**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-K**

 

(Mark One)

**ý****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

For the year endedDecember 31, 2001

OR

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

*COMMISSIONFILE NUMBER 001-16785*

 

**AmericanSpectrum Realty, Inc.**

(Exact name of Registrantas specified in its charter)

 

| **State of Maryland**                                           |   | **52-2258674**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |   | (I.R.S.  Employer Identification No.) |
|                                                            |   |                                  |
| **7700 Irvine Center Drive, Suite 555  Irvine, California**     |   | **92618**                             |
| (Address  of principal executive offices)                       |   | (Zip  Code)                           |
|                                                            |   |                                  |

 

| **(949) 753-7111**                                         |
|------------------------------------------------------------|
| (Registrant’s  telephone number, including area code) |

 

Securities registeredunder Section 12(b) of the Act:

 

| **Title of each class**       |   | **Name of Exchange on which registered** |
|-------------------------------|--------|------------------------------------------|
| Common  Stock, $.01 par value |   | American  Stock Exchange                 |

 

**Securitiesregistered pursuant to Section 12(g) of the Act: None**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý No o

 

 

----

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K [X]

 

As of March 20, 2002, the aggregate market value ofthe voting stock held by non affiliates of the registrant was approximately$30,965,000.  The aggregate market valuewas computed with reference to the closing price on the American Stock Exchangeon such date. Excludes 1,105,688 shares of Common Stock deemed to be held byofficers, directors and stockholders whose ownership exceeds ten percent of theshares of outstanding common stock of the Registrant on such date.  Exclusion of shares held by any personshould not be construed to indicate that such person is an affiliate of theRegistrant.

 

As of March 20, 2002, 5,529,190 shares of Common Stock($.01 par value) were outstanding.

 

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

None

 

 

 

2

----

 

**TABLE OFCONTENTS**

 

 

|    |   | PART I                                                                                     |   |   |
|---------|--------|--------------------------------------------------------------------------------------------|--------|--------|
|    |   |                                                                                       |   |   |
| Item 1  |   | Business                                                                                   |   |   |
| Item 2  |   | Properties                                                                                 |   |   |
| Item 3  |   | Legal Proceedings                                                                          |   |   |
| Item 4  |   | Submission of Matters to a Vote of Security  Holders                                       |   |   |
|    |   |                                                                                       |   |   |
|    |   | PART II                                                                                    |   |   |
|    |   |                                                                                       |   |   |
| Item 5  |   | Market for Registrant’s Common Stock and Related  Stockholder Matters                 |   |   |
| Item 6  |   | Selected Financial Data                                                                    |   |   |
| Item 7  |   | Management’s Discussion and Analysis of  Financial Condition and Results ofOperations |   |   |
| Item 7A |   | Quantitative and Qualitative Disclosure About  Market Risk                                 |   |   |
| Item 8  |   | Financial Statements and Supplementary Data                                                |   |   |
| Item 9  |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure      |   |   |
|    |   |                                                                                       |   |   |
|    |   | PART III                                                                                   |   |   |
|    |   |                                                                                       |   |   |
| Item 10 |   | Directors and Executive Officers of the  Registrant                                        |   |   |
| Item 11 |   | Executive Compensation                                                                     |   |   |
| Item 12 |   | Security Ownership of Certain Beneficial Owners  and Management                            |   |   |
| Item 13 |   | Certain Relationships and Related Transactions                                             |   |   |
|    |   |                                                                                       |   |   |
|    |   | PART IV                                                                                    |   |   |
|    |   |                                                                                       |   |   |
| Item 14 |   | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                           |   |   |
|    |   |                                                                                       |   |   |

 

 

3

----

 

**PART I**

 

**ITEM 1****. BUSINESS**

 

# **General Description of Business**

American SpectrumRealty, Inc. (“ASR” or the “Company”) is a Maryland corporation established onAugust 8, 2000.  The Company is afull-service real estate corporation, which owns,  manages and operates income-producing properties.   As of December 31, 2001, through itsmajority-owned subsidiary, American Spectrum Realty Operating Partnership, LP(the “Operating Partnership”), the Company owned and operated 33 propertieswhich consisted of 12 office, 11 office/warehouse, five shopping center, andfour apartment properties, and one developmental land property. The propertiesare located in four geographic regions in nine states.  The Company plans to expand its business andnet assets by acquiring additional properties. The Company will focus primarily on office and office/warehouseproperties located in Texas, the Midwest, Arizona and California.

 

The structure ofthe Company is generally referred to as an “UPREIT” structure.  Substantially all of the Company’s assetswill be held through the Operating Partnership. The Company is the sole generalpartner of the Operating Partnership. As the sole general partner of the Operating Partnership, the Companygenerally has the exclusive power under the Partnership Agreement to manage andconduct the business of the Operating Partnership. The Company’s interest inthe Operating Partnership entitles it to share in cash distributions from, andin profits and losses of, the Operating Partnership.  Holders of limited partnership units in the Operating Partnership(“OP Units”) have the same rights to distributions as holders of common stockin the Company. Most of the properties will be owned by the OperatingPartnership through subsidiary limited partnerships or limited liabilitycompanies.

 

At December 31, 2001, the Company held a 1% general partner interestand an 87.4% limited partner interest in the Operating Partnership.  Holders of the OP Units have the option toredeem their units and to receive, at the option of the Company, in exchangefor each OP Unit (i) one share of Common Stock of the Company, or (ii) cashequal to the fair market value of one share of Common Stock of the Company atthe date of conversion. As of December 31, 2001, the Operating Partnership,directly and through the subsidiaries in which it and the Company own 100% ofthe ownership interests, controls a portfolio of 33 real estate properties.

 

The Companyintends to qualify as a real estate investment trust, REIT, as defined underthe Internal Revenue Code of 1986, as amended, and to elect to be treated as aREIT beginning in 2003.  In general, aREIT is a company that owns or provides financing for real estate and paysannual distributions to investors of at least 90% of its taxable income.  A REIT typically is not subject to federalincome taxation on its net income, provided applicable income tax requirementsare satisfied.   Currently, the Companyis taxed as a C corporation.

 

## **CONSOLIDATIONTRANSACTION**

On October 19, 2001, the Company was thelegal acquirer and registrant in a consolidation transaction (the“Consolidation”).  Pursuant to theConsolidation, subsidiaries of the Company merged with eight public limitedpartnerships, acquired the assets and liabilities of two private entities managedby CGS Real Estate Company, Inc. (“CGS”) and its affiliates and acquiredcertain assets and liabilities of CGS and its majority-owned affiliates.  The accounting acquirer in the Consolidationwas Sierra Pacific Pension Investors `84 (“SPPI84”), one of the eight publiclimited partnerships.  Pursuant to theConsolidation, partners of the public partnerships received shares in theCompany or promissory notes in exchange for their partnership units and ownersof existing related entities exchanged ownership interests in real estate forASR shares or units in the Operating Partnership, an entity formed for thispurpose and initially wholly owned by the Company.   Prior to October 19, 2001, the Company was a wholly ownedsubsidiary of CGS.

 

**Business Objectives and Strategy**

 

The Company’s fundamentalbusiness objective is to maximize stockholder value.  The Company intends 

 

 

4

----

 

to achieve its businessobjective through opportunistic investments and by executing its otheroperating strategies.

 

*FinancingASR’s Growth Strategy. *Inorder to provide the funds necessary to fund the Company’s anticipated growth,it plans to refinance its current debt, replacing it with financing that willresult in a 70% loan to value on its real estate assets. The Companyanticipates that this refinancing effort will generate approximately$6,000,000.  Additionally, the Companymay seek to identify and work with joint venture equity partners to provideadditional capital.

 

*Opportunitiesto Acquire Undervalued and Undermanaged Properties. *The Company believes it is positioned to investin properties, either individually or in portfolios, at attractive prices,often at costs lower than replacement cost. This will be accomplished using the Company’s knowledge of diversegeographical markets and property types, as well as its established capabilityto identify, and negotiate with, highly-motivated sellers, which includeindividuals as well as such institutions as banks, insurance companies andpension funds.  In addition, theacquisition of under performing properties allow the Company to improve cashflow by substituting its property management policies and personnel and makingother changes, such as installing energy saving devices.  The Company will not set a maximum targetpurchase price but rather it will tailor its acquisitions to under performingproperties, which the Company believes are attractively priced due to relativephysical or operating deficiencies.  TheCompany believes that its real estate expertise will allow it to, whennecessary, reposition, renovate or redevelop these properties to make themcompetitive in their local markets.

 

*CompetitiveAdvantages.*  TheCompany believes it will have competitive advantages that will enable it to beselective with respect to real estate investment opportunities and allow it tosuccessfully pursue its growth strategy. Based on Management’s experience, the Company expects that its presencein geographically diverse markets will increase its exposure to opportunitiesfor attractive acquisitions of various types of properties throughout theUnited States with a primary focus in Texas, the Midwest, Arizona andCalifornia and provide it with competitive advantages which enhance its abilityto do so, including:

 
| • | strong local market expertise;                                                                                                                                                                                                                                |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                          |
| • | long-standing relationships with tenants, real  estate brokers, institutions and other owners of real estate in each local  market;                                                                                                                           |
|   |                                                                                                                                                                                                                                                          |
| • | fully integrated real estate operations which allow  quick response to acquisition opportunities;                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                          |
| • | access to capital markets at competitive rates as a  public company;                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                          |
| • | ability to acquire properties in exchange for ASR  shares or OP Units  which may make it  a more attractive purchaser when compared to purchasers who are not similarly  structured or are unable to make similar use of equity to purchase  properties. |

 

*Geographic and Property TypeDiversification. *The Company intends to seek acquisitionsof properties, which have sufficient historical operating income to assure thatdividend distributions to stockholders will not be diminished in the short-termand will be expected to increase in the long-term.  The Company intends to focus on acquisition of office and office/warehouseproperties in Texas, the Midwest, Arizona, and California.  However, the Company believes the Companywill be best able to take advantage of attractive opportunities if it is notlimited geographically or by property type. Such an absence of limits will enable the Company to acquire adiversified portfolio of properties, giving it a potential competitiveadvantage over more highly focused real estate investment trusts.  Moreover, the Company believes thatgeographic diversification of its properties will better enable it to withstandeconomic downturns in particular regions, and that diversification will helpprotect the Company from possible adverse factors (e.g., overbuilding) whichfrom time to time may affect particular types of properties.

 

*Property Management Strategies*. The entities included in the Consolidation developed procedures and 

 

 

5

----

 

expertise which will permit ASR to manage effectivelya variety of types of properties throughout the United States. Theirdecentralized structure with strong local management has enabled them tooperate efficiently.  In seeking tomaximize revenues, minimize costs and increase the value of properties theentities manage, they have historically followed aggressive property managementpolicies.  Among the property managementtechniques emphasized were regular and comprehensive maintenance programs,regular and comprehensive financial analyses, the use of a master property andcasualty insurance program, aggressive restructuring or conversion of tenantsspaces and frequent appearances before property tax assessors, planningcommissions and other local governmental bodies.  The Company believes that its management of the properties willbe a substantial factor in its ability to realize its objectives of maximizingearnings.

 

*Managing and Monitoring Investments*. The Company will actively manage the property portfolio and administerits investments.  The Company willmonitor issues including the financial advantages of property sales,minimization of real estate taxes, and insurance costs. Also the Company willactively analyze diversification, review tenant financial statements to dealwith potential problems quickly and will restructure investments in the case ofunderperforming and non-performing properties.

 

**Competition**

 

The Company competes withother entities both to locate suitable properties for acquisition and to locatepurchasers for its properties.  Whilethe markets in which it competes are highly fragmented with no dominantcompetitors, the Company faces substantial competition in both its leasing andproperty acquisition activities.  Thereare numerous other similar types of properties located in close proximity toeach of its properties.  The amount ofleasable space available in any market could have a material adverse effect onthe Company’s ability to rent space and on the rents charged.  Competition for acquisition of existingproperties from institutional investors and publicly traded REITs has increasedsubstantially in the past several years. In many of the Company’s markets, institutional investors and owners anddevelopers of properties compete vigorously for the acquisition, developmentand lease of space.  Many of thesecompetitors have substantial resources and experience greater than the Company.

 

**Employees**

 

As of December 31, 2001, ASR employed approximately100 individuals, including on-site property management and maintenancepersonnel.

 

# **Environmental Matters**

 

Variousfederal, state and local laws and regulations subject property owners andoperators to liability for reporting, investigating, remediating, andmonitoring of regulated hazardous substances released on or from aproperty.  These laws and regulationsoften impose strict liability without regard to whether the owner or operatorknew of, or actually caused, the release. The presence of, or the failure toproperly report, investigate, remediate, or monitor hazardous substances couldadversely affect the financial condition of the Company or the ability of theCompany to operate the properties.  Inaddition, these factors could hinder the Company’s ability to borrow againstthe properties.  The presence ofhazardous substances on a property also could result in personal injury orsimilar claims by private plaintiffs.  In addition, there are federal, state and local laws andregulations which impose requirements on the storage, use, management anddisposal of regulated hazardous materials or substances.  The failure to comply with thoserequirements could result in the imposition of liability, including penaltiesor fines, on the owner or operator of the properties.  Future laws or regulations could also impose unanticipatedmaterial environmental liabilities on the Company in connection with any of theproperties.

 

The Company may decide toacquire a property with known or suspected environmental contamination after itevaluates that business risk, the potential costs of investigation orremediation, and the potential costs to cure identified non-compliances withenvironmental laws or regulations.  Inconnection with its acquisition of properties, the Company may seek to have theseller indemnify it against environmental conditions or non-compliancesexisting as of the date of purchase, and under appropriate circumstances, it 

 

 

6

----

 

may obtain environmentalinsurance.  In some instances, theCompany may become the assignee of or successor to the seller’s indemnificationrights arising from the seller’s acquisition agreement for the property.  Additionally, the Company may try tostructure its leases for the property to require the tenant to assume all orsome of the responsibility for environmental compliance and remediation, and toprovide that material non-compliance with environmental laws or regulationswill be deemed a default under the lease. However, there can be no assurances that, despite these efforts,liability will not be imposed on the Company under applicable federal, state,or local environmental laws or regulations relating to the properties.

 

# **Insurance**

 

The Company carriescomprehensive liability, fire, extended coverage and rental loss insurancecovering all of its properties, with policy specifications and insured limits,which the Company believes are adequate and appropriate under thecircumstances. There are, however, types of losses that are not generallyinsured because they are either uninsurable or not economically feasible toinsure. The current insurance policies do not exclude coverage for acts of terror,however future policy renewals may eliminate this type of coverage. The Companymay be required to obtain specific coverage for acts of terror to comply withcertain loan covenants. The cost of such coverage could have a negative impacton cash flows and operating results.

 

Should an uninsured lossor a loss in excess of insured limits occur, the Company could lose its capitalinvested in the property, as well as the anticipated future revenues from theproperty and, in the case of debt which is with recourse to the Company, wouldremain obligated for any mortgage debt or other financial obligations relatedto the property. Any such loss would adversely affect the Company.  Moreover, the Company will generally beliable for any unsatisfied obligations other than non-recourse obligations. TheCompany believes that its properties are adequately insured. No assurance canbe given that material losses in excess of insurance proceeds will not occur inthe future.

 

# **Capital Expenditures**

 

Capital expenditure requirements include both normalrecurring capital expenditures, and tenant improvements and lease commissionsrelating to the releasing of space which is currently vacant and to tenantimprovements and lease commissions relating to space currently occupied astenants renew their leases.  Theentities included in the Consolidation had a history of acquiring properties,which require renovation, repositioning or management changes to improve theirperformance and enable them to compete effectively.  The Company plans to continue investing in these types ofproperties.  These properties mayrequire major capital expenditures or significant tenant improvements in orderto maximize their cash flows.

 

The Company hasbudgeted $6.5 million for capital expenditures, tenant improvements and leasecommissions for 2002.  These amountswill be funded primarily from proceeds generated by refinancing of properties,by cash flow from operations and from capital improvement reserves.

 

**Recent Developments**

 

In November, 2001, the Company sold the 42,142 squarefoot Tower Industrial Building for $1,800,000. The sale produced a net deferred gain on the sale of approximately$232,000 and net proceeds of approximately $1,688,000.  It is anticipated that the net proceeds,which were held in escrow at December 31, 2001, will be used as a source toassist the funding of a future acquisition. The property was unencumbered.

 

**ITEM 2****. PROPERTIES**

 

**The Location and Type of theCompany’s Properties**

 

The Company’s 33properties consist of 12 office, 11 office/warehouse, five shopping center andfour apartment properties, and one developmental land property located in fourgeographic regions in nine states. The following table sets forth the location,type and size of the properties (by rentable square feet and/or units) alongwith annualized net rent, rented square feet, occupancy, and rent per squarefoot as of December 31, 2001.

 

 

7

----

 
| **Location**                    |   | **Type**         |   | **Total  Gross Leasable Area (GLA) (Square Feet)** |   | **Percent of  GLA Leased on December 31, 2001** |   | **Rented  Square Feet** |   | **Annualized  Net Rent (dollars in thousands)** |   | **Rent per  Square Foot** |   |
|---------------------------------|--------|------------------|--------|----------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------|--------|-------------------------------------------------|--------|---------------------------|--------|
| *Arizona California Region*     |   |             |   |                                               |   |                                            |   |                    |   |                                            |   |                      |   |
| Pacific Spectrum, AZ            |   | Office           |   | 70,511                                             |   | 93.4                                            | %      | 65,885                  |   | $                                               | 1,099  |                      | $      | 16.69 |   |
| Valencia, AZ                    |   | Office/Whse      |   | 82,560                                             |   | 100.0                                           | %      | 82,560                  |   | 663                                             |   | 8.03                      |   |
| Phoenix Van Buren, AZ           |   | Land             |   | N/A                                                |   | N/A                                             |   | N/A                     |   | N/A                                             |   | N/A                       |   |
| Mira Mesa, CA                   |   | Office           |   | 89,560                                             |   | 100.0                                           | %      | 89,560                  |   | 2,141                                           |   | 23.91                     |   |
| Sorrento II, CA                 |   | Office           |   | 88,073                                             |   | 100.0                                           | %      | 88,073                  |   | 1,034                                           |   | 11.74                     |   |
| Creekside Office, CA            |   | Office           |   | 47,800                                             |   | 100.0                                           | %      | 47,800                  |   | 1,242                                           |   | 25.98                     |   |
| Bristol Bay, CA                 |   | Office           |   | 50,371                                             |   | 86.7                                            | %      | 43,692                  |   | 1,071                                           |   | 24.52                     |   |
| Daimler Chrysler, CA            |   | Office           |   | 208,269                                            |   | 89.5                                            | %      | 186,297                 |   | 5,387                                           |   | 28.92                     |   |
| Sorrento I, CA                  |   | Office/Whse      |   | 43,100                                             |   | 100.0                                           | %      | 43,100                  |   | 295                                             |   | 6.85                      |   |
| Creekside Apartments, CA        |   | Apartment        |   | 77,650                                             |   | 96.7                                            | %      | 75,095                  |   | 1,158                                           |   | 15.42                     |   |
| Villa Redondo, CA               |   | Apartment        |   | 96,802                                             |   | 92.8                                            | %      | 89,832                  |   | 2,721                                           |   | 30.29                     |   |
| Beach & Lampson, CA         |   | Shopping  Center |   | 13,017                                             |   | 100.0                                           | %      | 13,017                  |   | 157                                             |   | 12.05                     |   |
| Arizona California Region Total |   |             |   | 867,713                                            |   | 95.1                                            | %      | 824,911                 |   | $                                               | 16,968 |                      | $      | 20.57 |   |
| *Upper Midwest Region*          |   |             |   |                                               |   |                                            |   |                    |   |                                            |   |                      |   |
| Countryside Office Park, IL     |   | Office           |   | 91,975                                             |   | 93.1                                            | %      | 85,583                  |   | $                                               | 1,438  |                      | $      | 16.80 |   |
| Oak Grove Commons, IL           |   | Office/Whse      |   | 137,678                                            |   | 93.4                                            | %      | 128,577                 |   | 944                                             |   | 7.34                      |   |
| Park Plaza I & II, IN       |   | Office/Whse      |   | 95,080                                             |   | 86.4                                            | %      | 82,102                  |   | 512                                             |   | 6.24                      |   |
| Jackson Industrial A, IN        |   | Office/Whse      |   | 320,000                                            |   | 100.0                                           | %      | 320,000                 |   | 798                                             |   | 2.49                      |   |
| Morenci Professional Park, IN   |   | Office/Whse      |   | 105,600                                            |   | 77.3                                            | %      | 81,597                  |   | 330                                             |   | 4.04                      |   |
| Leawood Fountain Plaza, KS      |   | Office           |   | 86,030                                             |   | 88.6                                            | %      | 76,248                  |   | 1,394                                           |   | 18.28                     |   |
| Northwest Corporate Center, MO  |   | Office           |   | 87,334                                             |   | 73.6                                            | %      | 64,278                  |   | 1,159                                           |   | 18.03                     |   |
| Parkade Center, MO              |   | Office           |   | 221,772                                            |   | 73.2                                            | %      | 162,271                 |   | 1,290                                           |   | 7.95                      |   |
| Business Center, MO             |   | Office/Whse      |   | 64,387                                             |   | 93.7                                            | %      | 60,298                  |   | 517                                             |   | 8.58                      |   |
| The Lakes, MO                   |   | Apartment        |   | 311,912                                            |   | 93.6                                            | %      | 292,043                 |   | 2,130                                           |   | 7.30                      |   |
| Maple Tree, MO                  |   | Shopping  Center |   | 72,149                                             |   | 98.9                                            | %      | 71,348                  |   | 499                                             |   | 6.99                      |   |
| North Creek Office Park, OH     |   | Office           |   | 92,053                                             |   | 92.9                                            | %      | 85,517                  |   | 1,205                                           |   | 14.10                     |   |
| Northeast Commerce Center, OH   |   | Office/Whse      |   | 100,000                                            |   | 53.4                                            | %      | 53,360                  |   | 1,159                                           |   | 21.72                     |   |
| Upper Midwest Region Total      |   |             |   | 1,785,970                                          |   | 87.5                                            | %      | 1,563,223               |   | $                                               | 13,375 |                      | $      | 8.56 |   |
| *Carolina Region*               |   |             |   |                                               |   |                                            |   |                    |   |                                            |   |                      |   |
| Columbia, SC                    |   | Shopping  Center |   | 56,505                                             |   | 86.1                                            | %      | 48,656                  |   | $                                               | 249    |                      | $      | 5.11 |   |
| Marketplace, SC                 |   | Shopping  Center |   | 100,404                                            |   | 40.4                                            | %      | 40,583                  |   | 449                                             |   | 11.05                     |   |
| Richardson Plaza, SC            |   | Shopping  Center |   | 108,139                                            |   | 82.8                                            | %      | 89,561                  |   | 560                                             |   | 6.25                      |   |
| Carolina Region Total           |   |             |   | 265,048                                            |   | 67.5                                            | %      | 178,800                 |   | $                                               | 1,258  |                      | $      | 7.03 |   |
| *Texas Region*                  |   |             |   |                                               |   |                                            |   |                    |   |                                            |   |                      |   |
| San Felipe, TX                  |   | Office           |   | 100,900                                            |   | 96.5                                            | %      | 97,409                  |   | $                                               | 1,342  |                      | $      | 13.77 |   |
| Southwest Point, TX             |   | Office/Whse      |   | 101,102                                            |   | 97.9                                            | %      | 98,969                  |   | 596                                             |   | 6.02                      |   |
| Westlakes, TX                   |   | Office/Whse      |   | 95,370                                             |   | 48.2                                            | %      | 45,940                  |   | 432                                             |   | 9.40                      |   |
| Technology, TX                  |   | Office/Whse      |   | 109,012                                            |   | 100.0                                           | %      | 109,012                 |   | 1,149                                           |   | 10.54                     |   |
| Autumn Ridge, TX                |   | Apartment        |   | 297,400                                            |   | 91.5                                            | %      | 272,210                 |   | 1,977                                           |   | 7.26                      |   |
| Texas Region Total              |   |             |   | 703,784                                            |   | 88.6                                            | %      | 623,540                 |   | $                                               | 5,496  |                      | $      | 8.81 |   |
|                            |   |             |   |                                               |   |                                            |   |                    |   |                                            |   |                      |   |
| Total/Weighted Average          |   |             |   | 3,622,515                                          |   | 88.1                                            | %      | 3,190,474               |   | $                                               | 37,097 |                      | $      | 11.63 |   |
|                            |   |             |   |                                               |   |                                            |   |                    |   |                                            |   |                      |   |

 

For the year ended December 31, 2001, no tenantcontributed 10% or more of the total rental revenue of the Company. A completelisting of properties owned by the Company at December 31, 2001, is included aspart of Schedule III in Item 14.

 

**Office Properties**

 

The Company owns 12 office properties with totalrentable square footage of 1,234,648. The office properties range in size from47,800 square feet to 221,772 square feet, and have remaining lease termsranging from one to 10 years. The office leases generally require the tenant toreimburse the Company for increases in building operating costs over a baseamount. Certain of the leases provide for rent increases that are either fixedor based on a consumer price index. As of December 31, 2001, the weightedaverage 

 

 

8

----

occupancy of the office properties was 89%.   The weighted average base rent per squarefoot, calculated as total annualized base rents divided by gross leasable areaactually leased as of December 31, 2001, is $18.12.

 

The following table sets forth, for the periodsspecified, the number of expiring leases, the total rentable area subject toexpiring leases, average occupancy represented by expiring leases, and totaleffective annual base rent represented by expiring leases.

 

**OFFICEPROPERTIES**

**LEASEEXPIRATIONS**

 
| **Expiration Year** |   | **Number of  Expiring Leases** |   | **Rentable  Square Footage Subject to Expiring Leases** |   |   |   | **Annual  Base Rent Under Expiring Leases   (dollars in thousands)** |   |   |   | **Percentage  of Total Annual Base Rent Represented by Expiring Leases (1)** |   |
|---------------------|--------|--------------------------------|--------|---------------------------------------------------------|--------|--------|--------|----------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------|--------|
| 2002 (3)            |   | 95                             |   | 215,393                                                 |   |   |   | $                                                                    | 3,976  |   |   |                                                                         | 15.6   | % |
| 2003                |   | 76                             |   | 350,879                                                 |   |   |   | 9,374                                                                |   |   |   | 36.8                                                                         | %      |
| 2004                |   | 43                             |   | 161,191                                                 |   |   |   | 3,646                                                                |   |   |   | 14.3                                                                         | %      |
| 2005                |   | 39                             |   | 138,846                                                 |   |   |   | 3,463                                                                |   |   |   | 13.6                                                                         | %      |
| 2006                |   | 20                             |   | 129,403                                                 |   |   |   | 3,144                                                                |   |   |   | 12.3                                                                         | %      |
| Thereafter          |   | 13                             |   | 59,442                                                  |   |   |   | 1,869                                                                |   |   |   | 7.4                                                                          | %      |
|                |   |                           |   |                                                    |   |   |   |                                                                 |   |   |   |                                                                         |   |
| Total               |   | 286                            |   | 1,055,154                                               |   | (2     | )      | $                                                                    | 25,472 |   | (4     | )                                                                            | 100.0  | % |

 

(1) Annual base rentexpiring during each period, divided by total annual base rent (both adjustedfor contractual increases).

 

(2) This figure is based on square footage actuallyleased (which excludes vacant space), which accounts for the difference betweenthis figure and total rentable area (which includes vacant space).

 

(3) Includes leases that have initial terms of lessthan one year.

 

(4) This figure is based on square footage actuallyleased and incorporates contractual rent increases arising after 2001, and thusdiffers from annualized net rent in the preceding table, which is based on 2001rents.

 

**Office/Warehouse Properties**

 

The Company owns 11office/warehouse properties aggregating 1,253,889 square feet. Theoffice/warehouse properties are primarily designed for warehouse, distributionand light manufacturing and range in size from 43,100 square feet to 320,000square feet. As of December 31, 2001, nine of the office/warehouse propertieswere leased to multiple tenants and two were leased to single tenants. As ofDecember 31, 2001, the weighted average occupancy of the office/warehouseproperties was 88%.   The weighted average base rent per squarefoot, calculated as total annualized base rents divided by gross leasable areaactually leased as of December 31, 2001, is $6.69.

 

The office/warehouse properties have leases whoseremaining terms range from one to nine years. Most of the leases are industrial gross leases whereby the tenant paysas additional rent its pro rata share of common area maintenance and repaircosts and its share of the increase in taxes and insurance over a base amount.Certain of these leases call for fixed or consumer-price-index-based rentincreases.  Some of the leases are triplenet leases whereby the tenants are required to pay their pro rata share of theproperties’ operating costs, common area maintenance, property taxes, insuranceand non-structural repairs.

 

The following table sets forth, for the periodsspecified, the number of expiring leases, the total rentable area subject toexpiring leases, average occupancy represented by expiring leases and totaleffective annual base rent represented by expiring leases.

 

 

9

----

**OFFICE/WAREHOUSEPROPERTIES**

**LEASEEXPIRATIONS**

 
| **Expiration Year** |   | **Number of  Expiring Leases** |   | **Rentable  Square Footage Subject to Expiring Leases** |   |   |   | **Annual  Base Rent Under Expiring Leases  (dollars in thousands)** |   |   |   | **Percentage  of Total Annual Base Rent Represented by Expiring Leases (1)** |   |
|---------------------|--------|--------------------------------|--------|--------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------|--------|
| 2002 (3)            |   | 43                             |   | 291,955                                                      |   |   |   | $                                                                   | 1,957  |   |   |                                                                         | 22.4   | % |
| 2003                |   | 49                             |   | 156,815                                                      |   |   |   | 1,472                                                               |   |   |   | 16.9                                                                         | %      |
| 2004                |   | 29                             |   | 96,712                                                       |   |   |   | 718                                                                 |   |   |   | 8.2                                                                          | %      |
| 2005                |   | 11                             |   | 132,642                                                      |   |   |   | 1,925                                                               |   |   |   | 22.1                                                                         | %      |
| 2006                |   | 9                              |   | 237,123                                                      |   |   |   | 1,601                                                               |   |   |   | 18.4                                                                         | %      |
| Thereafter          |   | 7                              |   | 93,764                                                       |   |   |   | 1,044                                                               |   |   |   | 12.0                                                                         | %      |
|                |   |                           |   |                                                         |   |   |   |                                                                |   |   |   |                                                                         |   |
| Total               |   | 148                            |   | 1,009,011                                                    |   | (2)    |   | $                                                                   | 8,717  |   | (4)    |                                                                         | 100.0  | % |

 

 

(1) Annual base rentexpiring during each period, divided by total annual base rent (both adjustedfor contractual increases).

 

(2) This figure is based on square footage actuallyleased (which excludes vacant space), which accounts for the difference betweenthis figure and total rentable area (which includes vacant space).

 

(3) Includes leases that have initial terms of lessthan one year.

 

(4) This figure is based on square footage actuallyleased and incorporates contractual rent increases arising after 2001, and thusdiffers from annualized net rent in the preceding table, which is based on 2001rents.

 

**Shopping Center Properties**

 

The Company owns 5 shopping center properties withtotal rentable square footage of 350,214. The shopping center properties rangein size from 13,017 square feet to 108,139 square feet, and have remaininglease terms ranging from one to 20 years. The shopping center leases generallyrequire the tenant to reimburse the Company for increases in certain buildingoperating costs over a base amount. Certain of the leases provide for rentincreases that are either fixed or based on a consumer price index. As ofDecember 31, 2001, the weighted average occupancy of the shopping centerproperties was 75%.   The weightedaverage base rent per square foot, calculated as total annualized base rentsdivided by gross leasable area actually leased as of December 31, 2001, is$7.27.

 

The following table sets forth, for the periodsspecified, the number of expiring leases, the total rentable area subject toexpiring leases, average occupancy represented by expiring leases and totaleffective annual base rent represented by expiring leases.

 

**SHOPPINGCENTER PROPERTIES**

**LEASEEXPIRATIONS**

 
| **Expiration Year** |   | **Number of  Expiring Leases** |   | **Rentable  Square Footage Subject to Expiring Leases** |   |   |   | **Annual  Base Rent Under Expiring Leases  (dollars in thousands)** |   |   |   | **Percentage  of Total Annual Base Rent Represented by Expiring Leases (1)** |   |
|---------------------|--------|--------------------------------|--------|--------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------|--------|
| 2002 (3)            |   | 3                              |   | 29,450                                                       |   |   |   | $                                                                   | 236    |   |   |                                                                         | 10.1   | % |
| 2003                |   | 10                             |   | 46,893                                                       |   |   |   | 345                                                                 |   |   |   | 14.8                                                                         | %      |
| 2004                |   | 7                              |   | 49,439                                                       |   |   |   | 379                                                                 |   |   |   | 16.2                                                                         | %      |
| 2005                |   | 4                              |   | 17,360                                                       |   |   |   | 199                                                                 |   |   |   | 8.5                                                                          | %      |
| 2006                |   | 11                             |   | 19,150                                                       |   |   |   | 453                                                                 |   |   |   | 19.4                                                                         | %      |
| Thereafter          |   | 5                              |   | 79,496                                                       |   |   |   | 723                                                                 |   |   |   | 31.0                                                                         | %      |
|                |   |                           |   |                                                         |   |   |   |                                                                |   |   |   |                                                                         |   |
| Total               |   | 40                             |   | 241,788                                                      |   | (2)    |   | $                                                                   | 2,335  |   | (4)    |                                                                         | 100.0  | % |

 

(1) Annual base rent expiring during each period,divided by total annual base rent (both adjusted for 

 

 

10

----

 

contractual increases).

 

(2) This figure is based on square footage actuallyleased (which excludes vacant space), which accounts for the difference betweenthis figure and total rentable area (which includes vacant space).

 

(3) Includes leases that have initial terms of lessthan one year.

 

(4) This figure is based on square footage actuallyleased and incorporates contractual rent increases arising after 2001, and thusdiffers from annualized net rent in the preceding table, which is based on 2001rents.

 

**Apartment Properties**

 

As of December 31, 2001, the Company owns a 366-unitapartment property located in Houston, Texas, a 152-unit apartment propertylocated in Riverside, California, a 125-unit apartment property located in LongBeach, California and a 408-unit apartment property located in St. Louis,Missouri. All of the units are rented to residential tenants on either amonth-to-month basis or for terms of one year or less. As of December 31, 2001,the apartment properties were approximately 93% leased.   The weighted average base rent per squarefoot, calculated as total annualized base rents divided by gross leasable areaactually leased as of December 31, 2001, is $10.95.

 

**Development Land**

 

The Company owns a 16.65 acre parcel of land inPhoenix, Arizona.  The site isirregularly shaped and is indicated to have had several uses, including amobile home park, retail shops and a gasoline station.  The land has been cleared of allimprovements since January 1997.  Theland is held for future development.

 

**ITEM 3****. LEGAL PROCEEDINGS**

 

Lewis-Madison Matter

On or about September 27, 2001, Robert L.Lewis, Madison Liquidity Investors 103 LLC and Madison Liquidity Investors 112LLC (“Plaintiffs”), purporting to represent themselves and all others similarlysituated, initiated an action (the “Action”) against the Company, CGS, WilliamJ. Carden, John N. Galardi and S-P Properties, Inc. in the Orange CountySuperior Court, Case No. 01 CC 000394 (“Defendants”) (hereinafter refer to as“Plaintiffs’ Compliant”).

 

Plaintiffs’ Complaint in the Action allegesclaims against the Company and others for breach of fiduciary duty and breachof contract.  Plaintiffs’ Complaintchallenges the Consolidation, although the Consolidation was disclosed in aProspectus/Consent Solicitation filed with the Securities and ExchangeCommission and was approved by a majority vote of the limited partners of thepartnerships. Plaintiffs allege that the approval was invalid and that theConsolidation constitutes a breach of fiduciary duty by each of theDefendants.  Plaintiffs further allegethat the Consolidation constitutes a breach of partnership agreements governingthe partnerships.

 

Plantiffs’ prayer for relief seeks thefollowing: 1) an injunction prohibiting the Defendants from commingling; 2)imposition of a constructive trust providing for liquidation of the assets ofthe partnerships and a distribution of the assets to the former limitedpartners therein; 3) a judicial declaration that the Action may be maintainedas a class action; 4) monetary/compensatory damages; 5) Plaintiffs’ costs ofsuit, including attorneys’, accountants’ and expert fees; and 6) a judicialorder of dissolution of the partnerships and appointment of a liquidatingtrustee.

 

The Company intends to vigorously defend against theclaims asserted in the action.  OnFebruary 13, 2002, the Company filed a Demurrer to Plaintiff Complaintcontending Plantiffs lack standing to assert some of the claims alleged, thatPlaintiffs’ Complaint fails to state a cause of action for breach of fiduciaryduty against the Company and the Plaintiffs’ Complaint fails to state a causeof action for breach of contract against the Company.  On March 15, 2002, the Orange County Superior Court sustained theCompany’s Demurrer on the ground that Plaintiffs’ Complaint fails to state acause of action for either breach of fiduciary duty or breach of contractagainst the Company, and overruled the Company’s 

 

 

11

----

 

Demurrer on the ground of standing.  The Court gave the Plaintiffs’ twenty daysleave to amend their Complaint, which amended compliant was received by theCompany on April 3, 2002.  The Companyhas until May 8, 2002 to respond.

 

Teachout Matter

A subsidiary of CGS, S-P Properties, Inc., aCalifornia corporation, is a defendant in a lawsuit commenced in SuperiorCourt, County of Los Angles in November 1995, entitled Teachout et al. V. S.P.Properties, Inc. and Sierra Pacific Development Fund II (“Fund II”).  The suit was a derivative action brought bya limited partner on behalf of Fund II, which alleged that the general partnerbreached its fiduciary duty and breached the partnership agreement inconnection with loans to the general partner and the issuance of notes to anaffiliate of CGS in connection with the purchase of the Technology building(the “Property”) from Fund II.  Fund IIwas merged into a subsidiary of the Company pursuant to the Consolidation.  The loans to the general partner were madeprior to the acquisition of the general partner by CGS and were assumed by anaffiliate of CGS.  The purchase wasnegotiated prior to the acquisition of the general partner by CGS and closedimmediately prior to the acquisition of the general partner.  CGS and its affiliates denied anyliability.  The matter was settled and,pursuant to the settlement agreement, CGS’s subsidiary agreed to repay the amountof the notes with accrued interest.  Theobligation to repay was guaranteed by John N. Galardi, a principal stockholderof ASR.  Under the settlement agreement,the payment was due in December 2000. CGS did not make the payment when it was due because it did not havesufficient cash to make the payment.  Asa result, the plaintiff terminated the settlement agreement.  Plaintiff amended its complaint to claimthat additional loans in the amount of $500,000 were made by Fund II toaffiliates of the general partner in violation of the partnershipagreement.  In addition, plaintiffsamended their complaint to add the Company as a defendant as thesuccessor-in-interest to Fund II and its general partner.  The Company’s response to the amendedcomplaint is not yet due.  A trialsetting conference is scheduled for May 10, 2002.  Notwithstanding the termination of the settlement agreement, theCompany intends to make a distribution either in cash, stock, or both, to theformer limited partners of Fund II in an amount equal to that which thepartners would have been entitled to under the settlement agreement.  Principal and interest on this obligation,totaling approximately $8,069,000 is reflected in accrued and other liabilitiesin the accompanying consolidated financial statements of the Company atDecember 31, 2001.

