) of
ERISA.
Section 1.21 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
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Section 1.22 "Form S-4" shall mean the Registration Statement on Form S-4
to be filed with the SEC under the Securities Act in connection with the Mergers
for the purpose of registering the shares of Newco Common Stock to be issued in
the Mergers.
Section 1.23 "GBCA" shall have the meaning set forth in Section 2.1.
Section 1.24 "Governmental Entity" shall mean any court, administrative
agency or commission or other governmental authority or instrumentality,
domestic or foreign.
Section 1.25 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
Section 1.26 "Material Adverse Effect" with respect to any party, shall
mean a material adverse effect (or any development which, insofar as reasonably
can be foreseen, in the future is reasonably likely to have a material adverse
effect) on the business, assets, financial or other condition, results of
operations or prospects of such party and its Subsidiaries taken as a whole.
Section 1.27 "Mergers" shall mean the ART Merger and the NRLP Merger.
Section 1.28 "Merger Agreements" shall mean the ART Merger Agreement and
the NRLP Merger Agreement.
Section 1.29 "Newco Board" shall have the meaning set forth in Section 2.5.
Section 1.30 "Newco Bylaws" shall have the meaning set forth in Section
2.5.
Section 1.31 "Newco Common Stock" shall have the meaning set forth in
Section 2.1.
Section 1.32 "NRLP Balance Sheet" shall have the meaning set forth in
Section 4.5.
Section 1.33 "NRLP Designees" shall have the meaning set forth in Section
2.2.
Section 1.34 "NRLP Merger" shall have the meaning set forth in Section 2.5.
Section 1.35 "NRLP Merger Agreement" shall have the meaning set forth in
Section 2.2.
Section 1.36 "NRLP Partnership Agreement" shall have the meaning set forth
in Section 2.2.
Section 1.37 "NRLP Plan" shall have the meaning set forth in Section 2.2.
Section 1.38 "NRLP SEC Reports" shall have the meaning set forth in Section
4.10.
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Section 1.39 "NRLP Units" shall have the meaning set forth in Section 2.2.
Section 1.40 "Proxy Statement" shall mean the joint proxy statement/
prospectus to be distributed to holders of shares of ART Common Stock and
holders of NRLP Units in connection with the meetings of such holders to be held
in connection with the transactions contemplated by this Agreement and the
Merger Agreements.
Section 1.41 "SEC" shall mean the Securities and Exchange Commission.
Section 1.42 "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
Section 1.43 "Significant Subsidiary" shall have the meaning set forth in
Rule 1-02 of Regulation S-X of the SEC.
Section 1.44 "Sub I" shall have the meaning set forth in the introductory
clauses hereto.
Section 1.45 "Sub II" shall have the meaning set forth in the introductory
clauses hereto.
Section 1.46 "Subsidiary" shall have the meaning set forth in Rule 1-02 of
Regulation S-X of the SEC.
Section 1.47 "Termination Date" shall have the meaning set forth in Section
9.1.
Section 1.48 "Third Party" shall mean any person or group that is deemed to
be a "person" within the meaning of Section 13(d) of the Exchange Act.
ARTICLE II
THE MERGERS
Section 2.1 ART Merger.
----------
(a) Newco and Sub I have executed and delivered, and ART has executed
and delivered, and agrees, subject to the terms and conditions of this Agreement
and the ART Merger Agreement, to submit to its shareholders for adoption and
approval as required under the Georgia Business Corporation Code (the "GBCA"),
together with this Agreement, in accordance with Article II hereof, the
Agreement of Merger, a form of which is set forth as Exhibit A hereto, with such
---------
further changes as may be mutually agreed upon by the parties hereto (the "ART
Merger Agreement"), providing for the merger of Sub I with and into ART (the
"ART Merger") and the conversion of each outstanding share of ART common stock,
par value $0.01 per share (the "ART Common Stock"), into shares of Newco common
stock, par value $0.01 per share (the
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"Newco Common Stock") and the conversion of each outstanding share of ART
special stock, $2.00 par value per share (the "ART Special Stock" and, together
with the ART Common Stock, the "ART Stock") into one share of Newco preferred
stock, $2.00 par value per share. As provided in the ART Merger Agreement, ART
shall be the surviving corporation in the ART Merger and shall become a wholly
owned subsidiary of Newco. From and after the Effective Time, the identity and
separate existence of Sub I shall cease, and ART shall succeed, without other
transfer, to all the rights, properties, debts and liabilities of Sub I.
(b) In connection with the ART Merger, Newco shall take such action as
may be necessary to reserve sufficient shares of Newco Common Stock, prior to
the ART Merger, to permit the issuance of shares of Newco Common Stock (i) to
the holders of ART Common Stock as of the Effective Time in accordance with the
terms of the ART Merger Agreement and (ii) upon the exercise of ART Stock
Options to be assumed by Newco in accordance with Section 7.7 hereof. Each of
Newco and ART shall use its reasonable efforts to cause the ART Merger to be
consummated in accordance with the terms of this Agreement and the ART Merger
Agreement.
Section 2.2 NRLP Merger.
-----------
(a) Newco and Sub II have executed and delivered, and NRLP has
executed and delivered, and agrees, subject to the terms and conditions of this
Agreement and the NRLP Merger Agreement, to submit to its holders of units of
partnership interest (the "NRLP Units") for adoption and approval, as required
under the terms of the First Amended and Restated Agreement of Limited
Partnership of NRLP, as amended (the "NRLP Partnership Agreement"), and the
Delaware Revised Limited Partnership Act (the "DRLPA"), together with this
Agreement, in accordance with Article II hereof, the Agreement of Merger, a form
of which is set forth as Exhibit B hereto, with such further changes as may be
---------
mutually agreed upon by the parties hereto (the "NRLP Merger Agreement"),
providing for the merger of Sub II with and into NRLP (the "NRLP Merger") and
the conversion of the outstanding NRLP Units held by all limited partners, other
than ART and its wholly-owned subsidiaries, into shares of Newco Common Stock.
As set forth in the NRLP Merger Agreement, (i) all NRLP Units held by ART and
its wholly-owned subsidiaries will remain issued and outstanding and (ii) NRLP
shall be the surviving entity in the NRLP Merger and shall become a subsidiary
of Newco. From and after the Effective Time, the identity and separate existence
of Sub II shall cease, and NRLP shall succeed, without other transfer, to all
the rights, properties, debts and liabilities of Sub II.
(b) In connection with the NRLP Merger, Newco shall take such action
as may be necessary to reserve sufficient shares of Newco Common Stock prior to
the Merger to permit the issuance of shares of Newco Common Stock to the holders
of NRLP Units as of the Effective Time in accordance with the terms of the NRLP
Merger Agreement. Each of Newco and NRLP shall use its reasonable efforts to
cause the NRLP Merger to be consummated in accordance with the terms of this
Agreement and the NRLP Merger Agreement.
Section 2.3 Filing of Merger Agreements and Related Certificates.
----------------------------------------------------
Immediately after all conditions to this Agreement have been satisfied or
waived, the certificates of merger pertaining to the ART Merger and the NRLP
Merger, respectively (together the "Certificates of Merger"),
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or such other documents necessary to effect the Mergers, shall be executed and
filed in accordance with the GBCA or the DRLPA and the Delaware General
Corporation Law (the "DGCL"), as the case may be, and the Mergers shall become
effective substantially simultaneously (and shall be treated as occurring
simultaneously for tax purposes) in accordance with the terms of the Merger
Agreements (such time and date are referred to herein as the "Effective Time").
Section 2.4 Effect of Mergers. The parties agree to the following
-----------------
provisions with respect to the Mergers:
(a) Names of Surviving Entities. The names of ART and NRLP, as the
---------------------------
surviving entities in the Mergers, from and after the Effective Time shall be
"American Realty Trust, Inc." and "National Realty, L.P.," respectively, until
changed or amended in accordance with applicable law.
(b) Charter Documents. At the Effective Time (i) the articles of
-----------------
incorporation and bylaws of ART, as in effect immediately prior to the Effective
Time, shall be amended so that the operative provisions read in their entirety
exactly as the articles of incorporation and bylaws, respectively, of Sub I,
except that the name of the corporation specified therein shall be "American
Realty Trust, Inc." and (ii) the agreement of limited partnership of NRLP, as in
effect immediately prior to the Effective Time, shall be the partnership
agreement of NRLP and NRLP shall be the surviving entity in the NRLP Merger.
(c) Other Effects. The ART Merger shall have such other effects as
-------------
are set forth in the ART Merger Agreement and the GBCA and the NRLP Merger shall
have such other effects as are set forth in the NRLP Merger Agreement and the
DRLPA and the DGCL.
(d) Tax Effects. The parties intend that the transactions described
-----------
in this Agreement, the ART Merger Agreement and the NRLP Merger Agreement
constitute a single plan that is treated for federal income tax purposes as an
integrated transaction described in and satisfying each of the requirements of
Section 351 of the Code and the regulations thereunder (and any similar
provisions of state laws) pursuant to which (i) each shareholder of ART is
treated as transferring all of its ART stock to Newco in exchange for Newco
stock, (ii) each limited partner of NRLP, other than ART (and its wholly owned
subsidiaries), is treated as transferring all of its NRLP Units to Newco in
exchange for Newco stock and (iii) immediately after the transactions described
in (i) and (ii), the former shareholders of ART and the former limited partners
of NRLP, other than ART (and its wholly owned subsidiaries), as a group, are in
"control" of Newco (as such term is defined in Section 368(c) of the Code). The
parties intend that no transactions other than the transactions described in
this Agreement, the ART Merger Agreement and the NRLP Merger Agreement be
considered part of the integrated transaction for purposes of determining the
group in "control" of Newco immediately after these transactions.
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Section 2.5 Name of Newco, Directors and Officers of Newco.
----------------------------------------------
(a) Name. The name of Newco, as the parent of ART and NRLP following
the consummation of the Mergers, from and after the Effective Time, shall be
"American Realty, Inc." until changed or amended in accordance with applicable
law.
(b) Newco Governance.
-----------------
(i) The directors comprising the full board of directors of Newco
(the "Newco Board") at the Effective Time to be comprised of six directors.
Initially, four of such directors shall be designated by ART and two of
such directors shall be designated by NRLP. ART hereby designates the
persons listed as such on Exhibit C hereto as its initial designees to the
---------
Newco Board (the "ART Designees"). NRLP hereby designates the persons
listed as such on Exhibit C hereto as its initial designees to the Newco
---------
Board (the "NRLP Designees"). If, prior to the Effective Time, any of the
ART Designees or the NRLP Designees shall decline or be unable to serve as
a Newco director, ART (if such person was so designated by ART) or NRLP (if
such person was so designated by NRLP) shall designate another person to
serve in such person's stead, which person shall be reasonably acceptable
to the other parties or party as the case may be.
(ii) At or prior to the Effective Time, Karl L. Blaha shall be
designated as President and Chief Executive Officer of Newco, provided,
that if he is unwilling or unable to serve in such capacity, his
replacement shall be selected by the Newco Board as constituted at the
Effective Time. Newco shall also have such other officers as may be
elected by the Newco Board.
(c) Tenure. The foregoing officers and directors of Newco, shall hold
------
their positions until their resignation or removal or the election or
appointment of their successors in the manner provided by Newco's charter
documents and applicable law.
Section 2.6 Approval of Mergers by Newco. Newco, as the sole shareholder
----------------------------
of each of Sub I and Sub II, has heretofore executed a formal written consent
under Section 14-2-704 of the GBCA and Section 228 of the DGCL, approving,
authorizing and adopting the ART Merger Agreement and the NRLP Merger Agreement.
Section 2.7 Newco Certificate of Incorporation and Bylaws. Prior to the
---------------------------------------------
Effective Time, the shareholder of Newco shall cause Newco to amend its articles
of incorporation to read in its entirety as set forth in Exhibit D hereto and to
---------
amend its Bylaws to read in their entirety as set forth in Exhibit E hereto.
---------
Section 2.8 Sub I Articles of Incorporation and Bylaws. Prior to the
------------------------------------------
Effective Time the articles of incorporation and bylaws of Sub I shall be
amended in a manner reasonably acceptable to ART.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NEWCO
Newco represents and warrants to ART and NRLP as follows:
Section 3.1 Organization and Qualification. Newco is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Nevada and has the requisite power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted, and is
duly qualified to do business and in good standing in each jurisdiction in which
the properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
so qualify or be in good standing would not have a Material Adverse Effect on
Newco. True, accurate and complete copies of the articles of incorporation and
bylaws of Newco as in effect on the date hereof, including all amendments
thereto, have heretofore been delivered to ART and NRLP.
Section 3.2 Capitalization.
--------------
(a) The authorized capital stock of Newco consists of 1,000 shares of
Newco Common Stock. As of the date hereof, there were 1,000 shares of Newco
Common Stock issued and outstanding, all which are owned by Robert A. Waldman,
as the sole incorporator of Newco, and all of which are validly issued, fully
paid and nonassessable and are not subject to and were not issued in violation
of any preemptive rights.
(b) Except for this Agreement and the Merger Agreements, there are not
now, and at the Effective Time there will not be, any options, warrants, calls,
rights, subscriptions, convertible securities or other rights or agreements,
arrangements or commitments of any kind obligating Newco to issue, transfer or
sell any securities of Newco. There are no outstanding contractual or other
obligations of Newco to purchase, redeem or otherwise acquire any shares of
Newco Common Stock. There is not now, and at the Effective Time there will not
be, any stockholder agreement, voting trust or other agreement or understanding
to which Newco is a party or bound relating to the voting of any shares of the
capital stock of Newco.
Section 3.3 Authority. Newco has all requisite corporate power and
---------
authority to execute and deliver this Agreement and the Merger Agreements and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Merger Agreements, and the consummation by
Newco of the transactions contemplated hereby and thereby, have been duly
authorized by Newco's board of directors and no other corporate proceedings on
the part of Newco are necessary to authorize the execution and delivery of this
Agreement and the Merger Agreements and the consummation by Newco of the
transactions contemplated hereby and thereby, except for the approval thereof by
the stockholders of Newco. This Agreement has been and, as of the Effective
Time, the Merger Agreements will have been, duly and validly executed and
delivered by Newco and, assuming the due authorization, execution and delivery
hereof and thereof by ART and NRLP, constitute or will constitute, as the case
may be, valid and binding agreements of Newco, enforceable against Newco in
accordance
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with their terms, except that such enforceability may be subject to (a)
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting creditors' rights generally and (b)
by general principles of equity (regardless of whether enforcement is sought in
a proceeding in equity or at law).
Section 3.4 Consents and Approvals; No Violation. None of the execution
------------------------------------
and delivery of this Agreement or the Merger Agreements, the consummation by
Newco of the transactions contemplated hereby and thereby or compliance by Newco
with any of the provisions hereof will (a) conflict with or result in a breach
of any provision of the articles of incorporation or bylaws of Newco, (b)
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, except (i) pursuant
to the Exchange Act, the Securities Act and the HSR Act and (ii) for filing the
Certificate of Merger with respect to the Mergers pursuant to the GBCA or the
DRLPA and the DGCL, as applicable, (c) result in a default (or an event which
with notice or lapse of time or both would become a default) or give to any
third party any right of termination, cancellation, amendment or acceleration
under, or result in the creation of a lien or encumbrance on any of the assets
of Newco pursuant to any note, license, agreement or other instrument or
obligation to which Newco is a party or by which Newco or any of its assets may
be bound or affected, or (d) violate or conflict with any order, writ,
injunction, decree, statute, rule or regulation applicable to Newco or any of
its properties or assets, other than (i) such defaults, rights of termination,
cancellation, amendment or acceleration, liens and encumbrances, violations and
conflicts and (ii) such consents, approvals, authorizations, permits or filings
that are not obtained, as set forth pursuant to (b) above, which, in the
aggregate, would not have a Material Adverse Effect on Newco.
Section 3.5 No Prior Activities. Except for obligations or liabilities
-------------------
incurred in connection with their respective incorporation or organization or
the negotiation and consummation of this Agreement and the Merger Agreements and
the transactions contemplated hereby and thereby, none of Newco, Sub I or Sub II
has incurred any obligations or liabilities nor engaged in any business or
activities of any type or kind whatsoever or entered into any agreements or
arrangements with any person or entity. Newco, Sub I and Sub II are newly
created corporations. Sub I and Sub II were established, as wholly owned
subsidiaries of Newco, solely to effectuate the transactions described in this
Agreement.
Section 3.6 Information Supplied. The information supplied or to be
--------------------
supplied by Newco for inclusion in (a) the Form S-4 will not, either at the time
the Form S-4 is filed with the SEC or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and (b) the Proxy Statement, including any
amendments and supplements thereto, will not, either at the date mailed to
shareholders of ART and unitholders of NRLP or at the times of the meetings of
ART and NRLP to be held in connection with the transactions contemplated by this
Agreement and the Merger Agreements contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Proxy Statement and the Form S-4
will each comply as to form in all material respects with all applicable laws,
including the provisions of the Securities
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Act and the Exchange Act, except that no representation is made by Newco with
respect to information supplied by ART or NRLP for inclusion therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF NRLP
NRLP represents and warrants to ART and Newco as follows:
Except as otherwise disclosed to ART and Newco in a letter delivered to
them prior to the execution hereof (which letter shall contain appropriate
references to identify the representations and warranties herein to which the
information in such letter relates) (the "NRLP Disclosure Letter"), NRLP
represents and warrants to ART and Newco as follows:
Section 4.1 Organization and Qualification. Each of NRLP and its
------------------------------
Significant Subsidiaries is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has the
requisite power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted, and is duly qualified to do
business and in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to so qualify or be
in good standing would not have a Material Adverse Effect on NRLP. True and
complete copies of the NRLP Partnership Agreement and the articles of
incorporation of NRLP Management Corp., NRLP's general partner, each as in
effect on the date hereof, including all amendments thereto, have heretofore
been made available or delivered to ART and Newco.
Section 4.2 Capitalization.
--------------
(a) As of the date hereof, there were 6,321,577 NRLP Units issued and
outstanding, all of which are validly issued, fully paid and nonassessable and
are not subject to and were not issued in violation of any preemptive rights.
Except as disclosed in Section 4.2 of the NRLP Disclosure Letter, no Subsidiary
of NRLP holds any NRLP Units.
(b) Except for this Agreement and the NRLP Merger Agreement there are
not now, and at the Effective Time there will not be, any options, warrants,
calls, rights, subscriptions, convertible securities or other rights or
agreements, arrangements or commitments of any kind obligating NRLP or any of
its Subsidiaries to issue, transfer or sell any securities of NRLP. All NRLP
securities subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. There are
no outstanding contractual or other obligations of NRLP or any of its
Subsidiaries to purchase, redeem or otherwise acquire any NRLP Units. There is
not now, and at the Effective Time there will not be, any agreement, voting
trust or other agreement or understanding to which NRLP or any of its
Subsidiaries is a party or bound relating to the voting of any securities of
NRLP.
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Section 4.3 Authority. NRLP has all requisite power and authority to
---------
execute and deliver this Agreement and the NRLP Merger Agreement and, subject to
approval of this Agreement and the NRLP Merger Agreement by the unitholders of
NLRP, to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement, the NRLP Merger Agreement and the
consummation by NRLP of the transactions contemplated hereby and thereby have
been duly authorized by NRLP's general partner and no other partnership
proceedings on the part of NRLP are necessary to authorize the execution and
delivery of this Agreement, the NRLP Merger Agreement and the consummation by
NRLP of the transactions contemplated hereby and thereby, except for the
approval thereof by the unitholders of NRLP. This Agreement has been, and as of
the Effective Time, the NRLP Merger Agreement will be, duly and validly executed
and delivered by NRLP and, assuming the due authorization, execution and
delivery hereof and thereof by Newco, Sub I, Sub II and ART, constitute or will
constitute, as the case may be, valid and binding agreements of NRLP,
enforceable against NRLP in accordance with their terms, except that such
enforceability may be subject to (a) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally and (b) by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
Section 4.4 Consents and Approvals; No Violation. Except as disclosed in
------------------------------------
Section 4.4 of the NRLP Disclosure letter, none of the execution and delivery by
NRLP of this Agreement, the NRLP Merger Agreement, the consummation by NRLP of
the transactions contemplated hereby and thereby or compliance by NRLP with any
of the provisions hereof will (a) conflict with or result in a breach of any
provision of the respective partnership agreements, charters or bylaws (or
similar governing documents) of NRLP or any of its Subsidiaries, (b) require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Entity, except (i) pursuant to the Exchange Act, the
Securities Act and the HSR Act and (ii) for filing the Certificate of Merger
with respect to the NRLP Merger pursuant to the DRLPA and the DGCL, (c) result
in a default (or an event which with notice or lapse of time or both would
become a default) or give to any third party any right of termination,
cancellation, amendment or acceleration under, or result in the creation of a
lien or encumbrance on any of the assets of NRLP or any of its Subsidiaries
pursuant to, any note, license, agreement or other instrument or obligation to
which NRLP or any of its Subsidiaries is a party or by which NRLP or any of its
Subsidiaries or any of their respective assets may be bound or affected, or (d)
violate or conflict with any order, writ, injunction, decree, statute, rule or
regulation applicable to NRLP or any of its Subsidiaries or any of their
respective properties or assets, other than (i) such defaults, rights of
termination, cancellation, amendment or acceleration, liens and encumbrances,
violations and conflicts and (ii) such consents, approvals, authorizations,
permits or filings, as set forth pursuant to (b) above, that are not obtained,
which, in the aggregate, would not have a Material Adverse Effect on NRLP and
would not materially impair NRLP's ability to consummate the transactions
contemplated by this Agreement and the NRLP Merger Agreement.
