<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q/A
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 1999
Commission File Number 1-9648
----------------
NATIONAL REALTY, L.P.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 75-2163175
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
(Address of Principal Executive Office) (Zip Code)
(214) 692-4700
(Registrant's Telephone Number, Including Area Code)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
<TABLE>
<S> <C>
Units of Limited Partner Interest 6,321,524
(Class) (Outstanding at October 29, 1999)
</TABLE>
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<PAGE>
This Form 10-Q/A amends the Registrant's quarterly report on Form 10-Q for the
quarter ended September 30, 1999 as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Note 4. Notes Receivable - pages
9 - 12; and PART II - OTHER INFORMATION, Item 6. Exhibits and Reports on Form
8-K - page 24, to include Exhibit 2.0.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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>
2
<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.
3
<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.
4
<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.
5
<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.
6
<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.
7
<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.
8
<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
9
<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
10
<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,
11
<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
12
<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.
13
<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.
14
<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>
15
<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.
----------------
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
National Realty is a Delaware limited partnership formed on January 29,
1987, that owns and operates through the Operating Partnership, also a Delaware
limited partnership, a portfolio of real estate and mortgage notes. Most of the
Operating Partnership's properties were acquired in transactions consummated on
September 18, 1987, pursuant to which National Realty 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.
The General Partner has discretion in determining methods of obtaining funds
for the Partnership's operations. The Partnership's governing documents place
no limitation on the amount of leverage that the Partnership 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 the
Partnership'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.
The Partnership'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 the Partnership's
properties and other assets and proceeds from borrowings secured by the
Partnership's properties or mortgage notes receivable. The Partnership expects
that its cash on hand, cash flow from property operations together with
externally generated funds will be sufficient to meet the Partnership'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.
The Partnership'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 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 $1.8 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.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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.
The Partnership paid incentive disposition fees of $1.1 million to the
General Partner 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 Davister
Corp., 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,
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.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
Also 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 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.
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, the Partnership 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, 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. In February 1999, the Partnership funded an additional
$37,500.
Also in 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. In January 1999,
ART purchased the contract from JNC and acquired the land. In connection with
the purchase,
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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 JNC loan,
including accrued but unpaid interest, paydown by $1.3 million of the JNC line
of credit and paydown a portion of the JNC Frisco Panther Partners, Ltd. loan.
In 1997 and 1998, the Partnership 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, the
Partnership funded an additional $316,000 increasing the loan balance to $4.1
million.
Also in 1998 and the first nine months of 1999, the Partnership 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, the Partnership 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: (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
National Realty units of limited partnership; 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, the Partnership 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, 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.
In 1997, 1998 and 1999, the Partnership funded $1.8 million of a $2.1
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 approximately 6.5 acres of unimproved land in
Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux
partners. In October 1999, the Partnership received a paydown of $724,000.
In July 1999, the Partnership 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, the Partnership paid distributions of
$.375 per unit, or a total of $1.6 million.
Management reviews the carrying values of the Partnership'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. The Partnership's mortgage note receivable review
includes an evaluation of the collateral property securing such
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
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.
Results of Operations
The Partnership 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. The Partnership 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 the Partnership'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.
$4.3 million and $13.7 million of the decrease 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 the Partnership's apartments. Rents are
expected to continue to decrease during the remainder of 1999 as the
Partnership 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 in
1998. 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
funds on the ART line of credit.
Interest expense decreased to $7.3 million and $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 the Partnership continues
to selectively sell properties.
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
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
due to an increase of $1.2 million in cost reimbursements to an affiliate of
the General Partner, partially offset by a decrease of $891,000 in legal fees
as a result of the settlement of two lawsuits in 1998.
The Partnership paid $200,000 and $1.1 million in incentive disposition fees
to its General Partner 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 such property in June.
Tax Matters
National Realty is a publicly traded limited partnership and, for federal
income tax purposes, all income or loss generated by the Partnership is
included in the income tax returns of the individual partners. Under Internal
Revenue Service guidelines generally applicable to publicly traded partnerships
and thus to the Partnership, a limited partner's use of his or her share of
partnership losses is subject to special limitations.
Inflation
The effects of inflation on the Partnership'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 the
Partnership's properties and the ultimate gains to be realized by the
Partnership from property sales. Inflation also has an effect on the
Partnership's earnings from short-term investments and on its interest income
and interest expense to the extent that such income and expense is affected by
floating interest rates.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Partnership 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 the
Partnership for personal injury associated with such materials.
The General Partner is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the
Partnership's business, assets or results of operations.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Year 2000
BCM has informed management that its computer hardware operating system and
computer software have been certified as year 2000 compliant.
Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM that
performs property management services for the Partnership's properties, has
informed management that effective January 1, 1999, it began using year 2000
compliant computer hardware and property management software for the
Partnership's commercial properties. With regard to the Partnership's
apartments, Carmel, Ltd. has informed management that its subcontractors are
also using year 2000 compliant computer hardware and property management
software.
The Partnership 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. Such costs have been or will be borne by either BCM, Carmel, Ltd. or
the property management subcontractors of Carmel, Ltd.
Management has completed its evaluation of the Partnership'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.