 

Other Matters

Certain claims and lawsuits have arisen against theCompany in its normal course of business. The Company believes that such claimsand lawsuits will not have a material adverse effect on the Company’s financialposition, cash flow or results of operations.

 

**ITEM 4****. SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

The Company did not submit any matters to a vote ofsecurity holders in the fourth quarter of the year ended December 31, 2001.

 

 

12

----

 

**PART II**

 

**ITEM 5****. MARKET FORREGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

## **Market Information**

 

On November 20, 2001, the Company’s Common Stock begantrading on the American Stock Exchange under the symbol AQQ.  The following table sets forth the high andlow closing prices per share of the Company’s Common Stock from thecommencement of trading on November 20, 2001, until December 31, 2001 and forthe period January 1, 2002 through March 20, 2002.

 
| **Period Ending** |   | **High** |   | **Low** |   |
|-------------------|--------|----------|--------|---------|--------|
| December 31, 2001 |   | $        | 13.30  |    | $      | 6.08 |   |
| March 20, 2002    |   | $        | 7.07   |    | $      | 6.13 |   |

 

**Holders**

 

The approximate number of holders of record of theshares of the Company’s Common Stock was 7,725 as of March 20, 2002.

 

**Distributions**

 

No distributions were paid to holders of the Company’sCommon Stock in 2001. The Company intends to make quarterly dividenddistributions to stockholders beginning in 2002.

 

The Company intends toqualify as a REIT as defined under the Internal Revenue Code of 1986, asamended, and to elect to be treated as a REIT beginning in 2003.  In general, a REIT is required to pay annualdistributions to investors of at least 90% of its taxable income.

 

**RecentSales of Unregistered Securities**

 

Concurrently with and immediately subsequentto the consummation of the Consolidation of the eight public funds into ASR,the Company issued 5,409,690 shares of Common Stock and the OperatingPartnership issued 725,605 OP Units. The shares and OP Units were issued pursuant to merger agreements andcontribution agreements in connection with the acquisition of properties andassets from entities controlled or managed by CGS and its affiliates.  In addition, in October  2001, the Company issued 99,500 shares ofits Common Stock to its officers and directors pursuant to the Company’sOmnibus Stock Incentive Plan (the “Plan”) and 20,000 shares of its Common Stockto its legal counsel as partial consideration for legal services.  The issuance of Common Stock by ASR and OP Unitsby the Operating Partnership are exempt from the registration requirements ofthe Securities Act of 1933, as amended, pursuant to Section 4(2) and Rule 506of Regulation D promulgated thereunder. The OP Units are redeemable at the option of the holder for either, atthe option of ASR, (i) one share of Common Stock of ASR, or (ii) cash equal tothe fair market value of one share of Common Stock of ASR at the date ofconversion.

 

**ITEM 6****. SELECTED FINANCIALDATA**

 

Set forth below is selected financial data for the Company.Consolidated balance sheet and operating data is presented as of and for eachof the five years ended December 31.  The selectedfinancial data for the years ended 2000, 1999, 1998 and 1997 reflects thebalance sheet data and operating data for SPPI84, the accounting acquirer.  Balance sheet data as of December 31, 2001includes the assets and liabilities of entities acquired in theConsolidation.  Operating data includesthe results of operations of SPPI84 for the entire year, and the acquiredentities from October 20, 2001, through December 31, 2001.

 

 

13

----

 

This selected financial data should be read inconjunction with the financial statements of the Company, including the notesthereto, included in Item 14.

 

(Dollars in thousands, except for per share and perunit data)

 
|                                                                            |   | **2001**    |    | **2000**  |   | **1999**  |   | **1998**  |   | **1997**  |   |
|---------------------------------------------------------------------------------|--------|-------------|---------|-----------|--------|-----------|--------|-----------|--------|-----------|--------|
| OPERATING DATA:                                                                 |   |        |    |      |   |      |   |      |   |      |   |
| Total revenues                                                                  |   | $           | 8,478   |      | $      | 742       |   | $         | 810    |      | $      | 726 |   | $ | 671 |   |
| Property operating expense                                                      |   | 3,581       |    | 302       |   | 288       |   | 243       |   | 227       |   |
| General and administrative                                                      |   | 2,863  |    | 163  |   | 185  |   | 148  |   | 146  |   |
| Depreciation and amortization                                                   |   | 2,366       |    | 151       |   | 249       |   | 259       |   | 236       |   |
| Interest expense                                                                |   | 2,651       |    | 129       |   | 137       |   | 148       |   | 115       |   |
| (Loss) income from operations before minority interests and extraordinary  item |   | (2,589      | )       | 325       |   | 357       |   | 125       |   | (559      | )      |
| Extraordinary item — net gain on extinguishment of debt                    |   | 314         |    | —    |   | —    |   | —    |   | —    |   |
| Net (loss) income                                                               |   | (2,038      | )       | 325       |   | 357       |   | 125       |   | (559      | )      |
|                                                                            |   |        |    |      |   |      |   |      |   |      |   |
| Basic per share data:                                                           |   |        |    |      |   |      |   |      |   |      |   |
| Net loss before extraordinary item (1)                                          |   | $           | (.43    | )         | N/A    |      | N/A    |      | N/A    |      | N/A    |   |
| Extraordinary item — net gain on                                           |   |        |    |      |   |      |   |      |   |      |   |
| extinguishment of debt                                                          |   | .06         |    | N/A       |   | N/A       |   | N/A       |   | N/A       |   |
| Net loss                                                                        |   | (.37        | )       | N/A       |   | N/A       |   | N/A       |   | N/A       |   |
|                                                                            |   |        |    |      |   |      |   |      |   |      |   |
| Per unit data:                                                                  |   |        |    |      |   |      |   |      |   |      |   |
| Limited partner income (loss) per unit (2)                                      |   | N/A         |    | $         | 4.18   |      | $      | 4.64      |   | $         | 1.62   |   | $ | (7.26 | ) |
| Distributions per partnership unit (2)                                          |   | N/A         |    | N/A       |   | N/A       |   | N/A       |   | $         | .65    |   |
|                                                                            |   |        |    |      |   |      |   |      |   |      |   |
| BALANCE SHEET DATA:                                                             |   |        |    |      |   |      |   |      |   |      |   |
| Total assets                                                                    |   | $           | 266,205 |      | $      | 11,210    |   | $         | 10,808 |      | $      | 10,558 |   | $ | 10,475 |   |
| Total long term debt                                                            |   | 179,207     |    | 1,350     |   | 1,398     |   | 1,485     |   | 1,562     |   |
| Stockholders’ and partners’ equity                                    |   | 53,404      |    | 9,612     |   | 9,287     |   | 8,930     |   | 8,805     |   |
|                                                                            |   |        |    |      |   |      |   |      |   |      |   |
| OTHER DATA:                                                                     |   |        |    |      |   |      |   |      |   |      |   |
| Cash flow provided by (used in):                                                |   |        |    |      |   |      |   |      |   |      |   |
| Operating activities                                                            |   | $           | (6,472  | )         | $      | (30       | )      | $         | 1,078  |      | $      | (67 | ) | $ | (97 | ) |
| Investing activities                                                            |   | 2,421       |    | 436       |   | (389      | )      | 127       |   | (1,430    | )      |
| Financing activities                                                            |   | 6,301       |    | (404      | )      | (667      | )      | (77       | )      | 1,512     |   |

 

----

(1)  The netloss per share data was based upon the weighted average shares of 5,529,190 for2001.

 

(2) The limited partner income (loss) anddistributions per partnership unit were based upon the number of  SPPI84 limited partnership unitsoutstanding, 77,000 in all years.

 

**ITEM 7****. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

ASR is a full-service real estate corporation which owns, manages andoperates various income-producing properties.  As of December 31, 2001, through the Operating Partnership, the Companyowned and operated 33 properties which consisted of 12 office, 11office/warehouse, five shopping center, and four apartment properties, and onedevelopmental land property.  Theproperties are located in four geographic regions in nine states.  The Company plans to expand its business andnet assets by acquiring additional properties. The Company will focus primarily on office and office/warehouseproperties located in Texas, the Midwest, Arizona and California.  The Company intends to qualify as a realestate investment trust as defined under the Internal Revenue Code of 1986, asamended, and to elect to be treated as a REIT beginning in 2003.

 

 

14

----

 

On October 19, 2001, the Company was thelegal acquirer and registrant in the Consolidation.  Pursuant to the Consolidation, subsidiaries of the Company mergedwith eight public limited partnerships, acquired the assets and liabilities oftwo private entities managed by CGS and acquired certain assets and liabilitiesof CGS and the majority owned affiliates of CGS.  The accounting acquirer in the Consolidation was SPPI84, one ofthe eight public limited partnerships. Pursuant to the Consolidation, partners of the public partnershipsreceived shares in the Company or promissory notes in exchange for theirpartnership units and owners of existing related entities exchanged ownershipinterests in real estate for ASR shares or units in the Operating Partnership,an entity formed for this purpose and initially wholly owned by theCompany.   Prior to October 19, 2001,the Company was a wholly owned subsidiary of CGS.

 

The following discussion and analysis of thefinancial condition and results of operations of the Company should be read inconjunction with the selected financial data in Item 6 and the consolidatedfinancial statements of the Company, including the notes thereto, included inItem 8.

 

The majoraccounting policies followed by the Company are listed in Note 2. — Summary ofSignificant Accounting Policies. — in the Notes to the Consolidated FinancialStatements.  The consolidated financialstatements of the Company are prepared in accordance with accounting principlesgenerally accepted in the United States, which requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the results of operations during the reportingperiod. Actual results could differ materially from those estimates.

 

The Companybelieves the following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its consolidated financialstatements:

 

•                  Certain leasesprovide for tenant occupancy during periods for which no rent is due or whereminimum rent payments increase during the term of the lease.  The Company records rental income for thefull term of each lease on a straight-line basis.  Accordingly, a receivable is recorded from tenants for the amountthat is expected to be collected over the remaining lease term rather thancurrently (Deferred Rent Receivable). When a property is acquired, the term of existing leases is consideredto commence as of the acquisition date for purposes of this calculation.

 

•                  Rental properties are stated at cost, netof accumulated depreciation, unless circumstances indicate that cost, net ofaccumulated depreciation, cannot be recovered, in which case, the carryingvalue of the property is reduced to estimated fair value. Estimated fair value:(i) is based upon the Company’s plans for the continued operation of eachproperty; and (ii) is computed using estimated sales price, as determined byprevailing market values for comparable properties and/or the use ofcapitalization rates multiplied by annualized net operating income based uponthe age, construction and use of the building. The fulfillment of the Company’splans related to each of its properties is dependent upon, among other things,the presence of economic conditions which will enable the Company to continueto hold and operate the properties prior to their eventual sale. Due touncertainties inherent in the valuation process and in the economy, it isreasonably possible that the actual results of operating and disposing of theCompany’s properties could be materially different than current expectations.

 

•                  The Company is currently taxed as a Ccorporation.  Until the Company electsto be taxed as a REIT, it will be subject to federal income tax on its taxableincome at regular corporate rates.  Anydistribution by the Company to its stockholders will be subject to tax as adividend at the stockholder’s respective federal income tax rates.  Beginning with the tax year ending onDecember 31, 2003, the Company intends to elect to be taxed as a REIT forfederal income tax purposes.  TheCompany believes that it is organized and will operate so as to qualify as aREIT.  The qualification and taxation ofthe Company as a REIT depends upon its ability to meet, through actual annualoperating results, distribution levels, share ownership requirements andvarious qualifications imposed under the Internal Revenue Code of 1986, asamended.  Accordingly, while the Companyintends to qualify as a REIT and believes that it will be able to do so, theCompany 

 

 

15

----

 

cannot predict that theactual results of its operations for any particular year will satisfy therequirements.

 

# **RESULTS OF OPERATIONS**

 

## ***Comparison of the year endedDecember 31, 2001 to the year ended December 31, 2000***

 

On October 19, 2001, pursuant to the Consolidation,the Company acquired its initial 34 properties, which consisted of 3,664,635square feet of office, office/warehouse, apartment and shopping centerproperties, and a parcel of land held for development.  At December 31, 2001, the weighted averageoccupancy of the properties was 88%. The majority of the properties acquired in the Consolidation wererecorded at fair market value.  Oneproperty, wholly owned by the accounting acquirer, SPPI84, remained athistorical cost and three other properties partially owned by SPPI84 throughits former joint venture partner, Sierra Mira Mesa Partners (“SMMP”), aCalifornia general partnership, remained at historical cost based on theirproportions owned by SPPI84.

 

Therefore, the statement of operations for the yearended 2001 reflects the operating results of the accounting acquirer for thefull year, and the acquired entities for October 20, 2001, through December 31,2001, (“Stub Period”).  The statementsof operations for the years ended December 31, 2000 and 1999 solely reflect theoperating results of SPPI84.  Therefore,a discussion of operating results between 2001 and 2000 is not a truecomparison.

 

The Company recorded rental revenue of $8,317,000 andexpenses of $11,461,000 in 2001.  Therental revenue and expenses reflect the operations of the Company’s 33properties for the Stub Period and the operating results of SPPI84 through forthe year ended December 31, 2001. Rental revenue of $583,000 and operating expenses of $745,000 generatedin 2000 reflect operations SPPI84’s sole wholly owned property, SierraValencia.

 

Joint venture income from SPPI84’s investment its unconsolidated jointventure partner, SMMP, was $394,000 for the period from January 1 throughOctober 19, 2001, compared to $328,000 for 2000.   This represents SPPI84’s share of income generated by SMMP andSMMP’s joint venture partners.

 

The Company recognized anet gain on early extinguishments of debt of $314,000 for the year endedDecember 31, 2001.  The net gain wasrelated to the payoff of two loans and the refinancing of two loansindividually secured by four properties; Northwest Corporate Center, Creekside,Van Buren and Park Plaza I & II in November and December 2001.  No gain or loss on early extinguishments ofdebt was recorded in the prior year.

 

Holders of OP Units share ofthe loss was $267,000, which represented the 11.6% limited partner interest inthe Operating Partnership not held by the Company at December 31, 2001.  In addition, minority interest expense of$30,000 was recognized in 2001 as a result of income generated on a partiallyowned property.  SPPI84 had no minorityinterests for the year ended December 31, 2000.

 

In November 2001, the Company sold the 42,142 squarefoot Tower Industrial Building for $1,800,000. The sale produced a deferred gain of approximately $232,000 and netproceeds of approximately $1,688,000. It is anticipated that the net proceeds, which were held in escrow atDecember 31, 2001, will be used to acquire another property during the firstsix months of 2002. The Tower property was unencumbered.   Management believes it will be able toacquire another property in this time period. In the event a property is not acquired, the deferred gain will berecognized in the current period.

 

***Comparison of the year ended December 31,2000, to the year ended December 31, 1999.***

 

Asstated above, the statements of operations for the years ended December 31,2000, and 1999 reflect the results of operations of SPPI84.  Rental income decreased approximately$40,000, or 6%, principally due to occupancy fluctuations and lower common areamaintenance fees billed between years at Valencia, SPPI84’s sole wholly-ownedproperty.  Occupancy at Valenciafluctuated between 74% and 97% in 2000, as two tenants vacated during theyear.  Available space was subsequentlyre-leased at higher rental rates.

 

 

16

----

 

Assuch, the weighted-average effective rent per square foot increased from $7.19at December 31, 1999 to $7.52 at December 31, 2000. The decrease in rentalincome was also attributable to lower common area maintenance fees billedbetween years.  Supplemental billingswere made in 1999 to recover higher than anticipated prior year common areamaintenance fees.  The Valencia propertywas 93% occupied at December 31, 2000.

 

Total operating expenses of SPPI84 decreasedapproximately $107,000, or 15%, in comparison to 1999, primarily due to adecrease in depreciation and amortization expenses associated with thewrite-off of fully depreciated tenant improvements and lease costs.   Lower administrative costs incurred in 2000also attributed to the decrease in total operating expenses.

 

In 1999, the SPPI84 received a principalpay-down of $943,000 on its note receivable from affiliate and recognized$83,000 of its deferred gain associated with the note.  No such activity was incurred in 2000.

 

SPPI84’s share of income from its jointventure investment in SMMP increased approximately $4,000, or 1%.  This increase was primarily due to anincrease in SPPI84’s ownership interest in SMMP during 2000.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

 

The Company used net cash in operatingactivities of $6,472,000 during 2001 which represents the results of theaccounting acquirer forthe full year, and the acquired entities for October 20, 2001,through December 31, 2001.  This amountwas comprised of (i) net loss of $2,038,000 adjusted for non-cash items of$1,145,000 and (ii) the net change in operating assets and liabilities$5,579,000.

 

Net cash generated by investing activities of$2,421,000 was primarily the result of $2,518,000 in cash acquired inconnection with the Consolidation.

 

Net cash provided by financing activitiesamounted to $6,301,000 during 2001.  Thenet cash generated was principally comprised of proceeds received fromadditional borrowings of $23,564,000 adjusted for repayments of borrowings of$16,749,000 as detailed below.

 

Three new loan agreements were entered intowith a lender, each individually secured by the following properties; SorrentoII, Creekside, and Park Plaza I & II. These loans totaled $17,420,000. The loans bear interest at fixed rates, with a weighted average interestrate of 7.29% per annum (ranging from 7.17% to 7.54%), and mature at variousdates in 2011 and 2012.

 

Modification agreements were also enteredinto with a bank involving five secured loans that generated additional loanproceeds of $4,784,000 and extended maturity to December 31, 2002.  These loans, whose balances totaledapproximately $26,483,000 at the time of the modifications, bear interest atLibor plus 3%.  In addition, the bankfunded $1,310,000 on a $1,350,000 term loan at Libor plus 3% maturing December31, 2002.  Loans coming due at the endof 2002 will either be repaid with the proceeds of refinancing or the term ofthe loan will be extended.

 

The Company refinanced six secured loanstotaling $13,103,000 and two unsecured loans totaling $1,580,000 with proceedsobtained from the new loans and modification agreements, and made other loanpay-downs and scheduled principal payments of $2,066,000 during the year.

 

The Company expects to meet its short-termliquidity requirements from cash generated by operations.  The Company believes that its cash generatedby operations will be adequate to meet normal operating expenses.

 

The Company is projecting the need forsubstantial cash to fund obligations other than normal operating expenses in2002.  These obligations include capitalcosts related to re-leasing space, improvements to properties, repayment ofnotes issued in the Consolidation, and payment of other liabilities arisingfrom a litigation settlement agreement that was subsequently declaredvoid.  The Company may sell at least oneproperty, and is in the process of refinancing several other properties togenerate the cash necessary to fund the non-operating capital costs.

 

 

17

----

 

The Company will considerissuance of stock or OP Units in order to acquire additional properties.  There can be no assurance that the Companywill be successful in doing so.

 

The Company intends toqualify as a REIT beginning in 2003.  Ifthe Company becomes a REIT, it must pay distributions to investors of at least90% of its taxable net income.  TheCompany anticipates cash generated by operations will be sufficient to meetdistribution requirements.

 

**PREDECESSORFINANCIALS**

CGS and its majority-ownedaffiliates were involved in real estate developement, management, ownership andoperation. On October 19, 2001, subsidiaries of ASR acquired certain assets andliabilities of CGS and its majority-owned affiliates pursuant to theConsolidation. The private entities and public limited partnerships included inthe Consolidation were engaged in substantially the same business as CGS. Priorto October 19, 2001, ASR was a wholly-owned subsidiary CGS. ASR was establishedto be the legal acquirer and registrant in the Consolidation. The accountingacquirer in the Consolidation was SPPI84, one of the eight public limitedpartnerships. The financial statements of CGS and its majority-owned affiliatesare included in this filing as a predecessor entity.

 

**INFLATION**

Substantially all of the leases at the industrial andretail properties provide for pass-through to tenants of certain operatingcosts, including real estate taxes, common area maintenance expenses, andinsurance. Leases at the multifamily properties generally provide for an initialterm of one month to one year and allow for rent adjustments at the time ofrenewal. Leases at the office properties typically provide for rent adjustmentand pass-through of increases in operating expenses during the term of thelease. All of these provisions may permit the Company to increase rental ratesor other charges to tenants in response to rising prices and therefore, serveto reduce the Company’s exposure to the adverse effects of inflation.

 

**FORWARD-LOOKING STATEMENTS**

ThisReport on Form 10-K contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the Securities andExchange Act of 1934.  Theseforward-looking statements are based on Management beliefs and expectations,which may not be correct.  Importantfactors that could cause actual results to differ materially from theexpectations reflected in these forward-looking statements include thefollowing: ASR’s level of indebtedness and ability to refinance its debt; thefact that ASR’s predecessors have had a history of losses in the past;unforeseen liabilities which could arise as a result of the prior operations ofcompanies acquired in the Consolidation; risks inherent in the Company’sacquisition and development of properties in the future, including risksassociated with ASR’s strategy of investing in under-valued assets; generaleconomic, business and market conditions; changes in federal and local laws,and regulations; increased competitive pressures; and other factors, includingthe factors set forth below, as well as factors set forth elsewhere in thisReport on Form 10-K.

 

**RISK FACTORS**

 

**The Company’s increased leverage increases its risk ofdefault. This could adversely affect the Company’s results of operations, abilityto make distributions and market price of its Common Stock.**

TheCompany expects to increase its indebtedness to 70% of the appraised value ofits assets.  Any increase in theCompany’s leverage could increase the Company’s risk of default on its obligationsand adversely affect the Company’s funds from operations and its ability tomake distributions to its stockholders. The Company will have a higher ratio ofindebtedness to assets than many REITs. This could adversely affect the market price for the Company’s CommonStock.

 

**There are risks inherent in the Company’s acquisition anddevelopment strategy.  The Company maynot make profitable investments.**

The Company plans topursue its growth strategy through the acquisition and development ofadditional properties.  To the extentthat the Company pursues this growth strategy, it does not know that it willsucceed.  The Company may havedifficulty finding new properties, negotiating with new or existing tenants orsecuring acceptable financing. In addition, investing in additional propertiesis subject to many risks.  For instance,if an additional property is in a market in which the Company does not invest,the Company will have relatively little experience in and may be unfamiliarwith that new market.  Also, theCompany’s acquisition strategy of investing in under-valued assets subjects theCompany to increased risks.  The Companymay not succeed in turning around these properties.  The Company may not make a profit on these investments.

 

 

18

----

 

**The Company has a history of losses.  The Company cannot assure the stockholdersthat it will become profitable in the future.**

TheCompany has incurred losses on a pro forma basis in 2000 and 2001. The Companycannot assure the stockholders that it will not continue to have losses afterdepreciation and amortization under generally accepted accountingprinciples.  If the Company is notsuccessful, it will reduce or eliminate the distributions that stockholdersreceive from the Company.

 

**The Company is responsible for liabilities of entitiesincluded in the Consolidation.  Thiscould require the Company to make additional payments and reduce its availablecash.**

Subsidiariesof the Company merged with CGS’s majority-owned affiliates and the OperatingPartnership acquired assets of CGS and some of its subsidiaries.  Some of these companies were engaged in thebusiness of serving as general partners of limited partnerships and investingin and managing real properties.  As aresult of the consolidation, the Company or its subsidiaries may be responsiblefor liabilities arising out of the prior operations of these entities.  These liabilities may include claimsasserted in connection with pending litigations against the Company and unknowncontingent liabilities.  As a result,the Company may expend cash to pay these liabilities.  Any payments would reduce cash available for distribution tostockholders.

 

**The Company will need to refinance mortgage loans and obtainadditional financing to meet its obligations and fulfill its acquisitionstrategy.**

TheCompany expects to require substantial cash to meet its operating requirements,including budgeted capital expenditures. To meet these obligations, the Companywill be required to refinance mortgage indebtedness to provide cash. TheCompany cannot assure you that it will be successful in refinancing themortgage indebtedness and that it will have sufficient cash to meet itsobligations. In addition, to fulfill the Company’s growth strategy, the Companywill  require it to raise additionalcash through debt or equity financing.

 

**The Company’s properties may not be profitable, may notresult in distributions and/or may depreciate.**

Propertiesacquired by the Company: (i) may not operate at a profit;  (ii) may not perform to the Company’sexpectations;  (iii) may not appreciatein value; (iv) may depreciate in value; (v) may not ever be sold at a profit;and/or (vi) may not result in dividends. The marketability and value of anyproperties will depend upon many factors beyond the Company’s control.

 

**Upon expiration of current leases, the Company may not enterinto favorable leases.**

Overthe next three years, approximately 49% of the square footage of the leases onthe Company’s office/warehouse, office and shopping center properties willexpire.  The Company may be unable toenter into leases for all or a portion of this space.  If the Company enters into leases, the Company may not do so atcomparable lease rates, without incurring additional expenses.  If the Company is unsuccessful in leasingthe space, or cannot re-lease the space at current rental rates or higherrental rates, it could reduce the distributions to shareholders and adverselyaffect the market price of the Company’s Common Stock.

 

**Real property investments entail risk.  These risks could adversely affect theCompany’s distributions.**

TheCompany is subject to the risks of investing in real property.  In general, a downturn in the national orlocal economy, changes in the zoning or tax laws or the availability offinancing could affect the performance and value of the properties. Also,because real estate is relatively illiquid, the Company may not be able torespond promptly to adverse economic or other conditions by varying its realestate holdings.

 

**The Company may invest in joint ventures, which adds anotherlayer of risk to its business.**

TheCompany may acquire properties through joint ventures, which could subject theCompany to certain risks that may not otherwise be present if investments weremade directly by the Company.  Theserisks include: (i) the potential that the Company’s joint venture partner maynot perform; (ii) the joint venture partner may have economic or business interestsor goals which are inconsistent with or adverse to those of the Company; (iii)the joint venture partner may take actions contrary to the requests orinstructions of the Company or contrary to the Company’s objectives orpolicies; and  (iv) the joint venturersmay not be able to agree on matters relating to the property they jointly own.

 

 

19

----

 

The Company also mayparticipate with other investors, including, possibly investment programs orother entities affiliated with Management, in investments as tenants-in-commonor in some other joint ownership or venture. The risks of such joint ownership may be similar to those mentionedabove for joint ventures and, in the case of a tenancy-in-common, each co-tenantnormally has the right, if an unresolvable dispute arises, to seek partition ofthe property, which partition might decrease the value of each portion of thedivided property.

 

**The Company could incur unforeseen environmental liabilities.**

Various federal, stateand local laws and regulations subject property owners and operators toliability for reporting, investigating, remediating, and monitoring regulatedhazardous substances released on or from a property.  These laws and regulations often impose strict liability withoutregard to whether the owner or operator knew of, or actually caused, therelease.  The presence of, or thefailure to properly report, investigate, remediate, or monitor hazardoussubstances could adversely affect the financial condition of the Company or theability of the Company to operate the properties.  In addition, these factors could hinder the Company’s ability toborrow against the properties.  Thepresence of hazardous substances on a property also could result in personalinjury or similar claims by private plaintiffs.  In addition, there are federal, state and local laws andregulations which impose requirements on the storage, use, management anddisposal of regulated hazardous materials or substances.  The failure to comply with thoserequirements could result in the imposition of liability, including penaltiesor fines, on the owner or operator of the properties.  Future laws or regulations could also impose unanticipatedmaterial environmental liabilities on the Company in connection with any of theproperties.  The costs of complying withthese environmental laws and regulations for the Company’s properties couldadversely affect the Company’s operating costs and, if contamination ispresent, the value of those properties.

 

**The Company faces intense competition in all of its markets.**

Numerous propertiescompete with the Company’s properties in attracting tenants to leasespace.   Additional properties may bebuilt in the markets in which the Company’s properties are located.  The number and quality of competitiveproperties in a particular area will have a material effect on the Company’sability to lease space at existing properties or at newly acquired propertiesand on the rents charged.  Some of thesecompeting properties may be newer or better located than the Company’sproperties.  There are a significantnumber of buyers of properties, including institutional investors and publiclytraded REITs.  Many of these competitorshave significantly greater financial resources and experience than theCompany.  This has resulted in increasedcompetition in acquiring attractive properties.  This competition can adversely affect the Company’s ability toacquire properties and increase its distributions.

 

**The Company will not elect to operate as aREIT before the commencement of the taxable year ending December 31, 2003 andthe Company may never elect REIT status.**

The Company does not intend to qualify as aREIT until 2003.  Further, the Companyis not required to make a REIT election and the Board of Directors may determinenot to make a REIT election.  TheCompany will be taxed as a C corporation if the Board of Directors of theCompany determines not to make a REIT election, or for any time period beforean effective REIT election.  If theCompany is taxed as a C corporation, it will be subject to a corporate incometax.  The stockholders will also have topay taxes on any distributions they receive. The Company intends to make an effective REIT election and beginoperating as a REIT effective for its 2003 fiscal year.  If the Company qualifies as a REIT, it willcease to be taxed as a C corporation.

 

**If the Company fails to qualify as aREIT for tax purposes or does not make a REIT election, the Company will payfederal income taxes at corporate rates.**

If the Company fails to qualify as a REIT, the Companywill pay federal income taxes at corporate rates. The Company’s qualificationas a REIT depends on meeting the requirements of Code and Regulationsapplicable to REITs. The Company has not requested, and does not plan torequest, a ruling from the Internal Revenue Service that it qualifies as aREIT.  It has received an opinion,however, from its tax counsel, that it will meet the requirements forqualification as a REIT.  The taxcounsel’s opinion is based upon representations made by the Company regardingrelevant factual matters, existing Code provisions, applicable regulationsissued under the Code, reported administrative and judicial interpretations ofthe 

 

 

20

----

 

Code and regulations, the tax counsel’s review ofrelevant documents and the assumption that the Company will operate in themanner described in this consent solicitation. However, you should be aware that opinions of counsel are not binding onthe Internal Revenue Service or any court.

 

A REIT is subject to anentity level tax for a ten-year period on the sale of property with a fairmarket value in excess of basis it held before electing REIT status.  During the 10-year period following itsqualification as a REIT, the Company will be subject to an entity level tax onthe income it recognizes upon the sale of assets including all the assetstransferred to it as part of the consolidation it held before electing REITstatus in an amount up to the amount of the built-in gains at the time theCompany becomes a REIT.

 

If the Company fails toqualify as a REIT, it would be subject to federal income tax at regularcorporate rates.  In addition to thesetaxes, the Company may be subject to the federal alternative minimum tax andvarious state income taxes.  If theCompany qualifies as a REIT and its status as a REIT is subsequently terminatedor revoked, unless specific statutory provisions entitle the Company to relief,it could not elect to be taxed as a REIT for four taxable years following theyear during which it was disqualified.  Therefore, if the Company fails to qualify as a REIT or loses its REITstatus, the funds available for distributions would be reduced substantiallyfor each of the years involved.  Inaddition, dividend distributions that the Company makes would generally betaxed at income tax rates on ordinary income.

 

**To qualify as a REIT, the Company must meetasset requirements.  If the Companyfails to meet these asset requirements, it will pay tax as a corporation.**

For taxable years beginning after December31, 2000, in order to qualify as a REIT, at least 75% of the value of theCompany’s assets must consist of investments in real estate, investments inother REITs, cash and cash equivalents and government securities.

 

In addition, the Companymay not have more than 25% of the value of its assets represented by securitiesother than government securities and not more than 20% of the value of itstotal assets represented by the securities of one or more taxable REITsubsidiaries.   Additionally, with theexception of securities held in a taxable REIT subsidiary, the Company may notown:  (i) securities in any one Company(other than a REIT) which have, in the aggregate, a value in excess of 5% ofthe value of the Company’s total assets; (ii) securities possessing more than10% of the total voting power of the outstanding securities of any one issuerand (iii) securities having a value of more than 10% of the total value of theoutstanding securities of any one issuer.

 

The 75% and 5% tests aredetermined at the end of each calendar quarter. If at the end of any calendarquarter (plus a 30-day cure period), the Company fails to satisfy either test,it will cease to qualify as a REIT.

 

**To qualify as a REIT, the Company must meet distributionrequirements. If it fails to do so, it will pay tax as a corporation.**

Subject to adjustmentsthat are unique to REITs, a REIT generally must distribute 90% of its taxableincome.  In the event that the Company doesnot have sufficient cash, this distribution requirement may limit the Company’sability to acquire additional properties. Also, for the purposes of determining taxable income, the Code mayrequire the Company to include rent and other items not yet received andexclude payments attributable to expenses that are deductible in a differenttaxable year.  As a result, the Companycould have taxable income in excess of cash available for distribution.  In that case, the Company may have to borrowfunds or liquidate some of its assets in order to make sufficient distributionsand maintain its status as a REIT or obtain approval from its stockholders inorder to make a consent dividend.

 

**The Company must meet limitations on share ownership toqualify as a REIT. These limitations may deter parties from purchasing theCompany shares.**

In order to protect itsREIT status, the articles of incorporation include limitations on the ownershipby any single stockholder of any class of the Company capital stock.  The amended and restated articles ofincorporation also prohibit anyone from buying shares if the purchase wouldcause the Company to lose its REIT status. These restrictions may discourage a change in control of the Company,deter any attractive tender offers for the Company shares or limit theopportunity for stockholders to receive a premium for the 

 

 

21

----

 

Company shares.

 

**Future changes in tax law could adversely impact theCompany’s qualification as a REIT.**

The Company’s treatmentas a REIT for federal income tax purposes is based on the tax laws currently ineffect.  The Company is unable topredict any future changes in the tax laws that would adversely affect itsstatus as a REIT.  In the event thatthere is a change in the tax laws that prevents the Company from qualifying asa REIT or that requires REITs to pay corporate level federal income taxes, theCompany may not be able to make the same level of distributions to itsstockholders.  In addition, such changemay limit the Company’s ability to invest in additional properties.

 

**ITEM 7A****. QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

**INTEREST RATES**

The Company’s primary market risk exposure is tochanges in interest rates obtainable on its secured and unsecured borrowings.

 

It is the Company’s policy to manage its exposure tofluctuations in market interest rates for its borrowings through the use offixed rate debt instruments to the extent that reasonably favorable rates areobtainable with such arrangements. In order to maximize financial flexibilitywhen selling properties and minimize potential prepayment penalties on fixedrate loans, the Company has also entered into variable rate debt arrangements.

 

At December 31, 2001, the Company’s total indebtednessincluded fixed-rate debt of $134,596,000 and floating-rate indebtedness of$44,611,000.  The Company continuallyreviews the portfolio’s interest rate exposure in an effort to minimize therisk of interest rate fluctuations. The Company does not have any othermaterial market-sensitive financial instruments.  The Company may, from time to time, enter into interest rateprotection agreements intended to hedge the cost of new borrowings that arereasonably assured of completion. It is not the Company’s policy to engage inhedging activities for previously outstanding debt instruments or forspeculative purposes.

 

The table below providesinformation about the Company’s financial instruments that are sensitive tochanges in interest rates. For debt obligations, the table presents principalcash flows and related weighted average interest rates by expected maturitydates. Weighted average variable rates are based on rates in effect at thereporting date.

 
|                  |   | **Expected  Maturity Date** |   |
|-----------------------|--------|-----------------------------|--------|
|                  |   | **2002**                    |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Net Loan  Premiums** |   | **Total** |   | **Fair Value** |   |
|                  |   | **(dollars in thousands)**  |   |
| Secured Fixed         |   | $                           | 5,086  |   | $ | 1,427 |   | $ | 8,292 |   | $ | 5,134 |   | $ | 3,249 |   | $ | 88,428 |   | $ | 4,829 |   | $ | 116,445 |   | $ | 116,445 |   |
| Average interest rate |   | 10.22                       | %      | 7.97 | % | 7.37 | % | 9.72 | % | 8.42 | % | 7.88 | % |   |   | 8.05 | % |   |   |
|                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Secured Variable      |   | $                           | 35,976 |   | $ | 757 |   | $ | 3,642 |   | $ | 193 |   | $ | 154 |   | $ | 3,615 |   | $ | — |   | $ | 44,337 |   | $ | 44,337 |   |
| Average interest rate |   | 4.96                        | %      | 6.51 | % | 8.90 | % | 6.96 | % | 6.78 | % | 6.59 | % | 5.46 | % |   |   |   |   |
|                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unsecured Fixed       |   | $                           | 2,879  |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,879 |   | $ | 2,879 |   |
| Average interest rate |   | 11.69                       | %      | 11.69 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unsecured Variable    |   | $                           | 274    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 274 |   | $ | 274 |   |
| Average interest rate |   | 5.12                        | %      |   |   |   |   |   |   |   |   |   |   |   |   | 5.12 | % |   |   |
|                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bonds                 |   | $                           | 277    |   | $ | 306 |   | $ | 326 |   | $ | 356 |   | $ | 282 |   | $ | 11,034 |   | $ | — |   | $ | 12,581 |   | $ | 12,581 |   |
| Average interest rate |   | 7.93                        | %      | 7.88 | % | 7.88 | % | 7.84 | % | 8.34 | % | 6.39 | % |   |   | 6.58 | % |   |   |
|                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

The Company believes that the fair values of suchinstruments approximate carrying value at December 31, 2001.

 

 

22

----

 

A change of 1.00% in the index rate to which the Company’svariable rate debt is tied would change the annual interest incurred by theCompany by $446,000, based upon the balances outstanding on variable rateinstruments at December 31, 2001.

 

**ITEM 8****. FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

 

The response to this item is submitted as a separatesection of this Form 10-K. See Item 14. - **Exhibits,Financial Statement Schedules And Reports On Form 8K.**

 

**ITEM 9****. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On February 8, 2002, the Company filed Form 8-K disclosing that theCompany and Arthur Andersen LLP  (“AA”)agreed that the client-auditor relationship between the Company and AA had beenterminated.  On February 22, 2002, theCompany filed Form 8-K disclosing that the Company engaged BDO Seidman, LLP toact as its independent auditors effective on such date.  During the period ended December 31, 2001,there were no “reportable events” within the meaning of Item 304(a)(1)(v) of RegulationS-K promulgated under the Securities Act.