Section 4.5 SEC Reports and Financial Statements. Each form, report,
------------------------------------
schedule, registration statement and definitive proxy statement filed by NRLP
with the SEC since January 1, 1993 as such documents have since the time of
their filing been amended, the "NRLP SEC Reports"), which include all the
documents (other than preliminary material) that NRLP was required to file with
the SEC since such date, as of their respective dates, complied in all material
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<PAGE>
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, applicable to such NRLP SEC Reports. None of the NRLP SEC Reports
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, except
for such statements, if any, as have been modified by subsequent filings prior
to the date hereof. The financial statements of NRLP included in such reports
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of NRLP and its Subsidiaries as
at the dates thereof and the consolidated results of their operations and cash
flows (or changes in financial position prior to the approval of FASB 95) for
the periods then ended. Except as set forth in Section 4.5 of the NRLP
Disclosure Letter, since December 31, 1998, neither NRLP nor any of its
Subsidiaries has incurred any liabilities or obligations, whether absolute,
accrued, fixed, contingent, liquidated, unliquidated or otherwise and whether
due or to become due, except (a) as and to the extent set forth on the audited
balance sheet of NRLP and its Subsidiaries as at December 31, 1998 (including
the notes thereto) (the "NRLP Balance Sheet"), (b) as incurred in connection
with the transactions contemplated, or as provided, by this Agreement, (c) as
incurred after December 31, 1998 in the ordinary course of business and
consistent with past practices, (d) as described in the NRLP SEC Reports or (e)
as would not, individually or in the aggregate, have a Material Adverse Effect
on NRLP.
Section 4.6 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the NRLP SEC Reports filed prior to the date hereof or otherwise disclosed
pursuant to this Agreement, since December 31, 1998, NRLP and its Subsidiaries
have conducted their respective businesses only in the ordinary course,
consistent with past practice, and there has not occurred or arisen any event,
individually or in the aggregate, having or which, insofar as reasonably can be
foreseen, in the future is likely to have, a Material Adverse Effect on NRLP.
Section 4.7 Litigation. As of the date of this Agreement, except as
----------
disclosed in the NRLP SEC Reports filed prior to the date of this Agreement or
otherwise disclosed to Newco and ART prior to the date hereof, there is no
claim, suit, action or proceeding pending or, to the best knowledge of NRLP,
threatened against or affecting NRLP or any of its Subsidiaries, which is
reasonably likely to have a Material Adverse Effect on NRLP, nor is there any
judgment, decree, order, injunction, writ or rule of any court, governmental
department, commission, agency, instrumentality or authority or any arbitrator
outstanding against NRLP or any of its Subsidiaries having, or which, insofar as
reasonably can be foreseen, in the future is likely to have, any such effect.
Section 4.8 Disclosure. No representation or warranty of NRLP contained in
----------
this Agreement or the NRLP Merger Agreement, and no statement contained in any
certificate or schedule furnished or to be furnished by or on behalf of NRLP to
Newco and ART or any of its representatives pursuant thereto, contains or will
contain any untrue statement of a material fact,
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<PAGE>
or omits or will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements herein or therein not misleading or necessary in order to fully and
fairly provide the information required to be provided in any such document,
certificate or schedule.
Section 4.9 Information Supplied. The information supplied or to be
--------------------
supplied by NRLP or its Subsidiaries for inclusion in (a) the Form S-4 will not,
either at the time the Form S-4 is filed with the SEC or at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or (b) the Proxy
Statement, including any amendments and supplements thereto, will not, either at
the date mailed to unitholders or at the time of the meeting of unitholders of
NRLP to be held in connection with the transactions contemplated by this
Agreement and the Merger Agreements, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Proxy Statement and the Form S-4
will each comply as to form in all material respects with all applicable laws,
including the provisions of the Securities Act and the Exchange Act, except that
no representation is made by NRLP with respect to information supplied by Newco
and ART for inclusion therein.
Section 4.10 Affiliate Agreements. Except as disclosed in the NRLP SEC
--------------------
Reports filed prior to the date of this Agreement, except for this Agreement and
except as disclosed in Section 4.10 of the NRLP Disclosure Letter, as of the
date of this Agreement neither NRLP nor any of its Subsidiaries is a party to
any oral or written agreement with any of its Affiliates, other than with any of
its Subsidiaries.
Section 4.11 Compliance with Law. NRLP is not in violation of any Federal,
-------------------
state, local or foreign law, ordinance or regulation or judgment, order or
decree (including, but not limited to, those relating to the environment), the
violation of which, individually or in the aggregate, would have a Material
Adverse Effect on NRLP.
Section 4.12 Taxes. Except as disclosed in Section 4.12 of the NRLP
-----
Disclosure Letter, NRLP and each of its Subsidiaries have duly filed all
material tax returns required to be filed (or such tax returns have been
properly extended) other than those tax returns the failure to file would not
have a Material Adverse Effect on NRLP, and have paid all taxes and other
charges shown to be due on such returns, and there are no tax liens upon any
property or assets of NRLP or any of its Subsidiaries. There are no outstanding
agreements or waivers extending the statutory period of limitations applicable
to any Federal income tax return for any period. There does not exist any issue
that, if raised by any taxing authority with respect to any fiscal period,
would, singly or in the aggregate, be expected to result in an assessment
against NRLP that would have, or is reasonably likely to have, a Material
Adverse Effect on NRLP.
Section 4.13 Opinion of Financial Advisors. NRLP has received the opinion
-----------------------------
of Houlihan Lokey Howard & Zukin ("Houlihan") to the effect that, as of November
3, 1999, the consideration to be received in the NRLP Merger by the holders of
NRLP Units is fair to such holders from a financial point of view.
A-13
<PAGE>
Section 4.14 Brokers and Finders. Other than Houlihan, none of NRLP or any
-------------------
of its Subsidiaries nor any of their respective partners, directors, officers or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or similar payments in
connection with the transactions contemplated by this Agreement, or the NRLP
Merger Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ART
ART represents and warrants to NRLP and Newco as follows:
Except as otherwise disclosed to NRLP and Newco in a letter delivered to
them prior to the execution hereof (which letter shall contain appropriate
references to identify the representations and warranties herein to which the
information in such letter relates) (the "ART Disclosure Letter"), ART
represents and warrants to NRLP and Newco as follows:
Section 5.1 Organization and Qualification. Each of ART and its
------------------------------
Significant Subsidiaries is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has the
requisite power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted, and is duly qualified to do
business and in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to so qualify or be
in good standing would not have a Material Adverse Effect on ART. True and
complete copies of the articles of incorporation and bylaws of ART as in effect
on the date hereof, including all amendments thereto, have heretofore been
delivered to NRLP and Newco.
Section 5.2 Capitalization.
--------------
(a) The authorized capital stock of ART consists of 100,000,000 shares
of ART Common Stock and 20,000,000 shares of ART Special Stock. As of August 31,
1999, (i) 10,563,434 shares of ART Common Stock were issued and outstanding, all
of which are validly issued, fully paid and nonassessable and are not subject to
and were not issued in violation of any preemptive rights, (ii) 340,000 shares
of ART Common Stock were reserved for issuance upon the exercise of Options
granted pursuant to the ART Stock Option Plan and (iii) 3,401,000 shares of ART
Special Stock were issued and outstanding, all of which are validly issued,
fully paid and non-assessable and were not issued in violation of any preemptive
rights. Except as disclosed in Section 5.2(a) of the ART Disclosure Letter, no
Subsidiary of ART holds any shares of ART Stock. There has been no material
change in the information set forth in the second sentence of this Section 5.2
between the close of business on August 31, 1999 and the date hereof.
(b) Except for this Agreement, the ART Merger Agreement and the ART
Stock Options specified in Section 5.2(a) hereof and except as otherwise
disclosed in Section 5.2(b) of
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<PAGE>
the ART Disclosure Letter, there are not now, and at the Effective Time there
will not be, any options, warrants, calls, rights, subscriptions, convertible
securities or other rights or agreements, arrangements or commitments of any
kind obligating ART or any of its Subsidiaries to issue, transfer or sell any
securities of ART. All shares of ART Stock subject to issuance as aforesaid,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, will be duly authorized, validly issued, fully paid
and nonassessable. There are no outstanding contractual or other obligations of
ART or any of its Subsidiaries to purchase, redeem or otherwise acquire any
shares of ART Stock. There is not now, and at the Effective Time there will not
be, except as disclosed in Section 5.2(b) of the ART Disclosure Letter, any
stockholder agreement, voting trust or other agreement or understanding to which
ART or any of its Subsidiaries is a party or bound relating to the voting of any
shares of the capital stock of ART or any of its Subsidiaries.
Section 5.3 Authority. ART has all requisite corporate power and authority
---------
to execute and deliver this Agreement and the ART Merger Agreement and, subject
to approval of this Agreement and the ART Merger Agreement by the stockholders
of ART, to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement, the ART Merger Agreement and the
consummation by ART of the transactions contemplated hereby and thereby have
been duly authorized by ART's board of directors and no other corporate
proceedings on the part of ART are necessary to authorize the execution and
delivery of this Agreement, the ART Merger Agreement and the consummation by ART
of the transactions contemplated hereby and thereby, except for the approval
thereof by the stockholders of ART. This Agreement has been, and as of the
Effective Time, the ART Merger Agreement will be, duly and validly executed and
delivered by ART and, assuming the due authorization, execution and delivery
hereof and thereof by Newco, Sub I, Sub II and NRLP, constitute or will
constitute, as the case may be, valid and binding agreements enforceable against
ART in accordance with their terms, except that such enforceability may be
subject to (a) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to or affecting creditors'
rights generally and (b) by general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
Section 5.4 Consents and Approvals; No Violation. Except as disclosed in
------------------------------------
Section 5.4 of the ART Disclosure Letter, none of the execution and delivery by
ART of this Agreement, the ART Merger Agreement, the consummation by ART of the
transactions contemplated hereby and thereby or compliance by ART with any of
the provisions hereof will (a) conflict with or result in a breach of any
provision of the respective charters, bylaws or partnership agreements (or
similar governing documents) of ART or any of its Subsidiaries, (b) require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Entity, except (i) pursuant to the Exchange Act, the
Securities Act and the HSR Act and (ii) for filing the Certificate of Merger
with respect to the ART Merger pursuant to the GBCA, (c) result in a default (or
an event which with notice or lapse of time or both would become a default) or
give to any third party any right of termination, cancellation, amendment or
acceleration under, or result in the creation of a lien or encumbrance on any of
the assets of ART or any of its Subsidiaries pursuant to, any note, license,
agreement or other instrument or obligation to which ART or any of its
Subsidiaries is a party or by which ART or any of its Subsidiaries or any of
their respective assets may be bound or affected, or (d) violate or conflict
with any order, writ,
A-15
<PAGE>
injunction, decree, statute, rule or regulation applicable to ART or any of its
Subsidiaries or any of their respective properties or assets, other than (i)
such defaults, rights of termination, cancellation, amendment or acceleration,
liens and encumbrances, violations and conflicts and (ii) such consents,
approvals, authorizations, permits or filings, as set forth pursuant to (b)
above, that are not obtained, which, in the aggregate, would not have a Material
Adverse Effect on ART and would not materially impair ART's ability to
consummate the transactions contemplated by this Agreement and the ART Merger
Agreement.
Section 5.5 SEC Reports and Financial Statements. Each form, report,
------------------------------------
schedule, registration statement and definitive proxy statement filed by ART
with the SEC since January 1, 1993, (as such documents have since the time of
their filing been amended, the "ART SEC Reports"), which include all the
documents (other than preliminary material) that ART was required to file with
the SEC since such date, as of their respective dates, complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, applicable to such ART SEC Reports. None of the ART SEC Reports
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, except
for such statements, if any, as have been modified by subsequent filings prior
to the date hereof. The financial statements of ART included in such reports
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of ART and its Subsidiaries as
at the dates thereof and the consolidated results of their operations and cash
flows (or changes in financial position prior to the approval of FASB 95) for
the periods then ended. Except as set forth in Section 5.5 of the ART Disclosure
Letter, since December 31, 1998, neither ART nor any of its Subsidiaries has
incurred any liabilities or obligations, whether absolute, accrued, fixed,
contingent, liquidated, unliquidated or otherwise and whether due or to become
due, except (a) as and to the extent set forth on the audited balance sheet of
ART and its Subsidiaries as at December 31, 1998 (including the notes thereto)
(the "ART Balance Sheet"), (b) as incurred in connection with the transactions
contemplated, or as provided, by this Agreement, (c) as incurred after December
31, 1998 in the ordinary course of business and consistent with past practices,
(d) as described in the ART SEC Reports or (e) as would not, individually or in
the aggregate, have a Material Adverse Effect on ART.
Section 5.6 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the ART SEC Reports filed prior to the date hereof or otherwise disclosed
pursuant to this Agreement, since December 31, 1998, ART and its Subsidiaries
have conducted their respective businesses only in the ordinary course,
consistent with past practice, and there has not occurred or arisen any event,
individually or in the aggregate, having or which, insofar as reasonably can be
foreseen, in the future is likely to have, a Material Adverse Effect on ART.
Section 5.7 Litigation. As of the date of this Agreement, except as
----------
disclosed in the ART SEC Reports filed prior to the date of this Agreement or
otherwise disclosed to Newco and
A-16
<PAGE>
NRLP prior to the date hereof, there is no claim, suit, action or proceeding
pending or, to the best knowledge of ART, threatened against or affecting ART or
any of its Subsidiaries, which is reasonably likely to have a Material Adverse
Effect on ART, nor is there any judgment, decree, order, injunction, writ or
rule of any court, governmental department, commission, agency, instrumentality
or authority or any arbitrator outstanding against ART or any of its
Subsidiaries having, or which, insofar as reasonably can be foreseen, in the
future is likely to have, any such effect.
Section 5.8 Disclosure. No representation or warranty of ART contained in
----------
this Agreement or the ART Merger Agreement and no statement contained in any
certificate or schedule furnished or to be furnished by or on behalf of ART to
Newco and NRLP or any of its representatives pursuant thereto contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material fact necessary, in light of the circumstances under which it was or
will be made, in order to make the statements herein or therein not misleading
or necessary in order to fully and fairly provide the information required to be
provided in any such document, certificate or schedule.
Section 5.9 Information Supplied. The information supplied or to be
--------------------
supplied by ART or its Subsidiaries for inclusion in (a) the Form S-4 will not,
either at the time the Form S-4 is filed with the SEC or at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or (b) the Proxy
Statement, including any amendments and supplements thereto, will not, either at
the date mailed to shareholders or at the time of the meeting of shareholders of
ART to be held in connection with the transactions contemplated by this
Agreement and the Merger Agreements, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Proxy Statement and the Form S-4
will each comply as to form in all material respects with all applicable laws,
including the provisions of the Securities Act and the Exchange Act, except that
no representation is made by ART with respect to information supplied by Newco
or NRLP for inclusion therein.
Section 5.10 Stock Option Plans. ART has delivered or made available to
------------------
Newco and NRLP full and complete copies or descriptions of each, stock option,
stock appreciation right, restricted stock, phantom stock and performance stock
plans of ART (such plans being referred to herein as the "ART Plans"). Each of
the ART Plans is in material compliance with all applicable laws.
Section 5.11 Affiliate Agreements. Except as disclosed in the ART SEC
--------------------
Reports filed prior to the date of this Agreement and except for this Agreement
and except as otherwise disclosed in Section 5.11 of the ART Disclosure Letter,
as of the date of this Agreement neither ART nor any of its Subsidiaries is a
party to any oral or written agreement with any of its Affiliates, other than
with any of its Subsidiaries.
Section 5.12 Compliance with Law. ART is not in violation of any Federal,
-------------------
state, local or foreign law, ordinance or regulation or judgment, order or
decree (including, but not limited to,
A-17
<PAGE>
those relating to the environment), the violation of which, individually or in
the aggregate, would have a Material Adverse Effect on ART.
Section 5.13 Taxes. Except as disclosed in Section 5.13 of the ART
-----
Disclosure Letter, ART and each of its Subsidiaries have duly filed all material
tax returns required to be filed (or such returns have been properly extended)
other than those tax returns the failure to file would not have a Material
Adverse Effect on ART, and have paid all taxes and other charges shown to be due
on such returns, and there are no tax liens upon any property or assets of ART
or any of its Subsidiaries. There are no outstanding agreements or waivers
extending the statutory period of limitations applicable to any Federal income
tax return for any period. There does not exist any issue that, if raised by any
taxing authority with respect to any fiscal period, would, singly or in the
aggregate, be expected to result in an assessment against ART that would have,
or is reasonably likely to have, a Material Adverse Effect on ART.
Section 5.14 Opinion of Financial Advisors. ART has received the opinion
-----------------------------
of Fieldstone, Inc. ("Fieldstone") to the effect that, as of November 3, 1999,
the consideration to be received in the ART Merger by the holders of shares of
ART Common Stock is fair to such holders from a financial point of view.
Section 5.15 Brokers and Finders. Other than Fieldstone, none of ART or
-------------------
any of its Subsidiaries nor any of their respective partners, directors,
officers or employees has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
similar payments in connection with the transactions contemplated by this
Agreement or the ART Merger Agreement.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 6.1 Conduct of Business of NRLP Pending the Effective Time. Except
------------------------------------------------------
as expressly permitted or contemplated by this Agreement or the Merger
Agreements, until the Effective Time, NRLP shall, and shall cause each of its
Subsidiaries to, conduct its operations in the ordinary and usual course of
business consistent with past practice and use its commercially reasonable
efforts to preserve intact their respective business organizations' goodwill,
keep available the services of their respective present officers and key
employees, and preserve the goodwill and business relationships with suppliers,
distributors, customers and others having business relationships with them.
Without limiting the generality of the foregoing, and except as otherwise
permitted by this Agreement, prior to the Effective Time, without the consent of
ART, which consent shall not be unreasonably withheld, NRLP will not, and will
cause each of its Subsidiaries not to:
(a) amend or propose to amend their respective, partnership
agreements, charters or bylaws (other than as contemplated by this Agreement);
or split, combine or reclassify their outstanding securities or declare, set
aside or pay any dividend or distribution in respect of any securities (other
than the payment to NRLP or any of its Subsidiaries of any such dividend or
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<PAGE>
distribution) or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for the NRLP Units;
(b) (i) issue or authorize or propose the issuance of, sell, pledge or
dispose of, or agree to issue or authorize or propose the issuance of, any
additional NRLP Units, or any options, warrants or rights of any kind to acquire
any NRLP Units, or any debt or equity securities convertible into or
exchangeable for such NRLP Units, other than any such issuance pursuant to
options, warrants, rights or convertible securities outstanding as of the date
hereof in accordance with their terms; (ii) acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial equity interest in
or a substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets in each
case which are material, individually or in the aggregate, to NRLP and its
Subsidiaries taken as a whole; (iii) sell (including by sale-leaseback), lease,
pledge, dispose of or encumber any assets or interests therein, which are
material, individually or in the aggregate, to NRLP and its Subsidiaries taken
as a whole, other than in the ordinary course of business and consistent with
past practice; (iv) incur or become contingently liable with respect to any
material indebtedness for borrowed money or guarantee any such indebtedness or
issue any debt securities or otherwise incur any material obligation or
liability (absolute or contingent) other than short-term indebtedness in the
ordinary course of business and consistent with past practice; (v) redeem,
purchase, acquire or offer to purchase or acquire any (x) NRLP Units (or other
outstanding securities) or (y) long-term debt, other than as required by the
governing instruments relating thereto; or (vi) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
(c) enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other arrangements or
agreements with any partners, directors, officers or key employees;
(d) adopt, enter into or amend any, or become obligated under any new,
bonus, profit sharing, compensation, unit option, pension, retirement, deferred
compensation, health care, employment or other employee benefit plan, agreement,
trust, fund or arrangement for the benefit or welfare of any employee or
retiree, except as required to comply with changes in applicable law occurring
after the date hereof and except, with respect to all plans other than bonus
plans, in the ordinary course of business and consistent with past practice; or
(e) take any action that would, or is reasonably likely to, result in
any of its representations and warranties set forth in this Agreement becoming
untrue, or in any of the conditions to the Mergers set forth in Article VIII not
being satisfied.
