**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM10-K**

** **

| **(Mark  One)**                                                       |
|-----------------------------------------------------------------------|
| **ý**** ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF** |
| **THE  SECURITIES EXCHANGE ACT OF 1934**                              |
|                                                                  |   |   |
| **For  the year ended December 31, 2002**                             |
|                                                                  |
| **OR**                                                                |
|                                                                  |   |   |
| **o**** TRANSITION REPORT  PURSUANT TO 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 registered  under Section 12(b) of the Act:            |

 

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

 

Securities registeredpursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 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  o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).  Yes o  No ý

 

As of June 28, 2002, the last business day of theCompany’s most recent completed second quarter, the aggregate market value ofthe voting stock held by non-affiliates of the Registrant was approximately $32,763,256.  The aggregate market value was computed withreference to the price on the American Stock Exchange at which the voting stockwas last sold as of such date. For this purpose, 1,109,523 shares of Common Stockheld by officers, directors and stockholders whose ownership exceeds tenpercent of the shares of outstanding common stock of the Registrant on suchdate are deemed to be held by affiliates, but exclusion of shares held by anyperson should not be construed to indicate that such person is an affiliate ofthe Registrant for any other purpose.

 

As of March 10, 2003, 5,545,179 shares of Common Stock($.01 par value) were outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

Part III: Portions of the Registrant’s definitive proxy statement to be issued inconnection with the Registrant’s annual stockholder’s meeting to be held May 7,2003, which will be filed by April 30, 2003.

 

 

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**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 of Operations |
| 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 | Controls  and Procedures                                                                    |
| Item  15 | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                            |

 

2

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**PART I**

 

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

 

# **GeneralDescription of Business**

 

American Spectrum Realty,Inc. (“ASR” or the “Company”) is a Maryland corporation established on August8, 2000.  The Company is a full-servicereal estate corporation, which owns, manages and operates income-producingproperties.  Substantially all of theCompany’s assets are held through an operating partnership (the “OperatingPartnership”) in which the Company, as of December 31, 2002, held a 1% generalpartner interest and an 87.4% limited partnership interest. As of December 31,2002, through its majority-owned subsidiary, the Operating Partnership, theCompany owned and operated 33 properties, which consisted of 15 office, 11office/warehouse, three shopping center, and three apartment properties, andone developmental 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, California and Arizona.

 

Substantially all of theCompany’s assets are held through the Operating Partnership. The Company is thesole general partner of the Operating Partnership.  As the sole general partner of the Operating Partnership, theCompany generally has the exclusive power under the Partnership Agreement tomanage and conduct the business of the Operating Partnership. The Company’sinterest in the Operating Partnership entitles it to share in cashdistributions from, and in profits and losses of, the OperatingPartnership.  Holders of limitedpartnership units in the Operating Partnership (“OP Units”) have the samerights to distributions as holders of common stock in the Company. Most of theproperties will be owned by the Operating Partnership through subsidiarylimited partnerships or limited liability companies.

 

Holders of the OP Unitshave the option to redeem their units and to receive, at the option of theCompany, in exchange for each OP Unit (i) one share of Common Stock of theCompany, or (ii) cash equal to the fair market value of one share of CommonStock of the Company at the date of conversion.

 

Management isreconsidering whether it is in the best interest of the Company to elect to betreated as a real estate investment trustor REIT, as defined under the InternalRevenue Code of 1986, as amended.  Inthe event such election is made, the election could be effective as early asJanuary 1, 2003 upon the filing of the appropriate forms for the 2003 taxyear.  In this regard, the Company plansto operate within the requirements of REIT status in 2003.  In general, a REIT is a company that owns orprovides financing for real estate and pays annual distributions to investorsof at least 90% of its taxable income. A REIT typically is not subject to federal income taxation on its netincome, provided applicable income tax requirements are satisfied.   For the tax year 2002, the Company wastaxed as a C corporation.

 

## **ConsolidationTransaction**

 

In October 2001, theCompany acquired various properties 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 entitiesmanaged by CGS Real Estate Company, Inc. (“CGS”) and its affiliates andacquired certain assets and liabilities of CGS and its majority-ownedaffiliates.  Sierra Pacific PensionInvestors ‘84 (“SPPI84”), one of the eight public limited partnerships, wastreated, for accounting purposes, as the acquirer of the properties in theConsolidation.  Prior to theConsolidation, SPPI84’s activities involved the ownership and operation of tworeal estate properties in Arizona: Sierra Spectrum in Phoenix, Arizona and Sierra Valencia in Tucson,Arizona. 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 the Company.

 

3

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**Business Objectives and Strategy**

 

The Company’s fundamentalbusiness objective is to maximize stockholder value.  The Company intends to achieve its business objective throughopportunistic investments and by executing its other operating strategies.

 

The Company’s futuregrowth will be focused on multi-tenant suburban office and industrialproperties in the high growth markets of Texas, Arizona and California.  Properties in non-core markets will be soldand the net proceeds redeployed into funding future acquisitions in core marketsand to pay for capital expenditures and reduce debt.

 

*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 include individualsas well as such institutions as banks, insurance companies and pensionfunds.  In addition, the acquisition ofunder performing properties allow the Company to improve cash flow bysubstituting its property management policies and personnel and making otherchanges, such as installing energy saving devices.  The Company will not set a maximum target purchase price butrather it will tailor its acquisitions to under performing properties, whichthe Company believes are attractively priced due to relative physical oroperating deficiencies.  The Companybelieves that its real estate expertise will allow it to, when necessary,reposition, renovate or redevelop these properties to make them competitive intheir local markets.

 

*CompetitiveAdvantages.*  TheCompany believes it has 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 its management’s experience, the Company expects that itspresence in geographically diverse markets will increase its exposure toopportunities for attractive acquisitions of various types of propertiesthroughout its operating region and provide it with competitive advantageswhich enhance its ability to do so, including:

 

•                  strong localmarket expertise;

 

•                  long-standingrelationships with tenants, real estate brokers, institutions and other ownersof real estate in each local market;

 

•                  fully integratedreal estate operations which allow quick response to acquisition opportunities;

 

•                  access tocapital markets at competitive rates as a public company;

 

•                  ability toacquire properties in exchange for ASR shares or OP Units which may make it amore attractive purchaser when compared to purchasers who are not similarlystructured or are unable to make similar use of equity to purchase properties.

 

*Geographic and Property TypeDiversification. *TheCompany intends to seek acquisitions of properties, which have sufficienthistorical operating income to assure that dividend distributions tostockholders will not be diminished in the short-term and will be expected toincrease in the long-term.  The Companyintends to focus on acquisition of office and office/warehouse properties inTexas, Arizona and California.

 

*Property Management Strategies*.  The entities included in the Consolidationdeveloped procedures and expertise which will permit ASR to manage effectivelya variety of types of properties throughout the United States. Theirdecentralized structure with strong local management enabled them to operateefficiently.  In seeking to maximizerevenues, minimize costs and increase the value of their properties, theyhistorically followed aggressive property management policies.  Among the property management techniquesemphasized were regular and comprehensive maintenance programs, regular andcomprehensive financial analyses, the use of a master property and casualtyinsurance program, aggressive restructuring or 

 

4

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conversion of tenants spaces and frequent appearancesbefore property tax assessors, planning commissions and other localgovernmental bodies.  The Companybelieves that its management of the properties will be a substantial factor inits ability to realize its objectives of maximizing earnings.

 

*Managing and Monitoring Investments*.  The Company has actively managed theproperty portfolio and administered its investments.  The Company will monitor issues including the financialadvantages of property sales, minimization of real estate taxes, and insurancecosts. Also, the Company will actively analyze diversification, review tenantfinancial statements to deal with potential problems quickly and willrestructure investments in the case of underperforming and non-performingproperties.

 

**Competition**

 

The Company competes with other entities both to locate suitableproperties for acquisition and to locate purchasers for its properties.  While the markets in which it competes arehighly fragmented with no dominant competitors, the Company faces substantialcompetition in both its leasing and property acquisition activities.  There are numerous other similar types ofproperties located in close proximity to each of its properties.  The amount of leasable space available inany market could have a material adverse effect on the Company’s ability torent space and on the rents charged. Competition for acquisition of existing properties from institutionalinvestors and publicly traded REITs has increased substantially in the pastseveral years.  In many of the Company’smarkets, institutional investors and owners and developers of propertiescompete vigorously for the acquisition, development and leasing of space.  Many of these competitors have greaterresources and more experience than the Company.

 

**Employees**

 

As of December 31, 2002, ASR employed approximately 79individuals, including on-site property management and maintenance personnel.

 

# **Environmental Matters**

 

Various federal, state and local laws and regulations subject propertyowners and operators to liability for reporting, investigating, remediating,and monitoring 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 and regulationswhich impose requirements on the storage, use, management and disposal ofregulated hazardous materials or substances. The failure to comply with those requirements could result in theimposition of liability, including penalties or fines, on the owner or operatorof the properties.  Future laws orregulations could also impose unanticipated material environmental liabilitieson the Company in connection with any of the properties.

 

The Company may decide to acquire a property with known or suspectedenvironmental contamination after it evaluates that business risk, thepotential costs of investigation or remediation, and the potential costs tocure identified non-compliances with environmental laws or regulations.  In connection with its acquisition ofproperties, the Company may seek to have the seller indemnify it againstenvironmental conditions or non-compliances existing as of the date ofpurchase, and under appropriate circumstances, it 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.

 

5

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# **Insurance**

 

The Company carriescomprehensive liability, fire, terrorism, extended coverage and rental lossinsurance covering all of its properties, with policy specifications andinsured limits which the Company believes are adequate and appropriate underthe circumstances. There are, however, types of losses that are not generallyinsured because they are either uninsurable or not economically feasible toinsure.

 

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.

 

# **CapitalExpenditures**

 

Capital expenditurerequirements include both normal recurring capital expenditures, and tenantimprovements and lease commissions relating to the leasing of space to new orrenewing tenants.  The entities includedin the Consolidation had a history of acquiring properties which requiredrenovation, repositioning or management changes to improve their performanceand to enable them to compete effectively. The Company plans to continue to invest in these types ofproperties.  These properties mayrequire major capital expenditures or significant tenant improvements in orderto maximize their cash flows.

 

**Acquisitionsand Dispositions**

# ** **

On August 28, 2002, the Company acquired an officeproperty in Houston, Texas consisting of approximately 46,821 rentable squarefeet.  Acquisition costs ofapproximately $1,387,000 consisted primarily of the assumption of existing debtwith the remainder in cash.

 

On May 28, 2002, the Company acquired two officeproperties in Houston, Texas consisting of approximately 142,792 rentablesquare feet.  The aggregate acquisitioncosts of approximately $11,567,000 consisted of proceeds from a tax-deferredexchange, the assumption of existing debt and seller financing.

## ** **

## **OnOctober 15, 2002, the Company sold Maple Tree, a 72,149 square foot shoppingcenter in Missouri, for $3,800,000.  OnOctober 11, 2002, the Company sold Creekside Apartments, a 152-unit apartmentproperty in California, for $8,300,000. Gain on sales of $261,000 and $866,000, respectively, were recorded asgain on sale of discontinued operations. Total net sales proceeds, which totaled $279,000, were held in escrow atDecember 31, 2002.  It is anticipatedthe sales proceeds will be used in tax-deferred exchanges to assist withfunding future acquisitions.**

 

On April 30, 2002, theCompany sold Beach & Lampson, a 13,017 square foot shopping center inCalifornia, for $1,200,000.  The Companyreceived net cash proceeds of approximately $59,000 on the sale date and a$1,100,000 trust deed note from the buyer. The note, which contained a $200,000 early pay-off discount, was paid inOctober 2002 with the receipt of $900,000 from the buyer.  The sale of the property resulted in a$348,000 total loss on sale of real estate asset.

 

In November 2001, theCompany sold the 42,142 square foot Tower Industrial Building for$1,800,000.  The sale produced a netdeferred gain on the sale of approximately $232,000 and net proceeds ofapproximately $1,688,000.  The netproceeds, which were held in escrow at December 31, 2001, were used in atax-deferred exchange to assist the funding of the two office propertiesacquired in May 2002.

 

6

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

 

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

 

The Company’s 33 properties consist of 15 office, 11 office/warehouse,three shopping center and three apartment properties, and one developmentalland property located in four geographic regions in nine states. The followingtable sets forth the location, type and size of the properties (by rentablesquare feet and/or units) along with annualized net rent, rented square feet,occupancy, and rent per square foot as of December 31, 2002.