 

 

23

----

 

**PART III**

 

**ITEM 10****. DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**

 

The directors andexecutive officers of the Company are as follows:

 
| **NAME**              |   | **POSITION**                            |   | **AGE** |   | **APPROXIMATE  TIME IN OFFICE (1)** |   |
|-----------------------|--------|-----------------------------------------|--------|---------|--------|-------------------------------------|--------|
| William J. Carden     |   | Chief Executive Officer,  President and |   | 57      |   | Since 1989                          |   |
|                  |   |    Chairman of the Board      |   |    |   |                                |   |
| Timothy R. Brown      |   | Director                                |   | 55      |   | Since  2000                         |   |
| William W. Geary, Jr. |   | Director                                |   | 59      |   | Since  2000                         |   |
| Lawrence E. Fiedler   |   | Director                                |   | 63      |   | Since  2000                         |   |
| Harry A. Mizrahi      |   | Chief Operating Officer,  Senior Vice   |   | 44      |   | Since  2000                         |   |
|                  |   |    President and Director     |   |    |   |                                |   |
| Thomas N. Thurber     |   | Chief Financial Officer  and Senior     |   | 51      |   | Since  1995                         |   |
|                  |   |    Vice President             |   |    |   |                                |   |
| Paul E. Perkins       |   | Senior Vice President                   |   | 36      |   | Since  1994                         |   |
| Patricia A. Nooney    |   | Senior Vice President                   |   | 45      |   | Since  1997                         |   |
|                  |   |                                    |   |    |   |                                |   |

(1)  Including service with CGS and itsaffiliates.

 

William J. Carden — Mr. Carden is Chairman of theBoard, Chief Executive Officer and President of the Company.  In addition to his responsibilities for theCompany, Mr. Carden is president and one of the founders of CGS. Mr. Cardenalso serves as Chairman of the Board of American Spectrum Real Estate Services,Inc., a full service real estate broker, two of the offices of which areColdwell Banker Commercial franchises. He received an accounting degree from Long Beach State.  In connection with serving as a general partneror controlling person of the general partner of limited partnerships, Mr.Carden has been named as a defendant in law suits brought by investors, whichamong other things have alleged fraud and breach of fiduciary duty.

 

Timothy R. Brown - Mr. Brown is a director of theCompany and has been a Partner in the law firm of Thompson Knight L.L.P. since1999. Prior to that he was a founder and Partner of Brown, Parker & LeahyL.L.P. He received his B.A. from Stanford University and his Juris Doctoratefrom the University of Texas School of Law. Mr. Brown is Chairman of the Company’s audit committee.

 

William W. Geary, Jr. - Mr. Geary is a director of theCompany and has served as the President of Carlsberg Management Company, a realestate development company, since February 1986. Mr. Geary received his M.B.A.and B.S. degrees from Northwestern University in Chicago, Illinois.  Mr. Geary holds the designations of CharterFinancial Analyst, Certified Property Manager (“CPM”), Specialist in RealEstate Securities (SRS) and the Certified Commercial-Investment Member(“CCIM”).  He is a Member of Los AngelesSociety of Security Analysts.   Mr.Geary is a member of the Company’s audit committee.

 

Lawrence E. Fiedler - Mr. Fiedler is a director of theCompany and has served as President of JRM Development Enterprises, Inc. andits affiliated companies since 1987. These companies have developed, acquired,managed and leased retail, residential and commercial properties throughout theUnited States. In addition, Mr. Fiedler has been an Adjunct Professor at theNew York University Real Estate Institute since 1979. Mr. Fiedler received aBachelor of Sciences degree from Syracuse University, an LLB from New YorkUniversity School of Law and an LLM from New York University School of Law inTaxation. In November 2000, a limited partnership in which Mr. Fiedler is thePresident and sole Director of the general partner, filed a petition forreorganization under Chapter XI of the Federal Bankruptcy Act.  Mr. Fiedler is a member of the Company’saudit committee.

 

Harry A. Mizrahi - Mr. Mizrahi is Chief OperatingOfficer of the Company. During 1999-2000, Mr. Mizrahi headed the New Yorkoffice of International Property Corporation, an affiliate of the ReichmannGroup of Companies. Mr. Mizrahi is also an Adjunct Assistant Professor at NewYork University’s Real Estate Institute. From 1994-1998, Mr. Mizrahi was a VicePresident and Director of Salomon Brothers’ and 

 

 

24

----

 

Salomon Smith Barney’s Real Estate Investment BankingGroups. During 1981-1991, Mr. Mizrahi was employed by Eastdil Realty and becamean officer and Partner. Mr. Mizrahi received a B.A. from NorthwesternUniversity and an M.B.A. from Columbia University Graduate School of Business,and attended Harvard University Kennedy School of Government.

 

Thomas N. Thurber — Mr. Thurber is Chief FinancialOfficer of the Company.  Mr. Thurberserved as the Chief Financial Officer of CGS from 1995 until theConsolidation.  Prior to joining CGS,from 1993 through 1995 he was self-employed as a real estate advisor andinvestor in Houston. From 1989 to 1993, Mr. Thurber was the Director of RealEstate and Chief Financial Officer for the Horowitz Trust, a real estateinvestment firm; from 1987 to 1989 he held the same positions with TheVanderbilt Group, a retail development company in Southern California. Mr.Thurber was a partner in a regional C.P.A. firm, Williamson & Associates(later BDO Seidman), from 1983 to 1987. In 1982 and 1983, Mr. Thurber served asSenior Controller for Joseph C. Canizaro Interests, a real estate developer inNew Orleans. From 1979 to 1982, Mr. Thurber was the Controller, U.S. Operationsfor Daon Corporation and from 1972 to 1979 he held various positions withArthur Andersen LLP, progressing to Senior Tax Manager. Mr. Thurber is a CPAand holds a degree in accounting from Florida State University.

 

Paul E. Perkins — Mr. Perkins is a Senior VicePresident of the Company.  Mr. Perkinswas an officer of CGS from 1994 until the Consolidation. From 1988 to 1992, hewas an investment broker with the Seeley Company, a Los Angeles-basedcommercial real estate brokerage firm. Mr. Perkins holds an undergraduatedegree in business and finance from the University of Southern California and aMaster’s Degree in real estate from New York University.

 

Patricia A. Nooney - Ms.Nooney is a Senior Vice President of the Company.   Ms. Nooney served as President of the St. Louis office ofColdwell Banker Commercial American Spectrum from October 1997 until theConsolidation.  From 1981 throughSeptember 1997, Ms. Nooney was an officer of Brooklyn Street Properties, Inc.Ms. Nooney was an auditor with Deloitte & Touche from 1978 to 1981. Ms.Nooney received a B.A. in Business Administration from the University of Miami.Ms. Nooney holds the designations of CPM and CCIM. She serves as the nationalpresident-elect of the Institute of Real Estate Management (“IREM”) in 2002.

 

**ITEM 11****. EXECUTIVE COMPENSATION**

 

The following Summary Compensation Table sets forththe compensation earned for the calendar year 2001 by the persons who served asthe Company’s chief executive officer during the last completed fiscal year;and the four most highly compensated officers of the Company other than thechief executive officer who were serving as executive officers at the end ofthe last completed fiscal year and whose total annual salary and bonus equaledor exceeded $100,000 (“Named Executive Officers”).

 
| **Name and Principal Position**           |   | **Year** |   | **Salary** |   | **Restricted  Stock Awards $(1)** |    | **Securities  Underlying Options # (2)** |   |
|-------------------------------------------|--------|----------|--------|------------|--------|-----------------------------------|---------|------------------------------------------|--------|
| William J. Carden,Chief Executive Officer |   | 2001     |   | (3)        |   | $                                 | 262,500 |                                     | 12,500 |   |
| Harry A. Mizrahi,Chief Operating Officer  |   | 2001     |   | (4)        |   | $                                 | 525,000 |                                     | 25,000 |   |
| Thomas N. Thurber,Chief Financial Officer |   | 2001     |   | (5)        |   | $                                 | 525,000 |                                     | 25,000 |   |
| Paul E. Perkins,Senior Vice President     |   | 2001     |   | (6)        |   | $                                 | 150,000 |                                     | 7,500  |   |
| Patricia A. Nooney,Senior Vice President  |   | 2001     |   | (7)        |   | $                                 | 30,000  |                                     | 2,250  |   |

 

----

(1)  Representsthe following number of shares issued pursuant to the Plan: Mr. Carden 17,500;Mr. Mizrahi 35,000; Mr. Thurber 35,000; Mr. Perkins 10,000; and Ms. Nooney2,000. The dollar value is based on $15.00 per share which was the exchangevalue used in connection with the Consolidtion which equals or exceeds the fairmarket value per share on the date of grant: The shares are subject to repurchase by the Company upon termination ofthe individual’s employment for a price of $.01 per share.  The repurchase option lapses in four equalinstallments on the first, second, third and fourth anniversaries of the dateof 

 

 

25

----

 

grant, October 15, 2001. Recipients of restrictedstock paid no consideration to the Company for the shares, have the right tovote all shares subject to such grant, and to receive and retain all cashdividends payable to holders of ASR shares of record on or after the date ofgrant and to exercise all other rights, powers and privileges of a holder ofASR shares, with the exception that the recipients shall not transfer the ASRshares during the restriction period.

 

(2)  The rightsto purchase these shares were granted pursuant to Plan on October 15, 2001,with an exercise price of $15.00 per share, which was equal to or exceedsthe fair market value of the Company’s stock at the time of the grant.  The stock options granted vest 25% annuallywith the initial 25% vesting on the date of grant.

 

(3) Mr. Carden earned$372,083 paid by CGS and its affiliates prior to the Consolidation and earned$100,417 paid by the Company to Mr. Carden and corporations he controls.  In addition, in November 2001, the Companypaid Mr. Carden a cash bonus of $100,000.

 

(4)  Mr. Mizrahi earned $158,334 paid by CGS andits affiliates prior to the Consolidation and earned $41,666 paid by theCompany.

 

(5)  Mr. Thurber earned $169,708 paid by CGS andits affiliates prior to the Consolidation and earned $57,292 paid by theCompany.

 

(6)  Mr. Perkins earned $67,291 paid by CGS andits affiliates prior to the Consolidation and earned $24,375 paid by theCompany.  In addition, in February 2002,the Company paid Mr. Perkins a cash bonus of $100,000.

 

(7)  Ms. Nooney earned $114,791 paid by CGS andits affiliates prior to the Consolidation and earned $26,875 paid by theCompany.

 

**Employment Agreements**

 

The Company is in theprocess of negotiating employment agreements with William J. Carden, Harry A.Mizrahi, Thomas N. Thurber, Paul E. Perkins and Patricia A. Nooney. It iscontemplated that each of the employment agreements will provide for a basesalary as follows: William J. Carden - $480,000; Harry A. Mizrahi - $200,000,subject to increase up to $500,000 upon achievement of targets relating to theCompany’s total assets; Thomas N. Thurber - $300,000, Paul E. Perkins -$125,000; and Patricia A. Nooney - $175,000. In addition, the employment agreements may provide for a discretionarybonus.

 

The following number ofshares of Common Stock and the grant of options to purchase the number of ASRshares set forth below were issued: William J. Carden - grant of 17,500 sharesand 12,500 options; Harry A. Mizrahi - grant of 35,000 shares and 25,000options; Thomas N. Thurber - grant of 35,000 shares and 25,000 options; Paul E.Perkins - grant of 10,000 shares and 7,500 options; and Patricia A. Nooney -grant of 2,000 shares and 2,250 options. Such options were granted at $15 pershare on the date of the consummation of the Consolidation.  In addition, it is contemplated that optionswill be granted on the six month anniversary of the consummation of theConsolidation at the fair market value on the date of grant as set forth below:  William J.Carden — 12,500 options; Harry A.Mizrahi — 25,000 options; Thomas N. Thurber — 25,000 options; Paul E. Perkins —7,500 options; and Patricia N. Nooney 2,250 options. The stock grants andoptions will vest over a four-year period.

 

**Option and Restricted Share Plans**

 

The Company has adopted the Plan. The Board believesthat the Plan is in the best interest of ASR and will enable it to attract andretain highly qualified executive officers, directors and employees.

 

The Plan was administeredby the Board of Directors and provides for the granting of options, stockappreciation rights, restricted stock and performance units and shares. Underthe Plan, 720,000 ASR shares are available for issuance to executive officers,directors or other key employees of the Company.  Options to acquire ASR shares are expected to be in the form ofincentive and non-qualified stock options and are 

 

 

26

----

 

exercisable for up to 10years following the date of the grant. The exercise price of each option willbe set by the Board of Directors, but the Plan requires that the price per ASRshare must be equal to or greater than the fair market value of the ASR shareson the grant date.

 

The Plan also provides for the issuance of stockappreciation rights (“SARS”), which generally entitle a holder to receive cashor stock, as determined by the Board of Directors at the time of exercise,equal to the difference between the exercise price and the fair market value ofthe ASR shares, restricted ASR shares to executive officers, directors or otherkey employees upon such terms and conditions as shall be determined by theBoard of Directors in its sole discretion and other performance-basedincentives.

## ** **

## **Stock OptionGrants in Last Fiscal Year**

 

The following table setsforth information regarding grants of stock options to the Named ExecutiveOfficers during the period ended December 31, 2001.  No SARS  were granted bythe Company during the last fiscal year. See Compensation Table above for details of restricted stock granted.

 
| **Name**           |   | **Options/********SARS********Granted** |   | **%****of Options/SARS Granted During  Fiscal Year (1)** |   | **Exercise********Price/********Share (2)** |   | **Expiration********Date (3)** |       | **Potential Realized Value at  Assumed Annual Rates of Stock Price Appreciation for Option Term** |    |
|--------------------|--------|-----------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------|------------|---------------------------------------------------------------------------------------------------|---------|
| **5% (4)**         |   | **10% (4)**                             |
| William J. Carden  |   | 12,500                                  |   | 14.3                                                     | %      | $                                           | 15.00  |                           | 10/15/2011 |                                                                                              | $       | 117,918 |   | $ | 298,827 |   |
| Harry A. Mizrahi   |   | 25,000                                  |   | 28.7                                                     | %      | $                                           | 15.00  |                           | 10/15/2011 |                                                                                              | 235,835 |   | 597,653 |   |
| Thomas N. Thurber  |   | 25,000                                  |   | 28.7                                                     | %      | $                                           | 15.00  |                           | 10/15/2011 |                                                                                              | 235,835 |   | 597,653 |   |
| Paul E. Perkins    |   | 7,500                                   |   | 8.6                                                      | %      | $                                           | 15.00  |                           | 10/15/2011 |                                                                                              | 70,751  |   | 179,296 |   |
| Patricia A. Nooney |   | 2,250                                   |   | 2.6                                                      | %      | $                                           | 15.00  |                           | 10/15/2011 |                                                                                              | 21,225  |   | 53,789 |   |
|                    |        |                                         |        |                                                          |        |                                             |        |                                |            |                                                                                                   |         |  |  |  |  |  |

 

----

(1) Aggregate for all fiscal year 2001 grants.

(2) The exercise price was equal to or exceeds thefair market value of the Company’s Common Stock on the date of grant.

(3) The stock options granted vest 25% annuallywith the initial 25% vesting on the date of grant.

(4)  The amounts disclosed in these columns,which reflect appreciation of the Company’s Common Stock price at the 5% and10% rates dictated by the Securities and Exchange Commission, are not intendedto be a forecast of the Company’s Common Stock price and are not necessarilyindicative of actual values which may be realized by the Named ExecutiveOfficers.  These assumed rates of 5% and10% would result in the Company’s Common Stock price increasing from $15.00 pershare to approximately $24.43 per share and $38.90 per share, respectively.

 

**Aggregated Option Exercises in FiscalYear Ended December 31, 2001, and Fiscal Year End Option Values.**

 

The following table sets forth information regarding each exercise ofstock options during the fiscal year ended December 31, 2001, by the NamedExecutive Officers and the fiscal year-end value of unexercised options held bysuch persons.

 
| **Name**           |   | **Shares  Acquired on Exercise (#)** |   | **Value  Realized ($)** |   | **Number of  Securities Underlying Unexercised Options/SARS at FYE  Exercisable/ Unexercisable** |   | **Value of  Unexercised In-the-Money Options/SARS At FYE   Exercisable/ Unexercisable** |          |
|--------------------|--------|--------------------------------------|--------|-------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|---------------|
| William J. Carden  |   | —                               |   | —                  |   | 3,125/                                                                                                | 9,375  |                                                                                         | —/— |   |
| Harry A. Mizrahi   |   | —                               |   | —                  |   | 6,250/                                                                                                | 18,750 |                                                                                         | —/— |   |
| Thomas N. Thurber  |   | —                               |   | —                  |   | 6,250/                                                                                                | 18,750 |                                                                                         | —/— |   |
| Paul E. Perkins    |   | —                               |   | —                  |   | 1,875/                                                                                                | 5,625  |                                                                                         | —/— |   |
| Patricia A. Nooney |   | —                               |   | —                  |   | 562/                                                                                                  | 1,688  |                                                                                         | —/— |   |

 

 

27

----

 

### **Compensation ofDirectors**

 

Each non-employee director receives $12,000 annually for serving on theBoard of Directors, as well as fees of $1,000 per meeting attended and $500 foreach telephonic meeting in which the Director participates, including committeemeetings.  A director may elect toreceive the fee in cash or ASR shares. The Director is also reimbursed for travel expenses for attendingmeetings.  Under the Plan, eachnon-employee director was granted the option to purchase 5,000 shares at $15.00per share which represents the fair market value on the date of grant and eachnon-employee director is entitled to a grant of the option to purchase anadditional 5,000 shares on the six-month anniversary of the closing of theConsolidation at the fair market value on the date of grant.  In addition, each non-employee director isentitled to an annual automatic grant of an option to acquire 5,000 ASR shares.The first automatic grant will be on the date of the 2002 annual meeting.  The annual grant will be at the fair marketvalue on the date of grant.

 

**ITEM 12****. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table setsforth as of February 28, 2002, the number and percentage of outstanding sharesof Common Stock of the Company owned beneficially, within the meaning of Rule13d-3 promulgated under the Securities Exchange Act of 1934 (the “ExchangeAct”), by (i) each stockholder known by the Company to own more than 5% of theoutstanding shares of Common Stock; (ii) each director of the Company; (iii)each Named Executive Officer; and (iv) all directors and Named ExecutiveOfficers, as a group.  Except as otherwisespecified, the named beneficial owner has sole voting and investment power.

 

 
| **NAME OF BENEFICIAL OWNER (1)**                                 |   | **NUMBER OF  SHARES OF COMMON STOCK (2)** |   | **PERCENTAGE  OF OUTSTANDING COMMON STOCK (3)** |   |
|------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------------|--------|
| **Directors and Executive Officers**                             |   |                                      |   |                                            |   |
| William J. Carden  (4)                                      |   | 1,268,175                                 |   | 20.3                                            | %      |
| Harry A. Mizrahi(5)                                              |   | 41,250                                    |   | *                                               |   |
| Thomas N. Thurber (6)                                            |   | 41,250                                    |   | *                                               |   |
| Paul E. Perkins (7)                                              |   | 11,875                                    |   | *                                               |   |
| Patricia A. Nooney (8)                                           |   | 2,562                                     |   | *                                               |   |
| Timothy R. Brown  (9)                                       |   | 6,250                                     |   | *                                               |   |
| William W. Geary, Jr.  (10)                                 |   | 1,250                                     |   | *                                               |   |
| Lawrence E. Fiedler  (11)                                   |   | 6,250                                     |   | *                                               |   |
| All Directors and Executive Officers as a Group (8 persons) (12) |   | 1,378,862                                 |   | 22.0                                            | %      |
|                                                             |   |                                      |   |                                            |   |
| **Others**                                                       |   |                                      |   |                                            |   |
| John N. Galardi  (13)                                       |   | 867,889                                   |   | 13.9                                            | %      |
| Ira J. Gaines (14)                                               |   | 312,640                                   |   | 5.0                                             | %      |
|                                                                  |   |                                      |   |                                            |   |
| *Less than 1%.                                                   |   |                                      |   |                                            |   |

 

(1) Except as specifically noted in the footnotesbelow, the address of each of the named beneficial owners is c/o AmericanSpectrum Realty, Inc., 7700 Irvine Center Dr., Suite 555, Irvine, California92618.

 

(2) For each beneficial owner, ASR shares subject tooptions or conversion rights exercisable, respectively within 60 days ofFebruary 28, 2002 were deemed outstanding. Includes as to Messrs. Carden andGalardi ASR shares issuable in exchange for OP Units.

 

(3) The percentageownership is based on 5,529,190 outstanding shares of Common Stock; 725,605convertible OP Units; and shares deemed outstanding pursuant to Rule13d-3(d)(1) under the Exchange Act.

 

(4) Includes 17,500 shares, which is subject torepurchase by the Company on termination of Mr. Carden’s employment for a priceof $.01 per share.  The repurchaseoption lapses in four equal installments on the first, second, third and fourthanniversaries of the date of grant. Includes 726,702 ASR shares and 538,348 

 

 

28

----

 

ASR shares issuable on exchange of OP Units owned byMr. Carden and the persons or entities listed below, including the following:(i) the 17,500 shares referred to above, (ii) 2,000 OP Units owned by Mr.Carden, (ii)  76,608 OP Units owned bytrusts for the benefit of Mr. Carden’s children, as to which Michael L. Matkinsis trustee, (iii) 257,258 ASR shares and 179,798 OP Units owned by Mr. Carden’swife, (iv)  50,312 ASR shares and 77,671OP Units owned by a corporation controlled by Mr. Carden and  (v) 401,632 ASRshares and 202,271 OP Units reported owned by corporations controlled by Mr.Carden and Mr. Galardi. The ASR shares and OP Units owned by such corporationsmay be deemed to be beneficially owned by each of such persons.  Mr. Carden disclaims beneficial ownership ofthe shares and OP Units held by his wife and trusts for his children. Includes3,125 ASR shares, which Mr. Carden has the right to acquire upon the exerciseof stock options within 60 days.  Of the401,632 ASR shares and 202,971 OP Units reported owned by corporationscontrolled by Mr. Carden and  Mr.Galardi, 376,632 ASR shares and 202,271 OP Units are also reported in the totalfor Mr. Galardi.   Of these sharesreported owned by corporations controlled by Mr. Carden and Mr. Galardi, Mr.Carden has an economic interest in 212,427 ASR shares and 101,135.5 OP Units.

 

 (5) Includes35,000 ASR shares, which is subject to repurchase by the Company on terminationof Mr. Mizrahi’s employment for a price of $.01 per share.  The repurchase option lapses in four equalinstallments on the first, second, third and fourth anniversaries of the dateof grant.  Also includes 6,250 ASRshares, which Mr. Mizrahi has the right to acquire upon the exercise of stockoptions within 60 days.

 

(6) Includes 35,000 ASR shares, which is subject torepurchase by the Company on termination of Mr. Thurber’s employment for aprice of $.01 per share.  The repurchaseoption lapses in four equal installments on the first, second, third and fourthanniversaries of the date of grant. Also includes 6,250 ASR shares, which Mr. Thurber has the right toacquire upon the exercise of stock options within 60 days.

 

(7) Includes 10,000 ASR shares, which is subject torepurchase by the Company on termination of Mr. Perkins’s employment for aprice of $.01 per share.  The repurchaseoption lapses in four equal installments on the first, second, third and fourthanniversaries of the date of grant. Also includes 1,875 ASR shares, which Mr. Perkins has the right toacquire upon the exercise of stock options within 60 days.

 

(8) Includes 2,000 ASR shares, which is subject to repurchase by theCompany on termination of Ms. Nooney’s employment for a price of $.01 pershare.  The repurchase option lapses infour equal installments on the first, second, third and fourth anniversaries ofthe date of grant.  Also includes 562ASR shares, which Ms. Nooney has the right to acquire upon the exercise ofstock options within 60 days.

 

(9) Mr. Brown’s address is Two Allen Center, 1200 Smith Street, Suite3600, Houston, Texas 77002.  Includes1,250 ASR shares, which Mr. Brown has the right to acquire upon the exercise ofstock options within 60 days.

 

(10) Mr. Geary’saddress is 6171 West Century Boulevard, Suite 100, Los Angeles, California90045.  Includes 1,250 ASR shares, whichMr. Geary has the right to acquire upon the exercise of stock options within 60days.

 

(11) Mr. Fiedler’s address is 156 West 56th Street, Suite1101, New York, New York 10019. Includes 1,250 ASR shares, which Mr. Fiedler has the right to acquire uponthe exercise of stock options within 60 days.

 

(12)  Includes 99,500 shares,which are subject to repurchase by the Company on termination of employment ofcertain officers for a price of $.01 per share.  The repurchase option lapses in four equal installments on thefirst, second, third and fourth anniversaries of the date of grant.  Includes (i) 2,000 OP Units owned by Mr.Carden , (ii)  76,608 OP Units owned bytrusts for the benefit of Mr. Carden’s children, as to which Michael Matkins istrustee, (iii) 257,258 ASR shares and 179,798 OP Units owned by Mr. Carden’swife, (iv)  50,312 ASR shares and 77,671OP Units owned by a corporation controlled by Mr. Carden and  (v) 401,632 ASRshares and 202,271 OP Units reported owned by corporations controlled by Mr.Carden and Mr. Galardi.  The ASR sharesand OP Units owned by such corporations may be deemed 

 

 

29

----

 

to be beneficially owned by each of such persons.   Includes 21,812 ASR shares, which certainexecutive officers and directors have the right to acquire upon the exercise ofstock options within 60 days.

 

(13) Mr. Galardi’s address is 4440 Von Karman Avenue#222, Newport Beach, CA 92660. Includes 286,986 ASR sharesand 2,000 OP Units owned by Mr. Galardi. Also includes 376,632 ASR shares and202,271 OP Units owned by corporations controlled by Mr. Carden and Mr.Galardi. The ASR shares owned by such corporations may be deemed to bebeneficially owned by each of such persons. The 376,632 ASR shares and 202,271 OP Units are also reported in thetotal for Mr. Carden.Of these shares reported owned by corporations controlled by Mr. Carden and Mr.Galardi, Mr. Galardi has an economic interest in 187,427 ASR shares and101,135.5 OP Units.

 

(14) Information obtained from Schedule 13D as filed by Mr. Gainesdated November 29, 2001.  Mr. Gainestogether with IG Holdings, Inc., Hintzin Capital Group, Paradise Wire PensionPlan and Sunshine Wire Pension Plan (entities controlled solely by Mr. Gaines)hold 193,671 ASR shares.  In addition,Mr. Gaines shares voting and dispositive power over 119,069 ASR shares owned byBaseline Investment, a general partnership, Deuce Investment, a generalpartnership, and Summit Venture, a limited partnership.  Mr. Gaines is a 50% owner of each of thepartnerships referred to.

 

## **ITEM13**. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Inconnection with the Consolidation, limited partnerships and limited liabilitycompanies owned or controlled by William J. Carden and John N. Galardi andtheir family members and affiliates merged into certain subsidiaries of theCompany and the Company acquired assets from corporations controlled bythem.  Sixteen properties, in whichthese principal shareholders own interests, along with the CGS ManagementCompany, were acquired as a result of the Consolidation.  In addition, the principal stockholders heldlimited partnership interests in the public limited partnerships.  The principal stockholders and members oftheir family received 985,588 shares of Common Stock and 540,348 OP Units uponconsummation of the Consolidation.

 

The Company entered intoan agreement of limited partnership and an exchange rights agreement with thelimited partners of the Operating Partnership. These limited partners include owners of CGS and the majority-ownedaffiliates and CGS’s other affiliates including the principal stockholders. Theexchange rights agreement provides that holders of OP Units have the right, onand after the first anniversary of the year of the Consolidation, to cause theOperating Partnership to exchange OP Units for cash at the then fair marketvalue of the ASR shares or, at the election of the Company, to exchange the OPUnits for ASR shares on a one-for-one basis.

 

The Company entered intoa registration rights agreement with persons issued ASR shares and OP Units inprivate transactions in connection with the Consolidation with CGS and themajority-owned affiliates and CGS’s other affiliates, including the principalstockholders.  Under the registrationrights agreement, the Company will agree to register for resale under theSecurities Act ASR shares issued to such persons, or issuable in exchange forOP Units issued to them, after the first anniversary of the consummation of theConsolidation.

 

Certain obligations of CGS and the majority-owned affiliates becameliabilities of the Company as a result of the Consolidation.  These obligations include a distributionpayable of approximately  $7,883,000 dueto the former limited partners of Sierra Pacific Development Fund II inconnection with litigation against a subsidiary of CGS relating to secured andunsecured loans, among other matters. The obligation to repay was guaranteed by John N. Galardi, a principal stockholderof ASR.   This obligation, includingadditional accrued interest of approximately $186,000 is reflected in accruedand other liabilities in the accompanying consolidated financial statements ofthe Company as of December 31, 2001, (See Item 3. - Legal Proceedings.).

 

Inaddition, related party notes payable totaling $2,802,094 along with otheraccruals associated with the loans were assumed by ASR.  At December 31, 2001, these consisted of thefollowing:

 

•                  $1,600,000unsecured loan and accrued interest of $126,036 payable to John N. Galardi;

 

 

30

----

 

•                  $1,000,000secured loan with accrued interest and a participating profit liability of$1,207,081 to IDM Participating Mortgage Income Fund, the general partner ofwhich was an entity controlled by Mr. Carden.

 

•                  $202,094unsecured loan and accrued interest of $36,543 to Brown Parker and Leahy, LLP,a law firm in which Mr. Timothy R. Brown, a director of the Company, isPartner.   Refer to Note 7 for terms onthese notes.

 

Other related party liabilitiestotaling $2,024,680 in the form of loans and advances were assumed aswell.  These consisted of a $1,060,852net indebtedness to Meadow Wood Village Ltd., a California limited partnership,in which Messrs. Carden and Galardi own a 58% interest; $242,020 to CGS; and$721,808 to ASJ, Ltd, a Texas limited partnership, which is owned by Mr. Cardenand his children.

 

At December 31, 2001, the Company carried a receivablebalance of $7,725 from CGS, principally due to a debt pay-off made by theCompany on behalf of West Florissant, a wholly-owned property of CGS. Thisreceivable was paid in the first quarter 2002.

 

A law firm in whichTimothy R. Brown, a Director of the Company, is a Partner was retained by theCompany to render legal services during 2001.

 

 

 

31

----

 

**PART IV**

 

**ITEM 14****. EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 
|               |                                                                                                                                                                                                                                                                                                 |   | **Page No.** |   |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|
| (a)  (1) | Financial Statements                                                                                                                                                                                                                                                                                 |   |         |   |
|               | Independent Auditors’ Reports                                                                                                                                                                                                                                                                   |   | 33           |   |
|               | Consolidated Balance Sheets at December 31, 2001, and 2000                                                                                                                                                                                                                                           |   | 36           |   |
|               | Consolidated Statements of Operations for the years ended December  31, 2001, 2000 and 1999                                                                                                                                                                                                          |   | 37           |   |
|               | Consolidated Statements of Stockholders’ and Partners’ Equity for the  years ended December 31, 2001, 2000 and 1999                                                                                                                                                                        |   | 38           |   |
|               | Consolidated Statements of Cash Flows for the years ended December  31, 2001, 2000, and 1999                                                                                                                                                                                                         |   | 39           |   |
|               | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                           |   | 40           |   |
| (2)                | Financial Statement Schedules                                                                                                                                                                                                                                                                        |   |         |   |
|               | Schedule II — Valuation and Qualifying Accounts and Reserves                                                                                                                                                                                                                                    |   | 61           |   |
|               | Schedule III — Real Estate and Accumulated Depreciation                                                                                                                                                                                                                                         |   | 62           |   |
| (3)                | Consolidated Balance Sheets of Sierra Mira Mesa Partners as of  December 31, 2000 and 1999 and Statements of Operations, Changes in General  Partners’ Equity and Cash Flows for each of the three years in the period  ended December 31, 2000 and Independent Auditors’ Reports          |   | 66           |   |
| (4)                | Combined balance sheet of CGS and the Majority-Owned Affiliates as of  December 31, 2000 and statements of operations, equity (deficit) and cash  flows from January 1, 2001 through October 19, 2001 and for the two years  ended December 31, 2000 and 1999 and Independent Auditors’ Reports |   | 82           |   |
| (5)                | Exhibits to Financial Statements                                                                                                                                                                                                                                                                     |   |         |   |
|               | The Exhibit Index attached hereto is hereby incorporated by reference  to this Item                                                                                                                                                                                                                  |   | 99           |   |
| (b)                | Reports on Form 8-K (incorporated herein by reference)                                                                                                                                                                                                                                               |   |         |   |
|               | On November 27, 2001, a report on Form 8-K was filed with respect to  an investment profile for American Spectrum Reality, Inc.                                                                                                                                                                      |   |         |   |
|               | On November 27, 2001, a report on Form 8-K was filed with respect to  the approval of the Consolidation pursuant to the Prospectus/Consent  Solicitation Statement dated August 8, 2001.                                                                                                             |   |         |   |
|               | On February 15, 2002, a report on Form 8-K was filed with respect to  a change in certifying accountants.                                                                                                                                                                                            |   |         |   |
|               | On February 27, 2002, a report on Form 8-K was filed with respect to  a change in certifying accountants.                                                                                                                                                                                            |   |         |   |
| (c)                | Exhibits                                                                                                                                                                                                                                                                                             |   |         |   |

 

 

32

----

 

# **INDEPENDENT AUDITORS’ REPORT**

 

**To the Board of Directors andStockholders of**

**American Spectrum Realty, Inc.**

 

We have audited the accompanying consolidated balancesheet of American Spectrum Realty, Inc. (a Maryland corporation) andsubsidiaries, as of December 31, 2001, and the related consolidated statementsof income, stockholders’ equity and cash flow for the year then. Thesefinancial statements and the schedules referred to below are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements and schedules based on our audit.

 

We conducted our audit in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofAmerican Spectrum Realty, Inc. and subsidiaries, as of December 31, 2001 andthe consolidated results of their operations and their cash flows for the yearthen ended, in conformity with accounting principles generally accepted in theUnited States of America.

 

Our audit was made for the purpose of forming anopinion on the basic consolidated financial statements taken as a whole.  The accompanying schedules listed in theindex to financial statements and schedules are presented for the purpose ofcomplying with the Securities and Exchange Commission’s rules and are not arequired part of the basic consolidated financial statements.  This information has been subjected to theauditing procedures applied in our audit of the basic consolidated financialstatements and, in our opinion, is fairly stated in all material respects inrelation to the basic consolidated financial statements taken as a whole.

 

 

**BDO Seidman, LLP**

 

 

 

Dallas, Texas

April 10, 2002

 

 

33

----

 

**REPORT OF INDEPENDENT PUBLICACCOUNTANTS**

 

**To AmericanSpectrum Realty, Inc.**

 

We have audited the accompanying consolidatedbalance sheet of American Spectrum Realty, Inc., formerly Sierra PacificPension Investors ‘84 and subsidiary, a California limited partnership, (the“Partnership”) as of December 31, 2000 and the related consolidated statementsof operations, changes in partners’ equity and cash flows for the year thenended. These financial statements and the schedules referred to below are theresponsibility of the Partnership’s management.  Our responsibility is to express an opinion on these financialstatements and schedules based on our audit.

 

We conducted our audit in accordance withauditing standards generally accepted in the United States.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of American Spectrum Realty, Inc., formerly Sierra PacificPension Investors ‘84 and subsidiary as of December 31, 2000 and the results oftheir operations and their cash flows for the year then ended in conformitywith accounting principles generally accepted in the United States.

 

Our audit was made for the purpose of formingan opinion on the basic consolidated financial statements taken as awhole.  The accompanying schedules arepresented for the purpose of complying with the Securities and ExchangeCommission’s rules and are not a required part of the basic consolidated financialstatements.  This information has beensubjected to the auditing procedures applied in our audit of the basicconsolidated financial statements and, in our opinion, is fairly stated in allmaterial respects in relation to the basic consolidated financial statementstaken as a whole.

 

 

# **Arthur Andersen LLP**

 

 

 

Houston, Texas

March 26, 2001

 

 

34

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

**To thePartners of**

**SierraPacific Pension Investors ‘84**

 

 

We have audited the accompanying consolidated statements of operations,changes in partners’ equity and cash flows of Sierra Pacific Pension Investors‘84 and subsidiary, a California limited partnership, (the “Partnership”) forthe year ended December 31, 1999.  Ouraudit also included the financial statement schedules of Sierra Pacific PensionInvestors ‘84, listed in Item 14.  Thesefinancial statements and financial statement schedules are the responsibilityof the Partnership’s management.  Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedules based on our audit.