Section 6.2 Conduct of Business of ART Pending the Effective Time. Except
-----------------------------------------------------
as expressly permitted or contemplated by this Agreement or the Merger
Agreements until the Effective Time, ART shall, and shall cause each of its
Subsidiaries to, conduct its operations in the ordinary and usual course of
business consistent with past practice and use their commercially reasonable
efforts to preserve intact their respective business organizations' goodwill,
keep available the services of their respective present officers and key
employees and
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<PAGE>
preserve the goodwill and business relationships with suppliers, distributors,
customers and others having business relationships with them. Without limiting
the generality of the foregoing, and except as otherwise permitted by this
Agreement, prior to the Effective Time, without the consent of NRLP, which
consent shall not be unreasonably withheld, ART will not, and will cause each of
its Subsidiaries not to:
(a) amend or propose to amend their respective charters, bylaws or
partnership agreements (other than as contemplated by this Agreement); or split,
combine or reclassify their outstanding capital stock or partnership interests
or declare, set aside or pay any dividend or distribution in respect of any
capital stock (other than the payment to ART or any of its Subsidiaries of any
such dividend or distribution) or issue or authorize or propose the issuance of
any other securities in respect of, in lieu of or in substitution for shares of
its capital stock or partnership interests;
(b) (i) issue or authorize or propose the issuance of, sell, pledge or
dispose of, or agree to issue or authorize or propose the issuance of, any
additional shares of, or any options, warrants or rights of any kind to acquire
any shares of, their capital stock of any class or any debt or equity securities
convertible into or exchangeable for such capital stock, other than any such
issuance pursuant to options, warrants, rights or convertible securities
outstanding as of the date hereof in accordance with their terms;
(ii) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets in each case which are
material, individually or in the aggregate, to ART and its Subsidiaries taken as
a whole;
(iii) sell (including by sale-leaseback), lease, pledge,
dispose of or encumber any assets or interests therein, which are material,
individually or in the aggregate, to ART and its Subsidiaries taken as a whole,
other than in the ordinary course of business and consistent with past practice;
(iv) incur or become contingently liable with respect to any
material indebtedness for borrowed money or guarantee any such indebtedness or
issue any debt securities or otherwise incur any material obligation or
liability (absolute or contingent) other than short-term indebtedness in the
ordinary course of business and consistent with past practice;
(v) redeem, purchase, acquire or offer to purchase or
acquire any (x) shares of its capital stock or (y) long-term debt, other than as
required by the governing instruments relating thereto; or
(vi) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
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(c) enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other arrangements or
agreements with any directors, officers or key employees;
(d) adopt, enter into or amend any, or become obligated under any new,
bonus, profit sharing, compensation, stock option, pension, retirement, deferred
compensation, health care, employment or other employee benefit plan, agreement,
trust, fund or arrangement for the benefit or welfare of any employee or
retiree, except as required to comply with changes in applicable law occurring
after the date hereof and except, with respect to all plans other than bonus
plans, in the ordinary course of business and consistent with past practice; or
(e) take any action that would, or is reasonably likely to, result in
any of its representations and warranties set forth in this Agreement becoming
untrue or in any of the conditions to the Mergers set forth in Article VIII not
being satisfied.
Section 6.3 Cooperation. Subject to compliance with applicable law, from
-----------
the date hereof until the Effective Time, each of NRLP and ART shall confer on a
regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations and shall promptly provide the other party or its counsel with copies
of all filings made by such party with any Governmental Entity in connection
with this Agreement, the Merger Agreements and the transactions contemplated
hereby and thereby.
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS
Section 7.1 No Solicitation.
---------------
(a) Without the prior written consent of ART, NRLP and its
Subsidiaries will not, and will use their best efforts to cause their respective
partners, officers, directors, employees and agents not to, initiate or solicit,
directly or indirectly, any inquiries or the making of any proposal with respect
to or, except to the extent required by their fiduciary duties, engage in
negotiations concerning, provide any confidential information or data to or have
any discussions with, any Third Party, other than ART or any Affiliate of ART,
relating to any Acquisition Proposal (as hereinafter defined) with respect to
NRLP or any of its Subsidiaries. NRLP will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. NRLP shall
immediately notify ART if any such negotiations, or providing of confidential
information or data or discussions, are entered into or made or any such
inquiries are received in respect thereof, and shall provide details with
respect thereto.
(b) Without the prior written consent of NRLP, ART and its
Subsidiaries will not, and will use their best efforts to cause their respective
partners, officers, directors, employees and agents not to, initiate or solicit,
directly or indirectly, any inquiries or the making of any
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proposal with respect to or, except to the extent required by their fiduciary
duties, engage in negotiations concerning, provide any confidential information
or data to or have any discussions with, any Third Party, other than NRLP or any
Affiliate of NRLP, relating to any Acquisition Proposal with respect to ART or
any of its Subsidiaries. ART will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. ART shall immediately notify
NRLP if any such negotiations, or providing of confidential information or data
or discussions, are entered into or made or any such inquiries are received in
respect thereof, and shall provide details with respect thereto.
(c) The term "Acquisition Proposal" as used herein means any offer
or proposal for, or any indication of interest in, a merger or other business
combination involving ART or NRLP, or any of their respective Subsidiaries, or
the acquisition of any equity interest in, or a substantial portion of the
assets of, any such party, other than the transactions contemplated by this
Agreement.
Section 7.2 Access to Information. Subject to compliance with applicable
---------------------
law, upon reasonable notice ART and NRLP shall each (and shall cause each of
their respective Subsidiaries to) afford to the other and the officers,
employees, accountants, counsel, financial advisors and other representatives of
the other access during normal business hours throughout the period prior to the
Effective Time to all of its properties, books, contracts, commitments and
records and, during such period, each of ART and NRLP shall (and shall cause
each of their respective Subsidiaries to) furnish promptly to the other (a) a
copy of each report, schedule, registration statement and other document filed
or received by it during such period pursuant to the requirements of Federal
securities laws, and (b) all other information concerning its businesses,
properties and personnel as such other party may reasonably request. Unless
otherwise required by law, the parties will hold any such information which is
nonpublic in confidence until such time as such information otherwise becomes
publicly available through no wrongful act of either party and, in the event of
termination of this Agreement for any reason, each party shall promptly return
all nonpublic documents obtained from any other party, and any copies made of
such documents, to such other party. In addition, in the event of such
termination, all documents, memoranda, notes and other writings whatsoever
prepared by each party based on the information in such material shall be
destroyed (and each party shall use its commercially reasonable efforts to cause
its advisors and their representatives to similarly destroy their respective
documents, memoranda and notes), and such destruction (and commercially
reasonable efforts) shall be certified in writing to the other party by an
authorized officer supervising such destruction.
Section 7.3 Registration Statement and Proxy Statement. As soon as is
------------------------------------------
reasonably practicable after the date hereof, ART and NRLP shall prepare and
file the Proxy Statement with the SEC, and Newco shall promptly prepare and file
the Form S-4 with the SEC in which the Proxy Statement will be included. Newco
shall use its best efforts to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing. Newco
shall take any action required to be taken under applicable state securities and
blue sky laws in connection with the issuance of shares of Newco Common Stock in
the Mergers and as contemplated by this Agreement. ART and NRLP shall promptly
furnish to each other all
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information, and take such other actions, as may reasonably be requested in
connection with any action by any of them in connection with this Section 7.3.
Section 7.4 Approval of Agreements. Each of ART and NRLP shall call a
----------------------
meeting of its stockholders and unitholders, respectively, to be held as
promptly as practicable for the purpose of voting upon this Agreement and the
NRLP Merger Agreement in the case of NRLP and the ART Merger Agreement in the
case of ART. Subject to the exercise of their respective fiduciary obligations,
the board of directors of ART and the general partner of NRLP shall recommend to
their respective stockholders and unitholders approval of such matters. NRLP
and ART shall coordinate and cooperate with respect to the timing of such
meetings and shall use their best efforts to hold such meetings on the same day
and as soon as practicable after the date hereof. Waldman agrees to vote its
shares of Newco Common Stock for adoption and approval of this Agreement, the
Merger Agreements and the transactions contemplated hereby and to take all
additional actions necessary to adopt and approve this Agreement, the Merger
Agreements and the transactions contemplated hereby and thereby.
Section 7.5 Agreement to Cooperate; Further Assurances. Subject to the
------------------------------------------
terms and conditions of this Agreement, each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement and the Merger Agreements, subject to the appropriate vote of
unitholders of NRLP and stockholders of ART described in Section 8.1 (a) hereof,
including providing information and using reasonable efforts to obtain all
necessary or appropriate waivers, consents and approvals, and effecting all
necessary registrations and filings (including filings under the HSR Act);
provided that nothing herein shall require Newco, ART or NRLP to hold, manage or
operate any assets separately in order to obtain any such consent or approval or
to enter into any sale or divestiture of assets. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or the Merger Agreements, the proper partners,
officers and directors of each party to this Agreement shall take all necessary
actions to the extent not inconsistent with their other duties and obligations
or applicable law.
Section 7.6 Stock Options.
--------------
(a) To the extent that acceleration of the exercisability of any
outstanding option to purchase shares of ART Common Stock (an "ART Stock
Option"), any outstanding unit based on the value of ART Common Stock or the
stock of an ART Subsidiary is permitted but not required by the applicable
governing instrument, then ART shall take all necessary action to cause such
acceleration not to occur. In connection therewith, at the Effective Time, to
the extent permitted by the terms of the relevant governing instruments, each
ART Stock Option, whether vested or unvested, shall be assumed by Newco. Unless
ART and NRLP shall otherwise agree, each such ART Stock Option shall be deemed
to constitute an option to acquire, on the same terms and conditions as were
applicable under such ART Stock Option, the same number of shares of Newco
Common Stock as the holder of such ART Stock Option would have been entitled to
receive pursuant to the ART Merger had such holder exercised such option in full
immediately prior to the Effective Time.
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(b) As soon as practicable after the Effective Time, Newco shall
file a registration statement on the appropriate form with respect to the shares
of Newco Common Stock subject to such options and shall use its best efforts to
maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such options remain outstanding. Newco shall
administer the ART Plans assumed pursuant to this Section 7.6 in a manner that
complies with Rule 16b-3 promulgated under the Exchange Act to the extent the
ART Plans complied with such rule prior to the ART Merger.
Section 7.7 Public Statements. The parties shall consult with each other
-----------------
prior to issuing any public announcement or statement with respect to this
Agreement, the Merger Agreements or the transactions contemplated hereby or
thereby and shall not issue any such public announcement or statement prior to
such consultation, except as may be required by law or by the rules of the
exchange on which the ART Common Stock or NRLP Units are currently listed for
trading.
Section 7.8 Letter of NRLP's Accountants. NRLP shall use its best efforts
----------------------------
to cause to be delivered to ART a letter of BDO Seidman, LLP, dated a date
within two business days before the date on which the Form S-4 shall become
effective and addressed to ART, in form and substance reasonably satisfactory to
ART and customary in scope and substance for letters delivered by independent
public accountants in connection with registration statements similar to the
Form S-4.
Section 7.9 Letter of ART's Accountants. ART shall use its best efforts
---------------------------
to cause to be delivered to NRLP a letter of BDO Seidman, LLP, dated a date
within two business days before the date on which the Form S-4 shall become
effective and addressed to NRLP, in form and substance reasonably satisfactory
to NRLP and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Form S-4.
Section 7.10 Expenses. All costs and expenses incurred in connection with
--------
this Agreement and the Merger Agreements and the transactions contemplated
hereby and thereby shall be paid by the party incurring such expenses, except
that those expenses incurred in connection with printing and mailing the Proxy
Statement and the Form S-4, as well as the filing fee relating thereto, shall be
shared equally by ART, on the one hand, and NRLP, on the other hand.
Section 7.11 Newco Activities. Until the Effective Time, except in
----------------
connection with or furtherance of the transactions contemplated by this
Agreement and the Merger Agreements, Newco will incur no obligations or
liabilities nor engage in any business or activities of any type or kind
whatsoever or enter into any agreements or arrangements with any person or
entity.
7.12 Reporting. Newco, ART and NRLP shall for federal income tax
---------
purposes report the transactions contemplated by this Agreement, the ART Merger
Agreement and the NRLP Merger Agreement pursuant to which Newco stock is issued
to ART shareholders and limited
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partners of NRLP (other than ART and its wholly owned subsidiaries) as a
transaction governed by Section 351 of the Code. Newco shall comply with the
reporting and record keeping requirements of Treasury Regulation Section 1.351-3
with respect to such transactions. Newco shall inform each recipient of Newco
stock pursuant to such transactions of such recipient's reporting and record
keeping requirements as specified in Treasury Regulation Section 1.351-3 with
respect to such transactions.
ARTICLE VIII
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the Mergers.
-----------------------------------------------------------
The respective obligations of each party to effect the Mergers shall be subject
to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) This Agreement, the Merger Agreements and the transactions
contemplated hereby and thereby shall have been approved and adopted by the
affirmative vote of a majority of the outstanding shares of ART Common Stock and
NRLP Units entitled to vote;
(b) The waiting period, if any, applicable to the consummation of
the Mergers under the HSR Act shall have expired or been terminated;
(c) The parties hereto shall have made the requisite filings with
all Governmental Entities as shall be required pursuant to applicable laws,
rules and regulations, and such Governmental Entities, to the extent required by
applicable law, shall have approved the transactions contemplated by this
Agreement; except where the failure to obtain any such approval would not,
individually or in the aggregate, have a Material Adverse Effect on ART and
NRLP, and their respective Subsidiaries, taken as a whole, or upon the
consummation of the transactions contemplated hereby;
(d) The Form S-4 shall have become effective in accordance with the
provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect;
(e) No temporary restraining order, preliminary or permanent
injunction or other order or decree by any court of competent jurisdiction which
prevents the consummation of the Mergers or imposes material conditions with
respect thereto shall have been issued and remain in effect (each party agreeing
to use its reasonable efforts to have any such injunction, order or decree
lifted);
(f) No action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or Federal government or
governmental agency which would prevent the consummation of the Mergers or
impose material conditions with respect thereto; and
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(g) The shares of Newco Common Stock required to be issued
hereunder shall have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance.
Section 8.2 Conditions to Obligation of NRLP to Effect the NRLP Merger.
----------------------------------------------------------
The obligation of NRLP to effect the NRLP Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) ART shall have performed in all material respects its
agreements contained in this Agreement and the Merger Agreements required to be
performed on or prior to the Effective Time and the representations and
warranties of ART contained in this Agreement and the Merger Agreements shall be
true and correct in all material respects on and as of the date of this
Agreement and on and as of the Effective Time as if made on and as of such date,
except as contemplated or permitted by this Agreement and the Merger Agreements,
and NRLP shall have received a certificate of the President or of an Executive
Vice President of ART to that effect;
(b) ART shall have obtained the consent or approval of each person
whose consent or approval shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except those for
which failure to obtain such consents and approvals would not, individually or
in the aggregate, have a Material Adverse Effect on ART or upon the consummation
of the transactions contemplated hereby;
(c) NRLP shall have received the letter of BDO Seidman, LLP
referred to in Section 7.8 hereof; and
(d) NRLP and Newco shall have received an opinion from Locke
Liddell & Sapp LLP substantially to the effect that the NRLP Merger shall be
treated for federal income tax purposes as part of a transaction that satisfies
the requirements of Section 351 of the Code.
Section 8.3 Conditions to Obligation of ART to Effect the ART Merger. The
--------------------------------------------------------
obligation of ART to effect the ART Merger shall be subject to the fulfillment
at or prior to the Effective Time of the following additional conditions:
(a) NRLP shall have performed in all material respects its
agreements contained in this Agreement and the Merger Agreements required to be
performed on or prior to the Effective Time and the representations and
warranties of NRLP contained in this Agreement and the Merger Agreements shall
be true and correct in all material respects on and as of the date of this
Agreement and on and as of the Effective Time as if made on and as of such date,
except as contemplated by this Agreement and the Merger Agreements, and ART
shall have received a certificate of the general partner of NRLP to that effect;
(b) NRLP shall have obtained the consent or approval of each person
whose consent or approval shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except for which
failure to obtain such consents and approvals would not,
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individually or in the aggregate, have a Material Adverse Effect on NRLP or upon
the consummation of the transactions contemplated hereby;
(c) ART shall have received the letter of BDO Seidman, LLP referred
to in Section 7.9 hereof; and
(d) ART and Newco shall have received an opinion from Locke Liddell
& Sapp LLP substantially to the effect that the ART Merger shall be treated for
federal income tax purposes as part of a transaction that satisfies the
requirements of Section 351 of the Code.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any time prior
------------
to the Effective Time, whether before or after approval by the shareholders of
ART or the unitholders of NRLP:
(a) by the mutual written consent of ART and NRLP;
(b) by either ART or NRLP if (i) the Mergers shall not have been
consummated on or before March 31, 2000 (the "Termination Date"); (ii) any
Governmental Entity, the consent of which is a condition to the obligations of
ART and NRLP to consummate the transactions contemplated hereby or by the Merger
Agreements, shall have determined not to grant its consent and all appeals of
such determination shall have been taken and have been unsuccessful; or (iii)
any court of competent jurisdiction in the United States or any State shall have
issued an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting either of the Mergers and such
order, judgment or decree shall have become final and non-appealable;
(c) by NRLP if (i) in the exercise of its good faith judgment as to
its fiduciary duties to its unitholders imposed by law, the general partner of
NRLP determines that such termination is required by reason of an Acquisition
Proposal having been made to it on terms more favorable to NRLP's unitholders
than the transactions contemplated hereby, (ii) the ART Merger shall have been
voted on by holders of ART Common Stock at a meeting duly convened therefor, and
the votes shall not have been sufficient to satisfy the condition set forth in
Section 8.1(a) hereof, (iii) there has been a material breach by ART of any
representation, warranty, covenant or agreement set forth in this Agreement or
the ART Merger Agreement, which breach has not been cured within ten business
days following receipt by the breaching party of notice of such breach; or (iv)
the Board of Directors of ART should fail to recommend to its stockholders
approval of the transactions contemplated by this Agreement and the ART Merger
Agreement or such recommendation shall have been made and subsequently
withdrawn;
(d) by ART if (i) in its exercise of its good faith judgment as to
its fiduciary duties to its stockholders imposed by law, the Board of Directors
of ART determines that such
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termination is required by reason of an Acquisition Proposal having been made to
it on terms more favorable to ART's shareholders than the transactions
contemplated hereby, (ii) the NRLP Merger shall have been voted on by holders of
NRLP Units at a meeting duly convened therefor and the votes shall not have been
sufficient to satisfy the condition set forth in Section 8.1(a), (iii) there has
been a material breach by NRLP of any representation, warranty, covenant or
agreement set forth in this Agreement or the NRLP Merger Agreement, which breach
has not been cured within ten business days following receipt by the breaching
party of notice of such breach; or (iv) the general partner of NRLP should fail
to recommend to its unitholders approval of the transactions contemplated by
this Agreement and the NRLP Merger Agreement or such recommendation shall have
been made and subsequently withdrawn;
provided that the right to terminate this Agreement (x) under Section 9.1(b)(i)
hereof shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date and (y) under
Section 9.1(c) and (d) hereof shall not be available to any party who at such
time is in material breach of any representation, warranty, covenant or
agreement set forth in this Agreement or the Merger Agreements.
Section 9.2 Effect of Termination. In the event of termination of this
---------------------
Agreement by either ART or NRLP as provided in Section 9.1 hereof, this
Agreement shall forthwith become void (except as set forth in this Section 9.2
and in Sections 7.2 and 7.10 hereof which shall survive the termination) and
there shall be no liability on the part of Newco, ART or NRLP or their
respective officers, directors or partners except for any breach of any of its
obligations under this Section 9.2 and Sections 7.2 and 7.10. Notwithstanding
the foregoing, no party hereto shall be relieved from liability for any willful,
material breach of this Agreement.
Section 9.3 Amendment. This Agreement and the Merger Agreements may be
---------
amended by the parties hereto at any time before or after approval hereof by the
shareholders of ART or unitholders of NRLP, respectively, provided that after
any such approval, no amendment shall be made which (a) changes the ratios at
which shares of ART Stock or NRLP Units are to be converted into shares of Newco
Common Stock pursuant to the Merger Agreements hereof, (b) in any way materially
adversely affects the rights of holders of shares of ART Stock or holders of
NRLP Units or (c) changes any of the principal terms of this Agreement or the
Merger Agreements, in each case without the further approval of such
shareholders or unitholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 9.4 Waiver. At any time prior to the Effective Time, the parties
------
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE X
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GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations, Warranties and Agreements.
----------------------------------------------------------
None of the representations, warranties and agreements in this Agreement shall
survive the Effective Time.
Section 10.2 Notices. Any notices or other communications required or
-------
permitted hereunder shall be in writing and shall be deemed duly given upon (a)
transmitter's confirmation of a receipt of a facsimile transmission, (b)
confirmed delivery by a standard overnight carrier or when delivered by hand or
(c) the expiration of five business days after the day when mailed by certified
or registered mail, postage prepaid, addressed at the following addresses (or at
such other address as the parties hereto shall specify by like notice):
If to ART, to:
American Realty Trust, Inc.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Karl L. Blaha, President
If to NRLP, to:
National Realty, L.P.
c/o NRLP Management Corp.
10670 North Central Expressway
Suite 600
Dallas, Texas 75231
Attention: Thomas A. Holland, Executive Vice President
In either case, with a copy (which shall not constitute notice) to:
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Attention: C. Ronald Kalteyer, Esq.
Section 10.3 Interpretation. The headings contained in this Agreement are
--------------
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
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<PAGE>
Section 10.4 Miscellaneous. This Agreement (including the documents and
-------------
instruments referred to herein) (a) together with the Merger Agreements,
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof; (b) is not intended to confer upon any
other person any rights or remedies hereunder; and (c) shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Texas (without giving effect to the provisions thereof relating to
conflicts of law). The parties hereby acknowledge that, except as otherwise
specifically agreed to in writing, no party shall have the right to acquire or
shall be deemed to have acquired shares of common stock or units of partnership
interest of the other party pursuant to the Mergers until consummation thereof.