 
| **Location**                     |   | **Type**        |   | **Total  Gross  Leasable   Area (GLA)  (Square Feet)** |   | **Percent  of  GLA Leased  on December 31, 2002** |   | **Rented   Square Feet** |   | **Annualized  Net Rent  (dollars in  thousands)** |   | **Rent  per  Square   Foot** |   |
|----------------------------------|--------|-----------------|--------|--------------------------------------------------------|--------|---------------------------------------------------|--------|--------------------------|--------|---------------------------------------------------|--------|------------------------------|--------|
| *Arizona/California  Region*     |   |            |   |                                                   |   |                                              |   |                     |   |                                              |   |                         |   |
| Pacific  Spectrum, AZ            |   | Office          |   | 71,058                                                 |   | 47                                                | %      | 33,177                   |   | $                                                 | 583    |                         | $      | 17.57 |   |
| Valencia, AZ*                    |   | Office/Whse     |   | 82,843                                                 |   | 90                                                | %      | 74,187                   |   | 578                                               |   | 7.80                         |   |
| Phoenix Van  Buren, AZ           |   | Land            |   | N/A                                                    |   | N/A                                               |   | N/A                      |   | N/A                                               |   | N/A                          |   |
| Mira Mesa, CA                    |   | Office          |   | 89,553                                                 |   | 96                                                | %      | 85,550                   |   | 2,127                                             |   | 24.86                        |   |
| Sorrento II, CA                  |   | Office          |   | 88,073                                                 |   | 100                                               | %      | 88,073                   |   | 1,064                                             |   | 12.09                        |   |
| Creekside  Office, CA            |   | Office          |   | 47,810                                                 |   | 100                                               | %      | 47,810                   |   | 1,278                                             |   | 26.72                        |   |
| Bristol Bay, CA                  |   | Office          |   | 50,643                                                 |   | 87                                                | %      | 43,926                   |   | 1,146                                             |   | 26.08                        |   |
| Daimler  Chrysler, CA            |   | Office          |   | 208,117                                                |   | 92                                                | %      | 190,807                  |   | 5,430                                             |   | 28.46                        |   |
| Sorrento I, CA                   |   | Office/Whse     |   | 43,100                                                 |   | —                                            |   | —                   |   | —                                            |   | —                       |   |
| Villa Redondo,  CA               |   | Apartment       |   | 96,802                                                 |   | 91                                                | %      | 88,283                   |   | 2,108                                             |   | 23.88                        |   |
| Arizona/California  Region Total |   |            |   | 777,999                                                |   | 84                                                | %      | 651,813                  |   | 14,314                                            |   | 21.96                        |   |
| *Upper  Midwest Region*          |   |            |   |                                                   |   |                                              |   |                     |   |                                              |   |                         |   |
| Countryside  Office Park, IL     |   | Office          |   | 91,975                                                 |   | 75                                                | %      | 68,992                   |   | $                                                 | 1,158  |                         | $      | 16.78 |   |
| Oak Grove  Commons, IL           |   | Office/Whse     |   | 137,678                                                |   | 97                                                | %      | 133,347                  |   | 990                                               |   | 7.43                         |   |
| Park Plaza I  & II, IN       |   | Office/Whse     |   | 95,080                                                 |   | 91                                                | %      | 86,440                   |   | 552                                               |   | 6.39                         |   |
| Jackson  Industrial A, IN        |   | Office/Whse     |   | 320,000                                                |   | 61                                                | %      | 194,000                  |   | 534                                               |   | 2.75                         |   |
| Morenci  Professional Park, IN   |   | Office/Whse     |   | 105,600                                                |   | 89                                                | %      | 93,600                   |   | 417                                               |   | 4.46                         |   |
| Leawood Fountain  Plaza, KS      |   | Office          |   | 86,355                                                 |   | 72                                                | %      | 62,412                   |   | 1,128                                             |   | 18.08                        |   |
| Northwest  Corporate Center, MO  |   | Office          |   | 87,334                                                 |   | 74                                                | %      | 64,281                   |   | 1,183                                             |   | 18.40                        |   |
| Parkade Center,  MO              |   | Office          |   | 220,964                                                |   | 77                                                | %      | 169,547                  |   | 1,420                                             |   | 8.38                         |   |
| Business Center,  MO             |   | Office/Whse     |   | 64,387                                                 |   | 94                                                | %      | 60,298                   |   | 502                                               |   | 8.32                         |   |
| The Lakes, MO                    |   | Apartment       |   | 311,912                                                |   | 89                                                | %      | 278,274                  |   | 2,891                                             |   | 10.39                        |   |
| North Creek  Office Park, OH     |   | Office          |   | 92,282                                                 |   | 94                                                | %      | 87,087                   |   | 1,166                                             |   | 13.39                        |   |
| Northeast  Commerce Center, OH   |   | Office/Whse     |   | 100,000                                                |   | 72                                                | %      | 72,176                   |   | 473                                               |   | 6.55                         |   |
| Upper Midwest  Region Total      |   |            |   | 1,713,567                                              |   | 80                                                | %      | 1,370,454                |   | 12,414                                            |   | 9.06                         |   |
| *Carolina  Region*               |   |            |   |                                                   |   |                                              |   |                     |   |                                              |   |                         |   |
| Columbia, SC                     |   | Shopping Center |   | 56,487                                                 |   | 86                                                | %      | 48,642                   |   | $                                                 | 252    |                         | $      | 5.18 |   |
| Marketplace, SC                  |   | Shopping Center |   | 105,289                                                |   | 40                                                | %      | 42,559                   |   | 449                                               |   | 10.54                        |   |
| Richardson  Plaza, SC            |   | Shopping Center |   | 108,138                                                |   | 82                                                | %      | 88,458                   |   | 547                                               |   | 6.19                         |   |
| Carolina Region  Total           |   |            |   | 2,69,914                                               |   | 67                                                | %      | 179,659                  |   | 1,248                                             |   | 6.95                         |   |
| *Texas  Region*                  |   |            |   |                                                   |   |                                              |   |                     |   |                                              |   |                         |   |
| San Felipe, TX                   |   | Office          |   | 102,141                                                |   | 98                                                | %      | 100,072                  |   | $                                                 | 1,432  |                         | $      | 14.31 |   |
| Southwest Point,  TX             |   | Office/Whse     |   | 101,156                                                |   | 90                                                | %      | 91,099                   |   | 529                                               |   | 5.80                         |   |
| Westlakes, TX                    |   | Office/Whse     |   | 95,370                                                 |   | 48                                                | %      | 45,935                   |   | 432                                               |   | 9.40                         |   |
| Technology, TX                   |   | Office/Whse     |   | 109,012                                                |   | 85                                                | %      | 92,752                   |   | 980                                               |   | 10.56                        |   |
| Autumn Ridge, TX                 |   | Apartment       |   | 297,400                                                |   | 86                                                | %      | 255,146                  |   | 2,276                                             |   | 8.92                         |   |
| 16350 Park Ten  Place, TX        |   | Office          |   | 74,042                                                 |   | 89                                                | %      | 65,534                   |   | 1,023                                             |   | 15.62                        |   |
| 16360 Park Ten  Place, TX        |   | Office          |   | 68,606                                                 |   | 93                                                | %      | 63,603                   |   | 1,006                                             |   | 15.81                        |   |
| 888 Sam Houston  Parkway, TX     |   | Office          |   | 46,821                                                 |   | 72                                                | %      | 33,678                   |   | 523                                               |   | 15.54                        |   |
| Texas Region  Total              |   |            |   | 894,548                                                |   | 84                                                | %      | 747,819                  |   | 8,201                                             |   | 10.97                        |   |
|                             |   |            |   |                                                   |   |                                              |   |                     |   |                                              |   |                         |   |
| Total/Weighted  Average          |   |            |   | 3,656,028                                              |   | 81                                                | %      | 2,949,745                |   | 36,177                                            |   | 12.26                        |   |

 

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* As of 12/31/02 Valencia is considered discontinuedoperations

 

For the year ended December 31, 2002, no tenant contributed 10% or moreof the total rental revenue of the Company. A complete listing of propertiesowned by the Company at December 31, 2002, is included as part of Schedule IIIin Item 15.

 

7

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**Office Properties**

 

The Company owns 15 office properties with totalrentable square footage of 1,425,774. The office properties range in size from46,821 square feet to 220,964 square feet, and have remaining lease termsranging from less than one to 10 years. The office leases generally require the tenant to reimburse the Companyfor increases in building operating costs over a base amount.  Certain of the leases provide for rentincreases that are either fixed or based on a consumer price index.  As of December 31, 2002, the weightedaverage occupancy of the office properties was 85%.  The weighted average base rent per square foot, calculated astotal annualized base rents divided by gross leasable area actually leased asof December 31, 2002, was $17.99 as of such date.

 

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 ExpiringLeases  (dollars in thousands)** |   | **Percentage  of Total  Annual Base Rent  Represented by  Expiring Leases(1)** |   |
|-----------------------|--------|----------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|
| 2003(2)               |   | 195                              |   | 499,274                                                   |   | $                                                                   | 8,252  |                                                                           | 38     | % |
| 2004                  |   | 75                               |   | 199,636                                                   |   | 3,796                                                               |   | 17                                                                             | %      |
| 2005                  |   | 63                               |   | 200,086                                                   |   | 3,973                                                               |   | 18                                                                             | %      |
| 2006                  |   | 40                               |   | 184,111                                                   |   | 3,361                                                               |   | 15                                                                             | %      |
| 2007                  |   | 19                               |   | 62,908                                                    |   | 1,181                                                               |   | 6                                                                              | %      |
| Thereafter            |   | 13                               |   | 60,214                                                    |   | 1,378                                                               |   | 6                                                                              | %      |
|                  |   |                             |   |                                                      |   |                                                                |   |                                                                           |   |
| Total                 |   | 405                              |   | 1,206,229                                                 | (3)    | $                                                                   | 21,941 | (4)                                                                            | 100    | % |

 

----

(1) Annual base rent expiring during each period, divided by totalannual base rent (both adjusted for contractual increases).

 

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

 

(3) 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).

 

(4) This figure is based on square footage actuallyleased and incorporates contractual rent increases arising after 2002, and thusdiffers from annualized net rent in the preceding table, which is based on 2002rents.

 

**Office/Warehouse Properties**

 

The Company owns 11 office/warehouse propertiesaggregating 1,254,226 square feet. The office/warehouse properties areprimarily designed for warehouse, distribution and light manufacturing andrange in size from 43,100 square feet to 320,000 square feet.  As of December 31, 2002, eight of theoffice/warehouse properties were leased to multiple tenants, two were partiallyleased to single tenants, and one was not leased.  As of December 31, 2002, the weighted average occupancy of theoffice/warehouse properties was 75%. The weighted average base rent per square foot, calculated as totalannualized base rents divided by gross leasable area actually leased as ofDecember 31, 2002, was $6.67 as of such date.

 

The office/warehouse properties have leases whoseremaining terms range from less than one to eight years.  Most of the leases are industrial gross leaseswhereby the tenant pays as additional rent its pro rata share of common areamaintenance and repair costs and its share of the increase in taxes andinsurance over a base amount.  Certainof these leases call for fixed or consumer-price-index-based rentincreases.  Some of the leases aretriple net leases whereby the tenants are required to pay their pro rata shareof the

 

8

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properties’ operating costs, common area maintenance,property taxes, insurance and 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.

 

**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)** |   |
|-----------------------|--------|----------------------------------|--------|---------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|
| 2003(2)               |   | 50                               |   | 145,483                                                       |   | $                                                                    | 886    |                                                                          | 16     | % |
| 2004                  |   | 27                               |   | 114,477                                                       |   | 820                                                                  |   | 15                                                                            | %      |
| 2005                  |   | 49                               |   | 225,161                                                       |   | 1,765                                                                |   | 32                                                                            | %      |
| 2006                  |   | 13                               |   | 262,386                                                       |   | 1,031                                                                |   | 18                                                                            | %      |
| 2007                  |   | 10                               |   | 106,418                                                       |   | 820                                                                  |   | 15                                                                            | %      |
| Thereafter            |   | 2                                |   | 26,050                                                        |   | 251                                                                  |   | 4                                                                             | %      |
| Total                 |   | 151                              |   | 879,975                                                       | (3)    | $                                                                    | 5,573  | (4)                                                                           | 100    | % |

 

----

(1) Annual base rent expiring during each period, divided by totalannual base rent (both adjusted for contractual increases).

 

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

 

(3) 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).

 

(4) This figure is based on square footage actuallyleased and incorporates contractual rent increases arising after 2002, and thusdiffers from annualized net rent in the table under “The Location and Type of the Company’s Properties”, whichis based on 2002 rents.

 

**Shopping Center Properties**

 

The Company owns 3 shopping center properties withtotal rentable square footage of 269,914. The shopping center properties rangein size from 56,487 square feet to 108,138 square feet, and have remaininglease terms ranging from less than one to 19 years.  The shopping center leases generally require the tenant toreimburse the Company for increases in certain building operating costs over abase amount. Certain of the leases provide for rent increases that are eitherfixed or based on a percentage of tenants’ sales.  As of December 31, 2002, the weighted average occupancy of theshopping center properties was 67%.  Theweighted average base rent per square foot, calculated as total annualized baserents divided by gross leasable area actually leased as of December 31, 2002,was $6.95 as of such date.

 

9

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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)** |   |
|-----------------------|--------|----------------------------------|--------|------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|
| 2003(2)               |   | 7                                |   | 72,262                                                     |   | $                                                                    | 296    |                                                                           | 24     | % |
| 2004                  |   | 3                                |   | 11,951                                                     |   | 98                                                                   |   | 8                                                                              | %      |
| 2005                  |   | 3                                |   | 2,000                                                      |   | 65                                                                   |   | 5                                                                              | %      |
| 2006                  |   | 6                                |   | 16,350                                                     |   | 150                                                                  |   | 12                                                                             | %      |
| 2007                  |   | 0                                |   | —                                                     |   | —                                                               |   | —                                                                         |   |
| Thereafter            |   | 4                                |   | 77,096                                                     |   | 639                                                                  |   | 51                                                                             | %      |
|                  |   |                             |   |                                                       |   |                                                                 |   |                                                                           |   |
| Total                 |   | 23                               |   | 179,659                                                    | (3)    | 1,248                                                                | (4)    | 100                                                                            | %      |
|                       |        |                                  |        |                                                            |        |                                                                      |        |                                                                                |        |  |

 

----

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

 

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

 

(3) 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).

 

(4) This figure is based on square footage actuallyleased and incorporates contractual rent increases arising after 2002, and thusdiffers from annualized net rent in the table under “The Location and Type ofthe Company’s Properties”, which is based on 2002 rents.

 

**Apartment Properties**

 

As of December 31, 2002, the Company owns a 366-unitapartment property located in Houston, Texas, a 125-unit apartment propertylocated in Long Beach, California and a 408-unit apartment property located inSt. Louis, Missouri.  All of the unitsare rented to residential tenants on either a month-to-month basis or for termsof one year or less. As of December 31, 2002, the apartment properties wereapproximately 88% leased.  The weightedaverage base rent per square foot, calculated as total annualized base rentsdivided by gross leasable area actually leased as of December 31, 2002, was$11.70 as of such date.

 

**Development Land**

 

The Company owns a 16.65 acre parcel of land inPhoenix, Arizona.  The site isirregularly shaped and has had several uses in the past, including a mobilehome park, retail shops and a gasoline station.  The land has been cleared of all improvements since January1997.  The land is held for futuredevelopment.

 

10

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

 

Lewis-Madison Matter

On or about September 27, 2001, Robert L. Lewis, Madison LiquidityInvestors 103 LLC and Madison Liquidity Investors 112 LLC, purporting torepresent themselves and all others similarly situated, initiated an actionagainst the Company, CGS, William J. Carden, John N. Galardi and S-PProperties, Inc. in the Orange County Superior Court, Case No. 01 CC 000394.

 

Plaintiffs’ complaint in this action alleged claims against the Companyand others for breach of fiduciary duty and breach of contract.  Plaintiffs’ complaint challenged theConsolidation, although the Consolidation was disclosed in a Prospectus/ConsentSolicitation filed with the Securities and Exchange Commission and was approvedby a majority vote of the limited partners of the partnerships. Plaintiffsalleged that the approval was invalid and that the Consolidation constituted abreach of fiduciary duty by each of the defendants.  Plaintiffs further alleged that the Consolidation constitutedbreach of the partnership agreements governing the partnerships.

 

Plaintiffs’ prayer for relief sought the following: 1) an injunctionprohibiting the defendants from commingling; 2) imposition of a constructivetrust providing for liquidation of the assets of the partnerships and adistribution of the assets to the former limited partners therein; 3) ajudicial declaration that the action may be maintained as a class action; 4)monetary/compensatory damages; 5) plaintiffs’ costs of suit, includingattorneys’, accountants’ and expert fees; and 6) a judicial order ofdissolution of the partnerships and appointment of a liquidating trustee.  On March 15, 2002, the Court sustained theCompany’s demurrer to plaintiffs’ complaint and held that the complaint failedto state a cause of action for either breach of fiduciary duty or breach ofcontract against the Company.  The Courtgave the plaintiffs twenty days leave to amend.

 

Subsequently, plaintiffs filed and served a Second Amended Complaintalleging claims against the Company for breach of fiduciary duty, breach ofcontract, intentional interference with prospective economic advantage, andintentional interference with contractual relations.  On June 14, 2002, the Court sustained the Company’s demurrer onthe grounds that Plaintiffs’ Second Amended Complaint failed to state a causeof action against the Company for interference with contract or interferencewith prospective economic advantage. The Court gave Plaintiffs twenty days leave to amend.

 

Subsequently, the plaintiffs filed and served a Third Amended Complainton the Company alleging claims against the Company for breach of fiduciaryduty, breach of contract, intentional interference with prospective economicadvantage, and intentional interference with contractual relations.   On September 6, 2002, the Court sustainedthe Company’s demurrer on the grounds that the Plaintiffs’ Third AmendedCompliant failed to state a cause of action for either interference withcontract or interference with prospective economic advantage against theCompany.  The Court gave the Plaintiffstwenty days to amend.