 

We conducted our audit in accordance withgenerally accepted auditing standards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theresults of operations and cash flows of Sierra Pacific Pension Investors ‘84and subsidiary for the year ended December 31, 1999 in conformity withaccounting principles generally accepted in the United States of America.  Also, in our opinion, such financialstatement schedules, when considered in relation to the basic consolidatedfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

 

 

 

 

## **DELOITTE& TOUCHE LLP**

 

Houston, Texas

February 25, 2000

 

 

35

----

 

**AMERICANSPECTRUM REALTY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

(Dollars in thousands,except share amounts) 

 
| **ASSETS**                                                                                                                |   | **December 31, 2001** |       | **December 31, 2000** |       |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|-----------------------|------------|
|                                                                                                                      |   |                  | ** ** |                  | ** ** |
| Real estate held for investment                                                                                           |   | $                     | 254,679    |                  | $          | 4,070 |   |
| Accumulated depreciation and valuation allowance                                                                          |   | 5,172                 |       | 2,862                 |       |
| Real estate held for investment, net                                                                                      |   | 249,507               |       | 1,208                 |       |
|                                                                                                                      |   |                  |       |                  |       |
| Cash and cash equivalents                                                                                                 |   | 2,284                 |       | 34                    |       |
| Tenant and other receivables, net of allowance for doubtful accounts  of $234 and $64, respectively                       |   | 1,370                 |       | 69                    |       |
| Deferred rents receivable                                                                                                 |   | 149                   |       | 49                    |       |
| Note receivable from affiliate, net of deferred gain of $132                                                              |   | —                |       | 1,618                 |       |
| Accounts receivable from affiliates                                                                                       |   | 8                     |       | 937                   |       |
| Deposits held in escrow                                                                                                   |   | 1,956                 |       | —                |       |
| Investment in management company                                                                                          |   | 4,000                 |       | —                |       |
| Investment in unconsolidated joint venture                                                                                |   | —                |       | 7,063                 |       |
| Prepaid and other assets, net                                                                                             |   | 6,931                 |       | 232                   |       |
|                                                                                                                      |   |                  |       |                  |       |
| Total Assets                                                                                                              |   | $                     | 266,205    |                  | $          | 11,210 |   |
|                                                                                                                      |   |                  |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ AND****PARTNERS’ EQUITY**                                                       |   |                  |       |                  |       |
|                                                                                                                      |   |                  |       |                  |       |
| Liabilities:                                                                                                              |   |                  |       |                  |       |
| Notes payable, net of premiums of $4,829 at December 31, 2001  (including $2,802 to related parties at December 31, 2001) |   | $                     | 176,915    |                  | $          | 1,350 |   |
| Notes payable to former limited partners                                                                                  |   | 2,292                 |       | —                |       |
| Accounts payable                                                                                                          |   | 3,203                 |       | 115                   |       |
| Deferred gain on disposition of property                                                                                  |   | 232                   |       | —                |       |
| Accrued and other liabilities (including $3,394 to related parties at  December 31, 2001)                                 |   | 18,510                |       | 133                   |       |
|                                                                                                                      |   |                  |       |                  |       |
| Total Liabilities                                                                                                         |   | 201,152               |       | 1,598                 |       |
|                                                                                                                      |   |                  |       |                  |       |
| Minority Interests:                                                                                                       |   |                  |       |                  |       |
| Unit holders in the operating partnership                                                                                 |   | 10,616                |       | —                |       |
| Partially owned property                                                                                                  |   | 1,033                 |       | —                |       |
| Total Minority Interests                                                                                                  |   | 11,649                |       | —                |       |
|                                                                                                                      |   |                  |       |                  |       |
| Commitments and Contingencies:                                                                                            |   |                  |       |                  |       |
|                                                                                                                      |   |                  |       |                  |       |
| Redeemable Common Stock                                                                                                   |   | 300                   |       | —                |       |
|                                                                                                                      |   |                  |       |                  |       |
| Stockholders’ and Partners’ equity:                                                                             |   |                  |       |                  |       |
|                                                                                                                      |   |                  |       |                  |       |
| Preferred stock, $.01 par value; authorized, 25,000,000 shares, none  issued and outstanding                              |   | —                |       | —                |       |
| Common stock, $.01 par value; authorized, 100,000,000 shares; issued  and outstanding, 5,529,190 shares                   |   | 55                    |       | —                |       |
| Additional paid-in capital                                                                                                |   | 56,502                |       | —                |       |
| Accumulated deficit                                                                                                       |   | (2,038                | )          | —                |       |
| Unearned deferred compensation                                                                                            |   | (1,415                | )          |                  |       |
| Partners’ equity, 77,000 partnership units issued and outstanding                                                    |   | —                |       | 9,612                 |       |
|                                                                                                                      |   |                  |       |                  |       |
| Total stockholders’ and partners’ equity                                                                        |   | 53,104                |       | 9,612                 |       |
|                                                                                                                      |   |                  |       |                  |       |
| Total Liabilities and Stockholders’ and Partners’ equity                                                        |   | $                     | 266,205    |                  | $          | 11,210 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

 

36

----

 

**AMERICAN SPECTRUM REALTY, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(Dollarsin thousands, except share and per share amounts)

                                                                                                                
|                                                         |   | **Years Ended December 31,** |   |
|--------------------------------------------------------------|--------|------------------------------|--------|
|                                                         |   | **2001**                     |   | **2000** |   | **1999** |   |
| **REVENUES:**                                                |   |                         |   |   |   |   |   |
| Rental revenue                                               |   | $                            | 8,317  |   | $ | 583 |   | $ | 623 |   |
| Interest and other income                                    |   | 161                          |   | 159 |   | 187 |   |
|                                                         |   |                         |   |   |   |   |   |
| Total revenues                                               |   | 8,478                        |   | 742 |   | 810 |   |
|                                                         |   |                         |   |   |   |   |   |
| **EXPENSES:**                                                |   |                         |   |   |   |   |   |
| Property operating expense                                   |   | 3,581                        |   | 302 |   | 288 |   |
| General and administrative                                   |   | 2,863                        |   | 163 |   | 185 |   |
| Depreciation and amortization                                |   | 2,366                        |   | 151 |   | 249 |   |
| Interest expense                                             |   | 2,651                        |   | 129 |   | 137 |   |
|                                                         |   |                         |   |   |   |   |   |
| Total expenses                                               |   | 11,461                       |   | 745 |   | 859 |   |
|                                                         |   |                         |   |   |   |   |   |
| **OTHER INCOME:**                                            |   |                         |   |   |   |   |   |
| Gain from property disposition                               |   | —                       |   | — |   | 83 |   |
| Income from investment in unconsolidated  joint venture |   | 394                          |   | 328 |   | 323 |   |
|                                                         |   |                         |   |   |   |   |   |
| Total other income                                           |   | 394                          |   | 328 |   | 406 |   |
|                                                         |   |                         |   |   |   |   |   |
| Minority Interests:                                          |   |                         |   |   |   |   |   |
| Unit holders in the operating partnership                    |   | 267                          |   | — |   | — |   |
| Partially owned property                                     |   | (30                          | )      | — |   | — |   |
|                                                         |   |                         |   |   |   |   |   |
| Total Minority Interests                                     |   | 237                          |   | — |   | — |   |
|                                                         |   |                         |   |   |   |   |   |
| Net (loss) income before extraordinary item                  |   | (2,352                       | )      | 325 |   | 357 |   |
|                                                         |   |                         |   |   |   |   |   |
| Extraordinary item — net gain on extinguishment of debt |   | 314                          |   | — |   | — |   |
|                                                         |   |                         |   |   |   |   |   |
| Net (loss) income                                            |   | $                            | (2,038 | ) | $ | 325 |   | $ | 357 |   |
|                                                         |   |                         |   |   |   |   |   |
| Basic per share data:                                        |   |                         |   |   |   |   |   |
| Net loss before extraordinary item                           |   | $                            | (.43   | ) | $ | — |   | $ | — |   |
| Extraordinary item — net gain on extinguishment of debt |   | .06                          |   | — |   | — |   |
| Net loss                                                     |   | $                            | (.37   | ) | $ | — |   | $ | — |   |
|                                                         |   |                         |   |   |   |   |   |
| Per unit data:                                               |   |                         |   |   |   |   |   |
| Limited partner income (loss) per unit                       |   | $                            | N/A    |   | $ | 4.18 |   | $ | 4.64 |   |
|                                                         |   |                         |   |   |   |   |   |
| Basic weighted average shares used                           |   | 5,529,190                    |   | — |   | — |   |
| Limited partnership units outstanding                        |   | N/A                          |   | 77,000 |   | 77,000 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

 

 

37

----

 

**AMERICAN SPECTRUM REALTY INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ AND PARTNERS’ EQUITY**

 (Dollars in thousands)

 
|                       |   | **Common****Stock** |   | **Additional Paid-In Capital** |   | **Accumulated Deficit** | ** ** | **Unearned Deferred Compensation** | ** ** | **Total Partners’ Equity** | ** ** | **Total Equity** | ** ** |
|----------------------------|--------|---------------------|--------|--------------------------------|--------|-------------------------|------------|------------------------------------|------------|---------------------------------|------------|------------------|------------|
|                       |   |                |   |                           |   |                    |       |                               |       |                            |       |             |       |
| Balance, January 1, 1999   |   | —              |   | —                         |   | —                  |       |                               |       | $                               | 8,930      |             | $          | 8,930 |   |
| Net income                 |   | —              |   | —                         |   | —                  |       |                               |       | 357                             |       | 357              |       |
|                       |   |                |   |                           |   |                    |       |                               |       |                            |       |             |       |
| Balance, December 31, 1999 |   | —              |   | —                         |   | —                  |       |                               |       | 9,287                           |       | 9,287            |       |
| Net income                 |   | —              |   | —                         |   | —                  |       |                               |       | 325                             |       | 325              |       |
|                       |   |                |   |                           |   |                    |       |                               |       |                            |       |             |       |
| Balance, December 31, 2000 |   | —              |   | —                         |   | —                  |       |                               |       | 9,612                           |       | 9,612            |       |
| Net income                 |   | —              |   | —                         |   | —                  |       |                               |       | 390                             |       | 390              |       |
|                       |   |                |   |                           |   |                    |       |                               |       |                            |       |             |       |
| Balance, October 19, 2001  |   |                |   |                           |   |                    |       |                               |       | 10,002                          |       | 10,002           |       |
| Issuance of common stock   |   | $                   | 55     |                           | $      | 56,502                  |       | —                             |       | $                               | (1,415     | )                | (10,002    | ) | 45,140 |   |
| Net loss                   |   | —              |   | —                         |   | $                       | (2,038     | )                                  |       |                            | —     |             | (2,038     | ) |
|                       |   |                |   |                           |   |                    |       |                               |       |                            |       |             |       |
|                       |   | $                   | 55     |                           | $      | 56,502                  |       | $                                  | (2,038     | )                               | $          | (1,415           | )          | — |   | $ | 53,104 |   |
|                            |        |                     |        |                                |        |                         |            |                                    |            |                                 |            |                  |            |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

 

38

----

 

**AMERICANSPECTRUM REALTY, INC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Dollars in thousands)

** **
|                                                                                                |   | **Years Ended December 31** |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                |   | **2001**                    |   | **2000** |   | **1999** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                           |   |                        |   |   |   |   |   |
| Net (loss) income                                                                                   |   | $                           | (2,038 | ) | 325 |   | 357 |   |
| Adjustments to reconcile net (loss) income to net cash (used in)  provided by operating activities: |   |                        |   |   |   |   |   |
| Depreciation and amortization                                                                       |   | 2,366                       |   | 151 |   | 249 |   |
| Gain from property disposition                                                                      |   | —                      |   | — |   | (83 | ) |
| Extraordinary gain on extinguishments of debt                                                       |   | (314                        | )      | — |   | — |   |
| Income from investment in unconsolidated joint venture                                              |   | (394                        | )      | (328 | ) | (323 | ) |
| Minority interest income                                                                            |   | (237                        | )      | — |   | — |   |
| Deferred compensation expense                                                                       |   | 78                          |   | — |   | — |   |
| Amortization of loan premiums, included in interest expense                                         |   | (122                        | )      | — |   | — |   |
| (Increase) decrease in tenant and other receivables                                                 |   | (1,033                      | )      | (70 | ) | 42 |   |
| Deferred gain from property disposition                                                             |   | (232                        | )      | — |   | — |   |
| (Increase) decrease in note receivable                                                              |   | —                      |   | (159 | ) | 851 |   |
| (Increase) decrease in prepaid and other assets                                                     |   | (2,370                      | )      | (74 | ) | 4 |   |
| (Decrease) increase in accrued and other liabilities                                                |   | (2,176                      | )      | 125 |   | (19 | ) |
|                                                                                                |   |                        |   |   |   |   |   |
| Net cash (used in) provided by operating activities:                                                |   | (6,472                      | )      | (30 | ) | 1,078 |   |
|                                                                                                |   |                        |   |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                           |   |                        |   |   |   |   |   |
| Contributions to unconsolidated joint venture                                                       |   | —                      |   | (54 | ) | (540 | ) |
| Distributions from unconsolidated joint venture                                                     |   | 588                         |   | 618 |   | 299 |   |
| Additions to real estate assets                                                                     |   | (685                        | )      | (128 | ) | (148 | ) |
| Cash acquired in consolidation transaction                                                          |   | 2,518                       |   | — |   | — |   |
|                                                                                                |   |                        |   |   |   |   |   |
| Net cash provided by (used in) investing activities:                                                |   | 2,421                       |   | 436 |   | (389 | ) |
|                                                                                                |   |                        |   |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                           |   |                        |   |   |   |   |   |
| Proceeds from borrowings                                                                            |   | 23,564                      |   | — |   | — |   |
| Repayment of borrowings                                                                             |   | (16,749                     | )      | (48 | ) | (86 | ) |
| Advances to affiliate                                                                               |   | (514                        | )      | (356 | ) | (581 | ) |
|                                                                                                |   |                        |   |   |   |   |   |
| Net cash provided by (used in) financing activities:                                                |   | 6,301                       |   | (404 | ) | (667 | ) |
|                                                                                                |   |                        |   |   |   |   |   |
| Increase in cash                                                                                    |   | 2,250                       |   | 2 |   | 22 |   |
|                                                                                                |   |                        |   |   |   |   |   |
| Cash, beginning of period                                                                           |   | 34                          |   | 32 |   | 10 |   |
|                                                                                                |   |                        |   |   |   |   |   |
| Cash, end of period                                                                                 |   | $                           | 2,284  |   | $ | 34 |   | $ | 32 |   |
|                                                                                                |   |                        |   |   |   |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**                                              |   |                        |   |   |   |   |   |
| Cash paid for interest                                                                              |   | $                           | 3,018  |   | $ | 129 |   | $ | 138 |   |
|                                                                                                |   |                        |   |   |   |   |   |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING  ACTIVITIES:**                                      |   |                        |   |   |   |   |   |
| Issuance of common stock related to consolidation                                                   |   | $                           | 56,857 |   | $ | — |   | $ | — |   |
| Issuance of operating partnership units related to consolidation                                    |   | 10,884                      |   | — |   | — |   |
| Issuance of notes payable related to consolidation                                                  |   | 2,292                       |   | — |   | — |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

 

39

----

 

**AMERICANSPECTRUM REALTY, INC.**

### **Notes to Consolidated Financial Statements**

 

**NOTE 1. DESCRIPTION OF BUSINESS**

 

# **GENERAL**

American SpectrumRealty, Inc. (“ASR” or the “Company”) is a Maryland corporation established onAugust 8, 2000.  The Company is afull-service real estate corporation, which owns, manages and operatesincome-producing properties.   As ofDecember 31, 2001, through its majority-owned subsidiary, American SpectrumRealty Operating Partnership, LP (the “Operating Partnership”), the Companyowned and operated 33 properties which consisted of 12 office, 11office/warehouse, five shopping center, and four apartment properties, and onedevelopmental land property. The properties are located in four geographicregions in nine states.  The Companyplans to expand its business and net assets by acquiring additional properties.  The Company will focus primarily on officeand office/warehouse properties located in Texas, the Midwest, Arizona andCalifornia.

 

The structure ofthe Company is generally referred to as an “UPREIT” structure.  Substantially all of the Company’s assetsare held through the Operating Partnership. The Company is the sole generalpartner of the Operating Partnership. As the sole general partner of the Operating Partnership, the Companygenerally has the exclusive power under the Partnership Agreement to manage andconduct the business of the Operating Partnership. The Company’s interest inthe Operating Partnership entitles it to share in cash distributions from, andin profits and losses of, the Operating Partnership.  Holders of limited partnership units in the Operating Partnership(“OP Units”) have the same rights to distributions as holders of common stockin the Company. Most of the properties will be owned by the OperatingPartnership through subsidiary limited partnerships or limited liabilitycompanies.

 

At December 31, 2001, the Company held a 1% general partner interestand an 87.4% limited partner interest in the Operating Partnership.  Holders of the OP Units have the option toredeem their units and to receive, at the option of the Company, in exchangefor each OP Unit (i) one share of Common Stock of the Company, or (ii) cashequal to the fair market value of one share of Common Stock of the Company atthe date of conversion. As of December 31, 2001, the Operating Partnership,directly and through the subsidiaries in which it and the Company own 100% ofthe ownership interests, controls a portfolio of 33 real estate projects.

 

The Companyintends to qualify as a real estate investment trust, REIT, as defined underthe Internal Revenue Code of 1986, as amended, and to elect to be treated as aREIT beginning in 2003.  In general, aREIT is a company that owns or provides financing for real estate and paysannual distributions to investors of at least 90% of its taxable income.  A REIT typically is not subject to federalincome taxation on its net income, provided applicable income tax requirementsare satisfied.   Currently, the Companyis taxed as a C corporation.

 

## **CONSOLIDATIONTRANSACTION**

On October 19, 2001, the Company was thelegal acquirer and registrant in a consolidation transaction (the “Consolidation”).  Pursuant to the Consolidation, subsidiariesof the Company merged with eight public limited partnerships, acquired theassets and liabilities of two private entities managed by CGS Real EstateCompany, Inc. (“CGS”) and its affiliates and acquired certain assets andliabilities of CGS and its majority-owned affiliates.  The accounting acquirer in the Consolidation was Sierra PacificPension Investors `84 (“SPPI84”), one of the eight public limited partnerships.  SPPI84's activities have involved theownership and operation of two real estate projects in Arizona: Sierra Spectrumin Phoenix, Arizona and Sierra Valencia in Tucson, Arizona.  Pursuant to the Consolidation, partners ofthe public partnerships received shares in the Company or promissory notes inexchange for their partnership units and owners of existing related entitiesexchanged ownership interests in real estate for ASR shares or units in theOperating Partnership, an entity formed for this purpose and initially whollyowned by the Company.  Prior to October19, 2001, the Company was a wholly owned subsidiary of CGS.

 

**NOTE 2. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**BASIS OF PRESENTATION**

The accompanying financial statements present theconsolidated financial position of the Company and its 

 

40

----

 

subsidiaries as of December 31, 2001, and 2000, andthe consolidated results of operations and cash flows of the Company and its 

subsidiaries for the years ended December 31, 2001,2000 and 1999. All significant intercompany transactions, receivables andpayables have been eliminated in consolidation.

 

As discussed in Note 1, theaccounting acquirer in the Consolidation was SPPI84.  As such, the consolidated balance sheet at December 31, 2000, andthe related consolidated statements of operations and cash flows for the yearsended December 31, 2000 and 1999 reflect the financial position and results ofoperations and cash flows of SPPI84. The consolidated balance sheet at December 31, 2001, includes the assetsand liabilities of the acquired entities. The consolidated statement of operations and cash flow for the yearended December 31, 2001, include the results of operations and cash flows ofSPPI84 for the entire year, and the acquired entities from October 20, 2001,through December 31, 2001.

 

**RECLASSIFICATION**

Certain prior year balances have been reclassified toconform with the current year presentation.

 

**USE OF ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the results of operations duringthe reporting period. Actual results could materially differ from thoseestimates.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

In June 2001, FASB issued SFAS No. 141, whichsupercedes APB 16, “Business Combinations”, which is effective for businesscombinations initiated after June 30, 2001. SFAS 141 requires all business combinations to be accounted for underthe purchase method and that the pooling-of-interest method is no longerallowed.  The Company accounted for theConsolidation under the purchase method.

 

In June 2001, FASB issued SFAS No. 142, “Goodwill andOther Intangible Assets”, which is effective for fiscal years beginning afterDecember 15, 2001.  SFAS 142 requires,among other things, that goodwill no longer be amortized to earnings, butinstead be reviewed for impairment.  TheCompany is currently analyzing the provisions of SFAS 142 and has not yet madea determination of the impact the adoption will have on its financial statements.

 

In June 2001, FASB issued SFAS No. 143, “Accountingfor Asset Retirement Obligations”.  SFAS143 addresses financial accounting and reporting obligations associated withthe retirement of tangible long-lived assets and the associated asset retirementcosts.  The provisions of SFAS 143 arerequired to be applied starting with fiscal years beginning after June 15,2002.  The Company believes the adoptionof the provisions of SFAS 143 will not have a significant effect on itsfinancial position or results of operations.

 

In August 2001, FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,which addresses financial accounting and reporting for the impairment ordisposal of long-lived assets.  SFAS 144supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of”. SFAS 144 will be effective for the Company beginning January 1, 2002,the first day of its 2002 fiscal year. The Company is currently assessing but has not yet determined the impactof adopting SFAS 144 on its financial position and results of operations.

 

**REAL ESTATE**

Rental properties are stated at cost, net ofaccumulated depreciation, unless circumstances indicate that cost, net ofaccumulated depreciation, cannot be recovered, in which case, the carryingvalue of the property is reduced to estimated fair value. Estimated fair value:(i) is based upon the Company’s plans for the continued operation of eachproperty; and (ii) is computed using estimated sales price, as determined by prevailingmarket values for comparable properties and/or the use of capitalization ratesmultiplied by annualized net operating income based upon the age, constructionand use of the building. The fulfillment of the Company’s plans related to eachof its properties is dependent upon, among other things, the presence ofeconomic conditions which will enable the Company to continue to hold andoperate the properties prior to their eventual sale. Due to uncertaintiesinherent in the valuation process and in the economy, it is 

 

 

41

----

 

reasonably possible that the actual results ofoperating and disposing of the Company’s properties could be materiallydifferent than current expectations.

 

Depreciation is provided using the straight-linemethod over the useful lives of the respective assets. The useful lives are asfollows:

 

| Building and Improvements |   | 10 to 40 years            |
|---------------------------|--------|---------------------------|
| Tenant Improvements       |   | Term of the related lease |
| Furniture and Equipment   |   | 3 to 5 years              |

 

**CASH EQUIVALENTS**

Cash equivalents are considered to be all highlyliquid investments with a maturity of three months or less at the date ofpurchase.

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

Management believes that the carrying basis of thelong-term debt consisting of secured and unsecured borrowings approximatestheir respective fair market values at December 31, 2001, and December 31,2000. In addition, the carrying values of cash and cash equivalents, escrowdeposits, tenant and other rents receivable, accounts payable and accruedexpenses are reasonable estimates of their fair value.

 

**DERIVATIVE FINANCIAL INSTRUMENTS**

The Company may usederivative financial instruments in the event that it believes such instrumentswill be an effective hedge against fluctuations in interest rates on a specificborrowing. Derivative financial instruments such as forward rate agreements orinterest rate swaps may be used in this capacity. To the extent suchinstruments do not qualify as hedges, they will be accounted for on amark-to-market basis and recorded in earnings each period as appropriate. Thecost of terminated instruments not qualifying as hedges will be recorded inearnings in the period they are terminated. Instruments which qualify as hedgesupon obtaining the related debt will be recorded as a premium or discount onthe related debt principal and amortized into earnings over the life of thedebt instrument. If the hedged instrument is retired early, the unamortizeddiscount or premium will be included as a component of the calculation of gainor loss on retirement.

 

**DEFERRED FINANCING AND OTHER FEES**

Fees paid in connection with the financing and leasingof the Company’s properties are amortized over the term of the related notespayable or lease and are included in other assets.

 

# **MINORITY INTERESTS**

*Unit holders in the OperatingPartnership.*  AtDecember 31, 2001, unit holders in the Operating Partnership held an 11.6%limited partnership interest in the Operating Partnership.  Each of the holders of the interests in theOperating Partnership has the option to redeem its OP Units and to receive, atthe option of the Company, in exchange for each OP Unit, either (i) one shareof Common Stock of the Company, or (ii) cash equal to the fair value of oneshare of Common Stock of the Company at the date of conversion.

 

*Partiallyowned property.*  On February28, 2001, a third party buyer (the “Buyer”) purchased a 49% undividedtenancy-in-common interest in the Company’s Creekside/Riverside property for$1,000,000.  In addition, the sale agreementstipulates income and expenses shall be allocated to the Company and the Buyerbased upon the respective ownership interests.

 

From and after February 1, 2002, the Buyer,under the terms of the sale agreement, shall have the unilateral right to causethe sale of the property to a bona fide third party purchaser for a fair marketprice upon commercially reasonable terms and provisions.  Upon the sale of the property, all netproceeds shall be distributed as follows:

 

1)              the thenoutstanding principal balance of the Creekside loan is to be paid;

2)              the Buyer is toreceive $1,030,000 plus simple interest of 12% per annum accruing from the dateof the sale agreement less any distributions made during the same period;

3)              the remainingbalance of such net sale proceeds shall be distributed to the Company

 

 

42

----

 

Further, under the terms of the salesagreement, the Company has the right to purchase the Buyer’s 49% interest inthe property if the lender calls the loan under a “due on sale” provisionincluded in the Creekside loan.

 

The Company has accounted for thistransaction as a partial interest in real property and as such, the purchaseprice is accounted for as minority interest on the accompanying balance sheet.  Further, income and distributions allocableto the buyer are accounted for as an offset to the minority interestaccount.  In addition, to the extentthat the accumulation of net income less distributions made to the Buyer doesnot cover the guaranteed return ($30,000) and simple interest of 12% per annum,the Company records an accrual for any such difference in each fiscal perioduntil such obligation is paid in full.

 

**INVESTMENT IN UNCONSOLIDATED JOINTVENTURE**

SPPI84’s investment inunconsolidated joint venture (Sierra Mira Mesa Partners) at December 31, 2000,is stated at cost and was adjusted for SPPI84’s share in earnings or losses andcash contributions to or distributions from the joint venture (equity method).  See Note 5 Investment in Unconsolidated Joint Venture - for further discussion.

 

**RENTAL REVENUE**

Certain leases provide for tenant occupancy duringperiods for which no rent is due or where minimum rent payments increase duringthe term of the lease.  The Companyrecords rental income for the full term of each lease on a straight-linebasis.  Accordingly, a receivable isrecorded from tenants for the amount that is expected to be collected over theremaining lease term rather than currently (Deferred Rent Receivable).  When a property is acquired, the term ofexisting leases is considered to commence as of the acquisition date forpurposes of this calculation.

 

For the year ended December 31, 2001, no tenantrepresented 10% or more of rental revenue of the Company. During the year endedDecember 31, 2000, SPPI84 relied on three tenants to generate approximately 55%of total rental revenue.  The breakdownof these three tenants’ industry segments and rental income contribution is asfollows:  17% - electronicsmanufacturer; 16% - telecommunications manufacturing; and 21% - healthcareadministration.  During the year endedDecember 31, 1999, SPPI84 relied on three tenants to generate approximately 51%of total rental revenue.  The breakdownof these three tenants’ industry segments and rental income contribution is asfollows:  16% - optics research anddevelopment; 15% - telecommunications manufacturing; and 20% - healthcareadministration.

 

The Company’s portfolio of leases turns overcontinuously, with the number and value of expiring leases varying from year toyear. The Company’s ability to re-lease the space to existing or new tenants atrates equal to or greater than those realized historically is impacted by,among other things, the economic conditions of the market in which a property islocated, the availability of competing space, and the level of improvementswhich may be required at the property. No assurance can be given that therental rates that the Company will obtain in the future will be equal to orgreater than those obtained under existing contractual commitments.

 

# **NET LOSS PER SHARE**

Netloss per share is calculated based on the weighted average number of commonshares outstanding.  Stock optionsoutstanding and OP Units have not been included in the net loss per sharecalculation since their effect would be antidilutive.

 

**INCOME TAXES**

The Company is currently taxed as a Ccorporation.  Until the Company electsto be taxed as a REIT, it will be subject to federal income tax on its taxableincome at regular corporate rates.  Anydistribution by the Company to its stockholders will be subject to tax as adividend at the stockholder’s respective federal income tax rates.  Beginning with the tax year ending onDecember 31, 2003, the Company intends to elect to be taxed as a REIT forfederal income tax purposes.  TheCompany believes that it is organized and will operate so as to qualify as aREIT.  The qualification and taxation ofthe Company as a REIT depends upon its ability to meet, through actual annualoperating results, distribution levels, share ownership requirements andvarious qualifications imposed under the Internal Revenue Code of 1986, asamended.

 

 

43

----

 

Accordingly, while the Company intends to qualify as aREIT and believes that it will be able to do so, the Company cannot predictthat the actual results of its operations for any particular year will satisfythe requirements.

 

## **NOTE 3.CONSOLIDATION TRANSACTION**

 

On October 19, 2001, theCompany was the legal acquirer and registrant in the Consolidation.  Pursuant to the Consolidation, subsidiariesof the Company merged with eight public limited partnerships, acquired theassets and liabilities of two private entities managed by CGS and itsaffiliates and acquired certain assets and liabilities of CGS and itsmajority-owned affiliates.  All entitiesin the Consolidation were created to own and/or operate income-producingproperties.  The combination of theentities in the Consolidation is anticipated to reduce overall costs therebyincreasing shareholder value.  See Note1 — Description of Business.

 

An exchange valuerepresenting the estimate of the net asset value of each acquired entity wascomputed as follows: (A) the sum of (i) the estimated fair market value of thereal estate portfolio as determined by an independent appraisal and (ii) therealizable values of the non-real estate assets (B) reduced by (i) the mortgagedebt balance adjusted to reflect the market value of such debt, (ii) otherbalance sheet liabilities and (iii) the entities share of the Consolidationexpenses.   In addition, an exchangevalue was computed for the portion of the CGS Management Company acquired asfollows: (A) the sum of (i) an estimated value utilizing an earnings multipleapproach and (ii) the realizable values of the assets obtained, (B) reduced by(i) the mortgage debt balance adjusted to reflect the market value of suchdebt, (ii) other balance sheet liabilities and (iii) its share of theConsolidation expenses.   The number ofshares of Company stock issued was determined by the aggregate exchange valuedivided by $15.  Certain investorselected to receive notes in lieu of shares of Company stock.  Pursuant to the Consolidation, 5,429,690shares of the Common Stock of the Company; 725,605 OP Units and $2,292,671 innotes payable were issued.

 

The Company accounted forthe Consolidation under the purchase method. The property owned by SPPI84 remained at its historical costs and theother properties wererecorded at the fair market value.  As of October19, 2001, a summary of the assets and liabilities of the Company follows(dollars in thousands):

 

|                                                              |   | **October 19, 2001** |    |
|-------------------------------------------------------------------|--------|----------------------|---------|
| **ASSETS**                                                        |   |                 |    |
|                                                              |   |                 |    |
| Real  estate held for investment                                  |   | $                    | 251,381 |   |
| Investment in  management company                                 |   | 4,000                |    |
| Other assets                                                      |   | 10,602               |    |
| Total assets                                                      |   | $                    | 265,983 |   |
|                                                              |   |                 |    |
| **LIABILITIES  AND STOCKHOLDERS’ AND PARTNERS’ EQUITY** |   |                 |    |
|                                                              |   |                 |    |
| Long-term debt                                                    |   | $                    | 171,337 |   |
| Other liabilities                                                 |   | 25,902               |    |
| Total liabilities                                                 |   | 197,239              |    |
|                                                              |   |                 |    |
| Minority  Interest                                                |   | 11,887               |    |
|                                                              |   |                 |    |
| Equity                                                            |   | 56,857               |    |
| Total liabilities and  equity                                     |   | $                    | 265,983 |   |

 

In accordance with thepurchase method, the consolidated balance sheet at December 31, 2000, and therelated consolidated statements of operations and cash flows for the yearsended December 31, 2000, and 1999 reflect the financial position and results ofoperations and cash flows of SPPI84. The consolidated balance sheet at December 31, 2001, includes the assetsand liabilities of the acquired entities. The consolidated statements of operations and cash flow for the yearended December 31, 2001, include the results of operations and cash flows ofSPPI84 for the entire year, and the acquired entities from October 20, 2001,through December 31, 2001.

 

 

44

----

 

The following unaudited proforma financial information for the years ended December 31, 2001, and 2000,assumes the Consolidation occurred on the beginning of each year, after givingeffect to certain adjustments including depreciation based on the fair marketvalue of the real estate assets and amortization of the premium of the debtbased on the adjustments to reflect the debt at its fair market value (dollarsin thousands):

 

| **Pro Forma Results of Operations**         |   | **Year Ended December 31,  (Unaudited)** |   |
|---------------------------------------------|--------|------------------------------------------|--------|
|                                        |   | **2001**                                 |   | **2000** |   |
| Total  revenues                             |   | $                                        | 39,478 |   | $ | 36,450 |   |
| Operating expenses                          |   | 20,818                                   |   | 18,474 |   |
| Depreciation and  amortization              |   | 14,047                                   |   | 16,998 |   |
| Interest expense                            |   | 14,058                                   |   | 15,020 |   |
| Gain on sale of  property                   |   | —                                   |   | 1,328 |   |
| Minority  Interest                          |   | 1,059                                    |   | 1,696 |   |
| Loss before extraordinary  item             |   | (8,386                                   | )      | (11,018 | ) |
| Gain  (loss) on extinguishment of debt |   | 314                                      |   | (1,907 | ) |
| Net loss                                    |   | $                                        | (8,072 | ) | $ | (12,925 | ) |
|                                        |   |                                     |   |   |   |
| Weighted average shares                     |   | 5,529,190                                |   | 5,529,190 |   |
|                                        |   |                                     |   |   |   |
| Basic per share data:                       |   |                                     |   |   |   |
| Net loss before  extraordinary item         |   | $                                        | (1.52  | ) | $ | (1.99 | ) |
| Extraordinary item                          |   | .06                                      |   | (.34 | ) |
| Net loss                                    |   | $                                        | (1.46  | ) | $ | (2.33 | ) |

 

**NOTE 4. REAL ESTATE**

 

The cost and accumulated depreciation of rentalproperty as of December 31, 2001, and 2000 are as follows (dollars inthousands):

 
|                                |   | **Land** |   | **Buildings and  Improvements** |   | **Total Cost** |   | **Accumulated  Depreciation** |    | **Valuation  Allowance** |   | **Net  Recorded Value** |   |
|-------------------------------------|--------|----------|--------|---------------------------------|--------|----------------|--------|-------------------------------|---------|--------------------------|--------|-------------------------|--------|
| 2001:                               |   |     |   |                            |   |           |   |                          |    |                     |   |                    |   |
| Office properties                   |   | $        | 26,310 |                            | $      | 108,123        |   | $                             | 134,433 |                     | $      | 1,251                   |   | — |   | $ | 133,182 |   |
| Office/Warehouse properties         |   | 10,178   |   | 40,797                          |   | 50,975         |   | 1,493                         |    | $                        | 1,880  |                    | 47,602 |   |
| Shopping Center properties          |   | 8,110    |   | 9,684                           |   | 17,794         |   | 163                           |    | —                   |   | 17,631                  |   |
| Apartment properties                |   | 8,120    |   | 39,300                          |   | 47,420         |   | 342                           |    | —                   |   | 47,078                  |   |
| Land Held for Development and other |   | 3,900    |   | 157                             |   | 4,057          |   | 43                            |    | —                   |   | 4,014                   |   |
| Total                               |   | $        | 56,618 |                            | $      | 198,061        |   | $                             | 254,679 |                     | $      | 3,292                   |   | $ | 1,880 |   | $ | 249,507 |   |
|                                |   |     |   |                            |   |           |   |                          |    |                     |   |                    |   |
|                                |   |     |   |                            |   |           |   |                          |    |                     |   |                    |   |
| 2000:                               |   |     |   |                            |   |           |   |                          |    |                     |   |                    |   |
| Office properties                   |   | —   |   | —                          |   | —         |   | —                        |    | —                   |   | —                  |   |
| Office/Warehouse properties         |   | $        | 978    |                            | $      | 3,092          |   | $                             | 4,070   |                     | $      | 982                     |   | $ | 1,880 |   | $ | 1,208 |   |
| Shopping Center properties          |   | —   |   | —                          |   | —         |   | —                        |    | —                   |   | —                  |   |
| Apartment properties                |   | —   |   | —                          |   | —         |   | —                        |    | —                   |   | —                  |   |
| Land Held for Development and other |   | —   |   | —                          |   | —         |   | —                        |    | —                   |   | —                  |   |
| Total                               |   | $        | 978    |                            | $      | 3,092          |   | $                             | 4,070   |                     | $      | 982                     |   | $ | 1,880 |   | $ | 1,208 |   |

 

# **ACQUISITIONS**

On October 19, 2001, pursuant to the Consolidation,the Company acquired its initial 34 properties, which consisted of 3,664,635square feet of office, office/warehouse, apartments and shopping centerproperties.  The majority of theproperties acquired in the Consolidation were recorded at fair marketvalue.  One property, wholly owned bythe accounting acquirer, SPPI84, remained at historical cost and three otherproperties partially owned by SPPI84, remained at historical cost on apercentage basis.

 

 

45

----

 

## **DISPOSITIONS**

In November 2001, the Company sold the 42,142 squarefoot Tower Industrial Building for $1,800,000. The sale produced a net deferred gain on the sale of approximately$232,000 and net proceeds of approximately $1,688,000.  It is anticipated that the net proceeds,which were held in escrow at December 31, 2001, will be used as a source toassist the funding of a future acquisition. The property was unencumbered.

 

In 1999, SPPI84 received a principal payment of$943,413 on its trust deed note receivable from an affiliate of its generalpartner dated December 31, 1994 in the original amount of $3,200,000.  SPPI84 recognized a deferred gain of $83,315relating to the payment, which was classified as a gain from propertydisposition on SPPI84’s statement of operations (See Note 6 — Related PartyTransactions).

 

## **FUTURE MINIMUMRENTS**

The Company leases its office, office/warehouse andshopping center property under non-cancelable operating lease agreements.Future minimum rents to be received as of December 31, 2001, are as follows(dollars in thousands): 

 

| **Year Ending December 31,** |   | **Future Minimum Rents** |   |
|------------------------------|--------|--------------------------|--------|
| 2002                         |   | $                        | 26,838 |   |
| 2003                         |   | 18,835                   |   |
| 2004                         |   | 13,814                   |   |
| 2005                         |   | 9,765                    |   |
| 2006                         |   | 5,272                    |   |
| Thereafter                   |   | 11,905                   |   |
|                         |   | $                        | 86,429 |   |

 

**NOTE 5. INVESTMENT IN UNCONSOLIDATEDJOINT VENTURE**

 

The Company held no investments in operating jointventures at December 31, 2001.  AtDecember 31, 2000, SPPI84 held an investment in Sierra Mira Mesa Partners(SMMP), which it accounted for using the equity method.

 

SMMP, a California general partnership, wasformed in 1985 between SPPI84 and Sierra-Pacific Development Fund II (SPDFII),an affiliate of SPPI84, to develop and operate the real property known as MiraMesa, an office building, located in San Diego, California.  The property contains 89,560 square feet andwas 100% leased at December 31, 2000. At December 31, 2000, SPPI84’s interest in SMMP was 69.83%; the remaining30.17% interest was owned by SPDFII. For the years ended December 31, 2001, 2000 and 1999, SPPI84 recognizedincome from investment in SMMP of $393,764, $327,510 and $323,402,respectively.

 

SPPI84’s investment in SMMP as of December31, 2000, was comprised of the following (dollars in thousands):

 

|                                                               |   | **2000** |   |
|--------------------------------------------------------------------|--------|----------|--------|
| Equity interest                                                    |   | $        | 6,959  |   |
| Other investment fees, less accumulated amortization of  $150 |   | 104      |   |
| Investment in unconsolidated joint venture                         |   | $        | 7,063  |   |

 

On October 19, 2001, SPPI84 and SPDFII merged into a subsidiary of theCompany pursuant to the Consolidation. As a result, the assets and liabilities of Mira Mesa and its results ofoperations for the two months and twelve days ended December 31, 2001, areincluded in the consolidated financial statements of the Company at December31, 2001.