Section 10.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 10.6 Parties in Interest. Subject to the provisions of Section
-------------------
10.4(c) hereof, this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
assigns and, except as set forth in Section 10.4 hereof, nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 10.7 Successors and Assigns; Assignment. This Agreement and all of
----------------------------------
the provisions hereof shall be binding upon, and inure to the benefit of, each
of the parties hereto and each of their respective successors and permitted
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder may be assigned by the parties hereto without the prior
written consent of the others, nor is this Agreement intended to confer upon any
other persons except the parties hereto any rights or remedies hereunder.
Section 10.8 Waiver of Compliance; Consents. Except as otherwise provided
------------------------------
in this Agreement, any failure of any party hereto comply with any obligation,
covenant, agreement or condition herein may be waived by the party entitled to
the benefits thereof only by a written instrument signed by the party granting
such waiver, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
Section 10.9 Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
Section 10.10 Attorneys' Fees. If any action at law or equity, including an
---------------
action for declaratory relief, is brought to enforce or interpret any provision
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and expenses from the
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other party, which fees and expenses shall be in addition to any other relief
which may be awarded.
IN WITNESS WHEREOF, Newco, ART and NRLP have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
AMERICAN REALTY INVESTORS, INC.
By: /s/ Bruce A. Endendyk
---------------------------
Name: Bruce A. Endendyk
Title: Executive Vice President
AMERICAN REALTY TRUST, INC.
By: /s/ Thomas C. Holland
---------------------------
Name: Thomas C. Holland
Title:Executive Vice President
NATIONAL REALTY, L.P.
By: NRLP MANAGEMENT CORP.,
its general partner
By: /s/ Robert A. Waldman
-----------------------
Name: Robert A. Waldman
Title: Senior Vice President
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EXHIBIT A
---------
FORM OF AGREEMENT OF MERGER
AGREEMENT OF MERGER, dated November ___, 1999 (the "Agreement"), by and
among American Realty Investors, Inc., a newly formed Nevada corporation
("Newco"), American Realty Trust, Inc., a Georgia corporation ("ART"), and ART
Acquisition Corp., a newly formed Georgia corporation and a wholly owned
subsidiary of Newco ("Sub I").
WHEREAS, Newco, ART and National Realty, L.P., a Delaware limited
partnership ("NRLP"), have entered into an Agreement and Plan of Reorganization
(the "Plan of Reorganization"), which provides for this Agreement of Merger;
WHEREAS, the Boards of Directors of Newco, ART and Sub I have approved the
merger of Sub I with and into ART and the consummation of the transactions
contemplated hereby and by the Plan of Reorganization, upon the terms and
subject to the conditions set forth herein and in the Plan of Reorganization;
WHEREAS, the Boards of Directors of Newco and NRLP Acquisition Corp., a
newly formed Delaware corporation ("Sub II"), and the general partner of
National Realty, L.P. ("NRLP") have approved the merger of Sub II with and into
NRLP pursuant to an Agreement of Merger (the "NRLP Merger Agreement"); and
WHEREAS, as part of a single plan to be effectuated pursuant to this
Agreement, the Plan of Reorganization and the NRLP Merger Agreement, it is
intended that the transactions described in such agreements be treated for
federal income tax purposes as an integrated transaction described in Section
351 of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations thereunder (and any similar provision of state law).
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein and in the Plan of Reorganization, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
The Merger. Upon the terms and subject to the conditions of this
----------
Agreement and the Plan of Reorganization, at the Effective Time (as hereinafter
defined) in accordance with the Georgia Business Corporation Act (the "GBCA"),
Sub I shall be merged with and into ART and the separate existence of Sub I
shall thereupon cease (the "ART Merger"). ART shall be the surviving
corporation in the ART Merger (hereinafter sometimes referred to as the
"Surviving Corporation").
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Section 1.2 Effective Time of the ART Merger. The ART Merger shall become
--------------------------------
effective as of the date and at such time (the "Effective Time") as a
certificate of merger pursuant to Section 14-2-1105 of the GBCA and any other
documents necessary to effect the ART Merger in accordance with the GBCA shall
be filed with the Secretary of State of the State of Georgia and become
effective. Such filings shall be made, and shall provide that the instruments
filed therewith shall become effective, in accordance with the Plan of
Reorganization.
Section 1.3 Effects of Merger. The Merger shall have the effects set forth
-----------------
in Section 14-2-1106 of the GBCA.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Articles of Incorporation. At the Effective Time, the articles
-------------------------
of incorporation of ART, as in effect immediately prior to the Effective Time,
shall be amended so that the operative provisions read in their entirety exactly
as the articles of incorporation of Sub I as in effect immediately prior to the
Effective Time, except that the name of the corporation specified therein shall
be "American Realty Trust, Inc."
Section 2.2 Bylaws. At the Effective Time, the bylaws of ART, as in effect
------
immediately prior to the Effective Time, shall be amended so that they read in
their entirety exactly as the bylaws of Sub I, as in effect immediately prior to
the Effective Time, except that the name of the corporation specified therein
shall be "American Realty Trust, Inc."
Section 2.3 Directors and Officers. At and after the Effective Time, the
----------------------
board of directors of the Surviving Corporation shall be comprised of the
persons so designated in Exhibit A hereto and the officers of the Surviving
---------
Corporation shall be the persons so designated in Exhibit A hereto, in each case
---------
until their respective successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's articles of incorporation and bylaws.
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Conversion of Shares. At the Effective Time, by virtue of
--------------------
the ART Merger and without any action on the part of any holder of any capital
stock of ART or Sub I:
(a) each share of common stock, par value $.01 per share (the "ART
Common Stock"), of ART (other than any shares of ART Common Stock that are
held in the treasury of ART) issued and outstanding immediately prior to
the Effective Time shall, subject to Section 3.3 hereof, be converted into,
and become exchangeable for, .91 shares of common stock, par value $.01 per
share, of Newco (the "Newco Common Stock");
(b) ***the shares of special stock, par value $2.00 per share (the
"ART Special Stock" and, together with the ART Common Stock, the "ART
Stock") of ART (other than
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any shares of ART Special Stock that are held in the treasury of ART and
any shares of ART Special Stock that are owned by any of ART's direct or
indirect wholly owned Subsidiaries), issued and outstanding immediately
prior to the Effective Time, shall be converted into, and become
exchangeable for, one (1) share of preferred stock, par value $2.00 per
share of Newco (the "Newco Preferred Stock");
(c) each share of ART Stock that is held in the treasury of ART
shall be cancelled and cease to exist at and after the Effective Time and
no consideration shall be delivered with respect thereto;
(d) each share of common stock, par value $.01 per share, of Sub I,
shall be converted into and become one share of common stock, par value
$.01 per share, of the Surviving Corporation; and
(e) each share of Newco Common Stock issued and outstanding
immediately prior to the Effective Time and owned by Robert A. Waldman
shall be cancelled and cease to exist at and after the Effective Time and
no consideration shall be delivered with respect thereto.
Section 3.2Exchange of ART Certificates.
----------------------------
(a) From and after the Effective Time, (i) each holder of a
certificate that immediately prior to the Effective Time represented a
share of ART Common Stock (other than those shares of ART Common Stock held
in the treasury of ART) shall be entitled to receive in exchange therefor
(or upon the provision of an appropriate affidavit of lost certificate and
an indemnity bond), upon surrender thereof to an exchange agent selected by
ART and NRLP (the "Exchange Agent"), a certificate or certificates
representing the number of whole shares of Newco Common Stock into which
such holder's shares of ART Common Stock were converted pursuant to Section
3.1 hereof and (ii) each holder of a certificate that immediately prior to
the Effective Time represented a share of ART Special Stock (other than
those shares of ART Special Stock held in the treasury of ART) shall be
entitled to receive in exchange therefor (or upon the provision of an
appropriate affidavit of lost certificate and an indemnity bond), upon
surrender to the Exchange Agent, a certificate or certificates representing
the number of shares of Newco Preferred Stock into which such holder's
shares of ART Special Stock were converted pursuant to Section 3.1 hereof.
From and after the Effective Time, Newco shall be entitled to treat each
certificate formerly representing ART Stock (each an "ART Certificate"),
which has not yet been surrendered for exchange, as evidencing the
ownership of the number of full shares of Newco Common Stock into which the
ART Stock represented by such ART Certificate shall have been converted
pursuant to Section 3.1 hereof, notwithstanding the failure to surrender
such ART Certificate. However, notwithstanding any other provision of this
Agreement, until holders or transferees of ART Certificates formerly
representing ART Stock have surrendered them for exchange as provided
herein (i) no dividends or other distributions, if any, without interest,
shall be paid with respect to any shares of Newco Common Stock represented
by such ART Certificates and no payment for fractional shares shall be
made, and (ii) without regard to when such ART Certificates are surrendered
for exchange as provided herein, no interest
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<PAGE>
shall be paid or payable on any dividends, if any, or any amount payable in
respect of fractional shares of Newco Common Stock. Upon surrender of an
ART Certificate, which immediately prior to the Effective Time represented
ART Stock, there shall be paid to the holder of such ART Certificate the
amount of any dividends, if any, which theretofore became payable, but
which were not paid by reason of the foregoing, with respect to the number
of whole shares of Newco Common Stock represented by such ART Certificate
(or certificates) issued upon such surrender. If any certificate for shares
of Newco Common Stock is to be issued in a name other than that in which
the ART Certificate surrendered in exchange therefor is registered, it
shall be a condition of such exchange that the person requesting such
exchange shall pay any transfer or other taxes required by reason of the
issuance of certificates for such shares of Newco Common Stock in a name
other than that of the registered holder of the ART Certificate
surrendered, or shall establish to the satisfaction of Newco that such tax
has been paid or is not applicable.
(b) As soon as practicable after the Effective Time, Newco shall
make available to the Exchange Agent the certificates representing shares
of Newco Common Stock required to effect the exchange referred to in
Section 3.2(a) hereof. The shares of Newco Common Stock into which ART
Stock shall be converted in the ART Merger shall be deemed to have been
issued at the Effective Time.
(c) As soon as practicable after the Effective Time, the Exchange
Agent shall mail to each person who was a holder of record of ART Stock
immediately prior to the Effective Time whose shares were converted into
the right to receive shares of Newco Common Stock pursuant to Section 3.1
hereof (i) a form letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to any ART Certificate shall
pass, only upon actual delivery of the ART Certificates to the Exchange
Agent and shall be in such form and have such other provisions as ART and
NRLP may reasonably specify) and (ii) instructions for use in effecting the
surrender of ART Certificates in exchange for certificates representing
shares of Newco Common Stock. Upon surrender of an ART Certificate for
cancellation to the Exchange Agent, together with a duly executed letter of
transmittal and such other documents as the Exchange Agent shall require,
the holder of such ART Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of Newco
Common Stock into which the ART Stock theretofore represented by the ART
Certificates so surrendered shall have been converted pursuant to the
provisions of Section 3.1 hereof, and the ART Certificates so surrendered
shall forthwith be cancelled. Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder of ART
Stock for any shares of Newco Common Stock or dividends or distributions
thereon, if any, delivered to a public official pursuant to applicable
abandoned property, escheat or similar law.
Section 3.3 No Fractional Shares. Notwithstanding any other provision of
--------------------
this Agreement or the Plan of Reorganization, no certificates or scrip for
fractional shares of Newco Common Stock shall be issued upon the surrender for
exchange of an ART Certificate pursuant to this Article III and no dividend or
other distribution, stock split or interest with respect to shares of Newco
Common Stock, if any, shall relate to any fractional share, and such fractional
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interests shall not entitle the owner thereof to vote or to any other rights of
a stockholder. In lieu of any such fractional shares, each holder of ART Stock
who would otherwise have been entitled to a fraction of a share of Newco Common
Stock upon surrender of an ART Certificate for exchange pursuant to this Article
III shall be entitled to receive from the Exchange Agent a cash payment (without
interest) in lieu of such fractional share equal to such fraction multiplied by
the average closing price per share of Newco Common Stock on the New York Stock
Exchange, Inc. or on such exchange as the Newco Common Stock shall be listed,
during the five trading days immediately following the Effective Time.
Section 3.4 Closing of Transfer Books. From and after the Effective Time,
-------------------------
the stock transfer books of ART (but not of the Surviving Corporation) shall be
closed and no transfer of ART Stock shall thereafter be made. If, after the
Effective Time, ART Certificates are presented to Newco, they shall be cancelled
and exchanged for certificates representing shares of Newco Common Stock as set
forth in Section 3.1 hereof.
Section 3.5 Tax Effects. The parties intend that the transactions
-----------
described in this Agreement, the NRLP Merger Agreement and the Plan of
Reorganization constitute a single plan that is treated for federal income tax
purposes as an integrated transaction described in and satisfying each of the
requirements of Section 351 of the Code and the regulations thereunder (and any
similar provisions of state laws) pursuant to which (i) each shareholder of ART
is treated as transferring all of its ART stock to Newco in exchange for Newco
stock, (ii) each limited partner of NRLP, other than ART (and its wholly owned
subsidiaries), is treated as transferring all of its NRLP Units to Newco in
exchange for Newco stock and (iii) immediately after the transactions described
in (i) and (ii), the former shareholders of ART and the former limited partners
of NRLP, other than ART (and its wholly owned subsidiaries), as a group, are in
"control" of Newco (as such term is defined in Section 368(c) of the Code). The
parties intend that no transactions other than the transactions described in
this Agreement, the NRLP Merger Agreement and the Plan of Reorganization be
considered part of the integrated transaction for purposes of determining the
group in "control" of Newco immediately after these transactions.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. Prior to the Effective Time, this Agreement
-----------
shall terminate in the event of and upon the termination of the Plan of
Reorganization.
Section 4.2 Amendment. This Agreement may be amended by the parties
---------
hereto, at any time before or after approval hereof by the stockholders of Newco
or ART, provided that after any such approval, no amendment shall be made which
(a) changes the ratio at which shares of ART Stock are to be converted into
shares of Newco Common Stock pursuant to Section 3.1 hereof, (b) in any way
materially adversely affects the rights of holders of ART Stock or (c) changes
any of the principal terms of this Agreement or the Plan of Reorganization, in
each case, without the further approval of such stockholders. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
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<PAGE>
Section 4.3 Notices. Any notices or other communications required or
-------
permitted hereunder shall be in writing and shall be deemed duly given upon (a)
transmitter's confirmation of a receipt of a facsimile transmission, (b)
confirmed delivery by a standard overnight carrier or by hand delivery or (c)
the expiration of five business days after the day when mailed by certified or
registered mail, postage prepaid, addressed at the following addresses (or at
such other address as the parties hereto shall specify by like notice):
(a) If to Newco or Sub I to:
American Realty Investors, Inc.
c/o Basic Capital Management, Inc.
10670 North Central Expressway, Suite 600
Dallas, Texas 75231
Attention: Thomas A. Holland
Executive Vice President
(b) If to ART, to:
American Realty Trust, Inc.
10670 North Central Expressway, Suite 600
Dallas, Texas 75231
Attention: Karl L. Blaha
President
with a copy (which shall not constitute notice) to:
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Telecopy No. (214) 740-8800
Attention: C. Ronald Kalteyer, Esq.
Section 4.4 Interpretation. As used in this Agreement, the word
--------------
"Subsidiary" means, with respect to any party, any corporation or other entity
of which outstanding securities having ordinary voting power to elect a majority
of the board of directors of such corporation or a majority of the voting power
of the voting equity interest of such other entity is owned, directly or
indirectly, by such party. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
Section 4.5 Miscellaneous. This Agreement (including the documents and
-------------
instruments referred to herein) (a) together with the Plan of Reorganization,
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof; (b) is not intended to confer upon any
other person any rights or remedies hereunder; (c) shall not be assigned by
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<PAGE>
operation of law or otherwise without the prior written consent of the other
parties hereto, except that Sub I may assign, in its sole discretion, all or any
of its rights, interests and obligations hereunder to any direct or indirect
wholly owned Subsidiary of Newco; and (d) shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Georgia (without giving effect to the provisions thereof relating to conflicts
of law).
Section 4.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 4.7 Parties in Interest. Subject to the provisions of Section
-------------------
4.5(c) hereof, this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
assigns, and nothing in this Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
Section 4.8 Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
Section 4.9 Reporting. Newco, ART and Sub I shall for federal income tax
---------
purposes report the transactions contemplated by this Agreement, the NRLP Merger
Agreement and the Plan of Reorganization pursuant to which Newco stock is issued
to ART shareholders and limited partners of NRLP (other than ART and its wholly
owned subsidiaries) as a transaction governed by Section 351 of the Code. Newco
shall comply with the reporting and record keeping requirements of Treasury
Regulation Section 1.351-3 with respect to such transactions. Newco shall
inform each recipient of Newco stock pursuant to such transactions of such
recipient's reporting and record keeping requirements as specified in Treasury
Regulation Section 1.351-3 with respect to such transactions.
IN WITNESS WHEREOF, Newco, ART and Sub I have caused this Agreement of
Merger to be signed by their respective officers thereunto duly authorized as of
the date first written above.
AMERICAN REALTY INVESTORS, INC.
By:_______________________________________
Name:__________________________________
Title:_________________________________
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AMERICAN REALTY TRUST, INC.
By:_______________________________________
Name:__________________________________
Title:_________________________________
ART ACQUISITION CORP.
By:_______________________________________
Name:__________________________________
Title:_________________________________
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<PAGE>
EXHIBIT B
---------
FORM OF AGREEMENT OF MERGER
AGREEMENT OF MERGER, dated November ___, 1999 (the "Agreement"), by and
among American Realty Investors, Inc., a newly formed Nevada corporation
("Newco"), National Realty, L.P., a Delaware limited partnership ("NRLP"), and
NRLP Acquisition Corp., a newly-formed Delaware corporation and a wholly owned
subsidiary of Newco ("Sub II").
WHEREAS, Newco, NLRP and American Realty Trust, Inc., a Georgia corporation
("ART") have entered into an Agreement and Plan of Reorganization (the "Plan of
Reorganization"), which provides for this Agreement of Merger;
WHEREAS, the Boards of Directors of Newco and Sub II and the general
partner of NRLP have approved the merger of Sub II with and into NRLP and the
consummation of the transactions contemplated hereby and by the Plan of
Reorganization, upon the terms and subject to the conditions set forth herein
and in the Plan of Reorganization;
WHEREAS, the Boards of Directors of Newco, American Realty Trust, Inc., a
Georgia corporation ("ART") and ART Acquisition Corp., a Georgia corporation
("Sub I") have approved the merger of Sub I with and into ART pursuant to an
Agreement of Merger (the "ART Merger Agreement"); and
WHEREAS, as part of a single plan to be effectuated pursuant to this
Agreement, the ART Merger Agreement and the Plan of Reorganization, it is
intended that the transactions described in such agreements be treated for
federal income tax purposes as an integrated transaction described in Section
351 of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations thereunder (and any similar provision of state law).
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein and in the Plan of Reorganization, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions of
----------
this Agreement and the Plan of Reorganization, at the Effective Time (as
hereinafter defined) in accordance with the Delaware Revised Limited Partnership
Act ("DRLPA") and the Delaware General Corporation Law (the "DGCL") Sub II shall
be merged with and into NRLP and the separate existence of Sub II shall
thereupon cease (the "NRLP Merger"). NRLP shall be the surviving entity in the
NRLP Merger (hereinafter sometimes referred to as the "Surviving Entity").
Section 1.2 Effective Time of the NRLP Merger. The NRLP Merger shall
---------------------------------
become effective as of the date and at such time (the "Effective Time") as a
certificate of merger pursuant to Section 263 of the DGCL and any other
documents necessary to effect the NRLP Merger in accordance with the DRLPA and
the DGCL shall be filed with the Secretary of State of the State
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of Delaware and become effective. Such filings shall be made, and shall provide
that the instruments filed therewith shall become effective, in accordance with
the Plan of Reorganization.
Section 1.3 Effects of Merger. The Merger shall have the effects set
-----------------
forth in Section 251 of the DGCL.
ARTICLE II
THE SURVIVING ENTITY
Section 2.1 Governing Documents. At the Effective Time, the agreement of
-------------------
limited partnership of NRLP, as in effect immediately prior to the Effective
Time, shall be the agreement of limited partnership of the Surviving Entity.
ARTICLE III
CONVERSION OF UNITS
Section 3.1 Conversion of Units. At the Effective Time, by virtue of the
-------------------
NRLP Merger and without any action on the part of any holder of units of
partnership interest of NRLP (the "NRLP Units") or the holder of any capital
stock of Sub II:
(a) each Unit (other than units that are owned by ART or any of ART's
direct or indirect wholly owned Subsidiaries (as hereinafter defined))
issued and outstanding immediately prior to the Effective Time shall,
subject to Section 3.3 hereof, be converted into, and become exchangeable
for, one (1) share of common stock, par value $.01 per share, of Newco (the
"Newco Common Stock");
(b) the shares of common stock, par value $.01 per share, of Sub II
shall be converted into partnership units of NRLP representing a
partnership interest equal to the aggregate partnership interest of the
NRLP Units converted into shares of Newco Common Stock pursuant to the
terms hereof; and
(c) each share of Newco Common Stock issued and outstanding
immediately prior to the Effective Time and owned by Robert A. Waldman
shall be cancelled and cease to exist at and after the Effective Time and
no consideration shall be delivered with respect thereto.