 

On September 25, 2002, the plaintiffs filed and served a Fourth AmendedComplaint on the Company alleging claims against the Company for breach offiduciary duty, breach of contract, intentional interference with prospectiveeconomic advantage, and intentional interference with contractualrelations.  The plaintiffs’ prayer forrelief on its Fourth Amended Compliant seeks the following:  1) an injunction prohibiting the defendantsfrom commingling; 2) imposition of a constructive trust providing forliquidation of the assets of the partnerships and a distribution of the assetsto the former limited partners therein; 3) a judicial declaration that theaction may be maintained as a class action; 4) monetary/compensatory damages;5) plaintiffs’ costs of suit, including attorneys’, accountants’ and expertfees; and 6) a judicial order of dissolution of the partnerships andappointment of a liquidating trustee. On October 29, 2002, the Company responded by answer and assertedgeneral and specific affirmative defenses to the allegations in the FourthAmended Complaint.

 

On January 10, 2003, plaintiffs filed and served a Notice of Motion andMotion for Class Certification.  On January31, 2003, the Company filed an Opposition to Plaintiffs’ Motion for ClassCertification.  On March 7, 2003, theCourt granted plaintiffs’ Motion for Class Certification but expressly reservedthe right  to visit the issue ofcertification should rescission be chosen as a remedy to determine whether itis still a viable 

 

11

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procedure in the class setting.

 

Teachout Matter

A subsidiary of CGS, S-P Properties, Inc., was a defendant in a lawsuitcommenced in Superior Court, County of Los Angles in November 1995, entitledTeachout et al. v. S.P. Properties, Inc. and Sierra Pacific Development Fund II(“Fund II”).  The suit was a derivativeaction brought by a limited partner on behalf of Fund II, which alleged thatthe general partner breached its fiduciary duty and breached the partnershipagreement in connection with loans to the general partner and the issuance ofnotes to an affiliate of CGS in connection with the purchase of a property fromFund II.  Fund II was merged into asubsidiary of the Company pursuant to the Consolidation.

 

As part of the Consolidation, the Company assumed the repaymentobligation to the former Fund II investors and has carried these loans withaccrued interest on its books and records.  The obligation, totaling approximately $8,800,000 at December 31, 2002,is reflected in accrued and other liabilities in the accompanying consolidatedfinancial statements.

 

In January 2003, the parties reached a settlement regarding thismatter.  Under the settlement, which isexpected to be documented in the second quarter of 2003, the Company reaffirmedits previously announced obligation to pay the former limited partners of FundII, or their assignees or transferees, the loans which were made and called bythe former general partner of Fund II as part of the Consolidation.  Pursuant to the settlement, the Company hasestablished a definitive repayment plan and will secure the repaymentobligation with a second deed of trust on an office building owned by theCompany.  The repayment plan consists ofa promissory note in the amount of $8,800,000 (the amount of such loans, plusinterest as of December 31, 2002), which shall accrue interest at 6% per annum.  Interest only payments will be made quarterlyuntil the note is paid.  The note may beprepaid in whole or in part at any time without penalty.

 

As part of the settlement, the plaintiffs dismissed the lawsuit and allclaims therein with prejudice, and the Company has no obligation to pay anyfurther amounts, except for legal fees of $1,200,000 to plaintiff’s counsel.

 

In connection with the settlement, Mr. John Galardi, a principalstockholder of the Company, and Mr. William J. Carden, the Chief ExecutiveOfficer, a director and a principal stockholder of the Company, acknowledgedthat they owe the Company the sum of $1,187,695 as indemnification against aportion of the Company’s settlement obligation.  Mr. Galardi and certain affiliates of Mr. Carden and/or Mr.Galardi are beneficiaries, in part, of the settlement of the Teachout matterand are owed an amount in excess of this obligation pursuant to thesettlement.  Mr. Galardi and Mr. Cardenhave agreed to pay the Company the principal sum of this obligation, plusinterest thereon at the annual rate of 6% from March 15, 2003, in the form ofan assignment to the Company of their right to receive $1,187,695 of principalpayments on the notes payable to them and their affiliates by reason of thesettlement of the Teachout matter, plus all interest payable on such principalamount of notes.  On December 31, 2002,the receivable of $1,187,695 is reflected as a component of equity in theCompany’s consolidated financial statements.

 

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.

 

12

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** **

**ITEM 4****. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The 2002 annual meeting of stockholders was held onNovember 15, 2002.  The matters on whichthe stockholders voted, in person or by proxy, were i) to elect five directorsto serve until the Company’s next annual meeting of stockholders and untiltheir successors are duly elected and qualified, and ii) to ratify theselection of BDO Seidman, LLP, as the Company’s independent auditors for thefiscal year ended December 31, 2002.  The results of the voting are shown below:

 

Election of directors:

 
| **Name  of  Nominee** |   | **Number  of  Votes For** |   | **Number  of  Votes Withheld** |   |
|-----------------------|--------|---------------------------|--------|--------------------------------|--------|
| Timothy R. Brown      |   | 3,567,133                 |   | 137,967                        |   |
| William J. Carden     |   | 3,551,723                 |   | 153,377                        |   |
| Lawrence E. Fiedler   |   | 3,565,452                 |   | 139,648                        |   |
| William W. Geary, Jr. |   | 3,567,621                 |   | 137,479                        |   |
| Harry A. Mizrahi      |   | 3,563,415                 |   | 141,685                        |   |

 

Ratify the selection of BDO Seidman, LLP asindependent auditors:

 
| **Number  of  Votes For** |   | **Number  of  Votes Against** |   | **Number  of  Votes Abstaining** |   |
|---------------------------|--------|-------------------------------|--------|----------------------------------|--------|
| 3,639,002                 |   | 16,449                        |   | 49,649                           |   |

 

13

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**PART II**

 

**ITEM 5****. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATEDSTOCKHOLDER 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 for the periodsindicated, as reported by the American Stock Exchange.

 
|           |   | **Common  Stock** |   |
|----------------|--------|-------------------|--------|
|           |   | **High**          |   | **Low** |   |
| 2001           |   |              |   |   |   |
| First Quarter  |   | N/A               |   | N/A |   |
| Second Quarter |   | N/A               |   | N/A |   |
| Third Quarter  |   | N/A               |   | N/A |   |
| Fourth Quarter |   | $                 | 13.30  |   | $ | 6.08 |   |
| 2002           |   |              |   |   |   |
| First Quarter  |   | $                 | 7.07   |   | $ | 6.13 |   |
| Second Quarter |   | 8.50              |   | 6.72 |   |
| Third Quarter  |   | 7.40              |   | 5.85 |   |
| Fourth Quarter |   | 5.89              |   | 4.15 |   |

 

**Holders**

 

The approximate number of holders of the shares of theCompany’s Common Stock was 8,200 as of March 10, 2003.

 

**Distributions**

 

No dividends weredeclared to holders of the Company’s Common Stock in 2001.  During 2002, the Company’s Board ofDirectors declared the following dividends to holders of its Common Stock andOP Units:

 
| **Payment  Date** |   | **Dividend  per  share/unit** |   | **Distributions  to  Stockholders** |      | **Distributions  to  OP Unitholders** |   | **Total  Distributions** |   |
|-------------------|--------|-------------------------------|--------|-------------------------------------|-----------|---------------------------------------|--------|--------------------------|--------|
|              |   |                          |   |                                |      |                                  |   |                     |   |
| June 3, 2002      |   | 0.20                          |   | $                                   | 1,109,898 |                                  | $      | 145,121                  |   | $ | 1,255,019 |   |
| October 18, 2002  |   | 0.20                          |   | 1,107,398                           |      | 145,121                               |   | 1,252,519                |   |
| December 30, 2002 |   | 0.10                          |   | 553,699                             |      | 72,561                                |   | 626,260                  |   |
|                   |        |                               |        |                                     |           |                                       |        |                          |        |  |  |  |

 

In March 2003, the Company’s Board of Directorsestablished a policy of meeting on or about the 45th day after theend of each calendar quarter to consider the declaration and payment of adividend.  The first dividend meeting onthis schedule will be in May 2003.

 

Management is reconsidering whether it is in the bestinterest of the Company to elect to be treated as a real estate investmenttrust or REIT, as defined under the Internal Revenue Code of 1986, asamended.  In the event such election ismade, the election could be effective as early as January 1, 2003 upon thefiling of the appropriate forms for the 2003 tax year.  In this regard, the Company plans to operatewithin the requirements of REIT status in 2003.  In general, a REIT is required to pay annual distributions toinvestors of at least 90% of its taxable income.

 

**RecentSales of Unregistered Securities**

 

Concurrently with and immediatelysubsequent to the consummation of the Consolidation of the eight public fundsinto ASR, the Company issued 8,886 unregistered shares of Common Stock and theOperating 

 

14

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Partnership issued 725,605OP Units.  The shares and OP Units wereissued pursuant to merger agreements and contribution agreements in connectionwith the acquisition of properties and assets from entities controlled ormanaged by CGS and its affiliates.  Inaddition, in October  2001, the Companyissued 99,500 shares, and in April 2002, issued 10,000 shares of its CommonStock to its officers and directors pursuant to the Company’s Omnibus StockIncentive Plan (the “Plan”). In 2001, the Company issued 20,000 shares of itsCommon Stock to a law firm as partial consideration for legal services.  These issuances of Common Stock by ASR andOP Units by the Operating Partnership were exempt from the registrationrequirements of the Securities Act of 1933, as amended, pursuant to Section4(2) and Rule 506 of Regulation D promulgated thereunder.  The OP Units are redeemable at the option ofthe holder for either, at the option of ASR, (i) one share of Common Stock ofASR, or (ii) cash equal to the fair market value of one share of Common Stockof ASR at the date of conversion.

 

The following tableprovides information as of December 31, 2002 regarding the compensation planunder which equity securities of the Company are authorized for issuance:

 
| **Number  of Securities to  Be Issued Upon  Exercise of Outstanding  Options** |   | **Weighted  Average   Per Share Exercise   Price of Outstanding   Options** |   | **Number  of Securities   Remaining Available for   Future Issuance Under   Equity Compensation Plan   (excluding securities   reflected in first column)** |    |
|--------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| 189,500                                                                        |   | $                                                                           | 10.42  |                                                                                                                                                        | 421,000 |   |
|                                                                                |        |                                                                             |        |                                                                                                                                                             |         |  |

 

 See Note 14 – Stock Option and RestrictedShare Plan – in the Consolidated Financial Statements for information regardingthe material features of the above plan.

 

15

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** **

**ITEM 6****. SELECTED FINANCIAL DATA**

 

Set forth below is selected financial data for the Company.Consolidated balance sheet and operating data are presented as of and for eachof the five years ended December 31. The selected financial data for the years ended 2000, 1999 and 1998reflects the balance sheet data and operating data for SPPI84, which is treatedas having acquired the properties in the Consolidation for accountingpurposes.  For 2001, operating dataincludes the results of operations of SPPI84 for the entire year, and theacquired entities from October 20, 2001, through December 31, 2001.

 

This selected financial data should be read inconjunction with the financial statements of the Company, including the notesthereto, included in Item 15.

 

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

 
|                                          |   | **2002** |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|-----------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|--------|----------|--------|
| OPERATING DATA:                               |   |     |    |     |   |     |   |     |   |     |   |
| Total revenues                                |   | $        | 38,252  |     | $      | 7,435    |   | $        | 159    |     | $      | 187 |   | $ | 222 |   |
| Property  operating expense                   |   | 14,763   |    | 2,990    |   | —   |   | —   |   | —   |   |
| General and  administrative                   |   | 8,586    |    | 2,863    |   | —   |   | —   |   | —   |   |
| Depreciation and  amortization                |   | 11,691   |    | 2,123    |   | —   |   | —   |   | —   |   |
| Interest expense                              |   | 13,779   |    | 2,409    |   | —   |   | —   |   | —   |   |
| Litigation  settlement                        |   | 1,200    |    | —   |   | —   |   | —   |   | —   |   |
| Impairment of  real estate assets             |   | 4,746    |    | —   |   | —   |   | —   |   | —   |   |
| Income tax  benefit                           |   | 7,083    |    | —   |   | —   |   | —   |   | —   |   |
| Net (loss)  income from continuing operations |   | (8,595   | )       | (1,975   | )      | 487      |   | 510      |   | 418      |   |
| Net (loss)  income                            |   | (7,130   | )       | (2,038   | )      | 325      |   | 357      |   | 125      |   |
|                                          |   |     |    |     |   |     |   |     |   |     |   |
| Basic and  diluted per share data(1)          |   |     |    |     |   |     |   |     |   |     |   |
| Net loss income  from continuing operations   |   | $        | (1.55   | )        | $      | (0.36    | )      | N/A      |   | N/A      |   | N/A |   |
| Net loss income                               |   | (1.29    | )       | (0.37    | )      | N/A      |   | N/A      |   | N/A      |   |
| Dividends per  share(1)                       |   | 0.50     |    | N/A      |   | N/A      |   | N/A      |   | N/A      |   |
|                                          |   |     |    |     |   |     |   |     |   |     |   |
| Per unit data(2)                              |   |     |    |     |   |     |   |     |   |     |   |
| Limited partner  income from continuing       |   |     |    |     |   |     |   |     |   |     |   |
| operations per  unit                          |   | N/A      |    | N/A      |   | $        | 6.26   |     | $      | 6.62     |   | $ | 5.43 |   |
| Limited partner  income                       |   | N/A      |    | N/A      |   | 4.18     |   | 4.64     |   | 1.62     |   |
| Distributions  per partnership unit(2)        |   | N/A      |    | N/A      |   | N/A      |   | N/A      |   | N/A      |   |
|                                          |   |     |    |     |   |     |   |     |   |     |   |
| BALANCE SHEET  DATA:                          |   |     |    |     |   |     |   |     |   |     |   |
| Real estate held  for investment, net         |   | $        | 236,890 |     | $      | 237,285  |   | $        | — |     | $      | — |   | $ | — |   |
| Total assets                                  |   | 253,557  |    | 266,205  |   | 11,210   |   | 10,808   |   | 10,558   |   |
| Total long term  debt                         |   | 182,281  |    | 167,638  |   | —   |   | —   |   | —   |   |
| Stockholders’  and partners’ equity |   | 30,857   |    | 53,104   |   | 9,612    |   | 9,287    |   | 8,930    |   |
|                                          |   |     |    |     |   |     |   |     |   |     |   |
| OTHER DATA:                                   |   |     |    |     |   |     |   |     |   |     |   |
| Cash flow  provided by (used in):             |   |     |    |     |   |     |   |     |   |     |   |
| Operating  activities                         |   | $        | (423    | )        | $      | (6,377   | )      | $        | — |     | $      | 956 |   | $ | — |   |
| Investing  activities                         |   | (3,566   | )       | 2,421    |   | 436      |   | (390     | )      | 126      |   |
| Financing  activities                         |   | 1,624    |    | 6,301    |   | (404     | )      | (668     | )      | (77      | )      |

 

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(1) The net loss and dividends per share data werebased upon the weighted average shares of 5,534,348 for 2002 and 5,529,190 for2001.

 

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

 

16

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** **

**ITEM 7****. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

ASR is a full-service real estate corporation which owns, manages and operatesvarious income-producing properties.  Substantially all of the Company’s assets are held through the OperatingPartnership, in which the Company, as of December 31, 2002, held a 1% generalpartner interest and an 87.4% limited partnership interest.   As of December 31, 2002, through theOperating Partnership, the Company owned and operated 33 properties whichconsisted of 15 office, 11 office/warehouse, three shopping center, and threeapartment properties, and one developmental land property.  The properties are located in fourgeographic regions in nine states.  TheCompany plans to expand its business and net assets by acquiring additionalproperties.  The Company will focusprimarily on office and office/warehouse properties located in Texas,California and Arizona.