 

The consolidated financial statements of SMMP include the accounts ofSMMP and Sorrento I Partners, a majority owned California general partnershipfor the year ended December 31, 2000. The condensed 

 

 

46

----

 

balance sheet at December 31, 2000, and the condensed statements ofoperations for the years ended December 31, 2000, and 1999 for SMMP follow(dollars in thousands):

 

|                                                |   | **December  31,** |   |
|-----------------------------------------------------|--------|-------------------|--------|
|                                                |   | **2000**          |   |
| Assets                                              |   |              |   |
|                                                |   |              |   |
| Cash and cash equivalents                           |   | $                 | 52     |   |
| Rent receivable                                     |   | 932               |   |
| Due from affiliate                                  |   | 2,696             |   |
| Income-producing property,                          |   |              |   |
| net of accumulated depreciation                     |   | 8,347             |   |
| Investment in unconsolidated joint ventures         |   | 1,295             |   |
| Other assets, net of accumulated amortization       |   | 788               |   |
|                                                |   |              |   |
| Total Assets                                        |   | $                 | 14,110 |   |
|                                                |   |              |   |
| Liabilities and General Partners’ Equity       |   |              |   |
|                                                |   |              |   |
| Accrued and other liabilities                       |   | $                 | 105    |   |
| Notes payable                                       |   | 5,890             |   |
|                                                |   |              |   |
| Total Liabilities                                   |   | 5,995             |   |
|                                                |   |              |   |
| Minority interest in joint venture                  |   | (357              | )      |
|                                                |   |              |   |
| General Partners’ equity                       |   | 8,472             |   |
|                                                |   |              |   |
| Total Liabilities and General Partners’ equity |   | $                 | 14,110 |   |
|                                                |   |              |   |

 

|                                                                                    |   | **For the  Years Ended** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                    |   | **2000**                 |   | **1999** |   |
|                                                                                    |   |                     |   |   |   |
| Revenues:                                                                               |   |                     |   |   |   |
| Rental income                                                                           |   | $                        | 2,152  |   | $ | 2,126 |   |
| Other income                                                                            |   | 250                      |   | 224 |   |
| Total revenues                                                                          |   | 2,402                    |   | 2,350 |   |
| Expenses:                                                                               |   |                     |   |   |   |
| Operating expenses                                                                      |   | 936                      |   | 801 |   |
| Depreciation and amortization                                                           |   | 571                      |   | 587 |   |
| Interest                                                                                |   | 486                      |   | 450 |   |
|                                                                                    |   |                     |   |   |   |
| Total expenses                                                                          |   | 1,993                    |   | 1,838 |   |
|                                                                                    |   |                     |   |   |   |
| Income before Partnership’s share of unconsolidated joint venture  income (losses) |   | 409                      |   | 512 |   |
|                                                                                    |   |                     |   |   |   |
| Partnership’s share of unconsolidated joint venture income (losses)                |   | 43                       |   | (36 | ) |
|                                                                                         |        |                          |        |  |  |  |  |

 

 

47

----

 

|                                                                       |   |   |   |   |   |
|----------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Income before minority interest’s share of consolidated joint venture |   |   |   |   |   |
| Loss                                                                       |   | 452    |   | 476    |   |
|                                                                       |   |   |   |   |   |
| Minority interest’s share of consolidated joint venture loss          |   | 17     |   | 8      |   |
|                                                                       |   |   |   |   |   |
| Net income                                                                 |   | $      | 469    |   | $      | 484 |   |
|                                                                       |   |   |   |   |   |
|                                                                            |        |        |        |        |        |  |  |

 

As of December 31, 2000, SMMP held a 43.92%interest in Sorrento II Partners (a California general partnership with SierraPacific Institutional Properties V formed in 1993), a 5.08% interest in SierraCreekside Partners (“SCP”), (a California general partnership with SierraPacific Development Fund formed in 1994), and a 33.36% interest in Sierra VistaPartners (a California general partnership with Sierra Pacific Development FundIII formed in 1994).

 

The following is a summary of aggregated financial information for allinvestments owned by SMMP at December 31, 2000, which were accounted for underthe equity method (dollars in thousands):

 

|                                                       |   | **December  31,** |   |
|------------------------------------------------------------|--------|-------------------|--------|
|                                                       |   | **2000**          |   |
| Assets                                                     |   |              |   |
|                                                       |   |              |   |
| Cash and cash equivalents                                  |   | $                 | 54     |   |
| Rent receivable                                            |   | 450               |   |
| Income-producing property, net of accumulated depreciation |   | 7,831             |   |
| Other assets, net of accumulated amortization              |   | 538               |   |
|                                                       |   |              |   |
| Total Assets                                               |   | $                 | 8,873  |   |
|                                                       |   |              |   |
| Liabilities and General Partners’ Equity              |   |              |   |
|                                                       |   |              |   |
| Accrued and other liabilities                              |   | $                 | 216    |   |
| Note payable                                               |   | 4,025             |   |
|                                                       |   |              |   |
| Total Liabilities                                          |   | 4,241             |   |
|                                                       |   |              |   |
| General Partners’ equity                              |   | 4,632             |   |
|                                                       |   |              |   |
| Total Liabilities and General Partners’ equity        |   | $                 | 8,873  |   |
|                                                       |   |              |   |

 

|            |   | **For the  Years Ended** |   |
|-----------------|--------|--------------------------|--------|
|            |   | **2000**                 |   | **1999** |   |
|            |   |                     |   |   |   |
| Revenues:       |   |                     |   |   |   |
| Rental income   |   | $                        | 2,364  |   | $ | 2,112 |   |
| Interest income |   | 11                       |   | 35 |   |
| Other income    |   | —                   |   | 15 |   |
|                 |        |                          |        |  |  |  |  |

 

 

48

----

 

| Total revenues                                           |   | 2,375  |   | 2,162  |   |
|----------------------------------------------------------|--------|--------|--------|--------|--------|
| Expenses:                                                |   |   |   |   |   |
| Operating expenses                                       |   | 1,048  |   | 1,407  |   |
| Depreciation and amortization                            |   | 858    |   | 779    |   |
| Interest                                                 |   | 361    |   | 153    |   |
|                                                     |   |   |   |   |   |
| Total expenses                                           |   | 2,267  |   | 2,339  |   |
|                                                     |   |   |   |   |   |
| Income (loss) before extraordinary loss                  |   | 108    |   | (177   | )      |
|                                                     |   |   |   |   |   |
| Extraordinary loss from write-off of deferred loan costs |   | (46    | )      | — |   |
|                                                     |   |   |   |   |   |
| Net income (loss)                                        |   | $      | 62     |   | $      | (177 | ) |
|                                                     |   |   |   |   |   |
|                                                          |        |        |        |        |        |  |  |

 

**NOTE 6.   RELATED PARTY TRANSACTIONS**

 

Inconnection with the Consolidation, limited partnerships and limited liabilitycompanies owned or controlled by William J. Carden and John N. Galardi and theirfamily members and affiliates merged into certain subsidiaries of the Companyand the Company acquired assets from corporations controlled by them.  Sixteen properties, in which these principalstockholders owned interests, along with certain assets and liabilities of theCGS Management Company, were acquired as a result of the Consolidation.  In addition, the principal stockholders heldlimited partnership interests in the public limited partnerships.  The principal stockholders and members oftheir family received 985,588 shares of Common Stock and 540,348 OP Units uponconsummation of the Consolidation.

 

Certain obligations of CGS and the majority-owned affiliates becameliabilities of the Company as a result of the Consolidation. These obligationsinclude a distribution payable of approximately  $7,883,000 due to the former limited partners of Sierra PacificDevelopment Fund II in connection with litigation against a subsidiary of CGSrelating to secured and unsecured loans, among other matters.  The obligation to repay was guaranteed byJohn N. Galardi, a principal stockholder of ASR.   This obligation, plus additional accrued interest ofapproximately $186,000 is reflected in accrued and other liabilities in theaccompanying consolidated financial statements of the Company as of December31, 2001 (See Note 13 — Commitments and Contingencies).

 

Inaddition, related party notes payable totaling $2,802,094 along with otheraccruals associated with the loans were assumed by ASR.  At December 31, 2001, these consisted of thefollowing:

 

•                  $1,600,000unsecured loan and accrued interest of $126,036 payable to John N. Galardi;

 

•                  $1,000,000secured loan with accrued interest and a participating profit liability of$1,207,081 to IDM Participating Mortgage Income Fund, the general partner ofwhich was an entity controlled by Mr. Carden.

 

•                  $202,094unsecured loan and accrued interest of $36,543 to Brown Parker and Leahy, LLP,a law firm in which Mr. Timothy R. Brown, a Director of the Company, isPartner.    Refer to Note 7 for terms onthese notes.

 

Otherrelated party liabilities totaling $2,024,680 in the form of loans and advanceswere assumed as well.  These consistedof a $1,060,852 net indebtedness to Meadow Wood Village Ltd., in which Messrs.Carden and Galardi own a 58% interest; $242,020 to CGS; and $721,808 to ASJ,Ltd, which is owned by Mr. Carden and his children.

 

At December 31, 2001, the Company carried a receivablebalance of $7,725 from CGS, principally due to a 

 

 

49

----

 

debt pay-off made by the Company on behalf of WestFlorissant, a wholly-owned property of CGS. This receivable was paid in the first quarter of 2002.

 

As of December 31, 2000, SPPI84 had paid a totalof  $936,752 in expenses relating to theConsolidation.  These costs primarilyrelated to professional fees and were recorded as a receivable from affiliateon the balance sheet.  The limitedpartners of SPPI84 were compensated for paying Consolidation costs in excess oftheir allocable share by receiving additional stock upon the consummation ofthe Consolidation.

 

In1994 SPPI84 sold the Pacific Spectrum property to an affiliate of its generalpartner for cash of $800,000 and a $3,200,000 trust deed note dated December31, 1994.  The note called for monthlyinterest only payments and bore interest of 10% per annum.  Interest receivable had, from time to time,been added to the principal balance of the note and the maturity had beenextended annually for additional one-year terms.  In 1999 and 2000, interest receivable of $91,610 and $159,161,respectively, was added to the principal balance of the note.   In 1999, SPPI84 received a principalpayment of $943,413 and recognized a deferred gain of $83,315 relating to thetransaction.   Interest income relatedto this note of $141,083, $159,161, and $187,227 was recognized during theyears ended December 31, 2001, 2000, and 1999, respectively.  The December 31, 2000, balance of the notewas $1,750,771, which is reflected on the December 31, 2000, balance sheet netof a deferred gain of $132,471, and was secured by a second lien on the PacificSpectrum property.  On October 19, 2001,SPPI84 and the entity that owns Pacific Spectrum was acquired by ASR.  As such, the note receivable and related interestreceivable balance as of October 19, 2001, were eliminated in the accompanyingDecember 31, 2001, financial statements of ASR.

** **

 

50

----

 

**NOTE 7. NOTES PAYABLE**

 

The Company had the following mortgage loans, banklines, and notes payable outstanding as of December 31, 2001, and 2000 (dollarsin thousands):

 

|                                                                                                                                                                                                                                                                                                                                                          |   | **2001** |    | **2000** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Unsecured loans  with various lenders, bearing interest at fixed rates between 8.00% and  20.00% at December 31, 2001, and maturing at various dates through February  1, 2003.                                                                                                                                                                               |   | $        | 1,279   |     | — |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Unsecured loans  with various lenders, bearing interest at variable rates between 5.17% and  6.25% at December 31, 2001, and maturing at various dates through November 5,  2002.                                                                                                                                                                             |   | 72       |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Unsecured loans  with various parties, non-interest bearing, and maturing at various dates  through February 19, 2002.  The  Company paid $191 of loans through March 2002 and is negotiating extension  terms on the remaining $208.                                                                                                                    |   | 399      |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Secured loans  with various lenders, net of unamortized premiums of $4,829 at December 31,  2001, bearing interest at fixed rates between 5.00% and 12.00%, with monthly  principal and interest payments ranging between $8 and $269 and maturing at  various dates through January 1, 2012.                                                                 |   | 116,445  |    | $        | 1,350  |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Secured loans  with various banks bearing interest at variable rates ranging between 4.93%  and 9.00% at December 31, 2001, and maturing at various dates through May 1,  2008.                                                                                                                                                                               |   | 43,337   |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Secured Series A & B Bonds with a fixed interest rate of 6.39%,  monthly principal and interest payments of $74, and a maturity date of  September 30, 2031.                                                                                                                                                                                              |   | 11,816   |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Secured Series C Bonds with a fixed interest rate of 9.50%,  semi-annual principal and interest payments that increase by $5 from the  previous semi-annual payment ($70 at December 31, 2001), and a maturity date  of November 1, 2006.                                                                                                                     |   | 765      |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Secured loan with IDM Participating Mortgage Income Fund, owned by an  entity controlled by William J. Carden and John N. Galardi, principal  shareholders of the Company.  The loan  bears interest at the Federal Discount Rate + 3%, with a minimum of 12.12%  and a maximum of 15.15% (12.12% at December 31, 2001), maturing on November  30, 2002. |   | 1,000    |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Unsecured loan with Brown Parker and Leahy, LLP, a law firm in which  Timothy R. Brown, a director of the Company, is a partner.  The loan bears interest at prime (5.00% at  December 31, 2001) and is payable on demand.                                                                                                                               |   | 202      |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Unsecured loan with John N. Galardi, a principal stockholder, with a  fixed interest rate of 8.00%, payable on demand.                                                                                                                                                                                                                                        |   | 1,600    |    | —   |   |
|                                                                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |
| Total                                                                                                                                                                                                                                                                                                                                                         |   | $        | 176,915 |     | $      | 1,350 |   |

 

During 2001, the Company entered into threenew loan agreements with a securities lender, each individually secured by thefollowing properties; Sorrento II, Creekside, and Park Plaza I & II.  These loans totaled $17,420,000.  The loans bear interest at fixed rates, witha weighted average interest rate of 7.29% per annum (ranging from 7.17% to7.54%), and mature at various dates in 2011 and 2012.

 

Modification agreements were also enteredinto with a bank involving five secured loans that generated additional loanproceeds of $4,784,000 and extended maturity to December 31, 2002.  These loans, whose balances totaledapproximately $26,483,000 at the time of the modifications, bear interest atLibor plus 3%.  In addition, the bankfunded $1,310,000 on a $1,350,000 term loan at Libor plus 3% maturing December31, 2002.

 

The Company repaid in full six secured loanstotaling $13,103,000 and two unsecured loans totaling $1,580,000 with proceedsobtained from the new loans and modification agreements, and made other loanpay-downs and scheduled principal payments of $2,066,000 during the year.

 

 

51

----

 

Debt premiums are amortized into interestexpense over the terms of the related mortgages using the effective interestmethod.  As of December 31, 2001, theunamortized debt premiums were $4,829,000.

 

The required principal payments on the Company’s debtfor the next five years and thereafter, as of December 31, 2001, are as follows(dollars in thousands):

 

| **Year Ending December 31,**                           |   |    |    |
|--------------------------------------------------------|--------|---------|---------|
| 2002                                                   |   | $       | 44,891  |   |
| 2003                                                   |   | 2,491   |    |
| 2004                                                   |   | 12,260  |    |
| 2005                                                   |   | 5,684   |    |
| 2006                                                   |   | 3,685   |    |
| Thereafter                                             |   | 103,075 |    |
| Subtotal                                               |   | 172,086 |    |
| Net premium (net of  accumulated amortization of $122) |   | 4,829   |    |
| Total                                                  |   | $       | 176,915 |   |

 

# **NOTES PAYABLE TO FORMER LIMITED PARTNERS**

Limited partners of the eight public limitedpartnerships who voted against the Consolidation had the option of electing toreceive notes as opposed to ASR shares. The notes, which totaled $2,291,671, bear interest at 5.92% per annumand mature in October 2009.  Interest ispayable semi-annually in arrears on each June 15 and December 15, commencingJune 15, 2002.  The notes may beredeemed at any time at the option of ASR, in whole or from time to time inpart, at a redemption price equal to the sum of the principal amount of thenotes being redeemed plus accrued interest thereon to the redemption date.  On March 18, 2002, $1,158,833 of the notes,plus accrued interest, were paid.

 

*Proceeds from Sale of PropertiesFormerly Owned by the Partnerships.* In the eventthat, following the closing of the Consolidation, ASR sells or otherwise disposesof any property owned by one of the Partnerships immediately prior to theConsolidation and realizes Net Cash Proceeds, in excess of:

 

•                  the amount required to repay mortgageindebtedness outstanding immediately prior to the Consolidation secured by suchproperty or otherwise required to be applied to the reduction of indebtednessof ASR; and

•                  the costs incurred by ASR in connectionwith such sale or other disposition,

 

ASR will be requiredwithin 90 days of receipt of the total Net Cash Proceeds to redeem at theredemption price an aggregate amount of the principal of the particular seriesof notes issued to the holders who were limited partners of such Partnershipprior to the Consolidation equal to 80% of such Net Cash Proceeds.

 

*Proceeds from Refinancing ofProperties Formerly Owned by the Partnerships.*  In the eventthat, following the closing of the Consolidation, ASR refinances, whether atmaturity or otherwise, any indebtedness secured by any property owned by one ofthe partnerships immediately prior to the Consolidation and realizes Net CashProceeds, in excess of:

 

•                  the amount of indebtedness secured bysuch property at the time of the Consolidation, calculated prior to anyrepayment or other reduction in the amount of such indebtedness in theConsolidation; and

•                  the costs incurred by the ASR inconnection with refinancing,

 

ASR will be requiredwithin 90 days of receipt of the total Net Cash Proceeds to redeem at theredemption price an aggregate amount of the principal of the particular seriesof the notes issued to the holders who were limited partners of suchPartnership prior to the Consolidation equal to 80% of such Net Cash Proceeds.

 

**NOTE 8. NET GAIN ON EARLYEXTINGUISHMENTS OF DEBT**

 

 

52

----

 

The Company recognized anet gain on early extinguishments of debt of $314,000 for the year endedDecember 31, 2001.  The net gain wasrelated to the payoff of two loans and the refinancing of two loansindividually secured by four properties; Northwest Corporate Center, Creekside,Van Buren and Park Plaza I & II in November and December 2001.

 

**NOTE 9.REDEEMABLE COMMON STOCK**

On October 23, 2001, theCompany issued 20,000 shares of its Common Stock, $.01 par value per share,with the holder’s right to sell (the “Put”) the stock back to the Company at afixed price of $15.00 per share during the period from October 31, 2002 toNovember 30, 2002.  The holder mayexercise the Put by giving written notice thereof to the Company, within threebusiness days of the date of exercise in writing.  Within three business days’ of receipt of the Notice of Exerciseof the Put, the Company shall deliver to the holder in good funds the fullexercise price for the shares exercised under the Put and within three daysafter receipt of such funds the holder will deliver to the Company thecertificates representing the number of shares of Common Stock being soldpursuant to the Put.

 

**NOTE 10.INCOME TAXES**

 

The provision for income taxes on incomeconsists of the following for the period ended December 31, 2001:

 

| Current expense (benefit):  |   |   |   |
|-----------------------------|--------|--------|--------|
| Federal                     |   | $      | 0      |   |
| State                       |   | 0      |   |
|                        |   |   |   |
| Deferred expense (benefit): |   |   |   |
| Federal                     |   | 0      |   |
| State                       |   | 0      |   |
|                        |   |   |   |
|                        |   | $      | 0      |   |

 

The Company has a net operating loss carryforward ofapproximately $946,000 as of December 31, 2001.  The Company is a loss corporation as defined in Section 382 ofthe Internal Revenue Code.  Therefore,if certain changes in the Company’s ownership should occur, there could be asignificant annual limitation on the amount of loss carryforwards and futurerecognized losses that can be utilized and ultimately some amount of losscarryforwards may not be available. Such changes could result in additional tax provision.  The net operating loss generated in 2001 of$946,000 expires in 2021.

 

The components of deferred tax assets and liabilitiesconsist of the following as of October 19, 2001 and December 31, 2001respectively:

 

 
|                            |   | **October  19, 2001** |   | **December  31, 2001** |   |
|---------------------------------|--------|-----------------------|--------|------------------------|--------|
| Deferred tax assets:            |   |                  |   |                   |   |
| Net operating losses            |   | $                     | 0      |                   | $      | 359,000 |   |
| Allowance for bad debts         |   | 447,000               |   | 465,000                |   |
| Capitalized lease costs         |   | 612,000               |   | 563,000                |   |
|                            |   |                  |   |                   |   |
| Less:  Valuation Allowance |   | (1,059,000            | )      | (1.387,000             | )      |
|                            |   |                  |   |                   |   |
| Net deferred tax asset          |   | $                     | 0      |                   | $      | 0 |   |

 

SFAS No. 109 requires a valuation allowance againstdeferred tax assets if, based on available evidence, it is more likely than notthat some or all of the deferred tax assets will not be realized.

 

The Company intends to become a REIT as of January 1,2003 for federal income tax purposes. As a REIT, the Company will not generally be liable for federalcorporate income taxes.  As such,uncertainty exists as to the ultimate tax asset to be realized.  Management has recorded a valuationallowance against the entire net deferred asset to reflect thisuncertainty.  If the Company fails toqualify as a REIT in any 

 

 

53

----

 

taxable year, it will be subject to federal incometaxes on its taxable income at regular corporate tax rates.  In addition, a REIT is subject to an entitylevel tax on the sale of property it held before electing REIT status.  During the 10-year period following itsqualification as a REIT, the Company will be subject to an entity level tax onthe income it recognizes upon the sale of assets, including all the assetstransferred to it as part of the consolidation, it held before electing REITstatus in an amount up to the amount of the built-in gains at the time theCompany becomes a REIT.

 

The potential tax relatedto this built-in gain is approximately $12,943,000.  A deferred tax liability has not been recorded for this potentialtax because the tax law provides a means by which the assets can be recoveredtax-free. The Company expects that it will ultimately hold the propertiessubject to the built-in gains tax throughout the 10-year holding period or todispose of properties utilizing only tax-deferred exchanges.  If the Company’s expectation changes and itdisposes of any property that would become subject to the built-in gains taxupon the Company’s qualification for REIT status, the entire $12,943,000deferred tax liability will be recorded immediately on the books of theCompany.

 

**NOTE 11.  NET LOSS PER SHARE**

 

Net loss per share iscalculated based on the weighted average number of common shares outstanding.  Stock options outstanding and OP Units havenot been included in the net loss per share calculation since their effectwould be antidilutive.  Net loss pershare is as follows (in thousands, except for shares and per share amounts):

 

|                                                                |   | **Year Ending  December 31, 2001** |   |
|---------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                |   |                               |   |
| Net loss before  extraordinary item                                 |   | $                                  | (2,352 | ) |
| Extraordinary item  — net gain on extinguishments of debt |   | 314                                |   |
|                                                                |   |                               |   |
| Net loss                                                            |   | $                                  | (2,038 | ) |
|                                                                |   |                               |   |
| Basic weighted average  shares used                                 |   | 5,529,190                          |   |
|                                                                |   |                               |   |
| Basic per share data:                                               |   |                               |   |
| Net loss before  extraordinary item                                 |   | $                                  | (.43   | ) |
| Extraordinary item— net  gain onExtinguishments  of debt       |   | .06                                |   |
| Net loss                                                            |   | $                                  | (.37   | ) |

 

**NOTE 12. STOCK OPTION AND RESTRICTEDSHARE PLANS**

 

The Company has in effect its Omnibus Stock IncentivePlan (the “Plan”) which is administered by the Board of Directors and providesfor the granting of incentive and non qualified stock options, stockappreciation rights, restricted stock, performance units and performanceshares.   The Board reserved a total of720,000 shares under the Plan.  As ofDecember 31, 2001, 533,250 ASR shares are available for issuance to executiveofficers, directors or other key employees of the Company.  Of the 533,250 shares available, the Companyplans to grant options to purchase 87,250 shares to existing Board Members andManagement on the six-month anniversary of the closing of the Consolidation atthe fair market value on such date.

 

During fiscal 2001, optionsto purchase 87,250 ASR shares were granted at an exercise price of $15.00 pershare, which was equal to or exceeded the fair market value of the Company’sstock at the time of the grant.  Thestock options granted vest 25% annually with the initial 25% vesting on thedate of grant.  On December 31, 2001,options to purchase 21,812 ASR shares were exercisable and the right topurchase 87,250 ASR shares were outstanding. The right to purchase these shares terminate on the tenth anniversary ofthe grant date, which was October 15, 2001.

 

 

54

----

 

The Company accounts for the Plan under APB Opinion25.  Therefore, no compensation cost hasbeen recognized for the granting of options. For pro forma disclosures, the estimated fair value of the options isamortized to expense over the options’ vesting period.  The estimated fair value of options grantedduring the period ended December 31, 2001, was $10.29 per share.  Had compensation cost for the stock optionsgranted been based on the estimated fair value at the grant date, as prescribedby Statement of Financial Accounting Standards No. 123, the Company’s pro formanet loss and net loss per share would have increased by $47,000, or $0.01 perbasic and diluted share.

 

The fair value of each option is estimated, as of thegrant date, using the Black-Scholes option pricing model with the followingassumptions used for the grants:  nodividend yield, expected volatility of 49%; risk-free interest rate of 5.07%and expected lives of 10 years.  TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because the Company’s employee’s stock options have characteristicssignificantly different from those of traded options and because changes in thesubjective input assumptions can materially affect the fair value estimate, inManagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.

 

In addition, during fiscal2001, the Company granted restricted stock for 99,500 shares, which is subject to repurchase by theCompany on termination of the grantee’s employment for a price of $.01 pershare.  The repurchase option lapses infour equal installments on the first, second, third and fourth anniversaries ofthe date of grant.  Recipients ofrestricted stock paid no consideration to the Company for the shares, have theright to vote all shares subject to such grant, and receive and retain all cashdividends payable to holders of ASR shares of record on or after the date ofgrant and to exercise all other rights, powers and privileges of a holder ofASR shares, with the exception that the recipients shall not transfer the ASRshares during the restriction period. Compensation expense is recognized on a straight-line basis over thevesting period.  For the period endedDecember 31, 2001, $77,734 was recognized as expense for restricted sharesissued.  An additional $1,415,000 ofcompensation expense will be expensed over the remaining vesting period.

 

**NOTE 13. COMMITMENTS ANDCONTINGENCIES**

 

Lewis-Madison Matter

On or about September 27, 2001, Robert L.Lewis, Madison Liquidity Investors 103 LLC and Madison Liquidity Investors 112LLC (“Plaintiffs”), purporting to represent themselves and all others similarlysituated, initiated an action (the “Action”) against the Company, CGS, WilliamJ. Carden, John N. Galardi and S-P Properties, Inc. in the Orange CountySuperior Court, Case No. 01 CC 000394 (“Defendants”) (hereinafter refer to as“Plaintiffs’ Compliant”).

 

Plaintiffs’ Complaint in the Action allegesclaims against the Company and others for breach of fiduciary duty and breachof contract.  Plaintiffs’ Complaintchallenges the Consolidation. Although the Consolidation was disclosed in aProspectus/Consent Solicitation filed with the Securities and ExchangeCommission and was approved by a majority vote of the limited partners of thepartnerships. Plaintiffs allege that the approval was invalid and that theConsolidation constitutes a breach of fiduciary duty by each of theDefendants.  Plaintiffs further allegethat the Consolidation constitutes a breach of partnership agreements governingthe partnerships.

 

Plaintiffs’ prayer for relief seeks thefollowing: 1) an injunction prohibiting the Defendants from commingling; 2)imposition of a constructive trust providing for liquidation of the assets ofthe partnerships and a distribution of the assets to the former limitedpartners therein; 3) a judicial declaration that the Action may be maintainedas a class action; 4) monetary/compensatory damages; 5) Plaintiffs’ costs ofsuit, including attorneys’, accountants’ and expert fees; and 6) a judicialorder of dissolution of the partnerships and appointment of a liquidatingtrustee.

 

The Company intends to vigorously defend against theclaims asserted in the action.  OnFebruary 13, 2002, the Company filed a Demurrer to Plaintiff Complaintcontending Plaintiffs lack standing to assert some of the claims alleged, thatPlaintiffs’ Complaint fails to state a cause of action for breach of fiduciary 

 

 

55

----

 

duty against the Company and the Plaintiffs’ Complaintfails to state a cause of action for breach of contract against theCompany.  On March 15, 2002, the OrangeCounty Superior Court sustained the Company’s Demurrer on the ground thatPlaintiffs’ Complaint fails to state a cause of action for either breach offiduciary duty or breach of contract against the Company, and overruled theCompany’s Demurrer on the ground of standing. The Court gave the Plaintiffs’ twenty days leave to amend theirComplaint, which amended compliant was received by the Company on April 3,2002.  The Company has until May 8, 2002to respond.

 

Teachout Matter

A subsidiary of CGS, S-P Properties, Inc., isa defendant in a lawsuit commenced in Superior Court, County of Los Angles in November1995, entitled Teachout et al. V. S.P. Properties, Inc. and Sierra PacificDevelopment Fund II (Fund II).  The suitwas a derivative action brought by a limited partner on behalf of Fund II,which alleged that the general partner breached its fiduciary duty and breachedthe partnership agreement in connection with loans to the general partner andthe issuance of notes to an affiliate of CGS in connection with the purchase ofthe Technology building (the Property) from Fund II.  Fund II was merged into a subsidiary of the Company pursuant tothe Consolidation.  The loans to thegeneral partner were made prior to the acquisition of the general partner byCGS and were assumed by an affiliate of CGS. The purchase was negotiated prior to the acquisition of the generalpartner by CGS and closed immediately prior to the acquisition of the generalpartner.  CGS and its affiliates deniedany liability.  The matter was settledand, pursuant to the settlement agreement, CGS’s subsidiary agreed to repay theamount of the notes with accrued interest. The obligation to repay was guaranteed by John N. Galardi, a principalstockholder of ASR.  Under thesettlement agreement, the payment was due in December 2000.  CGS did not make the payment when it was duebecause it did not have sufficient cash to make the payment.  As a result, the plaintiff terminated thesettlement agreement.  Plaintiff amendedits complaint to claim that additional loans in the amount of $500,000 weremade by Fund II to affiliates of the general partner in violation of thepartnership agreement.  In addition,plaintiffs amended their complaint to add the Company as a defendant as thesuccessor-in-interest to Fund II and its general partner.  The Company’s response to the amendedcomplaint is not yet due.  A trialsetting conference is scheduled for May 10, 2002.  Notwithstanding the termination of the settlement agreement, theCompany intends to make a distribution either in cash, stock, or both to theformer limited partners of Fund II in an amount equal to that which thepartners would have been entitled to under the settlement agreement.  Principal and interest on this obligation,totaling approximately $8,069,000 is reflected in accrued and other liabilitiesin the accompanying consolidated financial statements of the Company atDecember 31, 2001.

 

Other Matters

Certain claims and lawsuits have arisen against theCompany in its normal course of business. The Company believes that such claimsand lawsuits will not have a material adverse effect on the Company’s financialposition, cash flow or results of operations.

 

**NOTE 14. SEGMENT INFORMATION**

 

As of December 31, 2001, the Company owned a diverseportfolio of properties comprising of office, office/warehouse, shoppingcenter, apartment, and developmental land. Each of these property typesrepresents a reportable segment with distinct uses and tenant types, whichrequire the Company to employ different management strategies. Each segmentcontains properties located in various regions and markets within the UnitedStates. The office portfolio consists primarily of suburban office buildings.The office/warehouse portfolio consists of properties designed for warehouse,distribution and manufacturing for single-tenant or multi-tenant use. Theshopping center portfolio consists primarily of community shopping centers. Theproperties in the apartment portfolio are apartment buildings with units rentedto residential tenants on either a month-by-month basis or for terms of oneyear or less.

 

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies. TheCompany evaluates performance of its property types based on net operatingincome derived by subtracting rental expenses and real estate taxes (operatingexpenses) from rental revenue. Significant information used by the Company forits reportable segments as of and for the years ended December 31, 2001, 2000,and 1999 is as follows (dollars in thousands):

 

 

56

----

 
|                        |   | **Office** |    | **Office/****Warehouse** |   | **Shopping Center** |   | **Apartment** |   | **Land Held for Development and Other** |   | **Property Total** |   |
|-----------------------------|--------|------------|---------|--------------------------|--------|---------------------|--------|---------------|--------|-----------------------------------------|--------|--------------------|--------|
| **2001**                    |   |       |    |                     |   |                |   |          |   |                                    |   |               |   |
| Rental revenue              |   | $          | 4,371   |                     | $      | 1,998               |   | $             | 431    |                                    | $      | 1,517              |   | $ | 8,317 |   |   |   |
| Property operating expenses |   | 1,722      |    | 636                      |   | 162                 |   | 1,052         |   | $                                       | 9      |               | 3,581  |   |
| Net operating income (NOI)  |   | $          | 2,649   |                     | $      | 1,362               |   | $             | 269    |                                    | $      | 465                |   | $ | (9 | ) | $ | 4,736 |   |
| Real estate assets, net     |   | $          | 133,182 |                     | $      | 47,602              |   | $             | 17,631 |                                    | $      | 47,078             |   | $ | 4,014 |   | $ | 249,507 |   |
|                        |   |       |    |                     |   |                |   |          |   |                                    |   |               |   |
| **2000**                    |   |       |    |                     |   |                |   |          |   |                                    |   |               |   |
| Rental revenue              |   | —     |    | $                        | 583    |                | — |          | — |                                    | — |               | $      | 583 |   |
| Property operating expenses |   | —     |    | 302                      |   | —              |   | —        |   | —                                  |   | 302                |   |
| Net operating income (NOI)  |   | —     |    | $                        | 281    |                | — |          | — |                                    | — |               | $      | 281 |   |
| Real estate assets, net     |   | —     |    | $                        | 1,208  |                | — |          | — |                                    | — |               | $      | 1,208 |   |
|                        |   |       |    |                     |   |                |   |          |   |                                    |   |               |   |
| **1999**                    |   |       |    |                     |   |                |   |          |   |                                    |   |               |   |
| Rental revenue              |   | —     |    | $                        | 623    |                | — |          | — |                                    | — |               | $      | 623 |   |
| Property operating expenses |   | —     |    | 288                      |   | —              |   | —        |   | —                                  |   | 288                |   |
| Net operating income (NOI)  |   | —     |    | $                        | 335    |                | — |          | — |                                    | — |               | $      | 335 |   |
| Real estate assets, net     |   | —     |    | $                        | 1,174  |                | — |          | — |                                    | — |               | $      | 1,174 |   |

 

The following is a reconciliation of segment revenues,income and assets to consolidated revenues, income and assets for the periodspresented above (dollars in thousands):

 

| **REVENUES**                                                                    |   | **2001** |   | **2000** |   | **1999** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Total revenues for reportable segments                                          |   | $8,317   |   | $583     |   | $623     |   |
| Other revenues                                                                  |   | 161      |   | 159      |   | 187      |   |
| Total consolidated revenues                                                     |   | $8,478   |   | $742     |   | $810     |   |
|                                                                            |   |     |   |     |   |     |   |
| **NET INCOME**                                                                  |   |     |   |     |   |     |   |
| NOI for reportable segments                                                     |   | $4,736   |   | $281     |   | $335     |   |
| Unallocated amounts:                                                            |   |     |   |     |   |     |   |
| Interest and other income                                                       |   | 161      |   | 159      |   | 187      |   |
| General and administrative expenses                                             |   | (2,863   | )      | (163     | )      | (185     | )      |
| Depreciation and amortization                                                   |   | (2,366   | )      | (151     | )      | (249     | )      |
| Interest expense                                                                |   | (2,651   | )      | (129     | )      | (137     | )      |
| Gain from property disposition                                                  |   | —   |   | —   |   | 83       |   |
| Income from investment in unconsolidated joint venture                          |   | 394      |   | 328      |   | 323      |   |
| Income (loss) from operations before minority interest and  extraordinary items |   | (2,589   | )      | 325      |   | 357      |   |
| Minority interest                                                               |   | 237      |   | —   |   | —   |   |
| Extraordinary item — gain from extinguishment of debt                      |   | 314      |   | —   |   | —   |   |
| Net income (loss)                                                               |   | $(2,038  | )      | $325     |   | $357     |   |
|                                                                            |   |     |   |     |   |     |   |
| **ASSETS**                                                                      |   |     |   |     |   |     |   |
| Total assets for reportable segments                                            |   | $249,507 |   | $1,208   |   | $1,174   |   |
| Cash and cash equivalents                                                       |   | 2,284    |   | 34       |   | 32       |   |
| Tenant and other receivables, net                                               |   | 1,370    |   | 69       |   | 3        |   |
| Deferred rent receivable                                                        |   | 149      |   | 49       |   | 44       |   |
| Note receivable from affiliate, net                                             |   | —   |   | 1,618    |   | 1,459    |   |
| Accounts receivable from affiliate                                              |   | 8        |   | 937      |   | 581      |   |
| Investment in management company                                                |   | 4,000    |   | —   |   | —   |   |
| Deposits held in escrow                                                         |   | 1,956    |   | —   |   | —   |   |
| Investment in unconsolidated joint venture                                      |   | —   |   | 7,063    |   | 7,304    |   |
| Prepaid and other assets, net                                                   |   | 6,931    |   | 232      |   | 211      |   |
| Total consolidated assets                                                       |   | $266,205 |   | $11,210  |   | $10,808  |   |

 

 

57

----

 

**NOTE 15. SUBSEQUENT EVENTS**

 

In January 2002, the Company refinanced $4,500,000 ona loan partially secured by North Creek Office Park and entered into a new loanagreement in the amount of $5,625,000. The new loan bears interest at a fixed rate of 7.58% per annum andmatures in February 2012.  Net proceedsof $639,000 were received as a result of the refinancing.

 

In March 2002, the Company refinanced $2,750,000 on aloan partially secured by Countryside Office Park and entered into a new loanagreement in the amount of $5,025,000. The new loan bears interest at a fixed rate of 7.38% per annum andmatures in March 2012.  Net proceeds of$1,887,000 were received as a result of the refinancing.