The Partnership has or will have in place the year 2000 compliant systems
that will allow it to operate. The risks the Partnership 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 the Partnership's operations is negligible.
23
<PAGE>
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Proposed Transaction with American Realty Investors, Inc.
On November 3, 1999, the Partnership and ART jointly announced the agreement
of their respective Boards to combine, in a tax free exchange, the two entities
into a new holding company to be named American Realty Investors, Inc. ("ARI").
Under the proposal, ARI will distribute shares of its common stock to ART
stockholders and NRLP unitholders. NRLP unitholders, except for ART, would
receive one share of ARI common stock for each unit of NRLP held. ART
stockholders would receive .91 shares of ARI common stock for each share of ART
held. ART preferred stock would convert into one share of preferred stock of
ARI, having substantially the same rights as ART's preferred stock. The share
exchange and merger are subject to a vote of stockholders/unitholders of both
entities. Approval requires the vote of a majority of the unitholders holding a
majority of the Partnership's outstanding units, and the vote of a majority of
the stockholders holding a majority of ART's outstanding shares of common and
preferred stock. As of November 3, 1999, ART owned approximately 56.2% of the
outstanding units of the Partnership and BCM owned approximately 30.0% of the
outstanding units of the Partnership and 56.9% of the outstanding shares of
ART's common stock. A date for the special meeting of the
stockholders/unitholders to vote on the merger proposal has not been set.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.0 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.
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
None.
24
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL REALTY, L.P.
By its General Partner:
NRLP MANAGEMENT CORP.
Date: December 8, 1999 By: /s/ Karl L. Blaha
------------------------- ----------------------------------
Karl L. Blaha
President
Date: December 8, 1999 By: /s/ Thomas A. Holland
------------------------- ----------------------------------
Thomas A. Holland
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
<PAGE>
NATIONAL REALTY, L.P.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended September 30, 1999
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------------------- ------
<C> <S> <C>
2.0 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.
27.0 Financial Data Schedule
</TABLE>
26
<PAGE>
EXHIBIT 2.0
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 "Newco
<PAGE>
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
<PAGE>
the ART Merger and the NRLP Merger, respectively (together the "Certificates of
Merger"), 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.
<PAGE>
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.
<PAGE>
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
<PAGE>
of Newco, enforceable against Newco 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 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 Act and the Exchange Act,
except that no
<PAGE>
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 agree ment or understanding to which NRLP or any of its
Subsidiaries is a party or bound relating to the voting of any securities of
NRLP.
<PAGE>
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
respects with the
<PAGE>
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, or omits or will omit to state
<PAGE>
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.
<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 the ART Disclosure Letter, there are not now, and
at the Effective Time there will not be, any options,
<PAGE>
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, injunction, decree, statute, rule or regulation applicable
<PAGE>
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 NRLP prior to the date hereof, there is no
claim, suit, action or proceeding pending or, to the best knowledge of
<PAGE>
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, those
<PAGE>
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
<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
<PAGE>
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 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;
<PAGE>
(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 proposal with
<PAGE>
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 information, and take such
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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 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
<PAGE>
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
(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
<PAGE>
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, 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
<PAGE>
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 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.
<PAGE>
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
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
<PAGE>
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."
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
<PAGE>
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 other party, which fees and expenses shall
be in addition to any other relief which may be awarded.
<PAGE>
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 A. Holland
--------------------------------------
Name: Thomas A. 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
--------------------------------
<PAGE>
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
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 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").
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
<PAGE>
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) each share 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 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),
<PAGE>
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 3.2 Exchange of ART Certificates.
----------------------------
(f) 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 shall be paid or payable on
any dividends, if any, or any amount payable in respect
<PAGE>
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.
(g) 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.
(h) 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
interests shall not entitle the owner thereof to vote or to any other rights of
a stockholder. In lieu of any such fractional shares,
<PAGE>
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
Acontrol" 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 Acontrol" 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.
<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
operation of law or otherwise
<PAGE>
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.
<PAGE>
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:_______________________________
AMERICAN REALTY TRUST, INC.
By:______________________________________
Name:_________________________________
Title:________________________________
ART ACQUISITION CORP.
By:______________________________________
Name:_________________________________
Title:________________________________
<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
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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
<PAGE>
accordance with the DRLPA and the DGCL shall be filed with the Secretary of
State of the State 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
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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) each share of common stock, par value $.01 per share, of Sub II shall
be cancelled and cease to exist at and after the Effective Time and no
consideration shall be delivered with respect thereto; 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.
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(d) 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) 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 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
certificate formerly representing NRLP Units (each an "NRLP
<PAGE>
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.
(e) 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.
(f) 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 into which the NRLP Units theretofore represented by the
NRLP Certificates so surrendered shall have been converted
<PAGE>
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.
ARTICLE IV
<PAGE>
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
<PAGE>
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
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.
<PAGE>
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 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:______________________________
<PAGE>
EXHIBIT C
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NEWCO BOARD OF DIRECTORS
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ART Designees
- -------------
Roy E. Bode
Collene C. Currie
Al Gonzalez
Cliff Harris
NRLP Designees
- --------------
Karl L. Blaha
Richard D. Morgan