 

In October 2001, the Company acquired various properties in theConsolidation.  Pursuant to theConsolidation, subsidiaries of the Company merged with eight public limitedpartnerships, acquired the assets and liabilities of two private entitiesmanaged by CGS and acquired certain assets and liabilities of CGS and themajority owned affiliates of CGS. SPPI84, one of the eight public limited partnerships, was treated, foraccounting purposes, as the acquirer of the properties in theConsolidation.  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.

 

The following discussion and analysis of the financial condition andresults of operations of the Company should be read in conjunction with theselected financial data in Item 6 and the consolidated financial statements ofthe Company, including the notes thereto, included in Item 15.

 

The major accounting policies followed by the Company are listed inNote 2 — Summary of Significant Accounting Policies. — in the Notes to theConsolidated Financial Statements.  Theconsolidated financial statements of the Company are prepared in accordancewith accounting principles generally accepted in the United States of America,which requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the results ofoperations during the reporting period. Actual results could differ materiallyfrom those estimates.

 

The Company believes the following critical accounting policies affectits more significant judgments and estimates used in the preparation of itsconsolidated financial statements:

 

•                  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 equal to theexcess of the amount that would have been collected on a straight-line basisover the amount collected and currently due (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.

 

•                  Rentalproperties are stated at cost, net of accumulated depreciation, unlesscircumstances indicate that cost, net of accumulated depreciation, cannot berecovered, in which case the carrying value of the property is reduced toestimated fair value. Estimated fair value (i) is based upon the Company’splans for the continued operation of each property and (ii) is computed usingestimated sales price, as determined by prevailing market values for comparableproperties and/or the use of capitalization rates multiplied by annualized netoperating income based upon the age, construction and use of the building.  The fulfillment of the Company’s plansrelated to each of its properties is dependent upon, among other things, thepresence of economic conditions which will 

 

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enable the Company to continue to hold and operate theproperties prior to their eventual sale. Due to uncertainties inherent in thevaluation process and in the economy, the actual results of operating anddisposing of the Company’s properties could be materially different than currentexpectations.

 

•                  Management isreconsidering whether it is in the best interest of the Company to elect to betreated as a real estate investment trust or REIT, as defined under theInternal Revenue Code of 1986, as amended. In the event such election is made, the election could be effective asearly as January 1, 2003 upon the filing of the appropriate forms for the 2003tax year.  In this regard, the Companyplans to operate within the requirements of REIT status in 2003.  In general, a REIT is a company that owns orprovides financing for real estate and pays annual distributions to investorsof at least 90% of its taxable income. A REIT typically is not subject to federal income taxation on its netincome, provided applicable income tax requirements are satisfied.   For the tax year 2002, the Company wastaxed as a C corporation.

 

# **RESULTS OFOPERATIONS**

 

The statement of operations for the year ended 2001reflects the operating results of SPPI84 for the full year, and the acquiredentities for October 20, 2001, through December 31, 2001, (“Stub Period”).  The statements of operations for the yearended December 31, 2000 solely reflect the operating results of SPPI84.  SPPI84 wholly owned one property (Valencia)and held an equity interest in another entity prior to the Consolidation.  Therefore, a comparison of operating resultsbetween 2002 and 2001 and between 2001 and 2000 is not meaningful.

 

In accordance with generally accepted accountingprinciples, the operating results of three properties are reported asdiscontinued operations in all periods presented.  These consist of a shopping center and an apartment property soldin 2002 and an office/warehouse property expected to be sold in the secondquarter of 2003.  The office/warehouseproperty was wholly owned by SPPI84 prior to the Consolidation.  See Note 5 – Discontinued Operations – ofthe Notes to Consolidated Financial Statements.  Unless otherwise indicated, the following discussion reflects theresults from continuing operations, which include the real estate assets heldfor investment.  The operating resultsof any properties acquired during the period include operations from the dateof acquisition.

 

## ***Comparisonof the year ended December 31, 2002 to the year ended December 31, 2001***

 

The Company recorded rental revenue of $38,043,000 andexpenses of $54,765,000 for the year ended December 31, 2002 compared to rentalrevenue of $7,274,000 and expenses of $10,385,000 for the Stub Period endedDecember 31, 2001.  The Company acquiredthree office properties and sold two shopping centers and one apartmentproperty during 2002.  Rental revenue of$1,502,000 and expenses of $1,428,000 were attributable to the three propertyacquisitions.  The weighted averageoccupancy of the Company’s properties held for investment decreased from 85% atDecember 31, 2001 to 81% at December 31, 2002. As of December 31, 2002, the Company owned and operated 33 properties.

 

During 2002, the Company recorded impairment charges of $4,746,000 toprovide for a decrease in the estimated fair market value of fiveproperties.  Impairment charges totaling$2,400,000 were recorded on the Company’s three shopping center properties inSouth Carolina.  Other charges consistedof $987,000 on an office property in Missouri, and $1,359,000 on an apartmentproperty in California.  No impairmentcharges were recorded in 2001.

 

During 2002, the Company accrued a litigation settlement expense of$1,200,000 associated with the settlement of the Teachout matter.  As part of the settlement, which is expectedto be documented in the second quarter of 2003, the Company has agreed to paylegal fees of $1,200,000 to plaintiff’s counsel.  Under the settlement, the Company reaffirmed its previouslyannounced obligation to pay the former limited partners of Fund II, or theirassignees or transferees, the loans which were made and called by the formergeneral partner of Fund II as part of the Consolidation.  Pursuant to the settlement, the Company hasestablished a definitive repayment plan and will secure the repaymentobligation with a second deed of trust on an office building owned by theCompany.  The repayment plan consists ofa promissory note in

 

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the amount of $8,800,000 (the amount of such loans, plus interest as ofDecember 31, 2002), which shall accrue interest only at 6% per annum.  Interest only payments will be madequarterly until the note is paid.  Thenote may be prepaid in whole or in part at any time without penalty.

 

The Company recorded a $47,000 net loss on sales of real estate assetsduring 2002.  The Company recorded a$348,000 loss attributable to the sale of Beach & Lampson, a shoppingcenter property sold in April 2002. This loss was partially offset by the recognition of a $232,000 deferredgain associated with the sale of the Tower Industrial property in 2001 and a$69,000 gain as a result of compensation for a strip of land condemned forhighway purposes at one of its office properties.  No gain or losses on sales of real estate assets were recordedduring 2001.

 

The Company recorded a $53,000 net loss on earlyextinguishments of debt in connection with the refinancing of several loansduring 2002.  Losses of $184,000 due tothe write-off of deferred loan costs and prepayment penalties were partiallyoffset by a $131,000 gain on the write-off of an unamortized loan premium.During 2001, the Company recognized a net gain on early extinguishments of debtof $314,000 related to the payoff of two loans and the refinancing of two otherloans.

 

The share of loss for the year ended December 31, 2002for the holders of OP Units was $935,000 compared to a loss of $267,000 for theStub Period ended December 31, 2001. The loss represents the 11.6% limited partner interest in the OperatingPartnership not held by the Company at December 31, 2002 and 2001.

 

SPPI84 recorded income of $394,000 from investment in itsunconsolidated joint venture partner, SMMP, during 2001.  This represents SPPI84’s share of incomegenerated by SMMP and SMMP’s joint venture partners.  The Company had no investments in unconsolidated joint venturesduring 2002.

 

During 2002, the Company recognized an income tax benefit of$7,083,000.  In 2002, managementreevaluated an earlier decision and determined that it may sell certain of theCompany’s real estate assets outside of tax deferred exchanges.  If the Company elects REIT status, duringthe 10-year period following such election, the Company will be subject to anentity level tax on the income it recognizes upon the sale of assetscontributed by certain partnerships that it held before electing REIT status inan amount up to the amount of the built-in gains at the time the Companybecomes a REIT.  The potential taxrelated to this built-in gain for book purposes is approximately$13,165,000.  Therefore, the Companyrecognized a deferred tax liability for this potential tax and has recordedthis liability as a charge to equity.  During 2002, the deferred tax liability for the built in gains wasreduced primarily due to tax effect of impairments recorded for certain realestate assets held.  In addition, basedon the current strategic plans of the Company, management has determined thatit was more likely than not that future taxable income, primarily from the gainon the sale of real estate assets, would be sufficient to enable the Company torealize all of its deferred tax assets. Therefore, as of December 31, 2002, no valuation allowance has beenrecorded and the valuation allowance previously recorded has been reversed. Thetax effect of the impairments recorded and the reversal of the previouslyrecorded allowance along with the tax benefits of the current year tax assetshave been recorded in the statement of operations as an income tax benefit.

 

The Company recorded net income from discontinuedoperations of $1,465,000 for the year ended December 31, 2002 compared to a netloss of $63,000 for the year ended December 31, 2001.  Net income from discontinued operations for 2002 represents theoperating results and gain on sales of a shopping center and an apartmentproperty sold in 2002, and the operating results of an office/warehouseproperty. The sale of this office/warehouse property is expected to becompleted in the second quarter of 2003. The net loss from discontinued operations for the year ended December31, 2001 represents the operating results of these three properties for the2001 Stub Period.  See Note 5 -Discontinued Operations – of the Notes to the Consolidated FinancialStatements.

 

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*** ***

***Comparison of theyear ended December 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 Company’s properties held for investment was 85%.  The majority of the properties acquired inthe Consolidation were recorded at fair market value.  One property, wholly owned by SPPI84, remained at historical costand three other properties partially owned by SPPI84 through its former joint venture,Sierra Mira Mesa Partners (“SMMP”), a California general partnership, remainedat historical cost based on their proportions owned by SPPI84.

 

The Company recorded rental revenue of $7,274,000 andexpenses of $10,385,000 in 2001.  Therental revenue and expenses reflect the operations of the Company’s propertiesfor the Stub Period and the operating results of SPPI84 through for the yearended December 31, 2001.  Rental revenueand expenses of SPPI84 for the year ended December 31, 2000 are reported asdiscontinued operations.  SPPI84’s whollyowned property, Valencia, is classified as “Real estate held for sale” in allperiods presented.  The property isexpected to be sold in the second quarter of 2003.

 

Joint venture income from SPPI84’s investment in its unconsolidatedjoint venture, SMMP, was $394,000 for the period from January 1 through October19, 2001, compared to $328,000 for 2000.  This represents SPPI84’s share of income generated by SMMP and SMMP’sjoint venture partners.

 

The Company recognized a net gain on early extinguishments of debt of$314,000 for the year ended December 31, 2001. The net gain was related to the payoff of two loans and the refinancingof two loans individually secured by four properties (Northwest CorporateCenter, Creekside, Van Buren and Park Plaza I & II) in November andDecember 2001.  No gain or loss on earlyextinguishments of debt was recorded in 2000.

 

Holders of OP Units share of the loss was $267,000,which represented the 11.6% limited partner interest in the OperatingPartnership not held by the Company at December 31, 2002.  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, 2001.

 

The Company recorded a net loss from discontinuedoperations of $63,000 in 2001 compared to a net loss of $162,000 in 2000.  The net loss in 2001 includes the operatingresults of a shopping center and an apartment property for the Stub Period andthe operating results of SPPI84’s wholly owned property for the entireyear.  The net loss for the year endedDecember 31, 2001 represents the operating results of SPPI84’s wholly ownedproperty.   See Note 5 - DiscontinuedOperations — of the Notes to the Consolidated Financial Statements.

 

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. The net proceeds, which were held in escrow at December 31, 2001, wereused in a tax-deferred exchange to assist the funding of the two officeproperties acquired in May 2002.

 

# **LIQUIDITY ANDCAPITAL RESOURCES**

 

The Company reported a net loss of $ 7,130,000 for the year endedDecember 31, 2002, which included (i) the following non-cash charges:depreciation and amortization from real estate held for investment of$11,692,000, litigation settlement payable in the future of $1,200,000,impairment charges of $4,746,000, deferred compensation expense of $834,000;and (ii) the following non-cash benefits: income tax of $7,083,000, deferred rental income of $407,000, minorityinterest of $935,000, and amortization of loan premiums of $621,000.  Net cash used in operating activitiesamounted to $423,000 for the year ended December 31, 2002.  Cash was used in operating activitiesprimarily for payment of prepaid and other assets, which primarily consists ofrequired lender-held funds.  Lender-heldfunds are amounts required to be deposited with a lender and drawn by theCompany with lender approval when certain conditions are met - for example,improvements on a property and payments of real estate taxes and insurancepremiums.

 

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Net cash used in investing activities of $3,566,000 for the year endedDecember 31, 2002 comprised (i) $4,407,000 paid for capital expenditures, 33%related to major renovations on an apartment property and (ii) $268,000 paidfor real estate acquisitions, offset by (iii) $1,109,000 in proceeds receivedfrom the sale of real estate assets.

 

Net cash provided by financing activities amounted to $1,624,000 duringthe year ended December 31, 2002. Proceeds received from borrowings totaled $24,382,000, as detailedbelow, of which $13,698,000 was used to repay debt.  The Company paid $3,865,000 in scheduled principal paymentsduring 2002.  Note payments to formerlimited partners totaling $2,055,000 were also made during the period.  Dividends to common stockholders of$2,772,000 and distributions to unitholders in the operating partnership of$362,000 were also made during the period.

 

In January 2002, the Company refinanced a $4,500,000loan 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 a $2,750,000loan 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.

 

In April 2002, the Company refinanced a $3,650,000loan secured by Oak Grove Commons, an office/warehouse property, and enteredinto a new loan agreement in the amount of $4,314,000.  The new loan bears interest at a fixed rateof 7.61% per annum and matures in May 2012. Net proceeds of $383,000 were received as a result of the refinancing.

 

In May 2002, the Company refinanced a $1,346,000 loansecured by Leawood Fountain Plaza, an office property, and entered into a newloan agreement in the amount of $3,000,000. The new loan bears interest at Libor plus 2.85% with a minimum of 5.75%per annum (5.75% at December 31, 2002), and matures in June 2003.  The loan contains a one-year extensionoption and an option to convert to a permanent loan provided certain lenderconditions are satisfied.  Net proceedsof $1,026,000 were received as a result of the refinancing.

 

In May 2002, the Company refinanced a $1,452,000 loansecured by Southwest Pointe, an office/warehouse property, and entered into anew loan agreement in the amount of $2,950,000.  The new loan bears interest at a fixed rate of 7.33% per annumand matures in June 2012.  Net proceedsof $1,297,000 were received as a result of the refinancing.

 

In May 2002, the Company financed insurance premiumsof $859,000 on its properties.  The loanbears interest at a fixed rate of 5.47% per annum and matures in February2003.  Other insurance premiums totaling$277,000 were financed during 2002. These loans bear interest at fixed rates between 5.47% and 6.99% perannum and mature at various dates in 2003.

 

In July 2002, a lender notified the Company it was technically indefault under its loan agreement for non-compliance with certain covenants,including covenants requiring improvements to shopping center properties inSouth Carolina.  Thereafter, the lendernotified the Company it was in default for failure to pay a matured portion ofthe loan, which matured in November 2002. As of December 31, 2002, the amount due under the matured portion of theloan was $2,720,000 and the aggregate principal balance of the loan agreementwas $6,390,000.  In early 2003, thelender sold the loan to the major tenant in the shopping center.  The new lender has not accelerated the loanagreement.  The Company is consideringvarious alternatives, including selling the property or using proceeds from thesale of another property to provide capital to pay off the matured portion ofthe loan.  The Company continues todiscuss the non-compliance matter with the new lender.

 

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In October 2002, the Company received proceeds of $1,532,000 from twobridge loans on Maple Tree, one of its shopping center properties.  One of the loans, which totaled $700,000,was provided by an affiliate of a related party (See Item 13 — CertainRelationships and Related Party Transactions). The mortgages were repaid in conjunction with the sale of the propertyin October 2002.  The additionalproceeds from the sale of the property were held in escrow at December 31, 2002in order to meet the requirements for a tax-deferred exchange.