 

 

58

----

 

**NOTE 16. UNAUDITED QUARTERLY RESULTSOF OPERATIONS**

 

The following represents an unaudited summary ofquarterly results of operations for the years ended December 31, 2001, and 2000(dollars in thousands, except for weighted average shares and per shareamounts):

 
|                                                          |   | ***Quarter Ended*** |   |
|---------------------------------------------------------------|--------|---------------------|--------|
|                                                          |   | **March 31, 2001**  |   | **June 30, 2001** |   | **Sept 30, 2001** |   | **Dec 31, 2001** |   |
| **REVENUES:** Rental revenue                                  |   | $                   | 165    |   | $ | 165 |   | $ | 169 |   | $ | 7,818 |   |
| Interest and other income                                     |   | 44                  |   | 44 |   | 44 |   | 29 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| Total revenues                                                |   | 209                 |   | 209 |   | 213 |   | 7,847 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| **EXPENSES:**                                                 |   |                |   |   |   |   |   |   |   |
| Operating expenses                                            |   | 153                 |   | 115 |   | 131 |   | 6,045 |   |
| Depreciation and amortization                                 |   | 48                  |   | 54 |   | 41 |   | 2,223 |   |
| Interest expense                                              |   | 31                  |   | 31 |   | 33 |   | 2,556 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| Total expenses                                                |   | 232                 |   | 200 |   | 205 |   | 10,824 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| **OTHER INCOME (LOSS):**                                      |   |                |   |   |   |   |   |   |   |
| Income from investment in unconsolidated  joint venture  |   | (20                 | )      | 230 |   | 156 |   | 28 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| Total other income (loss)                                     |   | (20                 | )      | 230 |   | 156 |   | 28 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| Minority Interests:                                           |   |                |   |   |   |   |   |   |   |
| Unit holders in the operating partnership                     |   | —              |   | — |   | — |   | (267 | ) |
| Partially owned property                                      |   | —              |   | — |   | — |   | 30 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| Total Minority Interests                                      |   | —              |   | — |   | — |   | (237 | ) |
|                                                          |   |                |   |   |   |   |   |   |   |
| Net (loss) income before extraordinary item                   |   | (43                 | )      | 239 |   | 164 |   | (2,712 | ) |
|                                                          |   |                |   |   |   |   |   |   |   |
| Extraordinary item — net gain on extinguishments of debt |   | —              |   | — |   | — |   | 314 |   |
|                                                          |   |                |   |   |   |   |   |   |   |
| Net (loss) income                                             |   | $                   | (43    | ) | $ | 239 |   | $ | 164 |   | $ | (2,398 | ) |
|                                                          |   |                |   |   |   |   |   |   |   |
| Basic per share data:                                         |   |                |   |   |   |   |   |   |   |
| Net loss before extraordinary item                            |   | $                   | N/A    |   | $ | N/A |   | $ | N/A |   | $ | (.49 | ) |
| Extraordinary item                                            |   | N/A                 |   | N/A |   | N/A |   | .05 |   |
| Net loss                                                      |   | $                   | N/A    |   | $ | N/A |   | $ | N/A |   | $ | (.43 | ) |

 

 

59

----

 
|                                                         |   | ***Quarter Ended*** |   |
|--------------------------------------------------------------|--------|---------------------|--------|
|                                                         |   | **March 31,  2000** |   | **June 30,  2000** |   | **Sept 30, 2000** |   | **Dec 31, 2000** |   |
| **REVENUES:**                                                |   |                |   |   |   |   |   |   |   |
| Rental revenue                                               |   | $                   | 148    |   | $ | 124 |   | $ | 166 |   | $ | 145 |   |
| Interest and other income                                    |   | 40                  |   | 40 |   | 40 |   | 39 |   |
|                                                         |   |                |   |   |   |   |   |   |   |
| Total revenues                                               |   | 188                 |   | 164 |   | 206 |   | 184 |   |
|                                                         |   |                |   |   |   |   |   |   |   |
| **EXPENSES:**                                                |   |                |   |   |   |   |   |   |   |
| Operating expenses                                           |   | 128                 |   | 85 |   | 145 |   | 107 |   |
| Depreciation and amortization                                |   | 36                  |   | 38 |   | 36 |   | 41 |   |
| Interest expense                                             |   | 33                  |   | 32 |   | 32 |   | 32 |   |
|                                                         |   |                |   |   |   |   |   |   |   |
| Total expenses                                               |   | 197                 |   | 155 |   | 213 |   | 180 |   |
|                                                         |   |                |   |   |   |   |   |   |   |
| **OTHER INCOME:**                                            |   |                |   |   |   |   |   |   |   |
| Income from investment in unconsolidated  joint venture |   | 128                 |   | 105 |   | 73 |   | 22 |   |
|                                                         |   |                |   |   |   |   |   |   |   |
| Total other income                                           |   | 128                 |   | 105 |   | 73 |   | 22 |   |
|                                                         |   |                |   |   |   |   |   |   |   |
| Net income                                                   |   | $                   | 119    |   | $ | 114 |   | $ | 66 |   | $ | 26 |   |
|                                                         |   |                |   |   |   |   |   |   |   |
| Per unit data:                                               |   |                |   |   |   |   |   |   |   |
| Limited partner income (loss) per unit                       |   | $                   | 1.52   |   | $ | 1.48 |   | $ | .85 |   | $ | .33 |   |

 

 

60

----

 

**AMERICANSPECTRUM REALTY, INC.**

**SCHEDULEII — VALUATION AND QUALIFYING ACCOUNTS**

 (Dollars in thousands)

 

 
| ***COLUMN A***                   |   | ***COLUMN B***                   |   | ***COLUMN C***                           |   | ***COLUMN D*** |   | ***COLUMN E***             |   |
|----------------------------------|--------|----------------------------------|--------|------------------------------------------|--------|----------------|--------|----------------------------|--------|
| **Description**                  |   | **Balance at Beginning of Year** |   | **Additions Charged Against Operations** |   | **Deductions** |   | **Balance at End of Year** |   |
| **Year Ended December 31, 2001** |   |                             |   |                                     |   |           |   |                       |   |
| Allowance for loss (1)           |   | $                                | 1,880  |                                     | — |           | — |                       | $      | 1,880 |   |
|                             |   |                             |   |                                     |   |           |   |                       |   |
| **Year Ended December 31, 2000** |   |                             |   |                                     |   |           |   |                       |   |
| Allowance for loss               |   | $                                | 1,880  |                                     | — |           | — |                       | $      | 1,880 |   |
|                             |   |                             |   |                                     |   |           |   |                       |   |
| **Year Ended December 31, 1999** |   |                             |   |                                     |   |           |   |                       |   |
| Allowance for loss               |   | $                                | 1,880  |                                     | — |           | — |                       | $      | 1,880 |   |

 

----

(1)  Thisvaluation was established for the Valencia property (a property owned by theaccounting acquirer) in 1989 as the appraised value declined below book value.

 

 

61

----

 

**AMERICANSPECTRUM REALTY, INC.**

**SCHEDULEIII - REAL ESTATE AND ACCUMULATED DEPRECIATION**

 

DECEMBER 31, 2001

(Dollars in thousands)

 
| **COLUMN A**                         |   | **COLUMN B**     |    | **COLUMN C**                      |   | **COLUMN D**                                      |   | **COLUMN E**                                             |    |
|--------------------------------------|--------|------------------|---------|-----------------------------------|--------|---------------------------------------------------|--------|----------------------------------------------------------|---------|
|                                 |   |             |    | ***Initial Cost to Company (1)*** |   | ***Cost capitalized subsequent to  acquisition*** |   | ***Gross amount carried at******December 31, 2001 (3)*** |    |
| **Description**                      |   | **Encumbrances** |    | **Land**                          |   | **Buildings and**Improvements                     |   | **Improvements**                                         |    | **Land** |   | **Buildings and Improvements** |   | **Total** |   |
| ***Office Properties****:*           |   |             |    |                              |   |                                              |   |                                                     |    |   |   |   |   |   |   |
| Mira Mesa, CA                        |   | $                | 4,093   |                              | $      | 810                                               |   | $                                                        | 6,904   |   | — |   | $ | 810 |   | $ | 6,904 |   | $ | 7,714 |   |
| San Felipe, TX                       |   | 2,840            |    | 2,290                             |   | 4,290                                             |   | $                                                        | 66      |   | 2,290 |   | 4,356 |   | 6,646 |   |
| Sorrento II, CA                      |   | 8,662            |    | 780                               |   | 7,078                                             |   | —                                                   |    | 780 |   | 7,079 |   | 7,859 |   |
| Creekside, CA                        |   | 6,400            |    | 2,790                             |   | 6,460                                             |   | —                                                   |    | 2,790 |   | 6,460 |   | 9,250 |   |
| Countryside Office Park, IL          |   | 1,761            |    | 2,110                             |   | 4,000                                             |   | 21                                                       |    | 2,110 |   | 4,020 |   | 6,130 |   |
| Leawood Fountain Plaza, KS           |   | 1,310            |    | 1,510                             |   | 5,120                                             |   | 30                                                       |    | 1,510 |   | 5,150 |   | 6,660 |   |
| North Creek Office Park, OH          |   | 4,500            |    | 550                               |   | 7,860                                             |   | 7                                                        |    | 550 |   | 7,867 |   | 8,417 |   |
| Bristol Bay, CA                      |   | 7,554            |    | 1,620                             |   | 7,880                                             |   | —                                                   |    | 1,620 |   | 7,880 |   | 9,500 |   |
| Daimler Chrysler, CA                 |   | 37,983           |    | 9,150                             |   | 40,390                                            |   | 53                                                       |    | 9,150 |   | 40,443 |   | 49,593 |   |
| Northwest Corporate Center, MO       |   | 5,640            |    | 1,550                             |   | 5,230                                             |   | 52                                                       |    | 1,550 |   | 5,282 |   | 6,832 |   |
| Pacific Spectrum, AZ                 |   | 6,154            |    | 1,460                             |   | 6,880                                             |   | —                                                   |    | 1,460 |   | 6,880 |   | 8,340 |   |
| Parkade Center, MO                   |   | 4,605            |    | 1,690                             |   | 5,730                                             |   | 72                                                       |    | 1,690 |   | 5,802 |   | 7,492 |   |
| **Office Total**                     |   | $                | 91,502  |                              | $      | 26,310                                            |   | $                                                        | 107,822 |   | $ | 301 |   | $ | 26,310 |   | $ | 108,123 |   | $ | 134,433 |   |
| ***Office/Warehouse Properties:***   |   |             |    |                              |   |                                              |   |                                                     |    |   |   |   |   |   |   |
| Sorrento I, CA                       |   | $                | 1,812   |                              | $      | 580                                               |   | $                                                        | 2,250   |   | — |   | $ | 580 |   | $ | 2,250 |   | $ | 2,830 |   |
| Southwest Point, TX                  |   | 1,599            |    | 1,800                             |   | 1,530                                             |   | $                                                        | 6       |   | 1,800 |   | 1,536 |   | 3,336 |   |
| Valencia, AZ  (2)               |   | 1,331            |    | 978                               |   | 1,212                                             |   | 4                                                        |    | 978 |   | 3,096 |   | 4,074 |   |
| Westlakes, TX                        |   | 2,001            |    | 280                               |   | 4,690                                             |   | —                                                   |    | 280 |   | 4,690 |   | 4,970 |   |
| Park Plaza I & II, IN            |   | 2,358            |    | 610                               |   | 2,810                                             |   | —                                                   |    | 610 |   | 2,810 |   | 3,420 |   |
| Jackson Industrial A, IN             |   | 3,595            |    | 1,190                             |   | 4,260                                             |   | 25                                                       |    | 1,190 |   | 4,285 |   | 5,475 |   |
| Morenci Professional Park, IN        |   | 2,161            |    | 790                               |   | 2,680                                             |   | —                                                   |    | 790 |   | 2,680 |   | 3,470 |   |
| Northeast Commerce Center, OH        |   | 2,674            |    | 1,020                             |   | 3,480                                             |   | —                                                   |    | 1,020 |   | 3,480 |   | 4,500 |   |
| Oak Grove Commons, IL                |   | 3,581            |    | 1,650                             |   | 3,940                                             |   | —                                                   |    | 1,650 |   | 3,940 |   | 5,590 |   |
| Business Center, MO                  |   | 3,203            |    | 700                               |   | 2,670                                             |   | —                                                   |    | 700 |   | 2,670 |   | 3,370 |   |
| Technology, TX                       |   | 7,829            |    | 580                               |   | 9,360                                             |   | —                                                   |    | 580 |   | 9,360 |   | 9,940 |   |
| **Office/Warehouse Total**           |   | $                | 32,144  |                              | $      | 10,178                                            |   | $                                                        | 38,882  |   | $ | 35 |   | $ | 10,178 |   | $ | 40,797 |   | $ | 50,975 |   |
| ***Shopping Center Properties:***    |   |             |    |                              |   |                                              |   |                                                     |    |   |   |   |   |   |   |
| Beach & Lampson, CA              |   | —           |    | $                                 | 1,080  |                                              | $      | 220                                                      |    | $ | 24 |   | $ | 1,080 |   | $ | 244 |   | $ | 1,324 |   |
| Columbia NE, SC                      |   | $                | 1,112   |                              | 1,050  |                                              | 1,530  |                                                     | —  |   | 1,050 |   | 1,530 |   | 2,580 |   |
| Marketplace, SC                      |   | 5,996            |    | 2,120                             |   | 3,110                                             |   | —                                                   |    | 2,120 |   | 3,110 |   | 5,230 |   |
| Richardson Plaza, SC                 |   | 4,150            |    | 960                               |   | 4,210                                             |   | —                                                   |    | 960 |   | 4,210 |   | 5,170 |   |
| Maple Tree, MO                       |   | 2,189            |    | 2,900                             |   | 590                                               |   | —                                                   |    | 2,900 |   | 590 |   | 3,490 |   |
| **Shopping Center Total**            |   | $                | 13,447  |                              | $      | 8,110                                             |   | $                                                        | 9,660   |   | $ | 24 |   | $ | 8,110 |   | $ | 9,684 |   | $ | 17,794 |   |
| ***Apartment Properties:***          |   |             |    |                              |   |                                              |   |                                                     |    |   |   |   |   |   |   |
| Autumn Ridge, TX                     |   | $                | 7,462   |                              | $      | 980                                               |   | $                                                        | 8,800   |   | $ | 305 |   | $ | 980 |   | $ | 9,106 |   | $ | 10,086 |   |
| Creekside, CA                        |   | 5,756            |    | 2,590                             |   | 5,100                                             |   | 2                                                        |    | 2,590 |   | 5,102 |   | 7,692 |   |
| Villa Redondo, CA                    |   | 9,171            |    | 1,490                             |   | 13,090                                            |   | 2                                                        |    | 1,490 |   | 13,092 |   | 14,582 |   |
| The Lakes, MO                        |   | 12,581           |    | 3,060                             |   | 12,000                                            |   | —                                                   |    | 3,060 |   | 12,000 |   | 15,060 |   |
| **Apartment Total**                  |   | $                | 34,970  |                              | $      | 8,120                                             |   | $                                                        | 38,990  |   | $ | 309 |   | $ | 8,120 |   | $ | 39,299 |   | $ | 47,419 |   |
| ***Development Land and Other:***    |   |             |    |                              |   |                                              |   |                                                     |    |   |   |   |   |   |   |
| Phoenix Van Buren, AZ                |   | $                | 1,300   |                              | $      | 3,900                                             |   | —                                                   |    | — |   | $ | 3,900 |   | — |   | $ | 3,900 |   |
| American Spectrum Realty-FF&E    |   | —           |    | —                            |   | $                                                 | 138    |                                                     | $       | 19 |   | — |   | $ | 157 |   | 157 |   |
| **Development Land and Other Total** |   | $                | 1,300   |                              | $      | 3,900                                             |   | $                                                        | 138     |   | $ | 19 |   | $ | 3,900 |   | $ | 157 |   | $ | 4,057 |   |
| **Combined Total**                   |   | $                | 173,363 |                              | $      | 56,618                                            |   | $                                                        | 195,492 |   | $ | 688 |   | $ | 56,618 |   | $ | 198,060 |   | $ | 254,678 |   |

 

 

62

----

 

**AMERICANSPECTRUM REALTY, INC.**

**SCHEDULEIII - REAL ESTATE AND ACCUMULATED DEPRECIATION**

 

DECEMBER 31, 2001

(dollars in thousands)

 
| **COLUMN A**                         |   | **COLUMN F**                 |   | **COLUMN G**             |   | **COLUMN H**      |   | **COLUMN I**                                                            |   |
|--------------------------------------|--------|------------------------------|--------|--------------------------|--------|-------------------|--------|-------------------------------------------------------------------------|--------|
|                                 |   |                         |   |                     |   |              |   |                                                                    |   |
| **Description**                      |   | **Accumulated Depreciation** |   | **Date of Construction** |   | **Date Acquired** |   | **Life on which depreciation in latest income statements is  computed** |   |
| ***Office Properties:***             |   |                         |   |                     |   |              |   |                                                                    |   |
| Mira Mesa, CA                        |   | $                            | 77     |                     | 1986   |              | 2001   |                                                                    | 5-40   |   |
| San Felipe, TX                       |   | 41                           |   | 1977                     |   | 2001              |   | 5-40                                                                    |   |
| Sorrento II, CA                      |   | 78                           |   | 1988                     |   | 2001              |   | 5-40                                                                    |   |
| Creekside, CA                        |   | 74                           |   | 1984                     |   | 2001              |   | 5-40                                                                    |   |
| Countryside Office Park, IL          |   | 55                           |   | 1984                     |   | 2001              |   | 5-40                                                                    |   |
| Leawood Fountain Plaza, KS           |   | 59                           |   | 1982                     |   | 2001              |   | 5-40                                                                    |   |
| North Creek Office Park, OH          |   | 95                           |   | 1984-1986                |   | 2001              |   | 5-40                                                                    |   |
| Bristol Bay, CA                      |   | 87                           |   | 1988                     |   | 2001              |   | 5-40                                                                    |   |
| Daimler Chrysler, CA                 |   | 478                          |   | 1989                     |   | 2001              |   | 5-40                                                                    |   |
| Northwest Corporate Center, MO       |   | 61                           |   | 1983-1987                |   | 2001              |   | 5-40                                                                    |   |
| Pacific Spectrum, AZ                 |   | 79                           |   | 1986                     |   | 2001              |   | 5-40                                                                    |   |
| Parkade Center, MO                   |   | 67                           |   | 1965                     |   | 2001              |   | 5-40                                                                    |   |
| **Office Total**                     |   | $                            | 1,251  |                     |   |              |   |                                                                    |   |   |
| ***Office/Warehouse Properties:***   |   |                         |   |                     |   |              |   |                                                                    |   |
| Sorrento I, CA                       |   | $                            | 25     |                     | 1986   |              | 2001   |                                                                    | 5-40   |   |
| Southwest Point, TX                  |   | 19                           |   | 1972                     |   | 2001              |   | 5-40                                                                    |   |
| Valencia, AZ                         |   | 1,076                        |   | 1987                     |   | 1987              |   | 5-40                                                                    |   |
| Westlakes, TX                        |   | 47                           |   | 1985                     |   | 2001              |   | 5-40                                                                    |   |
| Park Plaza I & II, IN            |   | 34                           |   | 1975-1979                |   | 2001              |   | 5-40                                                                    |   |
| Jackson Industrial A, IN             |   | 57                           |   | 1976-1980                |   | 2001              |   | 5-40                                                                    |   |
| Morenci Professional Park, IN        |   | 30                           |   | 1975-1979                |   | 2001              |   | 5-40                                                                    |   |
| Northeast Commerce Center, OH        |   | 39                           |   | 1985                     |   | 2001              |   | 5-40                                                                    |   |
| Oak Grove Commons, IL                |   | 41                           |   | 1972-1976                |   | 2001              |   | 5-40                                                                    |   |
| Business Center, MO                  |   | 31                           |   | 1985                     |   | 2001              |   | 5-40                                                                    |   |
| Technology, TX                       |   | 94                           |   | 1986                     |   | 2001              |   | 5-40                                                                    |   |
| **Office/Warehouse Total**           |   | $                            | 1,493  |                     |   |              |   |                                                                    |   |   |
| ***Shopping Center Properties:***    |   |                         |   |                     |   |              |   |                                                                    |   |
| Beach & Lampson, CA              |   | $                            | 6      |                     | 1987   |              | 2001   |                                                                    | 5-25   |   |
| Columbia NE, SC                      |   | 28                           |   | 1991                     |   | 2001              |   | 5-25                                                                    |   |
| Marketplace, SC                      |   | 56                           |   | 1980                     |   | 2001              |   | 5-25                                                                    |   |
| Richardson Plaza, SC                 |   | 59                           |   | 1992                     |   | 2001              |   | 5-25                                                                    |   |
| Maple Tree, MO                       |   | 14                           |   | 1974                     |   | 2001              |   | 5-25                                                                    |   |
| **Shopping Center Total**            |   | $                            | 163    |                     |   |              |   |                                                                    |   |   |
| ***Apartment Properties:***          |   |                         |   |                     |   |              |   |                                                                    |   |
| Autumn Ridge, TX                     |   | $                            | 93     |                     | 1999   |              | 2001   |                                                                    | 5-40   |   |
| Creekside, CA                        |   | 64                           |   | 1991                     |   | 2001              |   | 5-40                                                                    |   |
| Villa Redondo, CA                    |   | 77                           |   | 1990                     |   | 2001              |   | 5-40                                                                    |   |
| The Lakes, MO                        |   | 108                          |   | 1985                     |   | 2001              |   | 5-40                                                                    |   |
| **Apartment Total**                  |   | $                            | 342    |                     |   |              |   |                                                                    |   |   |
| ***Development Land and Other:***    |   |                         |   |                     |   |              |   |                                                                    |   |
| Phoenix Van Buren, AZ                |   | —                       |   | —                   |   | 2001              |   | N/A                                                                     |   |
| American Spectrum Realty-FF&E    |   | $                            | 43     |                     | — |              | — |                                                                    | 3-5    |   |
| **Development Land and Other Total** |   | $                            | 43     |                     |   |              |   |                                                                    |   |   |
| ***Combined Total***                 |   | $                            | 3,292  |                     | — |              | — |                                                                    | — |   |

 

----

(1) Initial cost and date acquired, where applicable.

 

(2) A valuation allowance of $1,880 was established in1989 as the appraised value of the property

 

 

63

----

 

declined below book value

 

(3) The aggregate cost for Federal income tax purposesis $204,757.

 

 

 

**AMERICANSPECTRUM REALTY INCORPORATED**

**SCHEDULEIII - REAL ESTATE AND ACCUMULATED DEPRECIATION**

 

December 31, 2001

(Dollars in thousands)

 

Reconciliation of gross amount at which real estatewas carried for the years ended December 31:

 

|                                 |   | **2001** |    | **2000** |   | **1999** |   |
|--------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **Rental Property:**                 |   |     |    |     |   |     |   |
| Balance at beginning of  year        |   | $        | 4,070   |     | $      | 4,039    |   | $ | 4,954 |   |
| Additions during year:               |   |     |    |     |   |     |   |
| Property acquisitions  and additions |   | 252,069  |    | 128      |   | 148      |   |
| Retirements/sales                    |   | (1,460   | )       | (97      | )      | (1,063   | )      |
| Balance at end of year               |   | $        | 254,679 |     | $      | 4,070    |   | $ | 4,039 |   |
|                                 |   |     |    |     |   |     |   |
| **Accumulated  Depreciation:**       |   |     |    |     |   |     |   |
| Balance at beginning of  year        |   | $        | 981     |     | $      | 984      |   | $ | 1,862 |   |
| Additions during year:               |   |     |    |     |   |     |   |
| Depreciation                         |   | 2,311    |    | 94       |   | 185      |   |
| Retirements/sales                    |   | —   |    | (97      | )      | (1,063   | )      |
| Balance at end of year               |   | $        | 3,292   |     | $      | 981      |   | $ | 984 |   |

 

 

64

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section l3 or l5(d) ofthe Securities Exchange Act of l934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

**AMERICANSPECTRUM REALTY INC**

 

By: American SpectrumRealty Inc.,

 
|                    |   |                                |
|-------------------------|--------|-------------------------------------|
|                    |   |                                |
| *Date:  April 12, 2002* |   | */s/  William J. Carden*            |
|                    |   |                                |
|                    |   | William J. Carden                   |
|                    |   | Chairman of the Board, President    |
|                    |   | and Chief Executive Officer         |
|                    |   |                                |
| *Date:  April 12, 2002* |   | */s/  Harry A. Mizrahi*             |
|                    |   |                                |
|                    |   | Harry A. Mizrahi                    |
|                    |   | Director, Senior Vice President and |
|                    |   | Chief Operating Officer             |
|                    |   |                                |
| *Date:  April 12, 2002* |   | */s/ Thomas N. Thurber*             |
|                    |   |                                |
|                    |   | Thomas N. Thurber                   |
|                    |   | *Chief  Financial Officer and*      |
|                    |   | Senior Vice President               |
|                    |   |                                |
| *Date:  April 12, 2002* |   | */s/  Patricia A. Nooney*           |
|                    |   |                                |
|                    |   | Patricia A. Nooney                  |
|                    |   | Principal Accounting Officer        |
|                    |   | Senior Vice President               |
|                    |   |                                |
| *Date:  April 12, 2002* |   | */s/  Timothy R. Brown*             |
|                    |   |                                |
|                    |   | Timothy R. Brown                    |
|                    |   | *Director*                          |
|                    |   |                                |
| Date: April 12, 2002    |   | */s/  William W. Geary, Jr.*        |
|                    |   |                                |
|                    |   | William W. Geary, Jr.               |
|                    |   | Director                            |
|                    |   |                                |
| *Date:  April 12, 2002* |   | */s/  Lawrence E. Fiedler*          |
|                    |   |                                |
|                    |   | *Lawrence  E. Fiedler*              |
|                    |   | Director                            |
|                    |   |                                |

 

 

65

----

 

 

**Sierra Mira Mesa Partners andSubsidiary**

**(A California General Partnership)**

 

 

 

 

 

 

 

 

 

**Consolidatedbalance sheets as of December 31, 2000 and 1999 and statements of operations,changes in general partners’ equity and cash flows for each of the three yearsin the period ended December 31, 2000 and Reports of Independent PublicAccountants**

 

 

 

 

 

 

66

----

 

 

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To the Partners of

Sierra Mira Mesa Partners

 

 

We have audited the accompanying consolidatedbalance sheet of Sierra Mira Mesa Partners, a California general partnership,and subsidiary (the “Partnership”) as of December 31, 2000 and the relatedconsolidated statements of operations, changes in partners’ equity and cashflows for the year then ended.  Thesefinancial statements are the responsibility of the Partnership’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance withauditing standards generally accepted in the United States.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Sierra Mira Mesa Partners and subsidiary as of December31, 2000, and the results of their operations and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in theUnited States.

 

 

 

ARTHUR ANDERSEN LLP

 

Houston, Texas

March 26, 2001

 

 

67

----

 

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Partners of

Sierra Mira Mesa Partners

 

 

We have audited the accompanying consolidatedbalance sheet of Sierra Mira Mesa Partners and subsidiary, a California generalpartnership, (the “Partnership”) as of December 31, 1999 and the relatedconsolidated statements of operations, changes in partners’ equity and cashflows for the years ended December 31, 1999 and 1998. These financialstatements are the responsibility of the Partnership’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance withgenerally accepted auditing standards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Sierra Mira Mesa Partners and subsidiary as of December31, 1999 and the results of its operations and cash flows for the years endedDecember 31, 1999 and 1998 in conformity with accounting principles generallyaccepted in the United States of America.

 

 

 

DELOITTE & TOUCHE LLP

 

Houston, Texas

February 25, 2000

 

 

 

68

----

 

*SIERRAMIRA MESA PARTNERS AND SUBSIDIARY*

*(ACalifornia General Partnership)*

 
| *CONSOLIDATED  BALANCE SHEETS* |
|--------------------------------|
|                           |

 
|                                                                                                           |   | **December  31,** |       | **December  31,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|-------------------|--------|
|                                                                                                           |   | **2000**          |       | **1999**          |   |
| ASSETS                                                                                                         |   |              |       |              |   |
|                                                                                                           |   |              |       |              |   |
| Cash and cash  equivalents                                                                                     |   | $                 | 51,660     |              | $      | 319,400 |   |
| Receivables:                                                                                                   |   |              |       |              |   |
| Unbilled rent  (Notes 1 and 4)                                                                                 |   | 898,542           |       | 1,114,598         |   |
| Billed rent  (Note 1)                                                                                          |   | 33,469            |       | 83,917            |   |
| Due from  affiliates, net (Note 3)                                                                             |   | 2,696,350         |       | 2,451,227         |   |
| Income-producing  property - net of accumulated  depreciation of $3,914,748 and $3,564,380  (Notes 1, 4 and 6) |   | 8,346,471         |       | 8,723,396         |   |
| Investment in  unconsolidated  joint ventures (Notes 1 and 5)                                                  |   | 1,295,403         |       | 2,526,875         |   |
| Other assets -  net of accumulated amortization  of $581,788 and $721,525 (Notes 1, 2 and 3)                   |   | 787,724           |       | 793,658           |   |
|                                                                                                           |
|                                                                                                           |   |              |       |              |   |
| Total Assets                                                                                                   |   | $                 | 14,109,619 |              | $      | 16,013,071 |   |
|                                                                                                           |   |              |       |              |   |
| LIABILITIES AND  GENERAL PARTNERS' EQUITY                                                                      |   |              |       |              |   |
|                                                                                                           |   |              |       |              |   |
| Accrued and  other liabilities (Note 2)                                                                        |   | $                 | 104,558    |              | $      | 101,104 |   |
| Notes payable  (Note 6)                                                                                        |   | 5,890,607         |       | 6,179,038         |   |
|                                                                                                           |   |              |       |              |   |
| Total  Liabilities                                                                                             |   | 5,995,165         |       | 6,280,142         |   |
|                                                                                                           |   |              |       |              |   |
| COMMITMENTS AND  CONTINGENT LIABILITIES (Note 7)                                                               |   |              |       |              |   |
|                                                                                                           |   |              |       |              |   |
| Minority  interest in consolidated  joint venture (Note 1)                                                     |   | (357,312          | )          | (340,614          | )      |
|                                                                                                           |   |              |       |              |   |
| General  Partners' equity (Note 1)                                                                             |   | 8,471,766         |       | 10,073,543        |   |
|                                                                                                           |   |              |       |              |   |
| Total  Liabilities and General Partners' equity                                                                |   | $                 | 14,109,619 |              | $      | 16,013,071 |   |

 

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

69

----

 

*SIERRAMIRA MESA PARTNERS AND SUBSIDIARY*

*(ACalifornia General Partnership)*

 
| *CONSOLIDATED  STATEMENTS OF OPERATIONS* |
|------------------------------------------|
|                                     |

 
|                                                                                |   |                          |      |                  |   |      |   | **Period  Ended**   |      |
|-------------------------------------------------------------------------------------|--------|-------------------------------|-----------|-----------------------|--------|-----------|--------|---------------------|-----------|
|                                                                                |   | **Years  Ended December 31,** |      | **October  19, 2001** |   |
|                                                                                |   | **2000**                      |      | **1999**              |   | **1998**  |   | **(Unaudited****)** |      |
| Revenues:                                                                           |   |                          |      |                  |   |      |   |                |      |
| Rental income  (Note 1)                                                             |   | $                             | 2,151,930 |                  | $      | 2,126,106 |   | $                   | 1,883,630 |   | $ | 1,865,865 |   |
| Interest income                                                                     |   | 249,827                       |      | 224,308               |   | 205,781   |   | 222,053             |      |
| Other income                                                                        |   | 0                             |      | 0                     |   | 0         |   | 67,673              |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| Total revenues                                                                      |   | 2,401,757                     |      | 2,350,414             |   | 2,089,411 |   | 2,155,591           |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| Expenses:                                                                           |   |                          |      |                  |   |      |   |                |      |
| Operating  expenses:                                                                |   |                          |      |                  |   |      |   |                |      |
| Depreciation and  amortization                                                      |   | 571,117                       |      | 587,070               |   | 581,956   |   | 517,349             |      |
| Property taxes  and insurance                                                       |   | 102,883                       |      | 98,611                |   | 97,781    |   | 91,833              |      |
| Administrative  fees (Note 3)                                                       |   | 115,621                       |      | 121,889               |   | 111,206   |   | 131,488             |      |
| Maintenance and  repairs                                                            |   | 246,460                       |      | 233,615               |   | 240,965   |   | 226,440             |      |
| Management fees  (Note 3)                                                           |   | 134,447                       |      | 119,166               |   | 109,725   |   | 119,095             |      |
| Utilities                                                                           |   | 194,507                       |      | 135,301               |   | 135,077   |   | 200,169             |      |
| Legal and  accounting                                                               |   | 35,239                        |      | 24,767                |   | 27,657    |   | 59,718              |      |
| General and  administrative                                                         |   | 19,937                        |      | 16,122                |   | 7,443     |   | 15,848              |      |
| Bad debt expense                                                                    |   | 67,673                        |      | 4,770                 |   | 0         |   | 0                   |      |
| Other operating  expenses                                                           |   | 19,410                        |      | 46,413                |   | 25,124    |   | 644                 |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| Total operating  expenses                                                           |   | 1,507,294                     |      | 1,387,724             |   | 1,336,934 |   | 1,362,584           |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| Interest                                                                            |   | 485,730                       |      | 450,177               |   | 438,711   |   | 374,854             |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| Total expenses                                                                      |   | 1,993,024                     |      | 1,837,901             |   | 1,775,645 |   | 1,737,438           |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| INCOME BEFORE  PARTNERSHIP'S SHARE OFUNCONSOLIDATED JOINT VENTURE  INCOME (LOSSES)  |   | 408,733                       |      | 512,513               |   | 313,766   |   | 418,153             |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| PARTNERSHIP'S  SHARE OF UNCONSOLIDATEDJOINT VENTURE INCOME (LOSSES) (Note 5)        |   | 43,580                        |      | (36,405               | )      | (131,897  | )      | 51,492              |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| INCOME BEFORE  MINORITY INTEREST'SSHARE OF CONSOLIDATED JOINT VENTURE LOSS (INCOME) |   | 452,313                       |      | 476,108               |   | 181,869   |   | 469,645             |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| MINORITY  INTEREST'S SHARE OF CONSOLIDATED                                          |   |                          |      |                  |   |      |   |                |      |
| JOINT VENTURE  LOSS (INCOME)                                                        |   | 16,698                        |      | 7,618                 |   | (787      | )      | 20,600              |      |
|                                                                                |   |                          |      |                  |   |      |   |                |      |
| NET INCOME                                                                          |   | $                             | 469,011   |                  | $      | 483,726   |   | $                   | 181,082   |   | $ | 490,245 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

70

----

 

*SIERRAMIRA MESA PARTNERS AND SUBSIDIARY*

*(ACalifornia General Partnership)*

 
| *CONSOLIDATED  STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY* |
|-------------------------------------------------------------------|
|                                                              |

 
|                                          |   | **General  Partners** |      |
|-----------------------------------------------|--------|-----------------------|-----------|
|                                          |   |                  |      |   |   |   |   |
|                                          |   | **Sierra  Pacific**   |      | **Sierra  Pacific** |   |   |   |
|                                          |   | **Development**       |      | **Pension** |   |   |   |
|                                          |   | **Fund II**           |      | **Investors  '84** |   | **Total** |   |
| General  Partners' equity - January 1, 1998   |   | $                     | 3,261,917 |   | $ | 6,603,968 |   | $ | 9,865,885 |   |
| Net (loss)  income                            |   | (14,912               | )         | 195,994 |   | 181,082 |   |
| Contributions                                 |   | 8,490                 |      | 42,000 |   | 50,490 |   |
| Distributions                                 |   | (211,490              | )         | (211,250 | ) | (422,740 | ) |
|                                          |   |                  |      |   |   |   |   |
| General  Partners' equity - December 31, 1998 |   | 3,044,005             |      | 6,630,712 |   | 9,674,717 |   |
| Net income                                    |   | 159,678               |      | 324,048 |   | 483,726 |   |
| Contributions                                 |   | 44,000                |      | 539,784 |   | 583,784 |   |
| Distributions                                 |   | (370,184              | )         | (298,500 | ) | (668,684 | ) |
|                                          |   |                  |      |   |   |   |   |
| General  Partners' equity - December 31, 1999 |   | 2,877,499             |      | 7,196,044 |   | 10,073,543 |   |
| Net income                                    |   | 141,501               |      | 327,510 |   | 469,011 |   |
| Contributions                                 |   | 119,678               |      | 53,900 |   | 173,578 |   |
| Distributions                                 |   | (1,626,473            | )         | (617,893 | ) | (2,244,366 | ) |
|                                          |   |                  |      |   |   |   |   |
| General  Partners' equity - December 31, 2000 |   | $                     | 1,512,205 |   | $ | 6,959,561 |   | $ | 8,471,766 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

71

----

 

*SIERRAMIRA MESA PARTNERS AND SUBSIDIARY*

*(ACalifornia General Partnership)*

 
| *CONSOLIDATED  STATEMENTS OF CASH FLOWS* |
|------------------------------------------|
|                                     |

 
|                                                            |   |                          |    |                  |   |     |   | **Period Ended** |    |
|-----------------------------------------------------------------|--------|-------------------------------|---------|-----------------------|--------|----------|--------|------------------|---------|
|                                                            |   | **Years  Ended December 31,** |    | **October  19, 2001** |   |
|                                                            |   | **2000**                      |    | **1999**              |   | **1998** |   | **(Unaudited)**  |    |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                          |   |                          |    |                  |   |     |   |             |    |
| Net income                                                      |   | $                             | 469,011 |                  | $      | 483,726  |   | $                | 181,082 |   | $ | 490,245 |   |
| Adjustments to  reconcile net income                            |   |                          |    |                  |   |     |   |             |    |
| to cash provided  by operating activities:                      |   |                          |    |                  |   |     |   |             |    |
| Depreciation and  amortization                                  |   | 571,117                       |    | 587,070               |   | 581,956  |   | 517,349          |    |
| Undistributed  (income) losses ofunconsolidated joint ventures  |   | (43,580                       | )       | 36,405                |   | 131,897  |   | (51,492          | )       |
| Minority  interest in consolidated  joint venture (loss) income |   | (16,698                       | )       | (7,618                | )      | 787      |   | (20,600          | )       |
| Bad debt expense                                                |   | 67,673                        |    | 4,770                 |   | 0        |   | 0                |    |
| Decrease in rent  receivable                                    |   | 198,831                       |    | 27,641                |   | 60,853   |   | 265,097          |    |
| Increase in  interest receivable                                |   | 0                             |    | 0                     |   | 0        |   | (217,015         | )       |
| Increase in due  from affiliates                                |   | (245,123                      | )       | (222,839              | )      | (202,581 | )      | 0                |    |
| Increase in  other assets                                       |   | (143,525                      | )       | (45,022               | )      | (215,974 | )      | (385,728         | )       |
| Increase  (decrease) in accrued and other liabilities           |   | 3,454                         |    | (150,886              | )      | 183,225  |   | 38,848           |    |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| Net cash  provided by operating activities                      |   | 861,160                       |    | 713,247               |   | 721,245  |   | 636,704          |    |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                          |   |                          |    |                  |   |     |   |             |    |
| Payments for  property additions                                |   | (44,733                       | )       | (160,815              | )      | (346,113 | )      | (68,924          | )       |
| Capital  contributions to unconsolidated  joint ventures        |   | (2,090,088                    | )       | (1,027,820            | )      | (350,900 | )      | (189,000         | )       |
| Distributions  received from unconsolidated  joint ventures     |   | 3,365,140                     |    | 105,000               |   | 372,312  |   | 617,000          |    |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| Net cash  provided by (used in) investing activities            |   | 1,230,319                     |    | (1,083,635            | )      | (324,701 | )      | 359,076          |    |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                          |   |                          |    |                  |   |     |   |             |    |
| Capital  contributions from General Partners                    |   | 173,578                       |    | 583,784               |   | 50,490   |   | 127,868          |    |
| Cash  distributions to General Partners                         |   | (2,244,366                    | )       | (668,684              | )      | (422,740 | )      | (877,130         | )       |
| Proceeds from  note payable secured by property                 |   | 0                             |    | 1,637,500             |   | 0        |   | 0                |    |
| Principal  payments on notes payable                            |   | (288,431                      | )       | (876,876              | )      | (254,638 | )      | (258,459         | )       |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| Net cash (used  in) provided by financing activities            |   | (2,359,219                    | )       | 675,724               |   | (626,888 | )      | (1,007,721       | )       |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| NET (DECREASE)  INCREASE IN CASH  AND CASH EQUIVALENTS          |   | (267,740                      | )       | 305,336               |   | (230,344 | )      | (11,941          | )       |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| CASH AND CASH  EQUIVALENTS - Beginning of year                  |   | 319,400                       |    | 14,064                |   | 244,408  |   | 51,660           |    |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| CASH AND CASH  EQUIVALENTS - End of year                        |   | $                             | 51,660  |                  | $      | 319,400  |   | $                | 14,064  |   | $ | 39,719 |   |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOWINFORMATION:               |   |                          |    |                  |   |     |   |             |    |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| Cash paid during  the year for real estate taxes                |   | $                             | 73,176  |                  | $      | 72,469   |   | $                | 71,184  |   | $ | 36,942 |   |
|                                                            |   |                          |    |                  |   |     |   |             |    |
| Cash paid during  the year for interest                         |   | $                             | 487,020 |                  | $      | 439,792  |   | $                | 439,756 |   | $ | 395,487 |   |

 

In 2000, 1999, and1998 interest receivable of $245,123, $222,839, and $202,581, respectively, wasadded to the principal balance of the related note receivable from affiliate.  These transactions are noncash items notreflected in the above statement of cash flows.