Section 3.2 Exchange of NRLP Certificates.
-----------------------------
(a) From and after the Effective Time, each holder of a certificate
that immediately prior to the Effective Time represented an NRLP Unit
(other than those NRLP Units owned by ART or any direct or indirect wholly
owned Subsidiary of ART) converted into shares of Newco Common Stock
pursuant to the terms hereof (the "NRLP Certificates") shall be entitled to
receive in exchange therefor (or upon the provision of an appropriate
affidavit of lost certificate and an indemnity bond), upon surrender
thereof to an exchange agent selected by NRLP and ART (the
"Exchange Agent"), a certificate or
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certificates representing the number of whole shares of Newco Common Stock
into which such holder's NRLP Units were converted pursuant to Section 3.1
hereof. From and after the Effective Time, Newco shall be entitled to treat
each NRLP Certificate, which has not yet been surrendered for exchange, as
evidencing the ownership of the number of full shares of Newco Common Stock
into which the NRLP Units represented by such NRLP Certificate shall have
been converted pursuant to Section 3.1 hereof, notwithstanding the failure
to surrender such NRLP Certificate. However, notwithstanding any other
provision of this Agreement, until holders or transferees of NRLP
Certificates formerly representing NRLP Units have surrendered them for
exchange as provided herein (i) no dividends or other distributions, if
any, without interest, shall be paid with respect to any shares of Newco
Common Stock represented by such NRLP Certificates and no payment for
fractional shares shall be made, and (ii) without regard to when such NRLP
Certificates are surrendered for exchange as provided herein, no interest
shall be paid or payable on any dividends, if any, or any amount payable in
respect of fractional shares of Newco Common Stock. Upon surrender of an
NRLP Certificate, which immediately prior to the Effective Time represented
NRLP Units, there shall be paid to the holder of such NRLP Certificate the
amount of any dividends, if any, which theretofore became payable, but
which were not paid by reason of the foregoing, with respect to the number
of whole shares of Newco Common Stock represented by such NRLP Certificate
(or certificates) issued upon such surrender. If any certificate for shares
of Newco Common Stock is to be issued in a name other than that in which
the NRLP Certificate surrendered in exchange therefor is registered, it
shall be a condition of such exchange that the person requesting such
exchange shall pay any transfer or other taxes required by reason of the
issuance of certificates for such shares of Newco Common Stock in a name
other than that of the registered holder of the NRLP Certificate
surrendered, or shall establish to the satisfaction of Newco that such tax
has been paid or is not applicable.
(b) As soon as practicable after the Effective Time, Newco shall make
available to the Exchange Agent the certificates representing shares of
Newco Common Stock required to effect the exchange referred to in Section
3.2(a) hereof. The shares of Newco Common Stock into which NRLP Units
shall be converted in the NRLP Merger shall be deemed to have been issued
at the Effective Time.
(c) As soon as practicable after the Effective Time, the Exchange
Agent shall mail to each person who was a holder of record of NRLP Units
immediately prior to the Effective Time whose shares were converted into
the right to receive shares of Newco Common Stock pursuant to Section 3.1
hereof (i) a form letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to any NRLP Certificate shall
pass, only upon actual delivery of the NRLP Certificates to the Exchange
Agent and shall be in such form and have such other provisions as NRLP and
ART may reasonably specify) and (ii) instructions for use in effecting the
surrender of NRLP Certificates in exchange for certificates representing
shares of Newco Common Stock. Upon surrender of an NRLP Certificate for
cancellation to the Exchange Agent, together with a duly executed letter of
transmittal and such other documents as the Exchange Agent shall require,
the holder of such NRLP Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Newco Common Stock
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into which the NRLP Units theretofore represented by the NRLP Certificates
so surrendered shall have been converted pursuant to the provisions of
Section 3.1 hereof, and the NRLP Certificates so surrendered shall
forthwith be cancelled. Notwithstanding the foregoing, neither the Exchange
Agent nor any party hereto shall be liable to a holder of NRLP Units for
any shares of Newco Common Stock or dividends or distributions thereon, if
any, delivered to a public official pursuant to applicable abandoned
property, escheat or similar law.
Section 3.3 No Fractional Shares. Notwithstanding any other provision of
--------------------
this Agreement or the Plan of Reorganization, no certificates or scrip for
fractional shares of Newco Common Stock shall be issued upon the surrender for
exchange of an NRLP Certificate pursuant to this Article III and no dividend or
other distribution, stock split or interest with respect to shares of Newco
Common Stock, if any, shall relate to any fractional share, and such fractional
interests shall not entitle the owner thereof to vote or to any other rights of
a stockholder. In lieu of any such fractional shares, each holder of NRLP Units
who would otherwise have been entitled to a fraction of a share of Newco Common
Stock upon surrender of an NRLP Certificate for exchange pursuant to this
Article III shall be entitled to receive from the Exchange Agent a cash payment
(without interest) in lieu of such fractional share equal to such fraction
multiplied by the average closing price per share of Newco Common Stock on the
New York Stock Exchange, Inc. or on such exchange as the Newco Common Stock
shall be listed, during the five trading days immediately following the
Effective Time.
Section 3.4 Closing of Transfer Books. From and after the Effective
-------------------------
Time, the unit transfer books of NRLP (but not of the Surviving Entity) shall be
closed and no transfer of NRLP Units shall thereafter be made. If, after the
Effective Time, NRLP Certificates are presented to Newco, they shall be
cancelled and exchanged for certificates representing shares of Newco Common
Stock as set forth in Section 3.1 hereof.
Section 3.5 Tax Effects. The parties intend that the transactions
-----------
described in this Agreement, the ART Merger Agreement and the Plan of
Reorganization constitute a single plan that is treated for federal income tax
purposes as an integrated transaction described in and satisfying each of the
requirements of Section 351 of the Code and the regulations thereunder (and any
similar provisions of state laws) pursuant to which (i) each shareholder of ART
is treated as transferring all of its ART stock to Newco in exchange for Newco
stock, (ii) each limited partner of NRLP, other than ART (and its wholly owned
subsidiaries), is treated as transferring all of its NRLP Units to Newco in
exchange for Newco stock and (iii) immediately after the transactions described
in (i) and (ii), the former shareholders of ART and the former limited partners
of NRLP, other than ART (and its wholly owned subsidiaries), as a group, are in
"control" of Newco (as such term is defined in Section 368(c) of the Code). The
parties intend that no transactions other than the transactions described in
this Agreement, the ART Merger Agreement and the Plan of Reorganization be
considered part of the integrated transaction for purposes of determining the
group in "control" of Newco immediately after these transactions.
A-43
<PAGE>
ARTICLE IV
MISCELLANEOUS
Section 4.1 Termination. Prior to the Effective Time, this Agreement
-----------
shall terminate in the event of and upon the termination of the Plan of
Reorganization.
Section 4.2 Amendment. This Agreement may be amended by the parties
---------
hereto, at any time before or after approval hereof by the stockholders of Newco
or the unitholders of NRLP, provided that after any such approval, no amendment
shall be made which (a) changes the ratio at which NRLP Units are to be
converted into shares of Newco Common Stock pursuant to Section 3.1 hereof, (b)
in any way materially adversely affects the rights of holders of NRLP Units or
(c) changes any of the principal terms of this Agreement or the Plan of
Reorganization, in each case, without the further approval of such unitholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
Section 4.3 Notices. Any notices or other communications required or
-------
permitted hereunder shall be in writing and shall be deemed duly given upon (a)
transmitter's confirmation of a receipt of a facsimile transmission, (b)
confirmed delivery by a standard overnight carrier or by hand delivery or (c)
the expiration of five business days after the day when mailed by certified or
registered mail, postage prepaid, addressed at the following addresses (or at
such other address as the parties hereto shall specify by like notice):
(a) If to Newco or Sub II to:
American Realty Investors, Inc.
c/o Basic Capital Management, Inc.
10670 North Central Expressway, Suite 600
Dallas, Texas 75231
Attention: Thomas A. Holland
Executive Vice President
(b) If to NRLP, to:
National Realty, L.P.
c/o NRLP Management Corp.
10670 North Central Expressway, Suite 600
Dallas, Texas 75231
Attention: Karl L. Blaha
President
with a copy (which shall not constitute notice) to:
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
A-44
<PAGE>
Telecopy No. (214) 740-8800
Attention: C. Ronald Kalteyer, Esq.
Section 4.4 Interpretation. As used in this Agreement, the word
--------------
"Subsidiary" means, with respect to any party, any corporation or other entity
of which outstanding securities having ordinary voting power to elect a majority
of the board of directors of such corporation or a majority of the voting power
of the voting equity interest of such other entity is owned, directly or
indirectly, by such party. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
Section 4.5 Miscellaneous. This Agreement (including the documents and
-------------
instruments referred to herein) (a) together with the Plan of Reorganization,
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof; (b) is not intended to confer upon any
other person any rights or remedies hereunder; (c) shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties hereto, except that Sub II may assign, in its sole discretion, all or
any of its rights, interests and obligations hereunder to any direct or indirect
wholly owned Subsidiary of Newco; and (d) shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Delaware (without giving effect to the provisions thereof relating to conflicts
of law).
Section 4.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 4.7 Parties in Interest. Subject to the provisions of Section
-------------------
4.5(c) hereof, this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
assigns, and nothing in this Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
Section 4.8 Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
Section 4.9 Reporting. Newco, NRLP and Sub II shall for federal income
---------
tax purposes report the transactions contemplated by this Agreement, the ART
Merger Agreement and the Plan of Reorganization pursuant to which Newco stock is
issued to ART shareholders and limited partners of NRLP (other than ART and its
wholly owned subsidiaries) as a transaction governed by Section 351 of the Code.
Newco shall comply with the reporting and
A-45
<PAGE>
record keeping requirements of Treasury Regulation Section 1.351-3 with respect
to such transactions. Newco shall inform each recipient of Newco stock pursuant
to such transactions of such recipient's reporting and record keeping
requirements as specified in Treasury Regulation Section 1.351-3 with respect to
such transactions.
IN WITNESS WHEREOF, Newco, NRLP and Sub II have caused this Agreement of
Merger to be signed by their respective officers thereunto duly authorized as of
the date first written above.
AMERICAN REALTY INVESTORS, INC.
By:_______________________________________
Name:__________________________________
Title:_________________________________
NATIONAL REALTY, L.P.
By: NRLP Management Corp.,
its general partner
By:___________________________________
Name:_____________________________
Title:____________________________
NRLP ACQUISITION CORP.
By:_______________________________________
Name:__________________________________
Title:_________________________________
A-46
<PAGE>
EXHIBIT C
NEWCO BOARD OF DIRECTORS
------------------------
ART Designees
- -------------
Roy E. Bode
Collene C. Currie
Al Gonzalez
Cliff Harris
NRLP Designees
- --------------
Karl L. Blaha
Richard D. Morgan
A-47
<PAGE>
APPENDIX B
Confidential
Board of Directors
American Realty Trust, Inc.
Search Plaza
10670 North Central Expressway, Suite 600
Dallas, Texas 75231
November 3, 1999
To the Board of Directors:
You have requested Fieldstone, Inc.'s ("Fieldstone") opinion as to the
fairness, from a financial point of view, to the holders of common stock of
American Realty Trust, Inc. ("ART") of the consideration to be received by such
shareholders pursuant to the terms of the Agreement and Plan of Reorganization,
dated as of November 3, 1999 (the "Agreement"), among ART, National Realty, L.P.
("NRLP") and American Realty Investors, Inc. ("ARI"). Pursuant to the
Agreement, ART will merge with a wholly-owned subsidiary of ARI (the "Merger")
and NRLP will merge with another wholly-owned subsidiary of ARI (the "NRLP
Merger"), as a result of which each of Art and NRLLP will become wholly-owned
subsidiaries of ARI. In the Merger, each share of common stock of ART (other
than treasury shares) will be convertible into 0.91 shares of common stock of
ARI (the "Effective Exchange Ratio") and, in the NRLP Merger, each unit of
partnership interest of NRLP (other than units owned by ART or ART's direct or
indirect wholly-owned subsidiaries) will be converted into one share of common
stock of ARI.
In arriving at the opinion set forth below, we have, among other things:
(i) reviewed, among other public information, ART's Annual Reports, Forms 10-K
and related financial information for the three fiscal years ended December 31,
1998 and ART's Forms 10-Q and the related unaudited financial information for
the three months ended March 31, 1999 and six months ended June 30, 1999; (ii)
reviewed, among other public information, NRLP's Annual Reports, Forms 10-K and
related financial information for the five (5) fiscal years ended December 31,
1998 and NRLP's Forms 10-Q and the related unaudited financial information for
the three months ended March 31, 1999 and six months ended June 30, 1999; (iii)
reviewed certain publicly available business and financial information relating
to ART and NRLP, which were deemed relevant; (iv) reviewed certain historical
and projected financial operating information with respect to the business and
operation of ART and NRLP furnished to us by the management or their advisors of
Art and NRLP; (v) appraisals of real estate assets of both ART and NRLKP (the
"Appraisals"), as prepared by various recognized appraisal firms; (vi) reviewed
the market prices, trading history and valuation multiples of the ART shares and
the NRLP units and compared them relative to each other, as well as with those
of certain publicly traded companies that we deemed to be relevant; (vii)
conducted discussions with members of senior management of ART and NRLP
concerning their respective businesses and prospects; (viii) reviewed a draft of
the Agreement provided to us on November 2, 1999; and (ix) conducted other such
financial studies and analyses and took into account such other financial,
economic and market criteria as we deemed appropriate in arriving at our
Opinion.
B-1
<PAGE>
Fieldstone Services Corp.
November 3, 1999
Page 2
In preparing our opinion, we have relied on the accuracy and completeness
of all information that was publicly available, supplied or otherwise
communicated to us by ART and NRLP, and we have not assumed any responsibility
to independently verify such information. With respect to the financial
forecasts furnished by ART and examined by us, we have assumed that they were
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the management of ART as to the future performance
of ART and the combined entity. We have also relied upon assurances of the
management of ART and NRLP, respectively, that they are unaware of any facts
that would make the information or financial forecasts provided to us incomplete
or misleading. We have not made any independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of ART or NRLP nor have we been
furnished with any such evaluations or appraisals, unless otherwise indicated.
We have also assumed, with your consent that (i) the Merger will be a tax-free
reorganization and (ii) any material liabilities (contingent or otherwise, known
or unknown) of ART and NRLP are as set forth in the consolidated financial
statements of ART and NRLP, respectively.
Our opinion is necessarily based on economic, monetary and market
conditions existing and the information made available to us on the date hereof.
This opinion is directed to the Board of Directors of ART and does not
constitute a recommendation to any shareholder of ART as to how any such
shareholder should vote on the Merger. This opinion does not address the
relative merits of the Merger and any other transactions or business strategies
discussed by the Board of Directors of ART as alternatives to the Merger or the
decision of the Board of Directors of ART to proceed with the Merger. We were
not requested to, and did not, solicit third party indications of interest in a
business combination transaction with ART. No opinion is expressed herein as to
the price at which the securities to be issued in the Merger may trade at any
time.
This opinion has been prepared for the information of the Board of
Directors of ART in connection with the Merger and shall not be reproduced,
summarized, described or referred to, provided to any person or otherwise made
public or used for any other purpose without the prior written consent of
Fieldstone, Inc., provided, however, that this letter may be reproduced in full
in the Proxy Statement/Prospectus to be filed with the Securities and Exchange
Commission in connection with the Merger.
Other than rendering the Opinion, Fieldstone shall not be responsible for
any other services in connection with the Merger. Fieldstone will receive a fee
for our services, a significant portion of which is contingent upon the delivery
of the Opinion. In the normal course of business, Fieldstone is retained, from
time to time, by ART or its affiliates for the provision of investment banking
services. In addition, in the ordinary course of business, Fieldstone may trade
in the securities of ART and NRLP for our own account and for the accounts of
our customers and, accordingly, may at any time hold long or short positions in
such securities.
B-2
<PAGE>
Fieldstone Services Corp.
November 3, 1999
Page 3
On the basis of, and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Effective Exchange Ratio is fair, from a financial
point of view, to the holders of common stock of ART.
Very truly yours,
Fieldstone, Inc.
Andrew Capitran
Managing Director
B-3
<PAGE>
APPENDIX C
November 3, 1999
To the Board of Directors of NRLP Management Corp.
10670 North Central Expressway Suite 300
Dallas, TX 75231
Dear Board of Directors Members:
We understand that National Realty, L.P., a Delaware limited partnership
("NRLP") and American Realty Trust, Inc., a Georgia corporation ("ART") are
considering entering into an agreement and plan of reorganization dated November
3, 1999 (hereinafter referred to as the "Merger Agreement") with American
Realty, Inc., a newly formed Nevada corporation ("Newco"), which would provide
for NRLP and ART to become subsidiaries of Newco. The proposed exchange ratio of
NRLP's limited partnership units for Newco shares is 1.0 to 1.0. The proposed
exchange ratio of ART's common shares for shares of Newco is 1.0 to .91 (such
transaction and all related transactions are referred to collectively
hereinafter as the "Transaction"). Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. ("Houlihan Lokey") has been retained by NRLP and reports to the
Board of Directors of NRLP Management Corp., the general partner of NRLP (the
"Board of Directors").
In connection with the proposed Transaction, the Board of Directors, on behalf
of NRLP unitholders which are not affiliated with ART (the "Non-Affiliated
Unitholders"), has requested that Houlihan Lokey render an opinion of the
fairness, from a financial point of view, to the Non-Affiliated Unitholders of
the consideration to be received by them in connection with the Transaction.
The Opinion does not address the NRLP's underlying business decision to effect
the Transaction. We have not been requested to, and did not, solicit third
party indications of interest in acquiring all or any part of the NRLP.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries, as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the annual report on Form 10-K for the fiscal years ended December
31, 1998 and quarterly report on Form 10-Q for the quarter ended June 30,
1999 for the NRLP and ART;
2. reviewed the annual report on Form 10-K for the fiscal years ended December
31, 1998 and quarterly report on Form 10-Q for the quarter ended June 30,
1999 for Transcontinental Realty Investors, Inc., Continental Mortgage and
Equity Trust, and Income Opportunity Realty Investors, Inc. (the "ART
Investment Companies" and collectively with ART and NRLP, the "Subject
Companies");
3. reviewed the Subject Companies' property information binders dated June 30,
1999;
4. met with the senior management of Basic Capital Management, Inc. (the
"Advisor"), the advisors for the Subject Companies, to discuss the
Transaction, operations, financial condition, future prospects and
performance of the Subject Companies;
C-1
<PAGE>
5. reviewed the Merger Agreement;
6. reviewed ART's land portfolio book dated August 1999;
7. reviewed ART's valuation book as of December 31, 1998;
8. reviewed public market trading data for the Subject Companies;
9. reviewed internally prepared financial statements for the Subject
Companies, for the six months ended June 30, 1997 and June 30, 1998 and for
the fiscal year ended December 31, 1998;
10. reviewed a schedule of properties acquired or sold since June 30, 1999;
11. reviewed publicly available information on companies we deemed comparable
to the Subject Companies; and
12. conducted such other studies analyses, studies and investigations as we
deemed appropriate under the circumstances for rendering the opinion
expressed herein.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Subject Companies, and that there has been no
material change in the assets, financial condition, business or prospects of the
Subject Companies since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Subject Companies and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Subject Companies. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
The Subject Companies, like other companies and any business entities analyzed
by Houlihan Lokey or which are otherwise involved in any manner in connection
with this Opinion, could be materially affected by complications that may occur,
or may be anticipated to occur, in computer-related applications as a result of
the year change from 1999 to 2000 (the "Y2K Issue"). In accordance with long-
standing practice and procedure, Houlihan Lokey's services are not designed to
detect the likelihood and extent of the effect of the Y2K Issue, directly or
indirectly, on the financial condition and/or operations of a business. Further,
Houlihan Lokey has no responsibility with regard to the Subject Companies'
efforts to make its systems, or any other systems (including its vendors and
service providers), Year 2000 compliant on a timely basis. Accordingly, Houlihan
Lokey shall not be responsible for any effect of the Y2K Issue on the matters
set forth in this Opinion.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
consideration to be received by the Non-Affiliated Unitholders of NRLP in
connection with the Transaction is fair to them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
C-2
<PAGE>
APPENDIX D
Article 13. Dissenters' Rights
Part 1. Right to Dissent and Obtain Payment for Shares
14-2-1301 DEFINITIONS.-As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporate action" means the transaction or other action by the
corporation that creates dissenters' rights under Code Section 14-2-1302.
/1/(3) "Corporation" means the issuer of shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
/2/(4) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Code Section 14-2-1302 and who exercises that right when
and in the manner required by Code Sections 14-2-1320 through 14-2-1327.
/3/(5) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
/4/(6) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under all
the circumstances.
/5/(7) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
/6/(8) "Shareholder" means the record shareholder or the beneficial
shareholder. (Last amended by Act 526, L. '93, eff. 7-1-93.)