 

In December 2002, the Company received proceeds of $800,000 from a loanon Valencia, an office/warehouse property classified as “Real estate held forsale” in the accompanying consolidated financial statements.   The loan was provided by an affiliate of arelated party (See Item 13).  Themortgage will be repaid in conjunction with the sale of the property, which isexpected to occur in the second quarter of 2003.

 

In December 2002, modification agreements were entered into with a bankto extend maturity on five secured loans to December 31, 2004.  These loans, whose balances total$22,003,000, bear interest at Libor plus 4% through June 30, 2003 and, providedcertain lender conditions are satisfied, Libor plus 3% thereafter.

 

During 2002, the Company received a $900,000 payoff on its $1,100,000mortgage loan receivable.  These fundswere used to meet obligations for capital costs relating to re-leasing andimprovements to properties.  The Companyrecorded a $200,000 loss on sale of real estate asset related to the payoff.

 

In April 2002, the Board of Directors declared a dividend of 20 centsper share to each holder of Common Stock and OP Units as of April 30,2002.  The dividend, which totaledapproximately $1,255,000, was paid on June 3, 2002.  In August 2002, the Board of Directors declared a dividend of 20cents per share to each holder of Common Stock and OP Units as of September 19,2002.  The dividend, which totaled approximately$1,253,000, was paid on October 18, 2002.  In November 2002, the Board of Directors declared a dividend of 10 centsper share to each holder of Common Stock and OP Unit as of December 16, 2002.  The dividend, which totaled approximately$626,000, was paid on December 30, 2002.

 

The Company expects to meet its short-term liquidity requirements fornormal property operating expenses and general and administrative payrollexpenses from cash generated by operations. In addition, the Company anticipates selling assets to provide funds forpayments of certain 2002 payables, consisting primarily of 2002 property taxes,tenant improvements and capital improvements on properties and fees forprofessional services.  Also, theCompany is projecting the need for cash to fund obligations in 2003, includingcapital costs incurred and to be incurred related to re-leasing space andimprovements to properties and litigation settlement costs.  The funds to meet these obligations will beobtained from proceeds of the sale of assets and lender held funds.  Based on current analysis, the Companybelieves that the cash generated by these anticipated sales will be adequate tomeet these obligations.  There can be noassurance, however, that the sales of these assets will occur and thatsubstantial cash will be generated.  Ifthese sales do not occur, the Company will not have sufficient cash to meet itsobligations.

 

As of this date, the Company has not paid the 2002 property taxes dueon several properties.  This non-paymentcould be considered a technical default on the loans for these properties.  The Company plans to pay these taxes withthe proceeds from the sale of a property which is currently expected to occurin the second quarter of 2003.  Therecan be no assurance, however, the sale of a property will occur.

 

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## **CONTRACTUAL OBLIGATIONS AND COMMITMENTS**

 

The Company has contractual obligations with regards to futureprincipal payments of debt, a litigation settlement, operating leases,employment agreements, and the purchase of OP Units from Nooney DevelopmentPartners.  The following tableaggregates the Company’s expected contractual obligations and commitmentssubsequent to December 31, 2002 (dollars in thousands):

 
|                                                               |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|
| Long-term debt                                                     |   | $        | 12,665 |     | $      | 33,374   |   | $        | 3,454  |     | $      | 7,579          |   | $         | 13,115 |   | $ | 108,439 |   | $ | 178,626 |   |
| Debt to former  limited  partners                             |   | —   |   | —   |   | —   |   | —   |   | —   |   | 237            |   | 237       |   |
| Litigation settlement                                              |   | 250      |   | —   |   | —   |   | 9,750    |   | —   |   | —         |   | 10,000    |   |
| Employee obligations                                               |   | 1,201    |   | 283      |   | —   |   | —   |   | —   |   | —         |   | 1,484     |   |
| Operating lease  commitments                                  |   | 171      |   | 37       |   | 12       |   | —   |   | —   |   | —         |   | 220       |   |
| Purchase of OP  Units  from Nooney  Development Partners |   | 223      |   | —   |   | —   |   | —   |   | —   |   | —         |   | 223       |   |
| Total                                                              |   | $        | 14,510 |     | $      | 33,694   |   | $        | 3,466  |     | $      | 17,329         |   | $         | 13,115 |   | $ | 108,676 |   | $ | 190,790 |   |
|                                                                    |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |  |  |  |  |  |  |  |  |

 

**FUNDS FROM OPERATIONS**

 

In October 1999, the Board of Governors of NAREITissued “White Paper on FFO-October 1999” to clarify its definition of Fundsfrom Operations (“FFO”).  The clarificationwas effective January 1, 2000 and requires restatement for all periodspresented in financial statements or tables. FFO, as clarified by NAREIT,represents “net income excluding gains (or losses) from sales of property, plusdepreciation and amortization, and after adjustments for unconsolidatedpartnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will becalculated to reflect funds from operations on the same basis.”  In 2002, NAREIT clarified that FFO relatedto assets held for sale, sold or otherwise transferred and included in resultsof discontinued operations should continue to be included in FFO.  This clarification was effective January 1,2002 and requires restatement for all periods presented in financial statementsor tables.  The Company believes thatFFO is helpful to investors as a measure of performance of an equity REITbecause, along with cash flow from operating activities, FFO provides investorswith an indication of our ability to incur and service debt, to make capitalexpenditures and to fund other cash needs. FFO does not represent net income or cash flows from operations, asdefined by GAAP, and should not be considered as an alternative to net income(determined in accordance with GAAP) as an indicator of the Company’s operatingperformance or as an alternative to cash flows from operating, investing andfinancing activities (determined in accordance with GAAP) as a measure ofliquidity.  FFO does not necessarilyindicate that cash flows will be sufficient to fund all of the Company’s cashneeds, including principal amortization, capital improvements and distributionsto stockholders.  Further, FFO asdisclosed by other companies may not be comparable to the Company’s calculationof FFO.

 

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The following table sets forth the Company’s calculation of FFO for theyear ended December 31, 2002 (in thousands except weighted average shares andper share amounts).  FFO for the yearended December 31, 2001 is not presented as it is not comparable or meaningful.

** **
|                                                                        |   | **2002**  |   |
|-----------------------------------------------------------------------------|--------|-----------|--------|
| Loss from  operations before minority interest and discontinued operations  |   | $         | (9,530 | ) |
| Depreciation and  amortization                                              |   | 11,691    |   |
| Impairment of  real estate assets                                           |   | 4,746     |   |
| Income tax  benefit                                                         |   | (7,083    | )      |
| Net loss on  sales of real estate assets                                    |   | 47        |   |
| Net income from  discontinued operations, excluding gain on sales           |   | 338       |   |
| Depreciation and  amortization from discontinued operations                 |   | 407       |   |
| Minority  interest on partially owned property from discontinued operations |   | 102       |   |
| FFO                                                                         |   | $         | 718    |   |
|                                                                        |   |      |   |
| Basic weighted  average shares                                              |   | 5,534,348 |   |
| FFO per share                                                               |   | $         | 0.13   |   |

 

**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 aninitial term of one month to one year and allow for rent adjustments at thetime of renewal.  Leases at the officeproperties typically provide for rent adjustment and pass-through of increasesin operating expenses during the term of the lease.  All of these provisions may permit the Company to increase rentalrates or other charges to tenants in response to rising prices and therefore,serve to reduce the Company’s exposure to the adverse effects of inflation.

 

**FORWARD-LOOKING STATEMENTS**

 

This Report on Form 10-K contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities and Exchange Act of 1934. These forward-looking statements are based on management’s beliefs andexpectations, which may not be correct. Important factors that could cause actual results to differ materiallyfrom the expectations reflected in these forward-looking statements include thefollowing: the Company’s level of indebtedness and ability to refinance itsdebt; the fact that the Company’s predecessors have had a history of losses inthe past; unforeseen liabilities which could arise as a result of the prioroperations of companies or properties acquired in the Consolidation; risksinherent in the Company’s acquisition and development of properties in thefuture, including risks associated with the Company’s strategy of investing inunder-valued assets; general economic, business and market conditions,including the impact of the current economic downturn; changes in federal andlocal laws and regulations; increased competitive pressures; and other factors,including the factors set forth below, as well as factors set forth elsewherein this Report on Form 10-K.

 

**RISK FACTORS**

 

**The Company’s increased leverageincreases its risk of default. This could adversely affect the Company’sresults of operations, ability to make distributions and market price of itsCommon Stock.**

The Company increased itsindebtedness to 88% of the estimated fair market value of its assets.  This increase in the Company’s leverageincreases the Company’s risk of default on its obligations and adverselyaffects the Company’s funds from operations and its ability to makedistributions to its stockholders**. **The Company has a higher ratio ofindebtedness to assets than many REITs. This could adversely affect the market price for the Company’s CommonStock.

 

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**There are risks inherent in theCompany’s acquisition and development strategy.  The Company may not 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.

 

**TheCompany has a history of losses.  TheCompany cannot assure the stockholders that it will become profitable in thefuture.**

The Company has incurredlosses in 2002 and losses on a pro forma basis in 2001 and 2000.  The Company cannot assure the stockholdersthat it will not continue to have losses after depreciation and amortizationunder generally accepted accounting principles.  If the Company is not successful, it will reduce or eliminate thedistributions that stockholders receive from the Company.

 

**TheCompany is responsible for liabilities of entities included in theConsolidation.  This could require theCompany to make additional payments and reduce its available cash.**

Subsidiaries of theCompany merged with CGS’s majority-owned affiliates and the OperatingPartnership and its subsidiaries acquired assets of CGS and some of itssubsidiaries.  Some of these companieswere engaged in the business of serving as general partners of limitedpartnerships and investing in and managing real properties.  As a result of the Consolidation, theCompany or its subsidiaries may be responsible for liabilities arising out ofthe prior operations of these entities. These liabilities may include claims asserted in connection with pendinglitigations against the Company and unknown contingent liabilities.  As a result, the Company has expended cashand may expend additional cash to pay these liabilities.  Any payments would reduce cash available fordistribution to stockholders.

 

**TheCompany will need to refinance mortgage loans and sell properties to meet itsobligations.**

The Company expects torequire substantial cash to meet its operating requirements, including budgetedcapital expenditures.  To meet theseobligations, the Company will be required to refinance mortgage indebtednessand/or sell certain assets to provide cash. The Company cannot provide assurance that it will be successful inrefinancing the mortgage indebtedness and that it will have sufficient cash tomeet its obligations.  In addition tofulfill the Company’s growth strategy, the Company may be required it to raiseadditional cash through debt or equity financing.

 

**TheCompany’s properties may not be profitable, may not result in distributionsand/or may depreciate.**

Properties acquired bythe Company: (i) may not operate at a profit; (ii) may not perform to the Company’s expectations;  (iii) may not appreciate in value; (iv) maydepreciate in value; (v) may not ever be sold at a profit; and/or (vi) may notresult in dividends. The marketability and value of any properties will dependupon many factors beyond the Company’s control.

 

**TheCompany may not be able to enter into favorable leases upon the expiration ofcurrent leases and on current vacant space.**

Over the next threeyears, approximately 49% of the square footage of the Company’s total rentablesquare footage of office/warehouse, office and shopping center properties willexpire.  In addition, 19% of theCompany’s total rentable square footage was vacant as of December 31,2002.  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.

 

25

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**Realproperty investments entail risk.  Theserisks could adversely affect the Company’s distributions.**

The Company is subject tothe risks of investing in real property. In general, a downturn in the national or local economy, changes in thezoning or tax laws or the availability of financing could affect theperformance and value of the properties. Also, because real estate is relatively illiquid, the Company may not beable to respond promptly to adverse economic or other conditions by varying itsreal estate holdings.

 

**TheCompany may invest in joint ventures, which adds another layer of risk to itsbusiness.**

The Company may acquireproperties through joint ventures, which could subject the Company to certainrisks that may not otherwise be present if investments were made directly bythe Company.  These risks include: (i)the potential that the Company’s joint venture partner may not perform; (ii)the joint venture partner may have economic or business interests or goals whichare inconsistent with or adverse to those of the Company; (iii) the jointventure partner may take actions contrary to the requests or instructions ofthe Company or contrary to the Company’s objectives or policies; and  (iv) the joint venturers may not be able toagree on matters relating to the property they jointly own.

 

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, eachco-tenant normally has the right, if an unresolvable dispute arises, to seek partitionof the property, which partition might decrease the value of each portion ofthe divided property.

 

**TheCompany 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 competitionin 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 the Company.  This has resulted in increased competitionin acquiring attractive properties. This competition can adversely affect the Company’s ability to acquireproperties and increase its distributions.

 

**The Company may never elect REITstatus.**

The Company is not required to make a REIT election and the Board ofDirectors may determine not to make a REIT election.  The Company will be taxed as a C corporation if the Board ofDirectors of the Company determines not to make a REIT election, or for anytime period before an effective REIT 

 

26

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election.  If the Company istaxed as a C corporation, it will be subject to a corporate income tax.  The stockholders will also have to pay taxeson any distributions they receive.  Ifthe Company qualifies as a REIT, it will cease 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 Company will pay federalincome taxes at corporate rates. The Company’s qualification as a REIT dependson meeting the requirements of Code and Regulations applicable to REITs.  The Company has not requested, and does notplan to request, a ruling from the Internal Revenue Service that it qualifiesas a REIT.

 

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.  If the Company elects REIT status, duringthe 10-year period following such election, the Company will be subject to anentity level tax on the income it recognizes upon the sale of assets includingall the assets transferred to it as part of the consolidation it held beforeelecting REIT status in an amount up to the amount of the built-in gains at thetime the Company becomes a REIT.

 

If the Company fails to qualify as a REIT, it would be subject tofederal income tax at regular corporate rates. In addition to these taxes, the Company may be subject to the federalalternative minimum tax and various state income taxes.  If the Company qualifies as a REIT and itsstatus as a REIT is subsequently terminated or revoked, unless specificstatutory provisions entitle the Company to relief, it could not elect to betaxed as a REIT for four taxable years following the year during which it wasdisqualified.   Therefore, if theCompany fails to qualify as a REIT or loses its REIT status, the fundsavailable for distributions would be reduced substantially for each of theyears involved.  In addition, dividenddistributions that the Company makes would generally be taxed at income taxrates on ordinary income.

 

**To qualify as a REIT, the Companymust meet asset requirements.  If theCompany fails to meet these asset requirements, it will pay tax as acorporation.**

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 Companymust meet distribution requirements.  Ifit 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 Companydoes not have sufficient cash, this distribution requirement may limit theCompany’s ability to acquire additional properties.  Also, for the purposes of determining taxable income, the Codemay require 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.

 

27

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**The Company must meet limitations onshare ownership to qualify as a REIT. These limitations may deter parties from purchasing the Company 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 Company shares.

 

**Future changes in tax law couldadversely impact the Company’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 AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK**

 

**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.

 

The Company uses interest rate swaps to hedge against fluctuations ininterest rates on specific borrowings. Interest rate swap contracts are reflected at fair value on theCompany’s balance sheet in accrued and other liabilities and the changes in thefair value of the hedge are recognized as adjustments to interest expense.  The Company had no swap contracts atDecember 31, 2002.  Interest rate swapcontracts in notional amounts of approximately $22,000,000, which expiredDecember 15, 2002 were subsequently renewed on January 7, 2003.