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

 

72

----

 

SIERRAMIRA MESA PARTNERS AND SUBSIDIARY

(ACalifornia General Partnership)

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

1.            ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

Organization

 

Sierra Mira Mesa Partners (“SMMP”), aCalifornia general partnership, was formed in 1985 between Sierra PacificDevelopment Fund II (“SPDFII”) and Sierra Pacific Pension Investors '84(“SPPI84”) to develop and operate the real property known as Sierra Mira Mesa,an office building, located in San Diego, California.  The property contains 89,560 square feet and was 100% leased atDecember 31, 2000.

 

Per the terms of the partnership agreement,SPDFII and SPPI84 shared in earnings, contributions and distributions in aratio of 51% to 49%, respectively. Effective December 31, 1996, the general partners amended thepartnership agreement to allow for adjustments in the sharing ratio each yearbased upon the relative net contributions and distributions since inception ofeach general partner.  In conjunctionwith this amendment, the general partners forgave the December 31, 1996balances of advances due from SMMP and included these amounts as adjustments totheir respective equity accounts.  Thesharing ratio in effect for 1998, 1999 and 2000 was 33.74%, 33.01% and 30.17%,respectively, for SPDFII and 66.26%, 66.99% and 69.83%, respectively, forSPPI84.  On January 1, 2001, the sharingratio will be decreased to 19.68% for SPDFII and increased to 80.32% for SPPI84to reflect the 2000 contributions and distributions.

 

S-P Properties, Inc. is the General Partnerand manager of SPDFII and SPPI84.  OnDecember 30, 1994, all of the outstanding stock of TCP, Inc. was sold toFinance Factors, Inc.  TCP, Inc. ownsall of the common stock of S-P Properties, Inc.  Finance Factors was a subsidiary of CGS Real Estate Company, Inc.(“CGS”), a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real EstateCompany, Inc., another subsidiary of CGS.

 

SMMP also holds investments in otherindustrial/commercial properties through its investments in unconsolidatedjoint ventures.  Refer to Note 5 foradditional information.

 

Basis of FinancialStatements

 

The Partnership maintains its books andprepares its financial statements in accordance with accounting principlesgenerally accepted in the United States. However, the Partnership prepares its tax returns on the accrual basisof accounting as defined by the Internal Revenue Code with adjustments toreconcile book and taxable income (loss) for differences in the treatment ofcertain income and expense items.  Theaccompanying financial statements do not reflect any provision for federal orstate income taxes since such taxes are the obligation of the individualpartners.

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reported period.  Actual results could differ from those estimates.

 

The consolidated financial statements of SMMPinclude the accounts of SMMP and Sorrento I Partners (“SIP”), a majority ownedjoint venture as of December 31, 2000. SMMP consolidates all subsidiaries in which it has a controlling equityinterest. All significant intercompany balances and transactions have beeneliminated in consolidation.

 

 

73

----

 

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page two

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents include highlyliquid, short-term investments with original maturities of three months orless.

 

Fair Value of FinancialInstruments

 

The financial instruments of the Partnership atDecember 31, 2000, and 1999 consist of cash and cash equivalents, receivables,due from affiliates, accounts payable and notes payable. The fair value of cashand cash equivalents, receivables and accounts payable approximate the carryingvalue due to the short term nature of these items.  In the opinion of management, the fair value of the notes payableapproximates the carrying value based on market rates at December 31, 2000, and1999.  Management does not fair valuethe amounts due from affiliates due to the related party nature of thisreceivable.

 

Income-Producing Properties

 

Property is carried at cost and depreciated on thestraight-line method over the estimated lives of the related assets, rangingfrom three to thirty years.  Tenantimprovements are carried at cost and depreciated on the straight-line methodover the life of the related lease.

 

Expenditures for repairs and maintenance arecharged against income as incurred. Improvements and major renewals are capitalized.  Costs and the related accumulateddepreciation of assets sold or retired are removed from the accounts in theyear of disposal or when fully depreciated and any resulting gain or loss isreflected in income.

 

The Partnership regularly evaluates long-lived assetsfor impairment whenever events or changes in circumstances indicate that thecarrying amount of the asset may not be recoverable in accordance withStatement of Financial Accounting Standards No.121, “Accounting for Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (the“Statement”).  Future cash flows areestimated and compared to the carrying amount of the asset to determine if animpairment has occurred.  If  the sum of the expected future cash flows isless than the carrying amount of the asset, the Partnership shall recognize animpairment loss in accordance with the Statement.  No such impairment has been recognized by the Partnership atDecember 31, 2000.

 

Because the determination of fair value isbased upon projections of future economic events such as property occupancyrates, rental rates, operating cost inflation and market capitalization rateswhich are inherently subjective, the amounts ultimately realized at dispositionmay differ materially from the net carrying value as of December 31, 2000.  The cash flows used to determine fair valueand net realizable value are based on good faith estimates and assumptionsdeveloped by management.  Unanticipatedevents and circumstances may occur and some assumptions may not materialize;therefore actual results may vary from the estimates and the variances may bematerial.  The Partnership may provideadditional write-downs which could be material in subsequent years if realestate markets or local economic conditions change.

 

Investment in UnconsolidatedJoint Ventures

 

The investment in unconsolidated jointventures is stated at cost and is adjusted for the Partnership’s share inearnings or losses and cash contributions to or distributions from the jointventures (equity method).

 

 

74

----

 

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page three

 

 

Other Assets

 

Deferred leasing costs represent costsincurred to lease properties and are amortized over the life of the relatedlease using the straight line method of accounting.

 

Deferred loan costs represent costs incurredto obtain financing and are amortized over the life of the related loan usingthe straight line method of accounting.

 

Rental Income and RentReceivable

 

Rental income is recognized on thestraight-line method over the term of the related operating lease in accordancewith the provisions of Statement of Financial Accounting Standards No. 13,“Accounting for Leases”.

 

Rent receivable consists of (a) unbilled rent - thedifference between rent recognized on the straight-line method and actual cashdue; and (b) billed rent — rent due but not yet received.

 

The Partnership periodically reviews itsoutstanding receivables for uncollectibility and provides a provision for baddebts for those accounts it believes it may not collect in full.

 

Recent AccountingPronouncements

 

In June 1998, the Financial AccountingStandards Board issued SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities”. SFAS No. 133 requires a company to recognize allderivative instruments (including certain derivative instruments embedded inother contracts) as assets or liabilities in its  balance sheet and measure them at fair value.  The statement requires that changes in thederivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria aremet.  SFAS No. 133, as amended, iseffective for fiscal years beginning after June 15, 2000.  The Partnership has evaluated SFAS No. 133and the impact on existing accounting policies and financial reportingdisclosures.  The Partnership believesthe adoption of SFAS No. 133 will not have a material effect on its financialstatements.

 

In December 1999, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 101 (SAB 101), RevenueRecognition in Financial Statements, which summarizes certain of the SECstaff’s views on applying generally accepted accounting principles to revenuerecognition in financial statements. The Partnership adopted the accounting provisions of SAB 101 in2000.  The implementation of SAB 101 didnot have a significant effect on the Partnership’s financial condition orresults of operations.

 

 

75

----

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page four

 

2.            DETAILS OFCERTAIN BALANCE SHEET ACCOUNTS

 

Additional information regarding certain balancesheet accounts, at December 31, 2000 and 1999, is as follows:

 
|                                                                               |   | **2000** |    | **1999** |   |
|------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Other assets:                                                                      |   |     |    |     |   |
| Prepaid expenses                                                                   |   | $        | 13,067  |     | $      | 7,383 |   |
| Deferred loan costs, net of accumulated  amortization of $65,972 and $49,842       |   | 152,096  |    | 168,225  |   |
| Deferred leasing costs, net of accumulated   amortization of $655,553 and $531,945 |   | 384,097  |    | 507,000  |   |
| Deposits                                                                           |   | 25,000   |    | 0        |   |
| Tax impounds and insurance impounds                                                |   | 34,491   |    | 26,831   |   |
| Tenant improvement reserves                                                        |   | 178,973  |    | 84,219   |   |
|                                                                               |   | $        | 787,724 |     | $      | 793,658 |   |
| Accrued and other liabilities:                                                     |   |     |    |     |   |
| Accounts payable                                                                   |   | $        | 29,964  |     | $      | 51,008 |   |
| Security deposits                                                                  |   | 32,573   |    | 17,922   |   |
| Accrued expenses                                                                   |   | 11,138   |    | 0        |   |
| Interest payable                                                                   |   | 30,883   |    | 32,174   |   |
|                                                                               |   | $        | 104,558 |     | $      | 101,104 |   |

 

3.   GENERAL PARTNER AND RELATED PARTY TRANSACTIONS

 

Affiliates of S-P Properties, Inc. receive amonthly management fee totaling 5.5% of the gross rental income collected fromthe properties or $600, whichever is greater. This fee amounted to $134,447, $119,166, and $109,725 respectively, forthe years ended December 31, 2000, 1999, and 1998.  This fee was recorded as part of the operating expenses of theproperties.

 

SMMP reimburses an affiliate of S-PProperties, Inc. for expenses incurred by the affiliate for services providedto SMMP such as accounting, data processing and similar services.  The affiliate was reimbursed $115,621,$122,239, and $111,206 respectively, for such services for the years endedDecember 31, 2000, 1999, and 1998. Additionally, SMMP reimbursed an affiliate for construction supervisioncosts incurred by the affiliate.  Forthe years ended December 31, 2000, 1999, and 1998, the affiliate received $0,$28,201, and $1,327 respectively, for tenant improvements supervisory costs.

 

In consideration for services rendered withrespect to initial leasing of SMMP’s property, an affiliate of S-P Properties,Inc. is paid initial leasing costs.  Forthe years ended December 31, 2000, 1999, and 1998, these fees amounted to $0,$0, and $63,492 respectively, and were recorded as deferred leasing costs.

 

During 1993, SMMP loaned funds to a formeraffiliate of S-P Properties, Inc. in the form of a demand note.  The liability was assumed by Finance Factors, Inc. which acquired S-PProperties, Inc. as of December 30, 1994. In July 1995, Finance Factors, Inc. merged with Bancor Real EstateCompany, Inc. who has assumed the note. The annual interest rate of the loan was variable at bank prime plus 21/4% - 3% with a minimum rate of 9%. The loan totaled $2,360,000 at December 31, 1993 and was reduced to$1,687,787 at December 31, 1994. This loan was amended effective January 1,1995 fixing the interest rate at 10%. On December 31, 2000, 1999, 1998 and1997, interest receivable of $245,123, $222,839, $202,581 and $338,020,respectively, was added to the principle balance of the loan.  No interest related to this loan was due tothe Partnership at December 31, 2000 and 1999. The principal balance outstanding at December 31, 2000 was$2,696,350.  The loan is guaranteed bythe owners of CGS Real Estate Company, Inc. (“CGS”).

 

 

 

76

----

 

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page five

 

The note receivable was involved in a lawsuitin which SPDII was the defendant.   Inconnection with the settlement of the lawsuit by SPDFII, the Partnership wouldcall a portion of the note receivable from Bancor Real Estate Company,Inc.  The portion called would be thatpercentage of the loan that is equal to SPDFII’s ownership interest in thePartnership, in any event no less than 30%. Such funds would have been distributed to SPDFII in accordance with thelawsuit settlement.  As of March 26,2001, the note has not been called, the settlement has been declared null andvoid, and a supplemental complaint alleging new allegations has been filed.

 

Management anticipates settlement of the SMMPnote receivable upon completion of the consolidation transaction (See Note8).  However, there can be no assurancesuch transaction will be executed. Should the partnerships be unable to settle the notes receivable subjectto the litigation, a  principalshareholder of S-P Properties, Inc. had unconditionally guaranteed theirpayment.

 

S-P Properties, Inc. has denied and continuesto deny that it has committed any violations of law.  Management believes the ultimate outcome of this litigation willnot have a material adverse effect on the Partnership.

 

During 1996, the Partnership made anon-interest bearing advance to an affiliate in the amount of $4,770.  The advance was deemed uncollectible andsubsequently written off to bad debt expense in 1999.

 

See Note 6 for note payable transactions with relatedparties.

 

 

4.   INCOME-PRODUCING PROPERTIES

 

At December 31, 2000 and 1999 the total costand accumulated depreciation of the properties are as follows:

 
|                      |   | **2000**   |      | **1999**   |
|---------------------------|--------|------------|-----------|------------|
|                      |   |       |      |       |
| Land                      |   | $          | 3,786,458 |       | $ | 3,786,458 |
| Building and improvements |   | 8,474,761  |      | 8,501,318  |
|                      |   |       |      |       |
| Total                     |   | 12,261,219 |      | 12,287,776 |
|                      |   |       |      |       |
| Accumulated depreciation  |   | (3,914,748 | )         | (3,564,380 |
|                      |   |       |      |       |
| Net                       |   | $          | 8,346,471 |       | $ | 8,723,396 |

 

During 2000 and 1999, the Partnership removed$71,290 and $147,303, respectively, from its building and improvements andrelated accumulated depreciation accounts for fully depreciated property.

 

 

77

----

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page six

 

Future minimum base rental income, under theexisting operating leases for the Sierra Mira Mesa and Sorrento I properties,to be recognized on a straight-line basis and amounts to be received on a cashbasis are as follows:

 

| **Year Ending**  |   | **Straight-line** |      | **Cash**  |
|------------------|--------|-------------------|-----------|-----------|
| **December 31,** |   | **Basis**         |      | **Basis** |
|             |   |              |      |      |
| 2001             |   | $                 | 2,092,837 |      | $ | 2,407,018 |
| 2002             |   | 2,083,837         |      | 2,507,237 |
| 2003             |   | 653,201           |      | 737,422   |
| 2004             |   | 179,747           |      | 184,288   |
| 2005             |   | 154,746           |      | 164,174   |
| Thereafter       |   | 438,415           |      | 501,186   |
|             |   |              |      |      |
| Total            |   | $                 | 5,602,783 |      | $ | 6,501,325 |

 

 

In each of the three years in the periodending December 31, 2000, two tenants accounted for the majority of thePartnership’s rental income.  A stategovernmental agency associated with workers compensation insurance accountedfor 69% of rental income in 2000 and 1999, and 78% in 1998; a tenant in thecommunications sector accounted for 13% of rental income in 2000 and 1999, and15% in 1998.

 

 

5.   INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

 

SMMP holds the following investmentsaccounted for under the equity method at December 31, 2000:

 

 

•                  a 43.92% equity interest inSorrento II Partners (“SIIP”), a joint venture formed on October 1, 1993 withSierra Pacific Institutional Properties V, an affiliate, to develop and operateSierra Sorrento II, an industrial building located in San Diego,California.  SMMP’s investment in SIIPas of December 31, 2000 and 1999 is $3,822,355 and $2,647,872,respectively.  SMMP’s share of the netincome (loss) of SIIP for the three years ended December 31, 2000, 1999 and1998 is $60,583, $(30,637) and $(143,251), respectively;

 

•                  a 5.08% equity interest inSierra Creekside Partners (“SCP”), a joint venture formed on February 1, 1994with Sierra Pacific Development Fund, an affiliate, to develop and operateSierra Creekside, a commercial office building in San Ramon, California.  SMMP’s investment in SCP as of December 31,2000 and 1999 was $(2,540,963) and $(128,513), respectively.  SMMP’s share of the net loss of SCP for thethree years ended December 31, 2000, 1999 and 1998 was $(12,441), $(5,903) and$(8,420), respectively;

 

•                  a 33.36% equity interest inSierra Vista Partners (“SVP”), a joint venture formed on February 1, 1994 withSierra Pacific Development Fund III, an affiliate, to develop and operateSierra Vista, an industrial building in Anaheim, California.  SMMP’s investment in SVP as of December 31,2000 and 1999 was $14,011 and $7,516, respectively.  SMMP’s share of the net (loss) income of SVP for the three yearsended December 31, 2000, 1999 and 1998 was $(4,562), $135 and $19,774,respectively.  The Sierra Vista propertywas sold in October 1997.

 

 

78

----

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page seven

 

 

Thefollowing is a summary of aggregated financial information for all investmentsowned by SMMP which are accounted for under the equity method:

 

 

Condensed Combined Balance Sheets

 
|                                                        |   | **December  31,** |      | **December  31,** |
|-------------------------------------------------------------|--------|-------------------|-----------|-------------------|
|                                                        |   | **2000**          |      | **1999**          |
| Assets                                                      |   |              |      |              |
|                                                        |   |              |      |              |
| Cash and cash equivalents                                   |   | $                 | 53,567    |              | $ | 272,657 |
| Rent receivable                                             |   | 449,743           |      | 588,742           |
| Income-producing property,  net of accumulated depreciation |   | 7,831,381         |      | 8,109,927         |
| Other assets, net of accumulated  amortization              |   | 538,029           |      | 1,897,050         |
|                                                        |   |              |      |              |
| Total Assets                                                |   | $                 | 8,872,720 |              | $ | 10,868,376 |
|                                                        |   |              |      |              |
| Liabilities and General Partners’ Equity               |   |              |      |              |
|                                                        |   |              |      |              |
| Accrued and other liabilities                               |   | $                 | 215,570   |              | $ | 350,272 |
| Note payable                                                |   | 4,025,544         |      | 1,673,186         |
|                                                        |   |              |      |              |
| Total Liabilities                                           |   | 4,241,114         |      | 2,023,458         |
|                                                        |   |              |      |              |
| Ground lessors’ equity in income-producing property    |   | 0                 |      | 3,000,000         |
|                                                        |   |              |      |              |
| General Partners’ equity                               |   | 4,631,606         |      | 5,844,918         |
|                                                        |   |              |      |              |
| Total Liabilities and General Partners’ equity         |   | $                 | 8,872,720 |              | $ | 10,868,376 |

 

 

79

----

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page eight

 

CondensedCombined Statements of Operations

 

 
|                                                     |   | **For the  Year Ended December 31,** |            |
|----------------------------------------------------------|--------|--------------------------------------|-----------------|
|                                                     |   | **2000**                             |            | **1999** |   | **1998** |   |
| Revenues:                                                |   |                                 |            |   |   |   |   |
| Rental income                                            |   | $                                    |  2,363,463 |   | $ |  2,112,254 |   | $ |  1,734,403 |   |
| Interest income                                          |   | 11,218                               |            | 34,540 |   | 0 |   |
| Other income                                             |   | 0                                    |            | 15,151 |   | 93,668 |   |
| Total revenues                                           |   | 2,374,681                            |            | 2,161,945 |   | 1,828,071 |   |
| Expenses:                                                |   |                                 |            |   |   |   |   |
| Operating expenses                                       |   | 1,048,507                            |            | 1,407,262 |   | 1,302,968 |   |
| Depreciation and amortization                            |   | 857,613                              |            | 779,142 |   | 829,081 |   |
| Interest                                                 |   | 360,801                              |            | 152,563 |   | 156,636 |   |
|                                                     |   |                                 |            |   |   |   |   |
| Total expenses                                           |   | 2,266,921                            |            | 2,338,967 |   | 2,288,685 |   |
|                                                     |   |                                 |            |   |   |   |   |
| Income (loss) before extraordinary loss                  |   | 107,760                              |            | (177,022 | ) | (460,614 | ) |
| Extraordinary loss from write-off of deferred loan costs |   | (46,020                              | )               | 0 |   | 0 |   |
| Net income (loss)                                        |   | $                                    |  61,740    |   | $ |  (177,022 | ) | $ |  (460,614 | ) |

 

 

6.   NOTES PAYABLE

 
|                                                                                                                                                                                      |   | **2000**  |      | **1999**  |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Mortgage note payable, due  in monthly installments with interest at 7.74% per annum, collateralized by  the real property known as Sierra Mira Mesa. This note matures in October  2010. |   | $         | 4,265,067 |      | $      | 4,543,984 |   |
|                                                                                                                                                                                      |   |      |      |      |   |
| Mortgage note payable, due  in monthly installments with interest at 8.75% per annum, collateralized by  the Sorrento I property.  The note  matures in September 2009.              |   | 1,625,540 |      | 1,635,054 |   |
|                                                                                                                                                                                      |   |      |      |      |   |
|                                                                                                                                                                                      |   | $         | 5,890,607 |      | $      | 6,179,038 |   |

 

In August 1999, SIP paid its mortgage note due to CGS,an affiliate of the General Partner, with an outstanding balance of$607,693.  On the same date, SIP enteredinto a new loan agreement with Finova Realty Capital, Inc. in the amount of$1,637,500.  This loan, which is securedby the Sorrento I property, bears interest at 8.75% per annum.  Principal and interest payments of $12,882are due monthly until maturity in September 2009. In connection with therepayment of the CGS note, SIP paid $29,528 to CGS related to late fees whichwere included in other operating expenses in the statement of operations for1999. The note balance as of December 31, 2000 was $1,625,540.

 

As of December 31, 2000, annual maturities onnotes payable were: $314,146 in 2001; $339,483 in 2002; $366,864 in 2003;$396,456 in 2004; $428,435 in 2005; and $4,045,223 thereafter.

 

 

80

----

 

Sierra Mira Mesa Partners

Notes to Consolidated Financial Statements

Page nine

 

 

7.                 COMMITMENTS AND CONTINGENT LIABILITIES

 

In the normal course of business, the Partnershipoccasionally becomes party to litigation. In the opinion of management, pending or threatened litigation involvingthe Partnership will not have a material adverse effect on its financialcondition.

 

Under the terms of the Sierra CreeksidePartners (“SCP”) joint venture agreement, SMMP would be obligated to contributeany negative balance outstanding in its capital account upon liquidation of thePartnership.  Such balance was$2,540,963 and $128,513 at December 31, 2000 and 1999, respectively.

 

8.               PENDINGTRANSACTION

 

CGS is continuing the development of a planwhich will combine the Partnership’s property with the properties of other realestate partnerships managed by CGS and its affiliates.  These partnerships own office properties,industrial properties, shopping centers and residential apartmentproperties.  It is expected that theacquiror, American Spectrum Realty, Inc. (“ASR”), would qualify as a realestate investment trust.  ASR filed aRegistration Statement on Form S-4 August 14, 2000 relating to the solicitationof consents with the Securities and Exchange Commission.  The Registration Statement was amendedFebruary 14, 2001.

 

9.     EVENTSSUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED)

 

On October 19, 2001, SMMP’s two joint venturepartners, SPPI84 and SPDFII, were included in a consolidation transaction (the“Consolidation”).  Pursuant to theConsolidation, SPPI84 and SPDFII along with six other public limitedpartnerships, acquired assets and liabilities of two private entities managedby CGS Real Estate Company, Inc. (“CGS”) and its affiliates and acquired assetsand liabilities of CGS and its majority-owned affiliates were merged intoASR.  The accounting acquirer in theConsolidation was SPPI84.  Pursuant tothe Consolidation, partners of the public partnerships received shares in ASRor promissory notes in exchange for their partnership units and owners ofexisting related entities exchanged ownership interests in real estate for ASRshares or units in the ASR operating partnership.

 

 

81

----

 

 

**CGS and the Majority-OwnedAffiliates**

 

 

 

 

 

 

 

 

**Combinedbalance sheet as of December 31, 2000 and statements of operations, equity(deficit) and cash flows from January 1, 2001 through October 19, 2001 and forthe two years ended December 31, 2000 and 1999 and Reports of IndependentPublic Accountants**

** **

** **

 

82

----

 

 

# **INDEPENDENTAUDITORS’ REPORT**

 

**To CGS andthe Majority-Owned Affiliates:**

 

We have audited theaccompanying combined statement of operations, equity (deficit) and cash flowof CGS and the Majority-Owned Affiliates for the period from January 1 2001 toOctober 19, 2001.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for ouropinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the combined results of operations and cash flows of CGS and theMajority-Owned Affiliates for the period from January 1. 2001 to October 19,2001, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

**BDOSeidman, LLP**

 

 

 

Dallas, Texas

April 10, 2002

 

 

 

83

----

 

 

**REPORT OFINDEPENDENT PUBLIC ACCOUNTANTS**

 

**To CGS andthe Majority-Owned Affiliates:**

 

We have audited theaccompanying combined balance sheet of CGS and the Majority-Owned Affiliates asof December 31, 2000, and the related combined statements of operations, equity(deficit) and cash flows for each of the two years in the period ended December31, 2000.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the combinedfinancial statements referred to above present fairly, in all materialrespects, the financial position of CGS and the Majority-Owned Affiliates as ofDecember 31, 2000, and the results of their operations and their cash flows foreach of the two years in the period ended December 31, 2000 in conformity withaccounting principles generally accepted in the United States.

 

The accompanying combinedfinancial statements have been prepared assuming that the Company will continueas a going concern. As discussed in Note 5 to the financial statements, theCompany has suffered recurring losses from operations, has a net capitaldeficiency and has debt in default. These factors, among others, raise substantial doubt about its abilityto continue as a going concern. Management's plans in regard to these mattersare also described in Note 5. The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

 

**ARTHURANDERSEN LLP**

 

Houston, Texas

April 16, 2001

 

 

84

----

 

 

CGSAND THE MAJORITY-OWNED AFFILIATES

COMBINEDBALANCE SHEET

(Dollars in thousands)

 
|                                                |   | **December  31,  2000** |    |
|-----------------------------------------------------|--------|-------------------------|---------|
| ASSETS:                                             |   |                    |    |
| Real estate held for investment, net                |   | $                       | 86,021  |   |
| Cash                                                |   | 1,787                   |    |
| Accounts receivable, net                            |   | 1,369                   |    |
| Notes and accounts receivable from affiliates       |   | 95                      |    |
| Investments in uncombined partnerships              |   | 3,241                   |    |
| Equipment, net                                      |   | 606                     |    |
| Goodwill, net                                       |   | 1,373                   |    |
| Prepaid and other assets, net                       |   | 7,690                   |    |
|                                                |   |                    |    |
| Total Assets                                        |   | $                       | 102,182 |   |
|                                                |   |                    |    |
| LIABILITIES AND EQUITY (DEFICIT):                   |   |                    |    |
|                                                |   |                    |    |
| Accounts payable and accrued expenses               |   | $                       | 6,283   |   |
| Deferred revenue                                    |   | 2,167                   |    |
| Notes payable                                       |   | 110,175                 |    |
| Notes and accounts payable to affiliates            |   | 18,618                  |    |
| Notes payable to shareholders                       |   | 1,300                   |    |
|                                                |   |                    |    |
| Total Liabilities                                   |   | 138,543                 |    |
|                                                |   |                    |    |
| MANDATORILY-REDEEMABLE COMMON STOCK   OF SUBSIDIARY |   | 1,045                   |    |
|                                                |   |                    |    |
| COMMITMENTS AND CONTINGENCIES:                      |   |                    |    |
|                                                |   |                    |    |
| Equity (Deficit)                                    |   |                    |    |
| Capital                                             |   | 2,481                   |    |
| Accumulated deficit                                 |   | (39,887                 | )       |
|                                                |   |                    |    |
| Total equity (deficit)                              |   | (37,406                 | )       |
|                                                |   |                    |    |
| Total liabilities and equity (deficit)              |   | $                       | 102,182 |   |

 

Theaccompanying notes are an integral part of these combined financial statements

 

 

85

----

 

 

CGSAND THE MAJORITY-OWNED AFFILIATES

COMBINEDSTATEMENTS OF OPERATIONS

(Dollars in thousands)

* *
|                                                      |   | **Period  Ended   October 19,** |   | **Year Ended    December 31,** |   | **Year Ended    December 31,** |   |
|-----------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|--------------------------------|--------|
|                                                      |   | **2001**                        |   | **2000**                       |   | **1999**                       |   |
| REVENUES:                                                 |   |                            |   |                           |   |                           |   |
| Rental income                                             |   | $                               | 14,572 |                           | $      | 15,994                         |   | $ | 14,813 |   |
| Property management income                                |   | 4,005                           |   | 6,812                          |   | 5,452                          |   |
| Income from affiliates                                    |   | 1,498                           |   | 1,702                          |   | 2,357                          |   |
|                                                      |   |                            |   |                           |   |                           |   |
| Total revenues                                            |   | 20,075                          |   | 24,508                         |   | 22,622                         |   |
|                                                      |   |                            |   |                           |   |                           |   |
| COSTS AND EXPENSES:                                       |   |                            |   |                           |   |                           |   |
| Property operating expense                                |   | 5,151                           |   | 5,486                          |   | 3,396                          |   |
| Property management expense                               |   | 9,512                           |   | 11,111                         |   | 10,766                         |   |
| Depreciation and amortization                             |   | 3,284                           |   | 4,634                          |   | 3,259                          |   |
| Real estate taxes                                         |   | 1,188                           |   | 1,571                          |   | 1,597                          |   |
| Equity in (income) loss of uncombined partnerships        |   | (53                             | )      | (235                           | )      | 330                            |   |
| Impairment charges                                        |   | —                          |   | —                         |   | 5,164                          |   |
|                                                      |   |                            |   |                           |   |                           |   |
| Total costs and expenses                                  |   | 19,082                          |   | 22,567                         |   | 24,512                         |   |
|                                                      |   |                            |   |                           |   |                           |   |
| OTHER EXPENSES (INCOME):                                  |   |                            |   |                           |   |                           |   |
|                                                      |   |                            |   |                           |   |                           |   |
| Interest expense                                          |   | 9,802                           |   | 12,620                         |   | 9,982                          |   |
| Loss on demolition of property                            |   | 867                             |   | —                         |   | —                         |   |
| Gain on sale of property                                  |   | (100                            | )      | (1,328                         | )      | —                         |   |
|                                                      |   |                            |   |                           |   |                           |   |
| Total other expenses (income)                             |   | 10,569                          |   | 11,292                         |   | 9,982                          |   |
|                                                      |   |                            |   |                           |   |                           |   |
| Minority Interest                                         |   | 257                             |   | —                         |   | —                         |   |
|                                                      |   |                            |   |                           |   |                           |   |
| Net loss before extraordinary items                       |   | (9,833                          | )      | (9,351                         | )      | (11,872                        | )      |
|                                                      |   |                            |   |                           |   |                           |   |
| Extraordinary items — loss on extinguishment of debt |   | —                          |   | (1,861                         | )      | (214                           | )      |
|                                                      |   |                            |   |                           |   |                           |   |
| Net loss                                                  |   | $                               | (9,833 | )                              | $      | (11,212                        | )      | $ | (12,086 | ) |

 

 

Theaccompanying notes are an integral part of these combined financial statements

 

86

----

 

 

CGSAND THE MAJORITY-OWNED AFFILIATES

COMBINEDSTATEMENTS OF EQUITY (DEFICIT)

(Dollars in thousands)

 
|                       |   | **Capital** |   | **Accumulated  Deficit** |   | **Total** |   |
|----------------------------|--------|-------------|--------|--------------------------|--------|-----------|--------|
| Balance, December 31, 1998 |   | $           | 1,208  |                     | $      | (17,519   | )      | $ | (16,311 | ) |
|                       |   |        |   |                     |   |      |   |
| Net loss                   |   | —      |   | (12,086                  | )      | (12,086   | )      |
|                       |   |        |   |                     |   |      |   |
| Net contributions          |   | 1,319       |   | 1,057                    |   | 2,376     |   |
|                       |   |        |   |                     |   |      |   |
| Balance, December 31, 1999 |   | 2,527       |   | (28,548                  | )      | (26,021   | )      |
|                       |   |        |   |                     |   |      |   |
| Net loss                   |   | —      |   | (11,212                  | )      | (11,212   | )      |
|                       |   |        |   |                     |   |      |   |
| Net distributions          |   | (46         | )      | (127                     | )      | (173      | )      |
|                       |   |        |   |                     |   |      |   |
| Balance, December 31, 2000 |   | 2,481       |   | (39,887                  | )      | (37,406   | )      |
|                       |   |        |   |                     |   |      |   |
| Net loss                   |   | —      |   | (9,833                   | )      | (9,833    | )      |
|                       |   |        |   |                     |   |      |   |
| Net contributions          |   | —      |   | 1,645                    |   | 1,645     |   |
|                       |   |        |   |                     |   |      |   |
| Balance, October 19, 2001  |   | $           | 2,481  |                     | $      | (48,075   | )      | $ | (45,594 | ) |

 

 

Theaccompanying notes are an integral part of these combined financial statements

 

87

----

 

 

CGSAND THE MAJORITY-OWNED AFFILIATES

COMBINEDSTATEMENTS OF CASH FLOWS

(Dollarsin Thousands)

 

----

|                                                                            |   | **Period  Ended   October 19, 2001** |   | **Year Ended    December 31, 2000** |   | **Year Ended    December 31, 1999** |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           |   |                                 |   |                                |   |                                |   |
| Net loss                                                                        |   | $                                    | (9,833 | )                                   | $      | (11,212                             | )      | $ | (12,086 | ) |
| Adjustments to reconcile net loss to net cash used in by operating  activities: |   |                                 |   |                                |   |                                |   |
| Gain on sale of property                                                        |   | (100                                 | )      | (1,328                              | )      | —                              |   |
| Loss on demolition of property                                                  |   | 867                                  |   | —                              |   | —                              |   |
| Depreciation and amortization                                                   |   | 3,284                                |   | 4,634                               |   | 3,259                               |   |
| Equity in (income) loss of uncombined partnerships                              |   | (53                                  | )      | (235                                | )      | 330                                 |   |
| Impairment charges                                                              |   | —                               |   | —                              |   | 5,164                               |   |
| Minority interest                                                               |   | 257                                  |   | —                              |   | —                              |   |
| Extraordinary loss                                                              |   | —                               |   | 1,861                               |   | 214                                 |   |
| Changes in assets and liabilities:                                              |   |                                 |   |                                |   |                                |   |
| Decrease (increase) in accounts receivable, net                                 |   | 419                                  |   | (128                                | )      | (80                                 | )      |
| Increase in prepaid and other assets, net                                       |   | (4,274                               | )      | (7,691                              | )      | (687                                | )      |
| Increase in deferred revenue                                                    |   | 82                                   |   | 1,940                               |   | 654                                 |   |
| Increase in accounts payable and accrued expenses                               |   | 3,006                                |   | 1,390                               |   | 986                                 |   |
|                                                                            |   |                                 |   |                                |   |                                |   |
| Net cash used in operating activities:                                          |   | (6,345                               | )      | (10,769                             | )      | (2,246                              | )      |
|                                                                            |   |                                 |   |                                |   |                                |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |   |                                 |   |                                |   |                                |   |
| (Investments in) distributions from uncombined partnerships, net                |   | (716                                 | )      | 291                                 |   | (2,062                              | )      |
| Additions to real estate assets                                                 |   | (2,569                               | )      | (2,975                              | )      | (4,854                              | )      |
| Proceeds from sales of real estate held for investment                          |   | 1,023                                |   | 8,236                               |   | —                              |   |
| Purchases of equipment                                                          |   | (48                                  | )      | (395                                | )      | —                              |   |
|                                                                            |   |                                 |   |                                |   |                                |   |
| Net cash (used in) provided by investing activities:                            |   | (2,310                               | )      | 5,157                               |   | (6,916                              | )      |
|                                                                            |   |                                 |   |                                |   |                                |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |   |                                 |   |                                |   |                                |   |
| Borrowings (repayments) of notes payable, net                                   |   | 2,311                                |   | (2,276                              | )      | 10,322                              |   |
| Sale of partially owned property                                                |   | 1,000                                |   | —                              |   | —                              |   |
| Decrease in notes and accounts receivable from affiliates                       |   | 8                                    |   | 5,847                               |   | 569                                 |   |
| Increase (decrease) in notes and accounts payable to affiliates                 |   | 3,238                                |   | 2,943                               |   | (4,169                              | )      |
| Equity contributions (distributions), net                                       |   | 1,645                                |   | (173                                | )      | 2,376                               |   |
| Proceeds from loan from shareholders                                            |   | 300                                  |   | 600                                 |   | —                              |   |
|                                                                            |   |                                 |   |                                |   |                                |   |
| Net cash provided by financing activities                                       |   | 8,502                                |   | 6,941                               |   | 9,098                               |   |
|                                                                            |   |                                 |   |                                |   |                                |   |
| (Decrease) increase in cash                                                     |   | (153                                 | )      | 1,329                               |   | (64                                 | )      |
|                                                                            |   |                                 |   |                                |   |                                |   |
| Cash, beginning of period                                                       |   | 1,787                                |   | 458                                 |   | 522                                 |   |
|                                                                            |   |                                 |   |                                |   |                                |   |
| Cash, end of period                                                             |   | $                                    | 1,634  |                                | $      | 1,787                               |   | $ | 458 |   |
|                                                                            |   |                                 |   |                                |   |                                |   |
| SUPPLEMENTAL DISCLOSURES:                                                       |   |                                 |   |                                |   |                                |   |
| Cash paid for interest                                                          |   | $                                    | 7,835  |                                | $      | 14,699                              |   | $ | 8,253 |   |

 

Theaccompanying notes are an integral part of these combined financial statements

 

 

88

----

 

 

**SupplementalDisclosures of Noncash Investing and Financing Activities:**

 

During 2000, the Company purchased a 100%interest in two property management and brokerage companies for$1,498,000.  The Company issued notes topay for part of the purchase and allocated the majority of the purchase priceto goodwill.