________________
Act 526, L. '93, eff. 7-1-93,added matter in italic and deleted /1/ ",(2)";
/2/"(3)", "/3/(4)": /4/"(5)"; /5/"(6)"; and /6/"(7) ".
14-2-1302 RIGHT TO DISSENT.-(a) A record shareholder of the corporation is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a party:
(A) If approval of the shareholders of the corporation is required for the
merger by Code Section 14-2-1103 or 14-2-1104 or the articles of incorporation
and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its parent under
Code Section 14-2-1104;
(2) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
________________
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<PAGE>
(3) Consummation of a sale or exchange of all or substantially all of the
property of the corporation if a shareholder vote is required on the sale or
exchange pursuant to Code Section 14-2-1202, but not including a sale pursuant
to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption, including
a provision respecting a sinking fund for the redemption or repurchase, of the
shares;
(C) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any matter, or to
cumulate votes, other than a limitation by dilution through issuance of shares
or other securities with similar voting rights;
(E) Reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under Code
Section 14-2-604; or
(F) Cancels, redeems, or repurchases all or part of the shares of the class;
(5) Any corporate action taken pursuant to a shareholder vote to the extent
that Article 9 of this chapter, the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares under
this article may not challenge the corporate action creating his entitlement
unless the corporate action fails to comply with procedural requirements of this
chapter or the articles of incorporation or bylaws of the corporation or the
vote required to obtain approval of the corporate action was obtained by
fraudulent and deceptive means, regardless of whether the shareholder has
exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be no
right of dissent in favor of the holder of shares of any class or series which,
at the record date fixed to determine the shareholders entitled to receive
notice of and to vote at a meeting at which a plan of merger or share exchange
or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the holders of shares
of the class or series are required under the plan of merger or share exchange
to accept for their shares anything except shares of the surviving corporation
or another publicly held corporation which at the effective date of the merger
or share exchange are either listed on a national securities exchange or held of
record by more than 2,000 shareholders, except for scrip or cash payments in
lieu of fractional shares; or
(2) The articles of incorporation or a resolution of the board of directors
approving the transaction provides otherwise. (Last amended by Act 295, L. '99,
eff. 7-1-99.)
________________
Act 295, L. '99, eff. 7-1-99, added matter in italic.
14-2-1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.-A record shareholder may
assert dissenters' rights as to fewer than all the shares registered in his name
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<PAGE>
only if he dissents with respect to all shares beneficially owned by any one
beneficial shareholder and notifies the corporation in writing of the name and
address of each person on whose behalf he asserts dissenters' rights. The
rights of a partial dissenter under this Code section are determined as if the
shares as to which he dissents and his other shares were registered in the names
of different shareholders.
Part 2. Procedure for Exercise of Dissenters' Rights
14-2-1320 NOTICE OF DISSENTERS' RIGHTS.-(a) If proposed corporate action
creating dissenters' rights under Code Section 14-2-1302 is submitted to a vote
at a shareholders' meeting, the meeting notice must state that shareholders are
or may be entitled to assert dissenters' rights under this article and be
accompanied by a copy this article.
(b) If corporate action creating dissenters' rights under Code Section 14-2-
1302 is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in Code Section 14-2-
1322 no later than ten days after the corporate action was taken. (Last amended
by Act 526, L. '93, eff. 7-1-93.)
________________
Act 526, L. '93, eff. 7-1-93, added matter in italic.
14-2-1321 NOTICE OF INTENT TO DEMAND PAYMENT.-(a) If proposed corporate
action creating dissenters' rights under Code Section 14-2-1302 is submitted to
a vote at a shareholders' meeting, a record shareholder who wishes to assert
dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written notice of
his intent to demand payment for his shares if the proposed action is
effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A record shareholder who does not satisfy the requirements of subsection
(a) of this Code section is not entitled to payment for his shares under this
article.
14-2-1322 DISSENTERS' NOTICE.- (a) If proposed corporate action creating
dissenters' rights under Code Section 14-2-1302 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of Code Section 14-2-1321.
(b) The dissenters' notice must be sent no later than ten days after the
corporate action was taken and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(3) Set a date by which the corporation must receive the payment demand, which
date may not be fewer than 30 nor more than 60 days after the date the notice
required in subsection (a) of this Code section is delivered; and
(4) Be accompanied by a copy of this article.
14-2-1323 DUTY TO DEMAND PAYMENT.-(a) A record shareholder sent a dissenters'
notice described in Code Section 14-2-1322 must demand payment and deposit his
certificates in accordance with the terms of the notice.
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<PAGE>
(b) A record shareholder who demands payment and deposits his shares under
subsection (a) of this Code section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(c) A record shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
14-2-1324 SHARE RESTRICTIONS.-(a) The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions released under
Code Section 14-2-1326.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
14-2-1325 OFFER OF PAYMENT.-(a) Except as provided in Code Section 14-2-1327,
within ten days of the later of the date the proposed corporate action is taken
or receipt of a payment demand, the corporation shall /1/by notice to each
dissenter who complied with Code Section 14-2-1323 offer to pay to such
dissenter the amount the corporation estimates to be the fair value of his or
her shares, plus accrued interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year ending not
more than 16 months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under Code Section
14-2-1327; and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by written notice to
the corporation within 30 days after the corporation's offer or is deemed to
have accepted such offer by failure to respond within said 30 days, payment for
his or her shares shall be made within 60 days after the making of the offer or
the taking of the proposed corporate action, whichever is later. (Last amended
by Act 526, L. '93, eff. 7-1-93.)
________________
Act 526, L. '93, eff. 7-1-93, added matter in italic and deleted /1/"offer to
pay".
14-2-1326 FAILURE TO TAKE ACTION.-(a) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section /1/114-2-1322 and repeat the payment
demand procedure. (Last amended by Act 964, L. '90, eff. 3-22-90.)
Act 964, L. '90, eff. 3-22-90, added matter in italic and deleted /1/"14-2-
1422".
14-2-1327 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.-(a) A
dissenter may notify the corporation in writing of his own estimate of the fair
D-4
<PAGE>
value of his shares and amount of interest due, and demand payment of his
estimate of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under Code Section
14-2-1325 is less than the fair value of his shares or that the interest due is
incorrectly calculated; or
(2) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within 60 days after the date set for demanding
payment.
(b) A dissenter waives his or her right to demand payment under this Code
section and is deemed to have accepted the corporation's offer unless he or she
notifies the corporation of his or her demand in writing under subsection (a) of
this Code section within 30 days after the corporation offered payment for his
or her shares, as provided in Code Section 14-2-1325.
(c) If the corporation does not offer payment within the time set forth in
subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under subsection (b)
of Code Section 14-2-1325, and the corporation shall provide the information to
the shareholder within ten days after receipt of a written demand for the
information; and
(2) The shareholder may at any time, subject to the limitations period of Code
Section 14-2-1332, notify the corporation of his own estimate of the fair value
of his shares and the amount of interest due and demand payment of his estimate
of the fair value of his shares and interest due. (Last amended by Act 526,
L.'93, eff. 7-1-93.)
________________
Act 526, L. '93, eff. 7-1-93, added matter in italic.
Part 3. Judicial Appraisal of Shares
14-2-1330 COURT ACTION.-(a) If a demand for payment under Code Section
14-2-1327 remains unsettled, the corporation shall commence a proceeding within
60 days after receiving the payment demand and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the 60 day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a nonjury
equitable valuation proceeding, in the superior court of the county where a
corporation's registered office is located. If the surviving corporation is a
foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail or by publication,
or in any other manner permitted by law,
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) of this Code section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them or in any amendment to it.
D-5
<PAGE>
Except as otherwise provided in this chapter, Chapter 11 of Title 9, known as
the "Georgia Civil Practice Act," applies to any proceeding with respect to
dissenters' rights under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount which the court finds to be the fair value of his shares, plus
interest to the date of judgment. (Last amended by Act 526, L. '93, eff.
7-1-93.)
________________
Act 526, L. '93, eff. 7-1-93, added matter in italic and deleted /1/"and".
14-2-1331 COURT COSTS AND COUNSEL FEES.-(a) The court in an appraisal
proceeding commenced under Code Section 14-2-1330 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court, but not including fees and expenses of attorneys and
experts for the respective parties. The court shall assess the costs against
the corporation, except that the court may assess the costs against all or some
of the dissenters, in amounts the court finds equitable, to the extent the court
finds the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under Code Section 14-2-1327.
(b) The court may also assess the fees and expenses of attorneys and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of Code
Sections 14-2-1320 through 14-2-1327; or
(2) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this article.
(c) If the court finds that the services of attorneys for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these attorneys reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
14-2-1332 LIMITATION OF ACTIONS.-No action by any dissenter to enforce
dissenters' rights shall be brought more than three years after the corporate
action was taken, regardless of whether notice of the corporate action and of
the right to dissent was given by the corporation in compliance with the
provisions of Code Section 14-2-1320 and Code Section 14-2-1322.
D-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of American Realty Investor's Restated Articles of
Incorporation provides that, to the fullest extent permitted by Nevada law, as
the same exists or may be hereafter be amended, no director of American Realty
Investors, Inc. shall be personally liable to American Realty Investors, Inc. or
the shareholders of American Realty Investors, Inc. for monetary damages for
breach of the duty of care as a director, provided that Article Nine does not
limit or eliminate liability for an act or omission not in good faith or
involving intentional misconduct or a knowing violation of. In addition, a
director's liability will not be limited as to any payment of a dividend or
approval of a stock repurchase that is illegal under Section 78.300 of the
Nevada Revised Statutes.
Article Nine applies only to claims against a director arising out of his or
her role as a director and not, if he or she is also an officer, his or her role
as an officer or in any other capacity. In addition, Article Nine does not
reduce the exposure of directors to liability under Federal securities laws.
The Bylaws of American Realty Investors, Inc. require it to indemnify any
person who, by reason of the fact that he is or was a director of ART, is made
or is threatened to be made a party to an action, including an action brought by
American Realty Investors, Inc. or its shareholders. The Bylaws provide that
American Realty Investors, Inc. will indemnify such person against reasonably
incurred expenses (including, but not limited to, attorneys' fees and
disbursements, court costs, and expert witness fees), and against any judgments,
fines and amounts paid in settlement, provided that American Realty Investors,
Inc. shall not indemnify such person under circumstances in which the Nevada
Revised Statues, as in effect from time to time, would not allow
indemnification.
The Bylaws of American Realty Investors, Inc. give the American Realty
Investors, Inc. board the power to cause American Realty Investors, Inc. to
provide to officers, employees, and agents of American Realty Investors, Inc.
all or any part of the right to indemnification afforded to directors of
American Realty Investors, Inc. as set forth in the Bylaws, subject to the
conditions, limitations and obligations therein, upon a resolution to that
effect identifying such officer, employee or agent and specifying the particular
rights provided.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of American
Realty Investors, Inc. pursuant to the foregoing provisions, American Realty
Investors, Inc. has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
2.1 Agreement and Plan of Reorganization, dated as of November 3, 1999, by
and among American Realty Investors, Inc., National Realty, L.P. and
American Realty Trust, Inc. (included as Appendix A to the joint proxy
statement/prospectus constituting a part of this registration
statement).
3.1 Articles of Incorporation (previously filed as Exhibit 3.1 to the
Registation Statement on Form S-4 filed by the Registrant with the
Securities and Exchange Commission on December 30, 1999 (the
"Registration Statement"), and incorporated herein by reference.)
3.2 Bylaws (previously filed as Exhibit 3.2 to the Registration Statement
and incorporated herein by reference)
5.1 Opinion of Locke Liddell & Sapp LLP as to the legality of the
securities being offered by this registration statement (1)
8.1 Opinion of Locke Liddell & Sapp LLP regarding tax matters (1)
10.1 Amended and Restated Advisory Agreement between American Realty Trust,
Inc. and Basic Capital Management, Inc., dated April 1, 1997
(incorporated by reference to Exhibit No. 10.0 to American Realty
Trust's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
10.2 Loan Servicing Agreement between American Realty Trust, Inc. and Basic
Capital Management, Inc., formerly National Realty Advisors, Inc.,
dated as of October 4, 1989 (incorporated by reference to Exhibit No.
10.16 to American Realty Trust's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989).
21.1 Subsidiaries of Registrant (previously filed as Exhibit 21.1 to the
Registration Statement and incorporated herein by reference)
23.1 Consent of BDO Seidman, LLP (American Realty Trust, Inc.) (1)
23.2 Consent of BDO Seidman, LLP (National Realty, L.P.) (1)
99.1 Form of proxy card (1)
- ----------
(1) Filed herewith.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the charges in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not
apply if this Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE>
(d) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the 1933 Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(e) For the purpose of determining any liability under the 1933 Act, each post-
effective-amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Amendment No. 1 on Form S-4 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on the 3rd day
of February, 2000.
AMERICAN REALTY INVESTORS, INC.
By: /s/ KARL L. BLAHA
-------------------------------------------
Karl L. Blaha
President (Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Karl L. Blaha
______________________________
Karl L. Blaha President (Principal Executive Officer)
and Director February 3, 2000
/s/ Roy E. Bode
______________________________
Roy E. Bode Director February 3, 2000
/s/ Collene C. Currie
______________________________
Collene C. Currie Director February 3, 2000
/s/ Al Gonzalez
______________________________
Al Gonzalez Director February 3, 2000
______________________________
Cliff Harris Director February 3, 2000
/s/ Richard D. Morgan
______________________________
Richard D. Morgan Director February 3, 2000
______________________________
Carey M. Portman Director February 3, 2000
/s/ Thomas A. Holland
______________________________
Thomas A. Holland Chief Financial Officer February 3, 2000
(Principal Financial and
Accounting Officer)
</TABLE>
II-5
<PAGE>
Exhibit 4.1
ARTICLES OF INCORPORATION
OF
AMERICAN REALTY INVESTORS, INC.
I, the person hereinafter named as incorporator, for the purpose of
associating to establish a corporation, under the provisions and subject to the
requirements of Title 7, Chapter 78 of Nevada Revised Statutes, and the acts
amendatory thereof, and hereinafter sometimes referred to as the General
Corporation Law of the State of Nevada, do hereby adopt and make the following
Articles of Incorporation:
FIRST: The name of the corporation is AMERICAN REALTY INVESTORS, INC. (the
-----
"Corporation").
SECOND: The street address and mailing address of the Corporation's
------
registered office in the State of Nevada is 6100 Neil Road, Suite 500, Reno,
Nevada 89520. The name of its resident agent at such address is The Corporation
Trust Company of Nevada.
THIRD: The aggregate number of shares of stock that the Corporation shall
-----
have authority to issue is 1,000 shares of Common Stock, $.01 par value per
share.
FOURTH: (1) The members of the governing board of the Corporation shall be
------
styled directors. The number of directors constituting the initial Board of
Directors is one. Thereafter, the number of directors constituting the Board of
Directors shall be fixed by or in accordance with the bylaws of the Corporation.
(2) The name and mailing address of the person who is to serve as
director until the first annual meeting of stockholders or until his successor
is elected and qualified is:
Name Mailing Address
---- ---------------
Karl L. Blaha Search Plaza
10670 N. Central Expressway
Suite 300
Dallas, Texas 75231
(3) There shall be no cumulative voting in the election of
directors. Election of directors need not be by written ballot unless the bylaws
of the Corporation so provide.
<PAGE>
FIFTH: The name and mailing address of the incorporator are:
-----
Name Mailing Address
---- ---------------
Robert A. Waldman Search Plaza
10670 N. Central Expressway
Suite 600
Dallas, Texas 75231
The power of the incorporator as such shall terminate upon the filing of these
Articles of Incorporation.
SIXTH: No stockholder shall have, as a stockholder of the Corporation, any
-----
preemptive right to acquire, purchase or subscribe for the purchase of any or
all additional issues of stock of the Corporation or any or all classes or
series thereof, or for any securities convertible into such stock, whether now
or hereafter authorized.
SEVENTH: The Board of Directors shall have the power to adopt, amend or
-------
repeal the bylaws of the Corporation.
EIGHTH: Special meetings of the stockholders may be called by the Board of
------
Directors or by the Chairman of the Board of Directors of the Corporation and
may not be called by any other person.
NINTH: The personal liability of the directors of the corporation is
-----
hereby eliminated to the fullest extent permitted by the General Corporation Law
of the State of Nevada, as the same may be amended and supplemented.
TENTH: The corporation shall have perpetual existence.
-----
ELEVENTH: The nature of the business of the corporation and the objects or
--------
the purposes to be transacted, promoted, or carried on by it are to engage in
any lawful activity.
TWELFTH: The corporation reserves the right to amend, alter, change, or
-------
repeal any provision contained in these Articles of Incorporation in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, I have hereunto set my hand this 2nd day of November,
1999.
/s/ Robert A. Waldman
------------------------------
Robert A. Waldman, Incorporator
<PAGE>
THE STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
Before me, a notary public in and for said county and state, personally
appeared Robert A. Waldman known to me to be the person whose name is subscribed
to the foregoing document, and being by me first duly sworn, declared that he
executed the same as his free act and deed and that the statements contained
therein are true and correct. Given under my hand and seal of office this 2 day
of November, 1999.
/s/ S.L. Bratton
------------------------------
Notary Public in and for
the State of Texas
S.L. Bratton
----------------------------
(Printed Name of Notary)
My Commission Expires:
8/21/2000
- ----------------------
<PAGE>
Exhibit 4.2
BYLAWS
OF
AMERICAN REALTY INVESTORS, INC.
(a Nevada Corporation)
ARTICLE I
Offices
Section 1. Principal Executive Office. The principal executive office of
--------------------------
the corporation shall be located at 10670 North Central Expressway, Suite 600,
Dallas, Texas, 75231. The board of directors is hereby granted full power and
authority to change said principal executive office from one location to
another. Any such change shall be noted on the by-laws by the secretary,
opposite this Section, or this Section may be amended to state the new location.
Section 2. Other Offices. Other business offices may at any time be
-------------
established by the board of directors at such other places both within and
without the State of Nevada as the board of directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meetings. All annual or other meetings of stockholders
-----------------
shall be held at the principal executive office of the corporation, or at any
other place within or without the State of Nevada which may be designated by the
board of directors and stated in the notice of the meeting.
Section 2. Annual Meetings. Annual meetings shall be held at such date and
---------------
time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting. At such meetings, directors shall be
elected, reports of the affairs of the corporation shall be considered and any
other business may be transacted which is within the powers of the stockholders.
Section 3. Special Meetings. Subject to the rights of the holders of any
----------------
series of stock having a preference over the common stock of the corporation as
to dividends or upon liquidation ("Preferred Stock") with respect to such series
of Preferred Stock, special meetings of the stockholders may be called only by
the chairman of the board, the president or by the board of directors pursuant
to a resolution adopted by a majority of the total number of directors which the
corporation would have if there were no vacancies.
1
<PAGE>
Section 4. Notice of Meetings of Stockholders and Delivery of Reports to
-------------------------------------------------------------
Stockholders. Written notice of any meeting of stockholders shall be given to
- ------------
each stockholder entitled to vote and a copy of each report to the stockholders
shall be given to each stockholder, in each case either personally or by mail or
other means of written communication, charges prepaid, addressed to such
stockholder at his address appearing on the books of the corporation or given by
him to the corporation for the purpose of notice. If any notice or report
addressed to the stockholder at the address of such stockholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice or report to the stockholder at such address, all
future notices or reports shall be deemed to have been duly given without
further mailing if such notice or report shall be available for the stockholder
upon written demand of the stockholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice
or report to all other stockholders. If a stockholder gives no address, notice
or a report shall be deemed to have been given to such stockholder if sent by
mail or other means of written communication addressed to the place where the
principal executive office of the corporation is situated, or if published at
least once in a newspaper of general circulation in the county in which the
principal executive office is located.
All such notices of meetings shall be given to each stockholder entitled
thereto not less than 10 days nor more than 60 days before each meeting, and all
such reports shall be given to each stockholder entitled thereto at the times
provided in Section 3 of Article VII of the bylaws or as otherwise provided by
applicable law. Any such notice or report shall be deemed to have been given at
the time when delivered personally or deposited in the mail or sent by other
means of written communication. An affidavit of mailing of any such notice or
report in accordance with the provisions of this Section, executed by a
responsible employee or any agent of the corporation, shall be prima facie
evidence of the giving of the notice or report.
Each such notice shall specify:
(a) the place, the date and the hour of the meeting;
(b) in the case of special meetings, the nature of the business
to be transacted (and no other business may be transacted at such meeting);
(c) in the case of annual meetings, those matters which the
board of directors, at the time of the mailing of the notice, intends to
present for action by the stockholders;
(d) if directors are to be elected, the names of nominees
intended at the time of the notice to be presented by the board of
directors or management for election; and
(e) such other matters, if any, as may be expressly required by
applicable law.
2
<PAGE>
Section 5. Quorum and Adjournment. Except as otherwise provided by law or
----------------------
by the articles of incorporation, the holders of a majority of the outstanding
shares of the corporation entitled to vote generally in the election of
directors, represented in person or by proxy, shall constitute a quorum at a
meeting of stockholders, except that when specified business is to be voted on
by a class or series of stock voting as a class, the holders of a majority of
the shares of such class or series shall constitute a quorum of such class or
series for the transaction of such business. The chairman of the meeting or a
majority of the shares so represented may adjourn the meeting from time to time,
whether or not there is such a quorum. No notice of the time and place of
adjourned meetings need be given except as required by law. The stockholders
present at a duly called meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 6. Notice of Stockholder Business and Nominations.