 

At December 31, 2002, the Company’s total indebtednessincluded fixed-rate debt of approximately $148,951,000 and floating-rateindebtedness of approximately $33,567,000. The Company continually reviews the portfolio’s interest rate exposurein an effort to minimize the risk of interest rate fluctuations. The Companydoes not have any other material market-sensitive financial instruments.

 

28

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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** |   |
|------------------------|--------|-----------------------------|--------|
|                   |   | **2003**                    |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Net  Loan  Premiums** |   | **Total** |   | **Fair  Value** |   |
|                   |   | **(dollars  in thousands)** |   |
| Secured  Fixed         |   | $                           | 5,606  |   | $ | 7,482 |   | $ | 2,925 |   | $ | 7,073 |   | $ | 1,952 |   | $ | 104,956 |   | $ | 3,655 |   | $ | 133,649 |   | $ | 133,649 |   |
| Average  interest rate |   | 10.31                       | %      | 6.93 | % | 7.56 | % | 9.42 | % | 7.67 | % | 7.75 | % |   |   | 7.90 | % |   |   |
|                   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Secured  Variable      |   | $                           | 4,214  |   | $ | 25,194 |   | $ | 193 |   | $ | 154 |   | $ | 130 |   | $ | 3,483 |   | $ | — |   | $ | 33,368 |   | $ | 33,368 |   |
| Average  interest rate |   | 5.76                        | %      | 5.89 | % | 6.58 | % | 6.36 | % | 6.12 | % | 6.12 | % |   |   | 5.90 | % |   |   |
|                   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unsecured  Fixed       |   | $                           | 2,360  |   | $ | 381 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,741 |   | $ | 2,741 |   |
| Average  interest rate |   | 8.91                        | %      | 8.00 | % |   |   |   |   |   |   |   |   |   |   | 9.55 | % |   |   |
|                   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unsecured  Variable    |   | $                           | 199    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 199 |   | $ | 199 |   |
| Average  interest rate |   | 4.25                        | %      |   |   |   |   |   |   |   |   |   |   |   |   | 4.25 | % |   |   |
|                   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bonds                  |   | $                           | 286    |   | $ | 317 |   | $ | 337 |   | $ | 352 |   | $ | 11,033 |   | $ | — |   | $ | — |   | $ | 12,324 |   | $ | 12,324 |   |
| Average  interest rate |   | 7.98                        | %      | 7.93 | % | 7.93 | % | 7.96 | % | 9.50 | % |   |   |   |   | 9.34 | % |   |   |

 

The Company believes that the fair values of suchinstruments approximate carrying value at December 31, 2002.

 

A change of 1.00% in the index rate to which theCompany’s variable rate debt is tied would change the annual interest incurredby the Company by $336,000, or $.06 per share, based upon the balancesoutstanding on variable rate instruments and the weighted average number ofcommon shares outstanding at December 31, 2002.

 

**ITEM 8****. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The response to this item is submitted as a separatesection of this Form 10-K. See Item 15. - **Exhibits,Financial Statement Schedules And Reports On Form 8K.**

 

**ITEM 9****. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

During the period endedDecember 31, 2002, there were no “reportable events” within the meaning of Item304(a)(1)(v) of Regulation S-K promulgated under the Securities Act.

 

29

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**PART III**

 

**ITEM 10****. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required by Item 10 is incorporated byreference from the Company’s definitive proxy statement to be filed on orbefore April 30, 2003 for its annual stockholder’s meeting to be held May 7,2003.

 

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

 

The information required by Item 11 is incorporated byreference from the Company’s definitive proxy statement to be filed on orbefore April 30, 2003 for its annual stockholder’s meeting to be held May 7,2003.

 

**ITEM 12****. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

The information required by Item 12 is incorporated byreference from the Company’s definitive proxy statement to be filed on orbefore April 30, 2003 for its annual stockholder’s meeting to be held May 7,2003.

 

## **ITEM 13**. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS

 

The information required by Item 13 is incorporated byreference from the Company’s definitive proxy statement to be filed on orbefore April 30, 2003 for its annual stockholder’s meeting to be held May 7,2003.

 

30

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**PART IV**

 

**ITEM 14****. CONTROLS AND PROCEDURES**

 

During the 90-day periodprior to the filing date of this report, management, including the Company’sChief Executive Officer and Acting Chief Financial Officer, evaluated theeffectiveness of the Company’s disclosure controls and procedures.  Based on, and as of the date of, thatevaluation, the Chief Executive Officer and Acting Chief Financial Officer concludedthat the disclosure controls and procedures were effective, in all materialrespects, to ensure that information required to be disclosed in the reportsthe Company files and submits under the Exchange Act is recorded, processed,summarized and reported as and when required.

 

There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of theevaluation referred to above.

 

**ITEM 15****. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTSON FORM 8-K**

 
|   |                                                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------|
| (a)    | (1)                                                                                                                             | Financial Statements |
|   | Independent Auditors’  Reports                                                                                             |
|   | Consolidated Balance Sheets  at December 31, 2002, and 2001                                                                     |
|   | Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000                                     |
|   | Consolidated  Statements of Stockholders’ and Partners’ Equity for the years ended December  31, 2002, 2001 and 2000  |
|   | Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001, and  2000                                   |
|   | Notes to  Consolidated Financial Statements                                                                                     |
| (2)    | Financial Statement  Schedules                                                                                                  |
|   | Schedule  III – Real Estate and Accumulated Depreciation                                                                   |
| (3)    | Exhibits to Financial  Statements                                                                                               |
|   | The Exhibit Index  attached hereto is hereby incorporated by reference to this Item.                                            |
|   | On November 14, 2002, a  report on Form 8-K was filed with respect to an investment profile for  American Spectrum Realty, Inc. |
| (c)    | Exhibits                                                                                                                        |
|        |                                                                                                                                 |  |

 

31

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# **Report ofIndependent Certified Public Accountants**

 

**To the Board of Directors andStockholders of**

**American Spectrum Realty, Inc.**

**Irvine, California**

 

We have audited the accompanying consolidated balancesheets of American Spectrum Realty, Inc. as of December 31, 2002 and 2001 andthe related consolidated statements of operations, stockholders’ equity, andcash flows for each of the three years in the period ended December 31, 2002.These financial statements and the schedules referred to below are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements 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, as wellas evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

As more fullydescribed in Note 17, the Company needs to sell assets to fund the cashrequirements for other than normal property operations and refinance or extenddebt as it matures.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of American Spectrum Realty, Inc. at December 31, 2002 and 2001, andthe results of its operations and its cash flows for each of the three years inthe period ended December 31, 2002 in conformity with accounting principlesgenerally accepted in the United States of America.

 

Our audits were 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 audits of the basic consolidated financial statementsand, in our opinion, is fairly stated in all material respects in relation tothe basic consolidated financial statements taken as a whole.

 

As discussed in Note 2 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standards No.144, *Accounting for the Impairment orDisposal of Long-Lived Assets,* on January 1, 2002.

 

 
| **BDO Seidman, LLP** |   |
|----------------------|--------|

 

 

 

Dallas, Texas

March 15, 2003

 

32

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**AMERICANSPECTRUM REALTY, INC.**

**CONSOLIDATED BALANCE SHEETS**

(Dollars in thousands,except share amounts)

 
|                                                                                                                                 |   | **December 31, 2002** |    | **December 31, 2001** |       |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|-----------------------|------------|
| **ASSETS**                                                                                                                           |   |                  |    |                  | ** ** |
|                                                                                                                                 |   |                  |    |                  |       |
| Real  estate held for investment                                                                                                     |   | $                     | 250,625 |                  | $          | 239,423 | ** ** |
| Accumulated  depreciation                                                                                                            |   | 13,735                |    | 2,138                 | ** ** |
| Real  estate held for investment, net                                                                                                |   | 236,890               |    | 237,285               | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Real  estate held for sale                                                                                                           |   | 1,374                 |    | 12,797                | ** ** |
| Cash  and cash equivalents                                                                                                           |   | 788                   |    | 2,284                 | ** ** |
| Tenant  and other receivables, net of allowance for doubtful accounts of $290 and  $225, respectively                                |   | 512                   |    | 1,286                 | ** ** |
| Deferred  rents receivable                                                                                                           |   | 505                   |    | 98                    | ** ** |
| Deposits  held in escrow                                                                                                             |   | 279                   |    | 1,956                 | ** ** |
| Investment  in management company                                                                                                    |   | 4,000                 |    | 4,000                 | ** ** |
| Prepaid  and other assets, net                                                                                                       |   | 9,209                 |    | 6,499                 | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Total  Assets                                                                                                                        |   | $                     | 253,557 |                  | $          | 266,205 | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ AND****PARTNERS’ EQUITY**                                                                  |   |                  |    |                  | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Liabilities:                                                                                                                         |   |                  |    |                  | ** ** |
| Notes  payable, net of premiums of $3,655 and $4,407, respectively (including $1,799  and $1,802, respectively, to related parties)  |   | $                     | 182,281 |                  | $          | 167,638 | ** ** |
| Liabilities  related to real estate held for sale (including $800 and $2,207,  respectively, to related parties)                     |   | 2,235                 |    | 11,756                | ** ** |
| Notes  payable to former limited partners                                                                                            |   | 237                   |    | 2,292                 | ** ** |
| Accounts  payable                                                                                                                    |   | 3,139                 |    | 3,179                 | ** ** |
| Deferred  gain on sale of real estate asset                                                                                          |   | —                |    | 232                   | ** ** |
| Deferred  tax liability                                                                                                              |   | 6,082                 |    | —                | ** ** |
| Accrued  and other liabilities (including $1,594 and $2,187, respectively, to related  parties)                                      |   | 19,107                |    | 17,088                | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Total  Liabilities                                                                                                                   |   | 213,081               |    | 202,185               | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Minority  interest                                                                                                                   |   | 9,319                 |    | 10,616                | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Commitments  and Contingencies:                                                                                                      |   |                  |    |                  | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Redeemable  Common Stock                                                                                                             |   | 300                   |    | 300                   | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Stockholders’  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,  5,536,990 and 5,529,190 shares, respectively |   | 55                    |    | 55                    | ** ** |
| Additional  paid-in capital                                                                                                          |   | 41,809                |    | 56,502                | ** ** |
| Accumulated  deficit                                                                                                                 |   | (9,168                | )       | (2,038                | **)**      |
| Receivable  from principal stockholders                                                                                              |   | (1,188                | )       | —                |       |
| Deferred  compensation                                                                                                               |   | (651                  | )  | (1,415                | **)**      |
|                                                                                                                                 |   |                  |    |                  |       |
| Total  Stockholders’ Equity                                                                                                     |   | 30,857                |    | 53,104                | ** ** |
|                                                                                                                                 |   |                  |    |                  | ** ** |
| Total  Liabilities and Stockholders’ Equity                                                                                     |   | $                     | 253,557 |                  | $          | 266,205 | ** ** |

 

The accompanying notesare an integral part of these consolidated financial statements

 

33

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**AMERICANSPECTRUM REALTY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(Dollars in thousands,except per share and unit amounts)

 
|                                                                                         |   | **Years  Ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                         |   | **2002**                      |   | **2001** |   | **2000** |   |
| **REVENUES:**                                                                                |   |                          |   |   |   |   |   |
| Rental  revenue                                                                              |   | $                             | 38,043 |   | $ | 7,274 |   | $ | — |   |
| Interest  and other income                                                                   |   | 209                           |   | 161 |   | 159 |   |
| Total  revenues                                                                              |   | 38,252                        |   | 7,435 |   | 159 |   |
|                                                                                         |   |                          |   |   |   |   |   |
| **EXPENSES:**                                                                                |   |                          |   |   |   |   |   |
| Property  operating expense                                                                  |   | 14,763                        |   | 2,990 |   | — |   |
| General  and administrative                                                                  |   | 8,586                         |   | 2,863 |   | — |   |
| Depreciation  and amortization                                                               |   | 11,691                        |   | 2,123 |   | — |   |
| Interest  expense                                                                            |   | 13,779                        |   | 2,409 |   | — |   |
| Litigation  settlement                                                                       |   | 1,200                         |   | — |   | — |   |
| Impairment  of real estate assets                                                            |   | 4,746                         |   | — |   | — |   |
| Total  expenses                                                                              |   | 54,765                        |   | 10,385 |   | — |   |
|                                                                                         |   |                          |   |   |   |   |   |
| **OTHER INCOME (LOSS):**                                                                     |   |                          |   |   |   |   |   |
| Net  loss on sale of real estate assets                                                      |   | (47                           | )      | — |   | — |   |
| Net  (loss) gain on extinguishment of debt                                                   |   | (53                           | )      | 314 |   | — |   |
| Income  from investment in unconsolidated joint venture                                      |   | —                        |   | 394 |   | 328 |   |
| Total  other income (loss)                                                                   |   | (100                          | )      | 708 |   | 328 |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Net  (loss) income before income tax benefit, minority interest and discontinued  operations |   | (16,613                       | )      | (2,242 | ) | 487 |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Income  tax benefit                                                                          |   | 7,083                         |   | — |   | — |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Net  (loss) income before minority interest and discontinued operations                      |   | (9,530                        | )      | (2,242 | ) | 487 |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Minority  interest                                                                           |   | 935                           |   | 267 |   | — |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Net  (loss) income before discontinued operations                                            |   | (8,595                        | )      | (1,975 | ) | 487 |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Discontinued  operations:                                                                    |   |                          |   |   |   |   |   |
| Income  (loss) from discontinued operations                                                  |   | 338                           |   | (63 | ) | (162 | ) |
| Gain  on sale of discontinued operations                                                     |   | 1,127                         |   | — |   | — |   |
| Income  (loss) from discontinued operations                                                  |   | 1,465                         |   | (63 | ) | (162 | ) |
|                                                                                         |   |                          |   |   |   |   |   |
| Net  (loss) income                                                                           |   | $                             | (7,130 | ) | $ | (2,038 | ) | $ | 325 |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Basic  and diluted per share data:                                                           |   |                          |   |   |   |   |   |
| Net  loss before discontinued operations                                                     |   | $                             | (1.55  | ) | $ | (0.36 | ) | $ | — |   |
| Income  (loss) from discontinued operations                                                  |   | 0.26                          |   | (0.01 | ) | — |   |
| Net  loss                                                                                    |   | $                             | (1.29  | ) | $ | (0.37 | ) | $ | — |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Per  unit data:                                                                              |   |                          |   |   |   |   |   |
| Net  income before discontinued operations                                                   |   | $                             | N/A    |   | $ | N/A |   | $ | 6.26 |   |
| Loss  from discontinued operations                                                           |   | N/A                           |   | N/A |   | (2.08 | ) |
| Net  income                                                                                  |   | $                             | N/A    |   | $ | N/A |   | $ | 4.18 |   |
|                                                                                         |   |                          |   |   |   |   |   |
| Basic  weighted average shares used                                                          |   | 5,534,348                     |   | 5,529,190 |   | — |   |
| Limited  partnership units outstanding                                                       |   | N/A                           |   | N/A |   | 77,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

34

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**AMERICANSPECTRUM REALTY INC.**