 

During 2000, the Company transferred landwith a book value of $3,298,000 to Sorrento II Partners, an affiliatedpartnership in exchange for cash and forgiveness of rent prepayments to theCompany from Sorrento II Partners.

 

During 2000, various netaffiliate payables of $173,000 were converted to equity.

 

During 1999, the Company purchased a propertyby assuming approximately $4,415,000 in liabilities.

 

89

----

 

 

CGS AND THEMAJORITY-OWNED AFFILIATES

NOTESTO COMBINED FINANCIAL STATEMENTS

 

 

1.             BASISOF PRESENTATION

 

The accompanying combined financialstatements present the financial position of CGS Real Estate Company, Inc. andthe Majority-owned Affiliates (the “Company’”) as of December 31, 2000, and theresults of operations and cash flows from January 1 through October 19, 2001and for the years ended December 31, 2000 and 1999.  As discussed in Note 2, certain assets and liabilities of theCompany were acquired in a consolidation transaction.

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reported period.  Actual results could differ from those estimates.

 

All significant intercompany balances andtransactions have been eliminated in combination.  Certain prior year balances have been reclassified to conformwith the current year presentation.

 

2.             CONSOLIDATIONTRANSACTION

 

On October 19, 2001, subsidiaries of American SpectrumRealty, Inc. (“ASR”) acquired certain assets and liabilities of the Companypursuant to a consolidation transaction (the “ Consolidation”).  Prior to October 19, 2001, ASR was a whollyowned subsidiary of CGS.  ASR wasestablished to be the legal acquirer and registrant in the Consolidation.  Subsidiaries of ASR also merged with eightpublic limited partnerships and acquired all the assets and liabilities of twoprivate entities as part of the Consolidation. The accounting acquirer in the Consolidation was Sierra Pacific PensionInvestors ‘84, one of the eight public limited partnerships.  The limited partners of each of the eightpublic limited partnerships approved the Consolidation with ASR pursuant to theRegistration Statement on Form S-4 that was declared effective by theSecurities and Exchange Commission on August 8, 2001.  The closing of the Consolidation was effective on October 19,2001.  Partners of the publicpartnerships received shares in ASR or promissory notes in exchange for theirpartnership units and owners of existing related entities exchanged ownershipinterests in real estate for ASR shares or units in American Spectrum OperatingPartnership, a majority-owned subsidiary of ASR.  The private entities and public limited partnerships were engagedin substantially the same business as the Company.

 

3.             NATUREOF BUSINESS AND PRINCIPLES OF COMBINATION

 

The Company included CGS Real Estate Company, Inc. andvarious other entities and properties involved in real estate development,management, ownership, and operation. The Company’s operations were located principally in the Midwest andWestern United States and consisted mainly of office, office/warehouse,shopping center, and multi-family apartment properties.

 

The entities and properties included in the combinedfinancial statements of the Company (1) have majority ownership interests heldby Mr. William J. Carden and Mr. John Galardi and/or their affiliates, (2)  agreed to participate in the Consolidationwith other entities in which Mssrs. Carden and Galardi have interests, and (3)are under common management.  Certainentities and assets included in these combined financial statements were mergedinto a subsidiary of the operating partnership owned by ASR. ASR is a Marylandcorporation, the legal acquirer in the Consolidation, and was a wholly ownedsubsidiary of CGS. ASR acquired eight public limited partnerships and twoprivate entities.  The accountingacquirer in this transaction was one of the eight public limited partnerships(Sierra Pacific Pension Investors ‘84). These events are collectively referred to as the Consolidation.  For all entities that elected to be includedin the Consolidation, the assets and liabilities of each entity was exchangedfor stock and promissory notes of ASR and operating partnership units in anewly formed operating partnership, that is wholly-owned by ASR and willcontinue to be a consolidated subsidiary of ASR thereafter.  The private entities and public limitedpartnerships included in the Consolidation were engaged in substantially the samebusiness as the Company.  The Companyprovided property management services to these entities.  ASR intends to qualify as a real estateinvestment trust (REIT) for federal income tax purposes beginning in 2003.

 

The combined financial statements included CGS and itsconsolidated subsidiaries and properties as follows:

 

 
| Legal Entities                               |   | CGS Ownership |   |
|----------------------------------------------|--------|---------------|--------|
|                                         |   |          |   |
| American Spectrum Realty, Inc.               |   | 100%          |   |
| Pasadena Autumn Ridge, LP                    |   | 100%          |   |
| Villa Redondo LLC                            |   | 100%          |   |
| American Spectrum Real Estate Services, Inc. |   | 80%           |   |
| SP Properties, Inc.                          |   | 100%          |   |
| Nooney Income Investments, Inc.              |   | 100%          |   |
| Nooney Income Investments-Two                |   | 100%          |   |
| Nooney Investors, Inc.                       |   | 100%          |   |
|                                         |   |          |   |
| Wholly-Owned Properties                      |   |          |   |
|                                         |   |          |   |
| Parkade Center                               |   |          |   |
| Autumn Ridge                                 |   |          |   |
| Villa Redondo                                |   |          |   |
| West Florissant                              |   |          |   |
| Phoenix Van Buren Land                       |   |          |   |

 

CGS owned interests in the public limited partnershipsand private entities acquired in the Consolidation. Property managementoperations were conducted through various consolidated property managementsubsidiaries in which CGS has ownership interests of 80 to 100 percent andwhich were referred to as the CGS Management Company. The Company’s combinedfinancial statements also include one privately-held real estate limitedpartnership and two LLCs where the ownership percentages are in substanceidentical to the ownership of CGS (the common controlled entities) as follows:

 
| Legal Entity              |   | Properties                   |
|---------------------------|--------|------------------------------|
| McDonnell  Associates LLP |   | Northwest  Corporate Center  |
|                      |   |                         |
| Pacific Spectrum  LLC     |   | Pacific Spectrum             |
|                      |   |                         |
| Creekside/Riverside  LLC  |   | Creekside Senior  Apartments |

 

Additionally, the combined financial statementsincluded one privately-held real estate limited partnership and two LLCs (theclosely-held private entities) where the general partner or managing member andmore than 50% of the limited partnership interests were controlled by theowners of CGS as follows:

 
| Legal Entity                            |   | Properties                 |
|-----------------------------------------|--------|----------------------------|
| CGS Properties  Marketplace Columbia LP |   | Columbia N.E.  Marketplace |
|                                    |   |                       |
| Back Bay LLC                            |   | Back Bay Office            |
|                                    |   |                       |
| Seventy Seven LLC                       |   | Chrysler                   |

 

The combined financial statements also included, on acarve-out basis, three properties, Beach and Lampson Pad D, Richardson Plazaand Sierra Technology which were acquired by ASR from the entities that ownthese properties. The entities that own these properties were also controlledby the owners of CGS.

 

Transactions and accounts between combined entities have beeneliminated. Accounts and transactions eliminated include inter-entity loans andadvances and management fees charged to various entities by the managementcompany subsidiaries of CGS.

 

90

----

 

4.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

# ***Real Estate Held for Investment*** — Real estate held for investment is carried atcost net of accumulated depreciation and amortization.  Economic, market, environmental andpolitical conditions may affect management’s development, investment and/ormarketing plans. In addition, the implementation of such development,investment and/or marketing plans could be affected by the availability offuture financing.  Buildings andimprovements included in real estate held for investment are depreciated usingthe straight-line method over the estimated useful lives of the related assets,ranging from five to forty years.

# ** **

*Evaluation of Impairment -*Long-lived assets, includingreal estate held for investment that are expected to be held and used inoperations are carried at the lower of cost or, if impaired, the fair value ofthe asset. Long-lived assets to be disposed of are reported at the lower of carryingamount or fair value less cost to sell. An impairment charge is triggered if the sum of expected future cashflows (undiscounted and without interest charges) is less than the carryingamount of the asset.  Assumptions andestimates used to calculate fair value in determining the amount of anyimpairment loss include estimated occupancy, lease revenue, costs to enter intoleases with tenants, and property operation costs.  The calculation of an impairment loss is based upon estimateddiscounted future cash flows.  Theestimates to determine an impairment adjustment can change in the near term aseconomic conditions fluctuate.

 

During 1999, the Company evaluated certaingoodwill associated with acquired management companies and recorded animpairment charge of $2,247,000.  Thegoodwill impaired relates to the management companies located in Missouri andColorado, which were acquired in October and August 1997, respectively.  The impairment charge was the result of theloss of several management contracts. In addition, the Company recorded impairment charges applicable tocertain real estate properties totaling $2,917,000 for the year ended 1999(Note 12).  The analysis of impairmenton real estate properties was performed due to the deteriorating operatingperformance of certain properties and included independent appraisals of theproperties, which were based upon projected future cash flows of theproperties.

 

*Allowancefor credit losses* — A provision for credit losses is recorded basedupon management’s judgement of tenant creditworthiness.  The activity in the allowance for creditlosses during 1999 and 2000 was as follows:

 
| **(In 000’s)**              |   |              |   |                      |   |                  |   |                |   |   |
|----------------------------------|--------|-------------------|--------|---------------------------|--------|-----------------------|--------|---------------------|--------|--------|
|                             |   | **Balance  at**   |   |                      |   |                  |   |                |   |   |
|                             |   | **Beginning  of** |   | **Provisions  for ** |   | **Accounts  Written** |   | **Balance  at End** |   |   |
| **Allowance for credit  losses** |   | **Period**        |   | **Credit Losses**         |   | **Off**               |   | **of Period**       |   |   |
|                             |   |              |   |                      |   |                  |   |                |   |   |
| Year ended December 31, 1999     |   | $                 | (334   | )                         | $      | (309                  | )      | $                   | 122    |   | $ | (521 | ) |
| Year ended December 31, 2000     |   | $                 | (521   | )                         | $      | (842                  | )      | $                   | 463    |   | $ | (900 | ) |
|                                  |        |                   |        |                           |        |                       |        |                     |        |        |  |  |  |  |  |

 

*Equipment* - Equipment is stated atcost and is depreciated using the straight-line method over the estimateduseful lives of the related assets, ranging from three to five years.Maintenance and repairs are charged to expense as incurred. Significantrenewals and betterments are capitalized. At the time of retirement or other disposition of property andequipment, the cost and accumulated depreciation and amortization are removedfrom the accounts and any resulting gain or loss is reflected in operations.

 

*Capitalization of Interest* - The Company follows thepractice of capitalizing interest to real estate held for investment during theperiod of development, in accordance with SFAS 34, “Capitalization of InterestCost”.   Interest costs capitalizedduring 1999 was $880,000.   No interestcosts were capitalized during the period ended October 19, 2001 and year endedDecember 31, 2000.

 

*Investments in Uncombined Partnerships* - The Companyinvests in various public and private limited partnerships and in limitedliability companies that are engaged in substantially the same business as theCompany.  Investments may be reducedbelow zero if the investee records losses in which the general partner isobligated to fund.  The Company does notrecord any losses in excess of investments when it only acts as a limited partner.  The Company accounts for its investments inlimited partnerships using the equity method. Under this method, the Company initially records its investment in thelimited partnerships at cost and adjusts the carrying amount of the investmentto recognize its share of the income or losses of 

 

 

91

----

 

 

the limited partnerships after the date ofacquisition.  Partnership income andlosses are allocated in accordance with the respective partnership agreements.

 

*DeferredRevenue -*Deferred revenue represents non-refundableprepayments of rents on certain operating properties, which are recognized asrevenue when earned.

 

*Interest Rate Swap*- The Company, from time to time, utilizes interest rate swaps to manageinterest rate sensitivity for its debt arrangements.  The periodic net settlement for interest rate swaps is recordedas an adjustment to interest expense or capitalized if the project containingthe swap is still in the development period as discussed above underCapitalization of Interest.

 

*Revenue Recognition* - Lease agreements withtenants are accounted for as operating leases and rental income is recognizedon the straight-line method over the term of the related operating lease.  Unbilled rent receivable represents thedifference between rent recognized under the straight-line method and theactual cash payments and is included in accounts receivable on the accompanyingcombined balance sheets.  Property operatingcost reimbursements due from tenants for common area maintenance are recognizedin the period the expenses are incurred at amounts expected to be recoveredfrom the tenants.

 

*Debt Issuance Costs and Discount -*Debt issuancecosts and discounts related to the Company’s notes payable are deferred andamortized to interest expense using the effective interest method over the termof the related notes.  Debt issuancecosts are included in other assets in the accompanying combined balance sheets.

 

*Mandatorily-Redeemable Common Stock of Subsidiary -*****In August 1997,American Spectrum Real Estate Services, Inc. (ASRESI), initially a wholly-ownedsubsidiary of CGS, acquired all of the common stock of Spectrum Holdings, Ltd.(a property management company) in exchange for new mandatorily-redeemable commonshares of ASRESI.  The sellingshareholders of Spectrum Holdings, Ltd. have the right to put their shares ofASRESI at $522.50 per share or $1,045,000. As a result of this transaction, ASRESI is 80% owned by CGS andcontinues to be a consolidated subsidiary, while the mandatorily-redeemablecommon stock of subsidiary represents the minority interest.

 

*Income Taxes* — As of October 19, 2001,the Company included various partnerships and limited liability companies thatwere not subject to Federal or significant state income tax at the entitylevel.

 

The corporate entities that are subject toincome tax account for income taxes using the asset and liability method.  Deferred income tax assets and liabilitiesare determined based upon the differences between the financial reporting andtax bases of assets and liabilities and are measured using currently enactedtax rates and laws.  These entities haveaccumulated net operating losses for both Federal and State reporting purposesand pay minimal taxes.  The Company hasoperations in California, Arizona, Texas, Missouri, South Carolina, NorthCarolina, Colorado, Maryland, Illinois, Indiana, Kansas, Minnesota, Nebraska,and Ohio.  Consummation of theConsolidation may significantly impact the future utilization of net operatingloss carry-forwards.

 

ASR intends to qualify as a REIT beginning in2003 for federal income tax purposes. As a REIT, ASR will not generally be liable for federal corporate incometaxes.  As such, uncertainty exists asto the ultimate tax asset to be realized. Management has recorded a valuationallowance against the entire net deferred tax asset to reflect thisuncertainty.  If ASR fails to qualify asa REIT in any taxable year, it will be subject to federal income taxes on itstaxable income at regular corporate tax rates.

 

*Segment Disclosure* - Management believes thatthe Company operates in a single segment as the Company’s real estateoperations have similar economic and environmental conditions, businessprocesses, types of customers (i.e., tenants), and services provided, andbecause resource allocation and other operating decisions made by seniormanagement are based upon evaluation of the entire portfolio.

 

*Use of Estimates* - The preparation ofcombined financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities.  Actual resultscould materially differ from those estimates.

 

 

92

----

 

 

In assessing impairment of real estateassets, certain estimates were used by management related to future leaseincome to be realized and future operating costs to be incurred.  These estimates could materially differ fromthe actual results achieved.

 

5.             GOING CONCERN

 

The Company has experienced losses in the periodspresented and has a net capital deficiency. Certain entities in the combined financial statements have not made debtpayments when due and various lenders have placed $10,250,000 of debt indefault (See Note 15).  In addition,certain entities were in default on certain notes payable to affiliatestotaling $7,218,000 (See Note 6). Certain entities also needed to pay or refinance a significant amount ofdebt coming due in the twelve months following December 31, 2000.  These factors raised substantial doubt aboutthe ability of the Company to continue as a going concern.

 

Management plans in regard to these matters includedobtaining additional loans from shareholders, obtaining extensions from lendersor refinancing all debt through the completion of the Consolidation.  In addition, if necessary, managementbelieved it could sell properties to generate cash to pay debt.    Management believed operating losses werea result of the Company’s business plan that included acquisition andturn-around of under performing properties. During the turn-around period, losses can accrue due to the temporaryexcess of operating expenses, interest expense and management costs over rentalincome.  The factors that raisedsubstantial doubt about the ability of the Company to continue as a goingconcern were cured as a result of the Consolidation (See Note 2).

 

6.             RELATEDPARTY TRANSACTIONS

 

(i)                                     Notes Payableto Shareholders

 

Notes payable to shareholders consist of non-interest bearing advances,due on demand.

 

(ii)                                  Notes Payableto Affiliates

 

Notes payable to affiliates consists of various notes secured usuallyby real estate.  The notes bear interestat various rates, ranging from 6% to 12% and generally mature in various yearsthrough January 2005.  Notes payabletotaling approximately $7,218,000 are part of a settlement agreement enteredinto 1999 and were, pursuant to the settlement agreement, were due prior toDecember 31, 2000.  Such notes were notpaid in accordance with the settlement agreement causing the settlementagreement to be declared void.  Theseobligations, along with certain other assets and liabilities of the Company,were acquired by ASR on October 19, 2001. ASR intends to pay these loans primarily with the proceeds from therefinancing of debt.

 

(iii)                               Income fromAffiliates

 

The Company includes various property management subsidiaries thatprovide leasing, brokerage, and other services to affiliates and unrelatedparties.  Amounts paid/received fromproperty management services to properties included in these combined financialstatements are eliminated.  The propertymanagement subsidiaries also perform services for various uncombined entitiesin which the Company has ownership interests, the revenue from which has beenreflected as income from affiliates in the accompanying combined financialstatements.

 

7.             MINORITYINTEREST

 

On February 28, 2001, a third party buyer(the “Buyer”) purchased a 49% undivided tenancy-in-common interest in theCompany’s Creekside/Riverside property (the “Property”).  In exchange for this interest, the Buyeragreed to pay the Company $1,000,000. In addition, the sale agreement stipulates income and expenses shall beallocated to the Company and Buyer based upon their respective ownershipinterests.

 

93

----

 

 

The Company has accounted for thistransaction as a joint venture and as such, the purchase price was accountedfor as minority interest.  Further,income and distribution allocable to the Buyer are accounted for as an offsetto the minority interest account.

 

From and after February 1, 2002, the Buyer,under the terms of the sale agreement, shall have the unilateral right to causethe sale of the property to a bona fide third party purchaser for a fair marketprice upon commercially reasonable terms and provisions.  Upon the sale of the property, all netproceeds shall be distributed as follows:

 

1)              the thenoutstanding principal balance of the Creekside loan is to be paid;

2)              the Buyer is toreceive $1,030,000 plus simple interest of 12% per annum accruing from the dateof the sale agreement less any distributions made during the same period;

3)              the remainingbalance of such net sale proceeds shall be distributed to the Company

 

Further, under the terms of the salesagreement, the Company has the right to purchase the Buyer’s 49% interest inthe property if the lender calls the loan under a “due on sale” provisionincluded in the Creekside loan.

 

The Company has accounted for thistransaction as a partial interest in real property and as such, the purchaseprice is accounted for as minority interest. Further, income and distributions allocable to the buyer are accountedfor as an offset to the minority interest account.  In addition, to the extent that the accumulation of net incomeless distributions made to the Buyer does not cover the guaranteed return($30,000) and simple interest of 12% per annum, the Company records an accrualfor any such difference in each fiscal period until such obligation is paid infull.

 

8.             RECENTACCOUNTING PRONOUNCEMENTS

 

In June 2001, FASB issued SFAS No. 141 whichsupercedes APB 16, “Business Combinations”, which is effective for businesscombinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted forunder the purchase method and that the pooling-of-interest method is no longerallowed.  ASR accounted for theConsolidation under the purchase method.

 

In June 2001, FASB issued SFAS No. 142, “Goodwill andOther Intangible Assets”, which is effective for fiscal years beginning afterDecember 15, 2001.  SFAS No. 142requires, among other things, that goodwill no longer be amortized to earnings,but instead be reviewed for impairment. The Company is currently analyzing the provisions of SFAS No. 142 andhas not yet made a determination of the impact the adoption will have on itsfinancial statements.

 

In June 2001, FASB issued SFAS 143, “Accounting forAsset Retirement”.  SFAS No. 143addresses financial accounting and reporting obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  The provisions of SFAS No. 143are required to be applied starting with fiscal years beginning after June 15,2002.  The Company believes the adoptionof the provisions of SFAS 143 will not have a significant effect on its financialposition or results of operations.

 

In August 2001, the FASB issued Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (SFAS 144), which addresses financial accounting andreporting for the impairment or disposal of long-lived assets.  SFAS 144 supersedes Statement of FinancialStandards No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of”, and the accounting and reportingprovisions of APB 30 related to the disposal of a segment of a business.  SFAS 144 will be effective for the Companybeginning January 1, 2002, the first day of its 2002 fiscal year.  The Company is currently assessing but hasnot yet determined the impact of adopting SFAS 144 on its financial positionand results of operations.

 

9.             COMMITMENTSAND CONTINGENCIES

 

A subsidiary of theCompany, S-P Properties, Inc., a California corporation, is a defendant in alawsuit 

 

94

----

 

 

commenced in SuperiorCourt, County of Los Angles in November 1995, entitled Teachout et al. V. S.P.Properties, Inc. and Sierra Pacific Development Fund II (“Fund II”).  The suit was a derivative action brought bya limited partner on behalf of Fund II, which alleged that the general partnerbreached its fiduciary duty and breached the partnership agreement inconnection with loans to the general partner and the issuance of notes to anaffiliate of the Company in connection with the purchase of the Technologybuilding (the “Property”) from Fund II. Fund II was merged into a subsidiary of ASR pursuant to theConsolidation.  The loans to the generalpartner were made prior to the acquisition of the general partner by theCompany and were assumed by an affiliate of the Company.  The purchase was negotiated prior to theacquisition of the general partner by the Company and closed immediately priorto the acquisition of the general partner. The Company and its affiliates denied any liability.  The matter was settled and, pursuant to thesettlement agreement, the Company’s subsidiary agreed to repay the amount ofthe notes with accrued interest.  Theobligation to repay was guaranteed by John Galardi.  Under the settlement agreement, the payment was due in December2000.  The Company did not make the paymentwhen it was due because it did not have sufficient cash to make thepayment.  As a result, the plaintiffterminated the settlement agreement. Plaintiff amended its complaint to claim that additional loans in theamount of $500,000 were made by Fund II to affiliates of the general partner inviolation of the partnership agreement.  In addition, plaintiffs amended their complaint to add ASR as adefendant as the successor-in-interest to Fund II and its general partner.  ASR’s response to the amended complaint isnot yet due.  A trial setting conferenceis scheduled for April 10, 2002. Notwithstanding the termination of the settlement agreement, the ASRintends to make a distribution either in cash, stock, or both to the formerlimited partners of Fund II in an amount equal to that which the partners wouldhave been entitled to under the settlement agreement.  As of October 19, 2001 and December 31, 2000 interest andprincipal due with respect to the loans totaled approximately $7,883,000 and$7,218,000, respectively.

 

In December 1998, a related entity of theCompany was named as a defendant in an action seeking compensatory and punitivedamages related to a dispute over the management of an account that the relatedentity handled for the plaintiff.  Asettlement agreement was reached in May 2001 and the Company advanced therelated entity approximately $1,400,000 to pay for the settlement.  This advance was subsequently written offduring the second quarter of 2001.

 

In March 2001, the Company was named as adefendant in an action brought by certain limited partners of a limitedpartnership, which was not a part of the Consolidation, seeking damages inexcess of $8,500,000.  The claims ariseout of allegations by the limited partners that an affiliate of the Company, asformer general partner, breached various legal duties to the partnership forbenefit of individuals and entities affiliated with the general partner.  The Company was alleged to be one of theparties that benefited from the alleged breaches.  A settlement agreement was entered into during November 2001 thatrequires the Company to pay plantiffs under an installment plan.

 

As discussed inNote 15, the Company was not in compliance with certain financial and otherconvenants of certain debt agreements. Accordingly, various lenders notified the Company that the loans wereplaced in default status.  In August 2001, Goldman Sachs MortgageCompany commenced a lawsuit in the United States District Court, CentralDistrict of California against the Company, seeking recovery of approximately$4,668,000 as a result of the Company’s alleged breach of its guaranty of amortgage loan made by plaintiff to McDonnell Associates, LLC.  The loan was secured by a second mortgage onthe Northwest Corporate Center and came due on August 17, 2001.  This loan became an obligation of ASR uponconsummation of the Consolidation.  ASRsubsequently paid the loan in full during November 2001 settling this matter.

 

The Company is also party to various lawsuitsand disputes that have arisen in the normal course of business.  The liability, if any, arising from theunfavorable outcome of these other matters is presently unknown.  In the opinion of management, the amount ofultimate liability, if any, with respect to these other actions will notmaterially affect the financial position or results of operations of theCompany.

 

# **LEASE OBLIGATIONS AS LESSOR**

As of December 31, 2000, the Company, throughownership of various commercial and retail operating properties and ground-leasedland, was a lessor under various non-cancelable operating leases. Minimumfuture rental income under these non-cancelable operating leases were asfollows: 

 
| **Years ending December  31,** |   | **Amount (In 000’S)** |   |
|--------------------------------|--------|----------------------------|--------|
| 2001                           |   | $                          | 10,029 |   |
| 2002                           |   | 8,982                      |   |
| 2003                           |   | 7,951                      |   |
| 2004                           |   | 6,578                      |   |
| 2005                           |   | 3,876                      |   |
| Thereafter                     |   | 6,810                      |   |
|                           |   | $                          | 44,226 |   |

 

The Company’s lease rent income from overage orpercentage rents was not material for each of the periods presented.

 

The Company had an interest in three apartmentcomplexes. The rental of apartment units was generally for terms of one year orless. Accordingly, the above table does not reflect minimum future rentalincome for such apartment complexes.

 

# **LEASE OBLIGATIONS AS LESSEE**

As of December 31, 2000, the Company was a lesseeunder various noncancellable operating leases for the land underlying officefacilities. Minimum future rentals under these noncancellable operating leaseswere as follows: 

 
| **Years ending December 31,** |   | **Amount (In 000’S)** |   |
|-------------------------------|--------|----------------------------|--------|
| 2001                          |   | $                          | 708    |   |
| 2002                          |   | 440                        |   |
| 2003                          |   | 305                        |   |
| 2004                          |   | 25                         |   |
|                          |   | $                          | 1,478  |   |

 

**EMPLOYEE OBLIGATIONS**

As of December 31, 2000, the Company was obligatedunder various employment agreements with key employees.  Minimum future obligations under theseemployment agreements were as follows:

 

 
| **Years ending December 31,** |   | **Amount (In 000’S)** |   |
|-------------------------------|--------|----------------------------|--------|
| 2001                          |   | $                          | 880    |   |
| 2002                          |   | 715                        |   |
| 2003                          |   | 19                         |   |
|                          |   | $                          | 1,614  |   |

 

10.           SUBSEQUENTEVENT

 

The limited partners of each of the eight publiclimited partnerships approved the Consolidation with ASR pursuant to theRegistration Statement on Form S-4.  Theclosing of the Consolidation was effective on October 19, 2001.  Pursuant to the Consolidation, subsidiariesof ASR acquired certain assets and liabilities 

 

95

----

 

 

of the Company, merged with the limited eight limitedpartnerships, and acquired all the assets and liabilities of two privateentities (Note 2).

 

11.            ACQUISITIONS

 

The following property was acquired during1999.  No properties were acquiredduring 2000 and the period ended October 19, 2001:

 
| **Property** |   | **Description** |   | **Acquisition  Date** |   | **Purchase  Price**

***(In 000’s)*** |   |
|--------------|--------|-----------------|--------|-----------------------|--------|--------------------------------------------|--------|
| Autumn Ridge |   | Apartments      |   | May  1999             |   | $                                          | 5,450  |   |
|              |        |                 |        |                       |        |                                            |        |  |

 

Substantially the entire purchase price,except for working capital amounts, was allocated to the real estate property.

 

12.            REAL ESTATE HELD FOR INVESTMENT, NET

 

Real estate held for investment at December31, 2000 consisted of the following:

 
|                                        |   | ***(I******n******000******’s******)*** |
|---------------------------------------------|--------|----------------------------------------------|
| Income producing property:                  |   |                                         |
| Land                                        |   | $                                            | 17,790 |
| Building and improvements                   |   | 81,251                                       |
|                                        |   | $                                            | 99,041 |
| Accumulated depreciation and   amortization |   | (13,020)                                     |
|                                        |   | $                                            | 86,021 |

 

During 2001, the Company recorded an $867,000loss on demolition of property.  Theloss was associated with the demolition of one of the buildings at theCompany’s Marketplace property in South Carolina.

 

During 2001, the Company recorded a gain onsale of property of $100,000.  The gainwas associated with the sale one of the Company’s management companies andrelated third party brokerage and property management businesses.

 

During 1999, the Company recorded animpairment loss of $1,156,000 based in part on the planned sale of one of twobuildings at Northwest Corporate Center, an office property acquired in August1998.  The sale was consummated in 2000.  No gain or loss was recorded on the sale ofthe building.

 

During 1999, the Company also recorded animpairment loss of $1,593,000 on a retail building acquired in February 1989,and an impairment loss of $168,000 on land which was acquired in September1998, in accordance with SFAS No 121. The analysis of impairment was performed due to the deterioratingoperating performance of the properties and included independent appraisals,which were based upon projected cash flows of the properties.

 

13.           EQUIPMENT,NET

 

Equipment consists primarily of furniture andfixtures and information technology/computer equipment.  Accumulated depreciation was approximately$2,444,000 at December 31, 2000.

 

96

----

 

14.         INVESTMENTS IN UNCOMBINED PARTNERSHIPS

 

The Company is a general partner and had afifty percent or less ownership interest in the following uncombinedpartnerships at December 31, 2000:

 
|                                        |   | General  Partner |   | Limited Partner |
|---------------------------------------------|--------|------------------|--------|-----------------|
| Sierra Pacific  Institutional Properties V* |   | 1%               |   | 0%              |
| Sierra Pacific Development  Fund III*       |   | 1                |   | 0               |
| Sierra Pacific Development  Fund II*        |   | 1                |   | 0               |
| Sierra Pacific Development  Fund*           |   | 1                |   | 6.03            |
| Sierra Pacific Pension  Investors ‘84* |   | 1                |   | 4.91            |
| Nooney Income Fund LTD*                     |   | 1                |   | 13.60           |
| Nooney Income Fund II*                      |   | 1                |   | 5.83            |
| Nooney Real Property  Investors Two LP*     |   | 1                |   | 5.40            |
| Nooney Rider Trail, LLC*                    |   | 0                |   | 1               |
| 8622 Starcrest Investors  LLC               |   | 0                |   | 38.25           |
| Mariner’s  Place                       |   | 9.62             |   | 0               |
| Meadow Wood Village  Associates LTD LP      |   | 1                |   | 0               |
| California Consultants,  Limited            |   | 1                |   | 0               |

 

* Entities thatparticipated in the Consolidation (Note 2).

 

The Company uses the equity method of accounting forits investments in these fifty percent or less owned partnerships (Note4).  The accounting policies of theentities are substantially the same as those of the Company.

 

15.           NOTESPAYABLE

 

Notes payable at December 31, 2000 consisted of thefollowing:

 
|                                                                                                                                                                                                                           |   | ***(I******n******000******’s******)*** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|
|                                                                                                                                                                                                                           |   |                                         |
| Fixed rate debt payable to financial  institutions, primarily secured by real estate held for investment at an  interest rate between 6.5% and 20.0% due between 2001 and 2010.                                                |   | $61,561                                      |
|                                                                                                                                                                                                                           |   |                                         |
| Variable rate debt payable to financial  institutions and other lenders, primarily secured by real estate held for  investment at an interest rate between 8% and 12% or based on various  indexes, due between 2000 and 2008. |   | 48,614                                       |
|                                                                                                                                                                                                                           |   | $110,175                                     |

 

Generally, the debt is arranged on a property-specificbasis and is secured by the property. Mssrs. Carden and Galardi have provided guarantees on certain borrowingsand/or stock of CGS and/or its subsidiaries have been pledged as collateral.

 

During 2000, the Company refinanced approximately$31,765,000 of debt with a bank loan of $34,940,000, principal and interest duemonthly at an interest rate of 8.5% per annum, with remaining unpaid principaland interest due on July 10, 2010.  Inconnection with the debt refinancing, the Company incurred a $1,861,000extraordinary loss for prepayment penalties and write-off of deferred loancosts.

 

 

97

----

 

 

Certain of the Company’s notes payable provide forvarious warranties, covenants and restrictions pertaining to financial andnon-financial matters requiring compliance on a continuing basis.  Default on any warranty, covenant orrestriction could affect the lender’s commitment to lend, and if not waived orcorrected, could accelerate the maturity of any borrowings outstanding underthe notes.

 

Asof December 31, 2000, the Company was not in compliance with certain financialand other covenants of certain debt agreements and had approximately$43,751,000 in debt coming due in the next twelve months.  Accordingly, various lenders notified theCompany of loans that were placed into a default status.  Total defaulted loans, as of December 31,2000, was approximately $10,250,000, in which the maturity dates of these loanshave been accelerated and total unpaid principal and interest was due infull.  Approximately $8,603,000 ofdefaulted loans are secured by real estate held for investment. These loans indefault are also guaranteed by Mssrs. Carden and Galardi.  Additionally, the primary portion of theremaining $1,647,000 of defaulted loans is guaranteed by Mssrs. Carden andGalardi.  On October 19, 2001, theCompany’s notes payable became the obligation of ASR pursuant to theConsolidation as discussed in Note 2.

 

 

98

----

 

 

**EXHIBITINDEX**

 

| **Exhibit No.** |   | **Exhibit Title**                                                                                                 |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                              |
| 3.1             |   | Form of Amended and Restated Articles of  Incorporation of the Company (1)                                        |
|            |   |                                                                                                              |
| 3.2             |   | Bylaws of the Company. (1)                                                                                        |
|            |   |                                                                                                              |
| 4.1             |   | Form of Stock Certificate (1)                                                                                     |
|            |   |                                                                                                              |
| 10.1            |   | Form of Agreement and Plan  of Merger of Sierra-Pacific Development Fund (1)                                      |
|            |   |                                                                                                              |
| 10.2            |   | Form of Agreement and Plan  of Merger of Sierra-Pacific Development Fund II (1)                                   |
|            |   |                                                                                                              |
| 10.3            |   | Form of Agreement and Plan  of Merger of Sierra-Pacific Development Fund III (1)                                  |
|            |   |                                                                                                              |
| 10.4            |   | Form of Agreement and Plan of Merger of Sierra  Pacific Pension Investors ‘84 (1)                            |
|            |   |                                                                                                              |
| 10.5            |   | Form of Agreement and Plan of Merger of Sierra  Pacific Institutional Properties V (1)                            |
|            |   |                                                                                                              |
| 10.6            |   | Form of Agreement and Plan of Merger of Nooney  Income Fund Ltd., L.P. (1)                                        |
|            |   |                                                                                                              |
| 10.7            |   | Form of Agreement and Plan of Merger of Nooney  Income Fund Ltd., L.P. (1)                                        |
|            |   |                                                                                                              |
| 10.8            |   | Form of Agreement and Plan of Merger of Nooney Real  Property Investors — Two, L.P. (1)                      |
|            |   |                                                                                                              |
| 10.9            |   | Omnibus Stock Incentive Plan (1)                                                                                  |
|            |   |                                                                                                              |
| 10.10           |   | Agreement of Limited  Partnership of American Spectrum Realty Operating Partnership, L.P. (1)                     |
|            |   |                                                                                                              |
| 10.11           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and CGS Properties (Mkt./Col.), L.P. (1) |
|            |   |                                                                                                              |
| 10.12           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and Creekside/Riverside, L.L.C. (1)      |
|            |   |                                                                                                              |
| 10.13           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and McDonnell Associates, L.L.C. (1)     |
|            |   |                                                                                                              |
| 10.14           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and Pacific Spectrum, L.L.C. (1)         |
|            |   |                                                                                                              |
| 10.15           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and Pasadena Autumn Ridge LP (1)         |
|            |   |                                                                                                              |
| 10.16           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and Seventy Seven, L.L.C. (1)            |
|            |   |                                                                                                              |
| 10.17           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and Villa Redondo LLC (1)                |
|            |   |                                                                                                              |
| 10.18           |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and Third Coast LLC (1)                  |
|            |   |                                                                                                              |

 

 

99

----

 

| 10.19  |   | Contribution Agreement, dated August 6, 2000,  between the Company and No.–So., Inc. (1)                                                                                                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                       |
| 10.20  |   | Form of Restricted Stock Agreement (1)                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                       |
| 10.21  |   | Form of Stock Option Agreement (Incentive Stock  Options) (1)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                       |
| 10.22  |   | Form of Stock Option Agreement (Directors) (1)                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                       |
| 10.23  |   | Form of Stock Option Agreement (Non-Qualified  Options) (1)                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                       |
| 10.29  |   | Form of Indenture Relating to Notes (1)                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                       |
| 10.25  |   | Contribution Agreement, dated May 31, 2001, between  the Company and CGS Real Estate Company, Inc. (1)                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                       |
| 10.26  |   | Contribution Agreement, dated May 31, 2001, between  the Company and American Spectrum Real Estate Services, Inc. (1)                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                       |
| 10.27  |   | Agreement and Plan of Merger, dated May 31, 2001,  between the Company and Lindbergh Boulevard Partners (Lindbergh), L.P. (1)                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                       |
| 10.28  |   | Agreement and Plan of Merger, dated May 31, 2001,  between the Company and Nooney Rider Trail LLC. (1)                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                       |
| 10.29  |   | Agreement and Plan of Merger, dated May 31, 2001,  between the Company and Back Bay LLC. (1)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                       |
| 10.30  |   | Contribution Agreement, dated May 31, 2001, between  the Company and CGS Real Estate Company, Inc., American Spectrum — Midwest,  American Spectrum — Arizona, American Spectrum — California and American  Spectrum — Texas, Inc. (1) |
|   |   |                                                                                                                                                                                                                                                       |
| 10.31  |   | Amendment of Agreement Plan of Merger between the  Company and Villa Redondo LLC                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                       |
| 10.32  |   | Amendment of Agreement Plan of Merger between the  Company and Pasadena Autumn Ridge, L.P.                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                       |
| 10.33  |   | Amendment of Agreement  Plan of Merger between the Company and Third Coast LLC                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                       |
| 10.34  |   | Registration Right’s Agreement between the Company,  the Operating Partnership, and other parties                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                       |
| 21.01  |   | Significant Subsidiaries of the Company                                                                                                                                                                                                                    |

 

----

(1) Incorporated herein by reference to the Company’sRegistration Statement on Form S-4 (Registration No. 333-43686), which becameeffective August 8, 2001.

 

 

100

----