----------------------------------------------
(A) Annual Meetings of Stockholders.
-------------------------------
(a) Nominations of persons for election to the board of
directors and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
corporation's notice of meeting, (ii) by or at the direction of the board
of directors or (iii) by any stockholder who was a stockholder of record at
the time of giving of notice provided for in this bylaw, who is entitled to
vote at the meeting and who complies with the notice procedures set forth
in this bylaw.
(b) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (iii)
of paragraph (A)(a) of this bylaw, the stockholder must have given timely
notice thereof in writing to the secretary of the corporation and such
other business must otherwise be a proper matter for stockholder action. To
be timely, a stockholder's notice shall be delivered to the secretary at
the principal executive office of the corporation not later than the close
of business on the 60th day nor earlier than the close of business on the
90th day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to
such annual meeting and not later than the close of business on the later
of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made
by the corporation. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving
of a stockholder's notice as described above. Such stockholder's notice
shall set forth (i) as to each person who the stockholder proposes to
nominate for election or reelection as a director, all information relating
to such person that is required to be disclosed in solicitations of proxies
for election of directors in an election contest, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended, and Rule 14a-11 thereunder (including such person's
written consent
3
<PAGE>
to being named in the proxy statement as a nominee and to serving as a
director if elected), (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal.
is made and (iii) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is
made (I) the name and address of such stockholder as they appear on the
corporation's books, and of such beneficial owner and (II) the class and
number of shares of the corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(c) Notwithstanding anything in the second sentence of paragraph
(A)(b) of this bylaw to the contrary, in the event that the number of
directors to be elected to the board of directors is increased and there is
no public announcement by the corporation naming all of the nominees for
director or specifying the size of the increased board of directors at
least 70 days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary at the
principal executive office of the corporation not later than the close of
business on the 10th day following the day on which such public
announcement is first made by the corporation.
(B) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the board of directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
corporation's notice of meeting, (ii) by or at the direction of the board of
directors or (iii) provided that the board of directors has determined that
directors shall be elected at such meeting, by any stockholder of the
corporation who is a stockholder of record at the time of giving of notice
provided for in this bylaw, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this bylaw. In the event that
the corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the board of directors, any such stockholder
may nominate a person or persons (as the case may be) for election to such
position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(b) of this bylaw shall be
delivered to the secretary at the principal executive office of the corporation
not earlier than the close of business on the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the board of directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.
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Section 7. Voting. Pursuant to Section 1 of Article VI of the bylaws, the
------
board of directors may fix a record date for the determination of the
stockholders entitled to vote at any meeting of stockholders.
Unless the articles of incorporation provide for more or less than one vote
per share, each outstanding share, regardless of class, shall be entitled to one
vote on each matter on which such share is entitled to be voted. Any holder of
shares entitled to vote on any matter may vote part of his shares in favor of
the proposal and refrain from voting the remaining shares or (except in voting
upon election of directors) vote them against the proposal, but, if the
stockholder fails to specify the number of shares such stockholder is voting
affirmatively, it will be conclusively presumed that the stockholder's approving
vote is with respect to all shares such stockholder is entitled to vote. Voting
by the stockholders may be a voice vote or by ballot; provided, however, that
all elections for directors must be by ballot upon demand made by a stockholder
at the meeting and before the voting begins.
Except as otherwise provided in the last two sentences of Section 5 of this
Article II:
(a) the affirmative vote of a majority of the shares actually
voted for or against a matter at a duly held meeting at which a quorum is
present (without giving effect to abstentions and broker non-votes) shall
be the act of the stockholders, unless the vote of a greater number or
voting by classes is required for such act by applicable law, the articles
of incorporation or the bylaws; and
(b) in the election of directors, subject to the rights of the
holders of any series of Preferred Stock to elect directors under specified
circumstances, the candidates receiving the highest number of affirmative
votes of shares entitled to be voted, up to the number of directors to be
elected by such shares, shall be elected. Votes against a candidate for
director and votes withheld shall have no legal effect.
If the articles of incorporation provide for more or less than one vote for
any share on any matter, the references in this Section and in Section 5 of this
Article II to a majority or other proportion of shares means, as to such matter,
a majority or other proportion of the votes entitled to be cast by such shares.
Section 8. Validation of Defectively Called or Noticed Meetings. The
----------------------------------------------------
transactions of any meeting of stockholders, annual or special, however called
and noticed and wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum is present pursuant to Section 5
of this Article II, either in person or by proxy, and if, either before or after
the meeting, each of the following persons signs a written waiver of notice, a
consent to the holding of such meeting or an approval of the minutes thereof:
(a) any person entitled to vote at the meeting not present at
the meeting in person or by proxy;
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(b) any person who, though present, has, at the beginning of the
meeting, properly objected to the transaction of any business because the
meeting was not lawfully called or convened; or
(c) any person who, though present, during the meeting has
properly objected to the consideration of particular matters of business
required by the Nevada General Corporation Law or the bylaws or otherwise
to be included in the notice of the meeting, but not so included.
Except as otherwise provided in the articles of incorporation, neither the
business to be transacted at, nor the purpose of, any annual or special meeting
of stockholders need be specified in any written waiver of notice, consent to
the holding of the meeting or approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Section 9. Action Without Meeting.
----------------------
(a) No action required to be taken or which may be taken at
any annual or special meeting of stockholders of the Corporation may be
taken by written consent without such a meeting except any action taken
upon the signing of a consent in writing by all stockholders of the
Corporation entitled to vote thereon setting forth the action to be taken.
(b) Stockholders may not participate in a meeting of
stockholders by means of a telephone conference or any similar method of
communication by which all persons participating in the meeting can hear
each other. Participation in a meeting must be in person, by proxy, or by
written consent as provided in subparagraph (a) of this Section 9.
Section 10. Proxies.
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(a) At any meeting of stockholders, any stockholder may
designate another person or persons to act as a proxy or proxies. If any
stockholder designates two or more persons to act as proxies, a majority of
those persons present at the meeting or, if only one is present, then that
one, has and may exercise all of the powers conferred by the stockholder
upon all of the persons so designated unless the stockholder provides
otherwise.
(b) Without limiting the manner in which a stockholder may
authorize another person or persons to act for him as proxy pursuant to
subsection (a), the following constitute valid means by which a stockholder
may grant such authority:
(i) a stockholder may execute a writing authorizing
another person or persons to act for him as proxy. Execution may be
accomplished by the signing of the writing by the stockholder or his
authorized officer, director, employee or agent or by causing the
signature of the stockholder to be affixed to
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the writing by any reasonable means, including, but not limited to, a
facsimile signature; or
(ii) a stockholder may authorize another person or
persons to act for him as proxy by transmitting or authorizing the
transmission of a telegram, cablegram or other means of electronic
transmission to the person who will be the holder of the proxy or to a
firm which solicits proxies or like agent who is authorized by the
person who will be the holder of the proxy to receive the
transmission. Any such telegram, cablegram or other means of
electronic transmission must either set forth or be submitted with
information from which it can be determined that the telegram,
cablegram or other electronic transmission was authorized by the
stockholder. If it is determined that the telegram, cablegram or other
electronic transmission is valid, the persons appointed by the
corporation to count the votes of stockholders and determine the
validity of proxies and ballots or other persons making those
determinations must specify the information upon which they relied.
(c) Any copy, communication by telecopier or other reliable
reproduction of the writing or transmission created pursuant to subsection
(b) may be substituted for the original writing or transmission for any
purpose for which the original writing or transmission could be used, if
the copy, communication by telecopier or other reproduction is a complete
reproduction of the entire original writing or transmission.
(d) No such proxy is valid after the expiration of six months
from the date of its creation, unless it is coupled with an interest, or
unless the stockholder specifies in it the length of time for which it is
to continue in force, which may not exceed seven years from the date of its
creation. Subject to these restrictions, any proxy properly created is not
revoked and continues in full force and effect until another instrument or
transmission revoking it or a properly created proxy bearing a later date
is filed with or transmitted to the secretary of the corporation or another
person or persons appointed by the corporation to count the votes of
stockholders and determine the validity of proxies and ballots.
Section 11. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof. If inspectors of election are not so appointed, the chairman of any
such meeting may, and on the request of any stockholder or his proxy shall, make
such appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more stockholders or
their respective proxies, the majority of shares entitled to vote represented in
person or by proxy shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may, and on the request of any stockholder or a
proxy of any stockholder entitled to vote shall, be filled by appointment by the
board of directors in advance of the meeting, or at the meeting by the chairman
of the meeting.
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The duties of such inspectors shall include: determining the number of
shares outstanding and the voting power of each; the shares represented at the
meeting; the existence of a quorum; the authenticity, validity and effect of
proxies; receiving votes, ballots or consents; hearing and determining all
challenges and questions in any way arising in connection with the right to
vote; counting and tabulating all votes or consents; determining when the polls
shall close; determining the result; and such acts as may be proper to conduct
the election or vote with fairness to all stockholders. In the determination of
the validity and effect of proxies, the dates contained on the forms of proxy
shall presumptively determine the order of execution of the proxies, regardless
of the postmark dates on the envelopes in which they are mailed.
The inspectors of election shall perform their duties impartially, in good
faith, to the best of their ability and as expeditiously as is practical. If
there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima
facie evidence of the facts stated therein.
Section 12. Presiding Officer; Order of Business; Conduct of Meeting.
--------------------------------------------------------
(a) Meetings of the stockholders shall be presided over by
such person as shall be designated by the board of directors or, if no
designation is made, then by the chairman of the board of directors, or if
there is no chairman of the board of directors, then the president. The
secretary of the corporation, or in his absence, an assistant secretary,
shall act as secretary of the meeting.
(b) Subject to the following, meetings of stockholders
shall generally follow accepted rules of parliamentary procedure.
(i) The chairman of the meeting shall have absolute
authority over matters of procedure and there shall be no appeal from
the ruling of the chairman. if the chairman, in his absolute
discretion, deems it advisable to dispense with the rules of
parliamentary procedure as to any one meeting of stockholders or a
part thereof, the chairman shall so state and shall clearly state the
rules under which the meeting or appropriate part thereof shall be
conducted.
(ii) The chairman may ask or require that anyone not
a bona fide stockholder or proxyholder leave the meeting.
(iii) A resolution or motion, if not contained in the
corporation's notice of meeting, shall only be considered for a vote
if proposed by a stockholder or duly authorized proxyholder, and
seconded by an individual, who is a stockholder or duly authorized
proxyholder, other than the individual who proposed the resolution or
motion.
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ARTICLE III
Directors
Section 1. Powers. Subject to the limitations of the Nevada General
------
Corporation Law and any limitations in the articles of incorporation relating to
action required to be authorized or approved by the stockholders, the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised by or under the direction of the board of directors. without
prejudice to such general powers, but subject to the same limitations, it is
hereby expressly declared that the directors shall have the following powers:
First - To select and remove all the officers, agents and employees of
the corporation; prescribe such powers and duties for them as may not be
inconsistent with applicable law, the articles of incorporation or the
bylaws; fix their compensation and require from them security for faithful
service.
Second - To conduct, manage and control the affairs and business of
the corporation, and to make such rules and regulations therefor, not
inconsistent with applicable law, the articles of incorporation or the
bylaws, as they may deem appropriate.
Third - To change the principal executive office of the corporation
from one location to another as provided in Section 1 of Article I of the
bylaws; to fix and locate from time to time one or more subsidiary offices
of the corporation within or without the State of Nevada, as provided in
Section 2 of Article I of the bylaws; to designate any place within or
without the State of Nevada for the holding of any stockholders' meeting or
meetings; and to adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock and to alter the form of such seal and of
such certificates from time to time, as in their judgment they may deem
appropriate, provided such seal and such certificates shall at all times
comply with the provisions of applicable law.
Fourth - To authorize the issue of shares of stock of the corporation
from time to time, upon such terms as may be lawful.
Fifth - To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and security
therefor.
Section 2. Number and Qualification of Directors. The number of directors
-------------------------------------
of the corporation shall not be less than three nor more than twelve until
changed by amendment of the articles of incorporation and by a bylaw amending
this Section. The exact number of directors shall be fixed from time to time,
within the limits specified in the articles of incorporation and in this
Section, by a resolution adopted by the board of directors.
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Subject to the foregoing provisions for changing the number of directors,
the number of directors of this corporation has been fixed at five.
Section 3. Election and Term of Office. Directors shall be elected at each
---------------------------
annual meeting of stockholders, but if any such annual meeting is not held or
directors are not elected thereat, directors may be elected at any special
meeting of stockholders held for that purpose. Each director, including a
director elected to fill a vacancy, shall hold office until the expiration of
the term for which such director was elected, and until a successor has been
elected and qualified, subject to the Nevada General Corporation Law and the
provisions of the bylaws with respect to vacancies on the board of directors.
Section 4. Vacancies.
---------
(a) A vacancy on the board of directors shall be deemed to
exist in case of the death, resignation or removal of any director, if the
authorized number of directors is increased or if the stockholders fail, at
any annual or special meeting of stockholders at which any director or
directors are to be elected, to elect the full authorized number of
directors to be voted for at that meeting.
(b) Except as otherwise provided in the articles of
incorporation, any or all of the directors may be removed with or without
cause if such removal is approved by the affirmative vote of at least two-
thirds of the outstanding shares entitled to vote on the election of
directors, provided that when by the provisions of the articles of
incorporation the holders of the shares of any class or series, voting as a
class or series, are entitled to elect one or more directors, any director
so elected may be removed only by the applicable vote of the holders of the
shares of that class or series.
No reduction in the authorized number or classes of
directors shall have the effect of removing any director prior to the
expiration of his term of office.
(c) Any director may resign effective upon giving written
notice to the chairman of the board, the president, the secretary or the
board of directors of the corporation, unless the notice specifies a later
time for the effectiveness of such resignation. If the board of directors
accepts the resignation of a director tendered to take effect at a future
time, the board of directors shall have power to elect a successor to take
office when the resignation is to become effective.
(d) Vacancies in the board of directors may be filled (i)
by the affirmative vote of a majority of the directors then in office
present at a duly held meeting at which a quorum is present or the
unanimous written consent of the directors then in office or (ii) if the
number of directors then in office is less than a quorum, by the unanimous
written consent of the directors then in office, or the affirmative vote of
a majority of the directors then in office at a duly held meeting of such
directors or a sole remaining director; and each director so elected shall
hold office until his successor is elected and qualified; provided,
however, that vacancies occurring due to an increase in the total number of
directors shall be filled only by the board of directors. The
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stockholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by
written consent shall require the consent of holders of a majority of the
outstanding shares entitled to vote for the election of such directors.
Section 5. Annual Meeting. Immediately following each annual meeting of
--------------
stockholders, the board of directors shall hold a regular meeting at the place
of said annual meeting, or at such other place as shall be fixed by the board of
directors, for the purpose of organization, election of officers and the
transaction of other business. Call and notice of such meetings are hereby
dispensed with.
Section 6. Other Regular Meetings. Other regular meetings of the board of
----------------------
directors shall be held during each year, at such times and places as the board
of directors may from time to time provide by resolution, either within or
without the State of Nevada, without other notice than such resolution.
Section 7. Special Meetings. Special meetings of the board of directors
----------------
for the purpose of taking any action permitted by the directors under the Nevada
General Corporation Law and the articles of incorporation may be called at any
time by the chairman of the board, the president, the secretary or any two
directors. Notice of the date, hour and place of special meetings shall be given
to each director (a) personally or by telephone, telegraph or facsimile
transmission, in each case at least 24 hours prior to the holding of the meeting
or (b) by first class mail, charges prepaid, addressed to him at his address as
it is shown upon the records of the corporation or, if it is not so shown on
such records and is not readily ascertainable, at the place at which the
meetings of the directors are regularly held, at least two days prior to the
holding of the meeting. Notice by mail shall be deemed to have been given at the
time a written notice is deposited in the United States mail, postage prepaid.
Any other written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier for
transmission, or actually transmitted by the person giving the notice by
electronic means to the recipient. Oral notice shall be deemed to have been
given at the time it is communicated, in person or by telephone, to the
recipient or to a person at the office of the recipient who the person giving
the notice has reason to believe will promptly communicate it to the recipient.
Any notice shall state the date, place and hour of the meeting and may, but
shall not be required to, state the general nature of the business to be
transacted.
Section 8. Waiver of Defectively Called or Noticed Meetings. Notice of a
------------------------------------------------
meeting need not be given to a director who signs a waiver of notice, or a
consent to holding the meeting or an approval of the minutes thereof, whether
before or after the meeting, or who attends the meeting without protesting,
prior to or at the commencement of the meeting, the lack of proper notice to
him. Any such waiver or consent shall state the date, place and hour of the
meeting, but need not specify the purpose of the meeting. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Section 9. Place of Meeting. Regular and special meetings of the board of
----------------
directors shall be held at any place within or without the State of Nevada which
has been designated from
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time to time by resolution of the board of directors. In the absence of such
designation, regular and special meetings shall be held at the principal
executive office of the corporation.
Section 10. Action at a Meeting: Quorum and Required Vote. Presence in
---------------------------------------------
person of a majority of the authorized number of directors at a meeting of the
board of directors constitutes a quorum for the transaction of business, except
as hereinafter provided. Members of the board may participate in a meeting
through use of conference telephone or similar communications equipment, so long
as all members participating in such meeting can hear one another. Participation
in a meeting as permitted by the preceding sentence constitutes presence in
person at such meeting. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors, unless a greater number, or the
same number after disqualifying one or more directors from voting, is required
by the Nevada General Corporation Law, the articles of incorporation or the
bylaws. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of a director, provided that
any action taken is approved by at least a majority of the required quorum for
such meeting.
Section 11. Adjournment. A majority of the directors present at any
-----------
meeting, whether or not a quorum is present, may adjourn any meeting of the
board of directors to meet again at a stated date, hour and place. If any
meeting is adjourned for more than 48 hours, notice of any adjournment to
another date, hour or place shall be given prior to the time of the adjourned
meeting to the directors who were not present at the time of adjournment.
Otherwise, notice of the date, hour and place of holding an adjourned meeting
need not be given to absent directors if the date, hour and place are fixed at
the meeting adjourned.
Section 12. Action Without Meeting. Any action by the board of directors
----------------------
may be taken without a meeting if all members of the board of directors shall
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
board of directors and shall have the same force and effect as a unanimous vote
of the directors.
Section 13. Committees of the Board. By resolution adopted by the board of
-----------------------
directors, the board of directors may designate an executive committee, an audit
committee and such other committees as it shall determine, each consisting of at
least one director and which may include one or more other persons who need not
be directors, to serve at the pleasure of the board of directors, and prescribe
the manner in which proceedings of such committees shall be conducted. The
appointment of members or alternate members of a committee shall be made by a
majority vote of the board of directors. For purposes of the bylaws, the term
"audit committee" shall mean any committee of the board of directors to which is
delegated the function of periodically reviewing the financial condition, and
the results of audit examinations, of the corporation with the corporation's
independent public accountants. The audit committee, if appointed, shall not
include any officer or employee of the corporation or its subsidiaries unless
the board of directors shall specifically designate an officer or employee to
serve on such committee. Unless the board of directors shall otherwise prescribe
the manner of proceedings of any such committee, meetings of such committee may
be scheduled in advance, in which case call and notice of any
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such meetings are hereby dispensed with, and may be called at any time by any
member thereof; otherwise, the provisions of the bylaws with respect to notice
and conduct of meetings of the board of directors shall govern.
Any such committee, to the extent provided in a resolution of the board of
directors, may have all of the authority of the board of directors, except with
respect to:
(a) the approval of any action for which the Nevada General
Corporation Law, the articles of incorporation or the bylaws also requires
approval of the stockholders;
(b) the filling of vacancies on the board of directors or on any
committee;
(c) the fixing of compensation of the directors for serving on the
board of directors or on any committee;
(d) the adoption, amendment or repeal of bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) any distribution to the stockholders, except at a rate or in a
periodic amount or within a range determined by the board of directors; and
(g) the appointment of other committees of the board of directors or
the members thereof.
Section 14. Compensation. Directors, and members of any committee of the
------------
board of directors, shall be entitled to such compensation for their services as
directors and members of any such committee as shall be fixed from time to time
by resolution of the board of directors and shall also be entitled to
reimbursement for any reasonable expenses incurred in attending such meetings.
Any director receiving compensation under these provisions shall not be barred
from serving the corporation in any other capacity and receiving compensation
for such other services.
Section 15. Transfer Agents and Registrars. The board of directors may
------------------------------
appoint one or more transfer agents and one or more registrars, either domestic
or foreign, at such times and places as the requirements of the corporation may
necessitate.
ARTICLE IV
Officers
Section 1. Officers. The officers of the corporation shall be a
--------
president, a secretary and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, a chief financial
officer, one or more vice presidents, one or more assistant
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secretaries, one or more assistant treasurers and such other officers as may be
appointed in accordance with the provisions of Section 3 of this Article IV. One
person may hold any two or more offices.