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

(Dollars in thousands)

 
|                                                      |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Accumulated  Deficit** |   | **Deferred  Compensation** |   | **Receivable  from  Principal  Stockholders** |   | **Treasury  Stock** |   | **Total  Partners’  Equity** |   | **Total  Equity** |    |
|-----------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------|--------|----------------------------|--------|-----------------------------------------------|--------|---------------------|--------|-----------------------------------|--------|-------------------|---------|
|                                                      |   |              |   |                             |   |                     |   |                       |   |                                          |   |                |   |                              |   |              |    |
| Balance,  January 1, 2000                                 |   | —            |   | —                           |   | —                   |   | —                     |   | —                                        |   | —              |   | $                                 | 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                   |   | —                     |   | $                                             | (1,493 | )                   | — |                              | — |              | (10,002 | ) | 45,062 |   |
| Amortization  of deferred compensation                    |   | —            |   | —                           |   | —                   |   | 78                         |   | —                                        |   | —              |   | —                            |   | 78                |    |
| Net  loss                                                 |   | —            |   | —                           |   | $                        | (2,038 | )                          | — |                                          | — |                | — |                              | — |              | (2,038  | ) |
|                                                      |   |              |   |                             |   |                     |   |                       |   |                                          |   |                |   |                              |   |              |    |
| Balance,  December 31, 2001                               |   | 55                |   | 56,502                           |   | (2,038                   | )      | (1,415                     | )      | —                                        |   | —              |   | —                            |   | 53,104            |    |
| Purchase  adjustment related to consolidation transaction |   | —            |   | (13,165                          | )      | —                   |   | —                     |   | —                                        |   | —              |   | —                            |   | (13,165           | )       |
| Issuance  of common stock to Officer                      |   | —            |   | 70                               |   | —                   |   | (70                        | )      | —                                        |   | —              |   | —                            |   | —            |    |
| Common  stock repurchase                                  |   | —            |   | —                           |   | —                   |   | —                     |   | —                                        |   | $                   | (14    | )                                 | — |              | (14     | ) |
| Retirement  of common stock                               |   | —            |   | (14                              | )      | —                   |   | —                     |   | —                                        |   | 14                  |   | —                            |   | —            |    |
| Receivable  from principal Stockholders                   |   | —            |   | 1,188                            |   | —                   |   | —                     |   | $                                             | (1,188 | )                   | — |                              | — |              | —  |   |
| Amortization  of deferred compensation                    |   | —            |   | —                           |   | —                   |   | 834                        |   | —                                        |   | —              |   | —                            |   | 834               |    |
| Dividends  to common  Stockholders                   |   | —            |   | (2,772                           | )      | —                   |   | —                     |   | —                                        |   | —              |   | —                            |   | (2,772            | )       |
| Net  loss                                                 |   | —            |   | —                           |   | (7,130                   | )      | —                     |   | —                                        |   | —              |   | —                            |   | (7,130            | )       |
|                                                      |   |              |   |                             |   |                     |   |                       |   |                                          |   |                |   |                              |   |              |    |
| Balance,  December 31, 2002                               |   | $                 | 55     |                             | $      | 41,809                   |   | $                          | (9,168 | )                                             | $      | (651                | )      | $                                 | (1,188 | )                 | $       | — |   | $ | — |   | $ | 30,857 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

35

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**AMERICANSPECTRUM REALTY, INC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Dollars in thousands)

** **
|                                                                                  |   | **Years  Ended December 31** |   |
|---------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                  |   | **2002**                     |   | **2001** |   | **2000** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                             |   |                         |   |   |   |   |   |
| Net  (loss) income                                                                    |   | $                            | (7,130 | ) | $ | (2,038 | ) | $ | 325 |   |
| Adjustments  to reconcile net (loss) income to net cash used in operating activities: |   |                         |   |   |   |   |   |
| (Income)  loss from discontinued operations                                           |   | (1,465                       | )      | 63 |   | 162 |   |
| Depreciation  and amortization                                                        |   | 11,691                       |   | 2,123 |   | — |   |
| Impairment  of real estate assets                                                     |   | 4,746                        |   | — |   | — |   |
| Net  loss on sales of real estate assets                                              |   | 47                           |   | — |   | — |   |
| Loss  (gain) on extinguishment of debt                                                |   | 53                           |   | (314 | ) | — |   |
| Income  from investment in unconsolidated joint venture                               |   | —                       |   | (394 | ) | (328 | ) |
| Income  tax benefit                                                                   |   | (7,083                       | )      | — |   | — |   |
| Deferred  rental income                                                               |   | (407                         | )      | (98 | ) | — |   |
| Minority  interest                                                                    |   | (935                         | )      | (267 | ) | — |   |
| Deferred  compensation expense                                                        |   | 834                          |   | 78 |   | — |   |
| Amortization  of loan premiums, included in interest expense                          |   | (621                         | )      | (108 | ) | — |   |
| Changes  in operating assets and liabilities:                                         |   |                         |   |   |   |   |   |
| Decrease  (increase) in tenant and other receivables                                  |   | 980                          |   | (911 | ) | — |   |
| (Decrease)  increase in accounts payable                                              |   | (40                          | )      | 735 |   | — |   |
| Deferred  gain on sale of real estate asset                                           |   | —                       |   | (232 | ) |   |   |
| Increase  in note receivable                                                          |   | —                       |   | — |   | (159 | ) |
| Increase  in prepaid and other assets                                                 |   | (2,816                       | )      | (2,115 | ) | — |   |
| Increase  (decrease) in accrued and other liabilities                                 |   | 1,723                        |   | (2,899 | ) | — |   |
| Net  cash used in operating activities:                                               |   | (423                         | )      | (6,377 | ) | — |   |
|                                                                                  |   |                         |   |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                             |   |                         |   |   |   |   |   |
| Capital  improvements to real estate assets                                           |   | (4,407                       | )      | (685 | ) | (128 | ) |
| Real  estate acquisition                                                              |   | (268                         | )      | — |   | — |   |
| Proceeds  received from sales of real estate assets                                   |   | 1,109                        |   | — |   | — |   |
| Cash  acquired in consolidation transaction                                           |   | —                       |   | 2,518 |   | — |   |
| Distributions  from unconsolidated joint venture                                      |   | —                       |   | 588 |   | 618 |   |
| Contributions  to unconsolidated joint venture                                        |   | —                       |   | — |   | (54 | ) |
| Net  cash (used in) provided by investing activities:                                 |   | (3,566                       | )      | 2,421 |   | 436 |   |
|                                                                                  |   |                         |   |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                             |   |                         |   |   |   |   |   |
| Proceeds  from borrowings                                                             |   | 24,382                       |   | 23,564 |   | — |   |
| Repayment  of borrowings                                                              |   | (17,563                      | )      | (16,749 | ) | (48 | ) |
| Note  payments to former limited partners                                             |   | (2,055                       | )      | — |   | — |   |
| Repurchase  of common stock                                                           |   | (14                          | )      | — |   | — |   |
| Distributions  to common stockholders                                                 |   | (2,772                       | )      | — |   | — |   |
| Distributions  to unitholders in the operation partnership                            |   | (362                         | )      | — |   | — |   |
| Collection  of advance to affiliate                                                   |   | 8                            |   | — |   | — |   |
| Advances  to affiliate                                                                |   | —                       |   | (514 | ) | (356 | ) |
| Net  cash provided by (used in) financing activities:                                 |   | 1,624                        |   | 6,301 |   | (404 | ) |
|                                                                                  |   |                         |   |   |   |   |   |
| Cash  from (used in) discontinued operations                                          |   | 869                          |   | (95 | ) | (30 | ) |
|                                                                                  |   |                         |   |   |   |   |   |
| Increase  (decrease) in cash                                                          |   | (1,496                       | )      | 2,250 |   | 2 |   |
|                                                                                  |   |                         |   |   |   |   |   |
| Cash,  beginning of period                                                            |   | 2,284                        |   | 34 |   | 32 |   |
|                                                                                  |   |                         |   |   |   |   |   |
| Cash,  end of period                                                                  |   | $                            | 788    |   | $ | 2,284 |   | $ | 34 |   |
|                                                                                  |   |                         |   |   |   |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**                                |   |                         |   |   |   |   |   |
| Cash  paid for interest                                                               |   | $                            | 13,435 |   | $ | 3,018 |   | $ | 129 |   |
| Cash  paid for income taxes                                                           |   | —                       |   | — |   | — |   |
|                                                                                  |   |                         |   |   |   |   |   |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:**                         |   |                         |   |   |   |   |   |
| Assumption  of mortgage loans in acquisitions of real estate assets                   |   | $                            | 9,863  |   | $ | — |   | $ | — |   |
| Seller  financing of acquired real estate assets                                      |   | 955                          |   | — |   | — |   |
| Trust  deed note receivable from sale of real estate asset                            |   | 1,100                        |   | — |   | — |   |
| 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

 

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**AMERICANSPECTRUM REALTY, INC.**

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

 

**NOTE 1. DESCRIPTION OF BUSINESS**

 

# **GENERAL**

 

American Spectrum Realty,Inc. (“ASR” or the “Company”) is a Maryland corporation established on August8, 2000.  The Company is a full-servicereal estate corporation, which owns, manages and operates income-producing properties.  Substantially all of the Company’s assetsare held through an operating partnership (the “Operating Partnership”) inwhich the Company, as of December 31, 2002, holds a 1% general partner interestand an 87.4% limited partnership interest. As of December 31, 2002, through itsmajority-owned subsidiary, the Operating Partnership, the Company owned andoperated 33 properties, which consisted of 15 office, 11 office/warehouse,three shopping center, and three apartment properties, and one developmentalland property. The properties are located in four geographic regions in ninestates.  The Company plans to expand itsbusiness and net assets by acquiring additional properties.  The Company will focus primarily on officeand office/warehouse properties located in Texas, California and Arizona.

 

Substantially all of theCompany’s assets are held through the Operating Partnership. The Company is thesole general partner of the Operating Partnership.  As the sole general partner of the Operating Partnership, theCompany generally has the exclusive power under the Partnership Agreement tomanage and conduct the business of the Operating Partnership. The Company’sinterest in the Operating Partnership entitles it to share in cashdistributions from, and in profits and losses of, the OperatingPartnership.  Holders of limitedpartnership units in the Operating Partnership (“OP Units”) have the samerights to distributions as holders of common stock in the Company.  Most of the properties will be owned by theOperating Partnership through subsidiary limited partnerships or limitedliability companies.

 

Holders of the OP Unitshave the option to redeem their units and to receive, at the option of theCompany, in exchange for each OP Unit (i) one share of Common Stock of theCompany, or (ii) cash equal to the fair market value of one share of CommonStock of the Company at the date of conversion.

 

Management isreconsidering whether it is in the best interest of the Company to elect to betreated as a real estate investment trust or REIT, as defined under theInternal Revenue Code of 1986, as amended. In the event such election is made, the election could be effective asearly as January 1, 2003 upon the filing of the appropriate forms for the 2003tax year.  In this regard, the Companyplans to operate within the requirements of REIT status in 2003.  In general, a REIT is a company that owns orprovides financing for real estate and pays annual distributions to investors ofat least 90% of its taxable income.  A REITtypically is not subject to federal income taxation on its net income, providedapplicable income tax requirements are satisfied.   For the tax year 2002, the Company was taxed as a C corporation.

## ** **

## **CONSOLIDATIONTRANSACTION**

 

In October 2001, theCompany acquired various properties 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.  Sierra Pacific Pension Investors ‘84(“SPPI84”), one of the eight public limited partnerships, was treated, foraccounting purposes, as the acquirer of the properties in theConsolidation.  Prior to theConsolidation, SPPI84’s activities involved the ownership and operation of tworeal estate properties in Arizona: Sierra Spectrum in Phoenix, Arizona and Sierra Valencia in Tucson,Arizona. 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 the Company.

 

37

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**NOTE 2. SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**BASIS OF PRESENTATION**

The accompanying financial statements present theconsolidated financial position of the Company and its subsidiaries as ofDecember 31, 2002, and 2001, and the consolidated results of operations andcash flows of the Company and its subsidiaries for the years ended December 31,2002, 2001 and 2000.  All significantintercompany transactions, receivables and payables have been eliminated inconsolidation.

 

As discussed in Note 1, the accounting acquirer in theConsolidation was SPPI84.  As such, theconsolidated statement of operations and cash flows for the year ended December31, 2001 includes the results of operations and cash flows of SPPI84 for theentire year, and the acquired entities from October 20, 2001, through December31, 2001.  The consolidated statement ofoperations and cash flows for the year ended December 31, 2000 solely reflectsthe results of operations and cash flows of SPPI84.

 

**RECLASSIFICATION**

Certain prior year balances have been reclassified toconform with the current year presentation.  In accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, which was effective for the Company beginningJanuary 1, 2002, real estate designated as held for sale subsequent to January1, 2002 will be accounted for in accordance with the provisions of SFAS No. 144and the results of operations of these properties are included in income fromdiscontinued operations.  Prior periodshave been reclassified for comparability, as required.

 

**USE OF ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires 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 results ofoperations during the reporting period. Actual results could materially differfrom those estimates.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

In June 2001, FASB issuedSFAS No. 141, which supercedes APB 16, “Business Combinations” (“FAS 141”),which is effective for business combinations initiated after September 30,2001.  FAS 141 requires that allbusiness combinations be accounted for under the purchase method and providesthat the pooling-of-interest method is no longer allowed.  The Company accounted for the Consolidationunder the purchase method.

 

In June 2001, FASB issuedSFAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), which is effectivefor fiscal years beginning after December 15, 2001.  FAS 142 requires, among other things, that goodwill no longer beamortized to earnings, but instead be reviewed for impairment.  The adoption of FAS 142 did not have amaterial impact on the Company’s consolidated financial position or results ofoperations.

 

In June 2001, FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations” (“FAS 143”).  FAS 143 addresses financial accounting andreporting obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs.  The provisions of FAS 143 are required to be applied startingwith fiscal years beginning after September 15, 2002.  The Company believes the adoption of the provisions of FAS 143will not have a significant effect on its consolidated financial position orresults of operations.

 

In August 2001, FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” (“FAS 144”), which addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. FAS 144 supersedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of”.  However, FAS 144 retains the fundamentalprovisions of SFAS No. 121 for (a) recognition and measurement of theimpairment of long-lived assets to be held for sale and used and (b)measurement of long-lived assets to be disposed of by sale.  FAS 144 was effective for the Companybeginning January 1, 2002, the first day of the Company’s 2002 fiscalyear.  Real estate designated as heldfor sale subsequent to January 1, 2002 will be accounted for in accordance

 

38

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with the provisions ofFAS 144 and the results of operations of these properties are included inincome from discontinued operations. Prior periods have been reclassified for comparability, asrequired.  The adoption of FAS 144 didnot have a material impact on the Company’s consolidated financial position orresults of operations.

 

In April 2002, FASBissued SFAS No. 145, “Rescission of FASB No. 4, 44, and 62, Amendment of FASBNo. 13, and Technical Corrections” (“FAS 145”).  In most instances, FAS 145 will require gains and losses onextinguishments of debt to be classified as income or loss from continuingoperations rather than as extraordinary items as previously required under FASBStatement No. 4, “Reporting Gains and Losses from Extinguishment of Debt” (“FAS4”).  This provision of FAS 145 is effectivefor fiscal years beginning after May 15, 2002, with early applicationencouraged.  Upon application, any gainor loss on extinguishments of debt previously classified as an extraordinaryitem in prior periods presented that does not meet the criteria of Opinion 30for such classifications should be reclassified to conform to the provisions ofFAS 145.  The Company adopted FAS 145 inthe third quarter of 2002.  The adoptionof FAS 145 did not have a material impact on the Company’s consolidated financialposition or results of operations.

## ** **

In July 2002, FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” (“FAS 146”).  FAS 146requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan.  FAS 146 is to beapplied prospectively to exit or disposal activities initiated after December31, 2002.  The Company does not expectthe adoption of FAS 146 to have a material impact on its consolidated financialposition or results of operations.