SECTION 2. Election. The officers of the corporation, except such officers
--------
as may be appointed in accordance with the provisions of Section 3 or Section 5
of this Article IV, shall be chosen annually by the board of directors;
provided, however, that each officer of the corporation shall hold his office at
the pleasure of the board of directors, or until he shall resign or shall become
disqualified to serve, or until his successor shall be elected and qualified,
subject, in each case, to the rights, if any, of the corporation and any such
officer under any contract of employment between the corporation and the
officer.
SECTION 3. Subordinate Officers, Etc. The board of directors may appoint,
-------------------------
and may empower the chairman of the board, the president or any vice president
to appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority and perform
such duties as provided in the bylaws or as the board of directors may from time
to time determine.
SECTION 4. Removal and Resignation.
-----------------------
(a) Any officer may be removed, either with or without cause, by the
board of directors, at any regular or special meeting thereof, or, except
in case of an officer chosen by the board of directors, by any officer upon
whom such power of removal may be conferred by the board of directors,
subject, in each case, to the rights, if any, of an officer under any
contract of employment with the corporation.
(b) Any officer may resign at any time by giving written notice to
the board of directors, the president or the secretary of the corporation,
without prejudice, however, to the rights, if any, of the corporation under
any contract to which such officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 5. Vacancies. A vacancy in any office as a result of any cause
---------
shall be filled in the manner prescribed in the bylaws for regular appointments
to such office.
SECTION 6. Chairman of the Board. The chairman of the board, if there
---------------------
shall be such an officer, shall be elected from among the directors and shall,
if present, preside at all meetings of the board of directors and exercise and
perform such other powers and duties as may be from time to time assigned to him
by the board of directors or prescribed by the bylaws.
SECTION 7. President. Subject to such supervisory powers, if any, as may
---------
be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and officers of the
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corporation. He shall preside at all meetings of the stockholders and, in the
absence of the chairman of the board, or if there be none, at all meetings of
the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or the bylaws.
SECTION 8. Vice President(s). In the absence or disability of the
-----------------
president, the vice presidents in order of their rank as fixed by the board of
directors or, if not ranked, the vice president designated by the board of
directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as are incident to the office of corporate vice president and as
from time to time may be prescribed for them respectively by the board of
directors or the bylaws.
SECTION 9. Secretary. The secretary shall record or cause to be recorded,
---------
and shall keep or cause to be kept, at the principal executive office and such
other place or places as the board of directors may order, a book of minutes of
actions taken at all meetings of, and by all written consents of, directors and
stockholders, together with, in the case of meetings, the time and place of
holding, whether regular or special and, if special, how authorized, the notice
thereof given, the names of those present at meetings of the board of directors,
the number of shares present or represented at meetings of stockholders and the
proceedings thereof. The secretary shall keep, or cause to be kept, at the
principal executive office or at the office of the corporation's transfer agent
or registrar, a stock ledger, or a duplicate stock ledger, showing the names of
the stockholders, alphabetically arranged, and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
such shares and the number and date of cancellation of every certificate
surrendered for cancellation.
If the stock ledger or duplicate stock ledger is kept at the office of the
corporation's transfer agent or registrar, a statement containing the name and
address of the custodian of the stock ledger or duplicate stock ledger shall be
kept at the corporation's principal executive office. The secretary shall give,
or cause to be given, notice of all the meetings of the stockholders and of the
board of directors required by the bylaws or by law to be given, and shall keep
the seal of the corporation in safe custody, and shall have such other powers
and perform such other duties as are incident to the office of corporate
secretary and as may be prescribed by the board of directors or the bylaws.
SECTION 10. Treasurer. The treasurer shall keep and maintain, or cause to
---------
be kept and maintained, adequate and correct accounts of the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, surplus and
shares. The books of account shall at all reasonable times be open to inspection
by any director. The treasurer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and the board of directors, whenever they request it, an account of
all of his transactions as treasurer and of the financial condition of the
corporation and
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shall have such other powers and perform such other duties as are incident to
the office of corporate treasurer and as may be prescribed by the board of
directors or the bylaws.
SECTION 11. Compensation. The salaries and other compensation for the
------------
principal officers of the corporation shall be fixed, from time to time, by the
board of directors. No officer shall be disqualified from receiving a salary or
such other compensation by reason of his also being a director of the
corporation.
ARTICLE V
Indemnification of Corporate Agents;
Purchase of Liability Insurance
SECTION 1. Indemnification of Agents of the Corporation; Purchase of
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Liability Insurance.
- -------------------
(a) The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys, fees, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with the action, suit
or proceeding, if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction
or upon a plea of nolo contendere or its equivalent does not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action
or proceeding, he had reasonable cause to believe that his conduct was
unlawful.
(b) The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including amounts paid in settlement and attorneys' fees,
actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit, if he acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests
of the corporation. However, indemnification shall not be made for any
claim, issue or matter as to which such a person has been adjudged by a
court of
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competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the
action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
(c) To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsection (a) or (b), or in
defense of any claim, issue or matter therein, he shall be indemnified by
the corporation against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
(d) Any indemnification under subsection (a) or (b), unless ordered
by a court or advanced pursuant to subsection (e), shall be made by the
corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper
in the circumstances. The determination shall be made: (i) by the
stockholders; (ii) by the board of directors by a majority vote of a quorum
consisting of directors who were not parties to the action, suit or
proceeding; (iii) if a majority vote of a quorum consisting of directors
who were not parties to the action, suit or proceeding so orders, by
independent legal counsel in a written opinion; or (iv) if a quorum
consisting of directors who were not parties to the action, suit or
proceeding cannot be obtained, by independent legal counsel in a written
opinion.
(e) The expenses of officers and directors incurred in defending a
civil or criminal action, suit or proceeding shall be paid by the
corporation as they are incurred and in advance of the final disposition of
the action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to
be indemnified by the corporation. The provisions of this subsection (e) do
not affect any rights to advancement of expenses to which corporate
personnel other than directors or officers may be entitled under any
contract or otherwise by law.
(f) The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this Article V (i) does not exclude any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under the articles of incorporation, the bylaws or
any agreement, vote of stockholders or disinterested directors or
otherwise, for either an action in his official capacity or an action in
another capacity while holding his office, except that indemnification,
unless ordered by a court pursuant to subsection (b) or for the advancement
of expenses made pursuant to subsection (e), shall not be made to or on
behalf of any director or officer if a final adjudication establishes that
his acts or omissions involved intentional misconduct, fraud or a knowing
violation of the law and were material to the cause of action and (ii)
continues for a person who has ceased to be a director, officer, employee
or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
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(g) The corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
for any liability asserted against him and liability and expenses incurred
by him in his capacity as a director, officer, employee or agent, or
arising out of his status as such, whether or not the corporation has the
authority to indemnify him against such liability and expenses. The other
financial arrangements made by the corporation may include any now or
hereafter permitted by applicable law.
(h) In the event that the Nevada General Corporation Law shall
hereafter permit or authorize indemnification by the corporation of the
directors, officers, employees or agents of the corporation for any reason
or purpose or in any manner not otherwise provided for in this Article V,
then such directors, officers, employees and agents shall be entitled to
such indemnification by making written demand therefor upon the
corporation, it being the intention of this Article V at all times to
provide the most comprehensive indemnification coverage to the
corporation's directors, officers, employees and agents as may now or
hereafter be permitted by the Nevada General Corporation Law.
(i) The foregoing indemnification provisions shall inure to the
benefit of all present and future directors, officers, employees and agents
of the corporation and all persons now or hereafter serving at the request
of the corporation as directors, officers, employees or agents of another
corporation, partnership, joint venture, trust or other enterprise and
their heirs, executors and administrators, and shall be applicable to all
acts or omissions to act of any such persons, whether such acts or
omissions to act are alleged to have or actually occurred prior to or
subsequent to the adoption of this Article V.
SECTION 2. Vested Rights. Neither the amendment nor repeal of this Article
-------------
V, nor the adoption of any provision of the articles of incorporation or the
bylaws or of any statute inconsistent with this Article V, shall adversely
affect any right or protection of a director, officer, employee or agent of the
corporation existing at the time of such amendment, repeal or adoption of such
inconsistent provision.
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ARTICLE VI
Shares and Share Certificates
Section 1. Record Date.
-----------
(a) The board of directors may fix a time in the future as
a record date for the determination of the stockholders entitled to notice
of and to vote at any meeting of stockholders or entitled to give consent
to corporate action in writing without a meeting, to receive any report, to
receive any dividend or distribution or any allotment of rights or to
exercise any rights in respect of any other lawful action. The record date
so fixed shall be not more than 60 days nor less than 10 days prior to the
date of any meeting, nor more than 60 days prior to any other event for the
purposes of which it is fixed.
(b) A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting unless the board of directors fixes a new record
date for the adjourned meeting, but the board of directors shall fix a new
record date if the meeting is adjourned for more than 30 days from the date
set for the original meeting.
(c) When a record date is fixed, only stockholders of
record on the close of business on that date are entitled to notice of and
to vote at any such meeting, to give consent without a meeting, to receive
any report, to receive a dividend, distribution or allotment of rights or
to exercise the rights, as the case may be, notwithstanding any transfer of
any shares on the books of the corporation after the record date, except as
otherwise provided in the articles of incorporation, by agreement, by the
Nevada General Corporation Law or in Section 4 of this Article VI.
Section 2. Certificate for Shares. Every holder of shares in the
----------------------
corporation shall be entitled to have a certificate signed in the name of the
corporation by the chairman of the board or the president or a vice president
and by the treasurer or an assistant treasurer or the secretary or an assistant
secretary, certifying the number of shares and the class or series of shares
owned by the stockholder. Any of the signatures on the certificate may be by
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if such
person were an officer, transfer agent or registrar at the date of issue.
Any certificate for shares shall contain such legend or other statement as
may be required by the Nevada General Corporation Law, applicable federal or
state securities laws, other applicable law or regulation or any agreement
between the corporation and the issuee thereof.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the board of directors or the bylaws may
provide; provided, however, that any
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such certificate so issued prior to full payment shall state on the face thereof
the amount theretofore paid, the amount remaining unpaid and the terms of
payment thereof.
No new certificate for shares shall be issued in lieu of an old certificate
unless the latter is surrendered and cancelled at the same time; provided,
however, that a new certificate shall be issued without the surrender and
cancellation of the old certificate if: (i) the old certificate is lost,
apparently destroyed or wrongfully taken; (ii) the request for the issuance of
the new certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction or theft; (iii) the request for
the issuance of a new certificate is made prior to the receipt of notice by the
corporation that the old certificate has been acquired by a bona fide purchaser;
(iv) if required by the corporation, the owner of the old certificate furnishes
sufficient indemnity to or provides other adequate security to the corporation;
and (v) the owner of the old certificate satisfies any other reasonable
requirements imposed by the corporation. In the event of the issuance of a new
certificate, the rights and liabilities of the corporation, and of the holders
of the old and new certificates, shall be governed by the provisions of the
Nevada Uniform Commercial Code.
When the articles of incorporation are amended in any way affecting the
statements contained in the certificates for outstanding shares, or it becomes
desirable for any reason, in the discretion of the board of directors, to cancel
any outstanding certificate for shares and issue a new certificate therefor
conforming to the rights of the holder, the board of directors may order any
holders of outstanding certificates for shares to surrender and exchange them
for new certificates within a reasonable time to be fixed by the board of
directors. The order may provide that a holder of any certificates so ordered to
be surrendered is not entitled to vote or to receive dividends or exercise any
of the other rights of stockholders until the holder has complied with the
order, but such order operates to suspend such rights only after notice and
until compliance. The duty of surrender of any outstanding certificates may also
be enforced by civil action.
SECTION 3. Transfer of Shares. Upon surrender to the secretary or transfer
------------------
agent or registrar of the corporation of a certificate for shares fully endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books, unless under applicable federal or state securities
laws or otherwise such transfer would be adverse to the best interests of the
corporation or unless the corporation has notice of an adverse claim, which may
be an adverse claim of the corporation, to the certificate.
SECTION 4. Stockholders of Record. Voting by stockholders shall in all
----------------------
cases be subject to the following provisions:
(a) Subject to subsection (h) of this Section 4, shares held
by an administrator, executor, guardian, conservator or custodian may be
voted by such holder either in person or by proxy, without a transfer of
such shares into the holder's name, and shares standing in the name of a
trustee may be voted by the trustee, either in person or
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by proxy, but no trustee shall be entitled to vote shares held by such
trustee without a transfer of such shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into the receiver's
name if authority to do so is contained in the order of the court by which
such receiver was appointed.
(c) Except where otherwise agreed in writing between the
parties, a stockholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.
(d) Shares standing in the name of a minor may be voted and
the corporation may treat all rights incident thereto as exercisable by the
minor, in person or by proxy, whether or not the corporation has notice,
actual or constructive, of the nonage, unless a guardian of the minor's
property has been appointed and written notice of such appointment given to
the corporation.
(e) If authorized to vote the shares by the power of attorney
by which the attorney-in-fact was appointed, shares held by or under
control of an attorney-in-fact may be voted and the corporation may treat
all rights incident thereto as exercisable by the attorney-in-fact, in
person or by proxy, without transfer of the shares into the name of the
attorney-in-fact.
(f) Shares standing in the name of another corporation,
domestic or foreign, may be voted by such officer, agent or proxyholder as
the articles of incorporation or the bylaws of such other corporation may
prescribe or, in the absence of such provision, as the board of directors
of such other corporation may determine or, in the absence of such
determination, by the chairman of the board, president or any vice
president of such other corporation, or by any other person authorized to
do so by the board of directors, president or any vice president of such
other corporation. Shares which are purported to be voted or any proxy
purported to be executed in the name of a corporation (whether or not any
title of the person signing is indicated) shall be presumed to be voted or
the proxy executed in accordance with the provisions of this subsection,
unless the contrary is shown.
(g) Subject to subsection (h) below, shares of the corporation
owned by the corporation or any subsidiary shall not be entitled to vote on
any matter and shall not be counted in determining the total number of
outstanding shares. Solely for purposes of this subsection and subsection
(h) below, a "subsidiary" of the corporation shall mean a corporation,
shares of which possessing a majority of the power to vote for the election
of directors at the time determination of such voting power is made, are
owned directly, or indirectly through one or more subsidiaries, by the
corporation.
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(h) Shares held by the corporation in a fiduciary capacity,
and shares of the corporation held in a fiduciary capacity by any
subsidiary, shall not be entitled to vote on any matter, except to the
extent that the settlor or beneficial owner possesses and exercises a right
to vote or to give the corporation binding instructions as to how to vote
such shares.
(i) If shares stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, husband and wife as community property, tenants by the
entirety, voting trustees, persons entitled to vote under a stockholder
voting agreement or otherwise, or if two or more persons (including
proxyholders) have the same fiduciary relationship respecting the same
shares, unless the secretary of the corporation is given written notice to
the contrary and is furnished with a copy of the instrument or order
appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so
voting binds all; and
(iii) If more than one vote, but the vote is evenly split
on any particular matter, each fraction may vote the securities in
question proportionately.
If the instrument so filed or the registration of the shares
shows that any such tenancy is held in unequal interests, a majority or
even split for the purpose of this Section shall mean a majority or even
split in interest.
ARTICLE VII
Records and Reports
SECTION 1. Maintenance and Inspection of Share Register. The corporation
--------------------------------------------
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, a stock ledger, revised annually, of its stockholders,
giving the names and addresses of all stockholders and the number and class of
shares held by each stockholder. In lieu of the stock ledger, the corporation
may keep a statement setting out the name of the custodian of the stock ledger,
and the present and complete post office address, including street and number,
if any, where the stock ledger is kept.
To the extent required by the Nevada General Corporation Law, any person
who has been a stockholder of record for at least 6 months immediately preceding
his demand, or any person holding, or thereunto authorized in writing by the
holders of, at least 5 percent (5%) of all of the corporation's outstanding
shares, upon at least five (5) days' written demand inspect and copy the records
of stockholders' names and addresses and shareholdings during usual business.
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SECTION 2. Maintenance and Inspection of Articles and Bylaws. The
-------------------------------------------------
corporation shall keep at its registered office a copy of the articles of
incorporation, as amended to date, certified by the Secretary of State, and the
original or a copy of the bylaws, as amended to date, certified by an officer of
the corporation. Such articles and bylaws shall be open to inspection by any
person who has been a stockholder or record for at least 6 months or is the
holder of five percent (5%) of the outstanding stock of the corporation as
required by the Nevada General Corporation Law, at all reasonable times during
office hours.
SECTION 3. Maintenance and Inspection of Other Corporate Records. The
-----------------------------------------------------
accounting books and records and minutes of proceedings of the stockholders and
the board of directors and any committee or committees of the board of directors
shall be kept at such place or places designated by the board of directors, or,
in the absence of such designation, at the principal office of the corporation.
The minutes shall be kept in written form and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form within a reasonable time. The minutes and
accounting books and records shall be open to inspection during normal business
hours as required by the Nevada General Corporation Law by any stockholder that
owns not less that fifteen percent (15%) of all of the issued and outstanding
shares of stock of the corporation or has been authorized in writing by the
holders of at least 15% of all the issued and outstanding shares, upon at least
five (5) days' written notice. Such person is authorized to make extracts
therefrom, and to conduct an audit of such records. Holders of voting trust
certificates representing 15% of the issued and outstanding stock of the
corporation shall be regarded as stockholders for the purpose of this inspection
of records.
SECTION 4. Inspection by Directors. Every director shall have the absolute
-----------------------
right at any reasonable time to inspect and copy all books, records and
documents of every kind and to inspect the physical properties of the
corporation and its subsidiaries. Such inspection by a director may be made in
person or by agent or attorney and the right of inspection includes the right to
copy and make extracts.
SECTION 5. Annual Reports.
--------------
(a) So long as the corporation is subject to the Securities
Exchange Act of 1934, as amended, the board of directors shall cause an
annual report to be sent to the stockholders not later than 120 days after
the close of the fiscal year; provided that such report shall be sent to
the stockholders at least 10 days prior to the annual meeting of
stockholders. Such report shall contain all matters required by the
Securities Exchange Act of 1934, as amended and other applicable laws.
(b) Any report required by this Section shall be given in
the manner and shall be deemed to have been given by the corporation as
provided in Section 4 of Article I of the bylaws.
SECTION 6. Annual Statement of Information. The corporation shall file
-------------------------------
annually with the Secretary of State of the State of Nevada, on the prescribed
form, a statement in compliance with Section 78.150 of the Nevada General
Corporation Law.
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ARTICLE VIII
Miscellaneous
SECTION 1. Checks, Drafts, Etc. All checks, drafts or other orders for
--------------------
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the board of directors.
SECTION 2. Contracts, Etc., How Executed. The board of directors, except
-----------------------------
as otherwise provided in the bylaws, may authorize any officer or officers,
agent or agents, to enter into any contract or execute any instrument in the
name of and on behalf of the corporation, and such authority may be general or
confined to specific instances; and, unless so authorized by the board of
directors, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or for any amount. Subject to the provisions of
applicable law, any note, mortgage, evidence of indebtedness, contract, share
certificate, conveyance or other document or instrument in writing and any
assignment or endorsements thereof executed or entered into between the
corporation and any other person, when signed by the chairman of the board, the
president, any vice president, the chief financial officer, the treasurer or any
assistant treasurer of the corporation shall be valid and binding on the
corporation in the absence of actual knowledge on the part of the other person
that the signing officers had no authority to execute the same.
SECTION 3. Representation of Shares of Other Corporations. Any officer of
----------------------------------------------
the corporation is authorized to vote, represent and exercise on behalf of the
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of the corporation. The authority herein
granted to such officers to vote or represent on behalf of the corporation any
and all shares held by the corporation in any other corporation or corporations
may be exercised either by such officers in person or by any other person
authorized so to do by proxy or power of attorney duly executed by such
officers.
SECTION 4. Seal. The corporation shall adopt and may, but shall not be
----
required to, use a corporate seal consisting of a circle setting forth on its
circumference the name of the corporation and showing the state and date of
incorporation.
SECTION 5. Fiscal Year. Unless changed by resolution of the board of
-----------
directors, the fiscal year of the corporation shall end on the last day of
December.
SECTION 6. Loans. No loans shall be contracted on behalf of the
-----
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors, which authority may be
general or confined to specific instances.
SECTION 7. Deposits. The board of directors shall select banks, trust
--------
companies or other depositories in which all funds of the corporation not
otherwise employed shall, from time to time, be deposited to the credit of the
corporation.
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SECTION 8. Construction and Definitions. Unless the context otherwise
----------------------------
requires, the general provisions, rules of construction and definitions
contained in the Nevada General Corporation Law shall govern the construction of
the bylaws. Without limiting the generality of the foregoing, the masculine
gender includes the feminine and neuter, the singular number includes the plural
and the plural number includes the singular and the term "person" includes a
corporation or other entity as well as a natural person.
ARTICLE IX
Amendments
SECTION 1. Power of Stockholders. New bylaws may be adopted or the bylaws
---------------------
may be amended or repealed by the affirmative vote of a majority of the
outstanding shares entitled to vote.
SECTION 2. Power of Directors. Subject to the right of the stockholders as
------------------
provided in Section 1 of this Article IX to adopt, amend or repeal bylaws,
bylaws may be adopted, amended or repealed by the board of directors.
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