 

In November 2002, FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires acompany, at the time it issues a guarantee, to recognize an initial liabilityfor the fair value of obligations assumed under the guarantee and elaborates onexisting disclosure requirements related to guarantees and warranties.  The initial recognition requirements of FIN45 are effective for guarantees issued or modified after December 31, 2002 andadoption of the disclosure requirements are effective for financial statementsending after December 15, 2002.  Theadoption of FIN 45 is not expected to have a significant impact on theCompany’s consolidated financial position or results of operations.

 

In December 2002, FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition andDisclosure” (“FAS 148”), which amended SFAS Statement No. 123, “Accounting forStock-Based Compensation” (“FAS 123”). FAS 148 provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  Additionally, FAS 148amends the disclosure requirements of FAS 123 to require prominent disclosuresin the annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used on reportedresults.  FAS 148 is effective forfinancial statements for fiscal years ending after December 15, 2002.  In compliance with FAS 148, the Company haselected to continue to follow the intrinsic value method in accounting for itsstock-based employee compensation arrangement as defined by APB No. 25“Accounting for Stock Issued to Employees”.

 

**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 carrying valueof the property is reduced to estimated fair value.  Estimated fair value (i) is based upon the Company’s plans forthe continued operation of each property and (ii) is computed using estimatedsales price, as determined by prevailing market values for comparableproperties and/or the use of capitalization rates multiplied by annualized netoperating income based upon the age, construction and use of the building.  The fulfillment of the Company’s plans relatedto each of its properties is dependent upon, among other things, the presenceof economic conditions which will enable the Company to continue to hold andoperate the properties prior to their eventual sale.  Due to uncertainties inherent in the valuation process and in theeconomy, actual results of operating and disposing of the Company’s propertiescould be materially different from current expectations.

 

39

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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 include all highly liquid investmentswith a maturity of three months or less at the date of purchase.

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

The Company’s financial instruments consist of cashand cash equivalents, escrow deposits, tenant and other receivables, notespayable, accounts payable and accrued expenses.  Management believes that the carrying value of the Company’sfinancial instruments approximate their respective fair market values atDecember 31, 2002 and December 31, 2001.

 

**DERIVATIVE FINANCIAL INSTRUMENTS**

The Company followsStatement of Financial Accounting Standard No. 133, as amended, whichestablishes accounting and reporting standards for derivative financialinstruments, including certain derivative instruments embedded in other contractsand hedging activities.  Allderivatives, whether designed in hedging relationships or not, are required tobe recorded on the balance sheet at fair value.  If the derivative is designated as a fair value hedge, thechanges in the fair value of the derivative and of the hedged item attributableto the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effectiveportions of changes in the fair value of the derivative are recorded in othercomprehensive income and ineffective portions of changes in the fair value ofcash flow hedges are recognized in earnings.

 

The Company uses interestrate swaps to hedge against fluctuations in interest rates on specificborrowings.  Interest rate swapcontracts are reflected at fair value on the Company’s balance sheet in accruedand other liabilities and the changes in the fair value of the hedge arerecognized as adjustments to interest expense. The Company had no swap contracts at December 31, 2002.  Interest rate swap contracts in notionalamounts of approximately $22,000,000, which expired December 15, 2002, weresubsequently renewed on January 7, 2003.

 

**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 notepayable or lease and are included in other assets.

 

## **STOCK-BASED COMPENSATION**

The Financial Accounting Standards Board issued SFASNo. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) in October 1995.  This standard establishes a fair valueapproach to valuing stock options awarded to employees as compensation. InDecember 2002, FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure” (“FAS 148”), which amended FAS123.  FAS 148 provides alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  Additionally, FAS 148 amends the disclosure requirements of FAS123 to require prominent disclosures in the annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  FAS 148 is effective for financialstatements for fiscal years ending after December 15, 2002.  In compliance with FAS 148, the Company haselected to continue to follow the intrinsic value method in accounting for itsstock-based employee compensation arrangement as defined by APB No. 25“Accounting for Stock Issued to Employees”.

 

At December 31, 2002, the Company had in effect itsOmnibus Stock Incentive Plan (the “Plan”), which is described more fully inNote 14. The Company has elected, as permitted by SFAS No. 123, to use theintrinsic value based method of accounting for stock options consistent withAccounting Principles Board Opinions No. 25, “Accounting for Stock Issued toEmployees”.  The intrinsic value methodmeasures

 

40

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compensation cost for stock options as the excess, ifany, of the quoted market price of the Company’s stock at the measurement dateover the exercise price.  No stock-basedemployee compensation cost is reflected in net income related to stock options,as all options granted under the Plan had an exercise price equal to the fairmarket value of the underlying common stock on the date of grant.

 

The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition of the provisions of FAS 123 to stock-based employee compensation(thousands of dollars):

 
|                                                                                                                     |   | **Years  Ended December 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                                     |   | **2002**                      |   | **2001** |   | **2000** |   |
| Net (loss) income, as  reported                                                                                          |   | $                             | (7,130 | ) | $ | (2,038 | ) | $ | 325 |   |
| Deduct:  Employee compensation expense for stock  option grants under fair value method, net of related tax effects |   | (476                          | )      | (47 | ) | — |   |
| Pro forma net (loss)  income                                                                                             |   | $                             | (7,606 | ) | $ | (2,085 | ) | $ | 325 |   |
|                                                                                                                     |   |                          |   |   |   |   |   |
| Per share data:                                                                                                          |   |                          |   |   |   |   |   |
| Basic and diluted, as  reported                                                                                          |   | $                             | (1.29  | ) | $ | (0.37 | ) | N/A |   |
| Basic and diluted,  proforma                                                                                             |   | $                             | (1.37  | ) | $ | (0.38 | ) | N/A |   |
|                                                                                                                     |   |                          |   |   |   |   |   |
| Per unit data:                                                                                                           |   |                          |   |   |   |   |   |
| As reported and  proforma                                                                                                |   | N/A                           |   | N/A |   | $ | 4.18 |   |

 

# **MINORITY INTEREST**

At December 31, 2002 and2001, unit holders in the Operating Partnership held an 11.6% limitedpartnership interest in the Operating Partnership.  Each of the holders of the interests in the Operating Partnershiphas the option to redeem its OP Units and to receive, at the option of theCompany, in exchange for each OP Unit, either (i) one share of Common Stock ofthe Company, or (ii) cash equal to the fair value of one share of Common Stockof the Company at the date of conversion.

 

**INVESTMENT IN UNCONSOLIDATED JOINTVENTURE**

The Company currentlyholds no investments in operating joint ventures.  Prior to the Consolidation, SPPI84 held an investment in SierraMira Mesa Partners (“SMMP”), which it accounted for using the equity method.The investment was stated at cost and was adjusted for SPPI84’s share inearnings or losses and cash contributions to or distributions from the joint venture(equity method).  See Note 7 -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 equal to the excess of the amount that would have beencollected on a straight-line basis over the amount collected and currently due(Deferred Rent Receivable).  When aproperty is acquired, the term of existing leases is considered to commence asof the acquisition date for purposes of this calculation.

 

For the years ended December 31, 2002 and 2001, notenants represented 10% or more of rental revenue of the Company.  During the year ended December 31, 2000,SPPI84 relied on three tenants to generate approximately 55% of total rentalrevenue.  The breakdown of these threetenants’ industry segments and rental income contribution is as follows:  17% - electronics manufacturer; 16% -telecommunications manufacturing; and 21% - healthcare administration.  During the year ended December 31, 2000,SPPI84’s rental revenue was generated solely by Valencia, a property whoseresults of operations are reflected in the accompanying consolidated statementsof operations as discontinued operations. See Note 5 — Discontinued Operations.

 

The Company’s portfolio of leases turns overcontinuously, with the number and value of expiring leases

 

41

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varying from year to year.  The Company’s ability to re-lease the space to existing or newtenants at rates equal to or greater than those realized historically is impactedby, among other things, the economic conditions of the market in which aproperty is located, the availability of competing space, and the level ofimprovements which may be required at the property. No assurance can be giventhat the rental rates that the Company will obtain in the future will be equalto or greater than those obtained under existing contractual commitments.

 

# **NET LOSS PER SHARE**

Net loss per share iscalculated based on the weighted average number of common sharesoutstanding.  Stock options outstandingof 189,500 at December 31, 2002 and OP Units outstanding of 725,605 at December31, 2002 have not been included in the net loss per share calculation sincetheir effect would be antidilutive.

 

**INCOME TAXES**

In preparing the Company’s consolidated financialstatements, management estimates the income tax in each of the jurisdictions inwhich the Company operates.  Thisprocess includes an assessment of current tax expense, the results of taxexaminations, and the effects of temporary differences resulting from thedifferent treatment of transactions for tax and financial accountingpurposes.  These differences may resultin deferred tax assets or liabilities which are included in the consolidatedbalance sheet.  The realization ofdeferred tax assets as a result of future taxable income must be assessed andto the extent that the realization is doubtful, a valuation allowance isestablished.  The Company’s income taxprovision is based on calculations and assumptions that will be subject to examinationby the taxing authorities in the jurisdictions in which the Companyoperates.  Should the actual resultsdiffer from the Company’s estimates, the Company would have to adjust theincome tax provision in the period in which the facts and circumstances thatgive rise to the revision become known. Tax law and rate changes are reflected in the income tax provision inthe period in which such changes are enacted.

 

## **NOTE 3. CONSOLIDATION TRANSACTION**

 

In October 2001, the Company acquired various propertiesin the Consolidation.  Pursuant to theConsolidation, subsidiaries of the Company merged with eight public limitedpartnerships, acquired the assets and liabilities of two private entitiesmanaged by CGS and its affiliates and acquired certain assets and liabilitiesof CGS and its majority-owned affiliates. All entities in the Consolidation were created to own and/or operateincome-producing properties.  Thecombination of the entities in the Consolidation is anticipated to reduceoverall costs, thereby increasing shareholder value.  See Note 1 — Description of Business.

 

An exchange value representing the estimate of the netasset value of each acquired entity was computed as follows: (A) the sum of (i)the estimated fair market value of the real estate portfolio as determined byan independent appraisal and (ii) the realizable values of the non-real estateassets (B) reduced by (i) the mortgage debt balance adjusted to reflect themarket value of such debt, (ii) other balance sheet liabilities and (iii) theentity’s share of the Consolidation expenses.  In addition, an exchange value was computed for the portion of the CGSmanagement company acquired as follows: (A) the sum of (i) an estimated valueutilizing an earnings multiple approach and (ii) the realizable values of theassets obtained, (B) reduced by (i) the mortgage debt balance adjusted toreflect the market value of such debt, (ii) other balance sheet liabilities and(iii) its share of the Consolidation expenses.   The number of shares of Company stock issued was determined bythe aggregate exchange value divided by $15. Certain investors elected to receive notes in lieu of shares of Companystock.  Pursuant to the Consolidation,5,429,690 shares of the Common Stock of the Company; 725,605 OP Units and$2,292,671 in notes payable were issued.

 

42

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The Company accounted for the Consolidation under thepurchase method.  The property owned bySPPI84 remained at its historical cost and the other properties were recordedat 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 the purchase method, theconsolidated statement of operations and cash flows for the year ended December31, 2001 includes the results of operations and cash flows of SPPI84 for theentire year, and the acquired entities from October 20, 2001, through December31, 2001.  The consolidated statement ofoperations and cash flows for the year ended December 31, 2000 solely reflectsthe results of operations and cash flows of SPPI84.

 

The following unaudited pro forma financialinformation for the years ended December 31, 2001, and 2000, assumes theConsolidation occurred on the beginning of each year, after giving effect tocertain adjustments including depreciation based on the fair market value ofthe real estate assets and amortization of the premium of the debt based on theadjustments to reflect the debt at its fair market value (dollars inthousands):

 
|                                   |   | **Year  Ended December 31,  (Unaudited)** |   |
|----------------------------------------|--------|-------------------------------------------|--------|
| **Pro  Forma Results of Operations**   |   | **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 |   |
| Gain (loss) on extinguishment  of debt |   | 314                                       |   | (1,907 | ) |
| Minority interest                      |   | 1,059                                     |   | 1,696 |   |
| Net loss                               |   | $                                         | (8,072 | ) | $ | (12,925 | ) |
|                                   |   |                                      |   |   |   |
| Weighted average shares                |   | 5,529,190                                 |   | 5,529,190 |   |
|                                   |   |                                      |   |   |   |
| Net loss per basic and  diluted share  |   | $                                         | (1.46  | ) | $ | (2.34 | ) |

 

43

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**NOTE 4. REAL ESTATE**

 

The cost and accumulated depreciation of rentalproperty held for investment as of December 31, 2002, and 2001 are as follows(dollars in thousands):

 
|                                 |   | **Land** |   | **Buildings  and  Improvements** |   | **Total  Cost** |   | **Accumulated  Depreciation** |    | **Net  Recorded  Value** |   |
|--------------------------------------|--------|----------|--------|----------------------------------|--------|-----------------|--------|-------------------------------|---------|--------------------------|--------|
| 2002:                                |   |     |   |                             |   |            |   |                          |    |                     |   |
| Office  properties                   |   | $        | 28,801 |                             | $      | 119,031         |   | $                             | 147,832 |                     | $      | 8,250 |   | $ | 139,582 |   |
| Office/warehouse  properties         |   | 9,200    |   | 38,309                           |   | 47,509          |   | 2,616                         |    | 44,893                   |   |
| Shopping  center properties          |   | 4,130    |   | 6,781                            |   | 10,911          |   | 911                           |    | 10,000                   |   |
| Apartment  properties                |   | 5,530    |   | 34,691                           |   | 40,221          |   | 1,852                         |    | 38,369                   |   |
| Land  held for development and other |   | 3,900    |   | 252                              |   | 4,152           |   | 106                           |    | 4,046                    |   |
| Total                                |   | $        | 51,561 |                             | $      | 199,064         |   | $                             | 250,625 |                     | $      | 13,735 |   | $ | 236,890 |   |
|                                 |   |     |   |                             |   |            |   |                          |    |                     |   |
| 2001:                                |   |     |   |                             |   |            |   |                          |    |                     |   |
| Office  properties                   |   | $        | 26,310 |                             | $      | 108,123         |   | $                             | 134,433 |                     | $      | 1,251 |   | $ | 133,182 |   |
| Office/warehouse  properties         |   | 9,200    |   | 37,701                           |   | 46,901          |   | 417                           |    | 46,484                   |   |
| Shopping  center properties          |   | 5,210    |   | 9,094                            |   | 14,304          |   | 149                           |    | 14,155                   |   |
| Apartment  properties                |   | 5,530    |   | 34,198                           |   | 39,728          |   | 278                           |    | 39,450                   |   |
| Land  held for development and other |   | 3,900    |   | 157                              |   | 4,057           |   | 43                            |    | 4,014                    |   |
| Total                                |   | $        | 50,150 |                             | $      | 189,273         |   | $                             | 239,423 |                     | $      | 2,138 |   | $ | 237,285 |   |

 

# **ACQUISITIONS**

On August 28, 2002, the Company acquired an officeproperty in Houston, Texas consisting of approximately 46,821 rentable squarefeet.  Acquisition costs ofapproximately $1,387,000 consisted primarily of the assumption of existing debtwith the remainder in cash.

 

On May 28, 2002, the Company acquired two officeproperties in Houston, Texas consisting of approximately 142,792 rentablesquare feet.  The aggregate acquisitioncosts of approximately $11,567,000 consisted of proceeds from a tax-deferredexchange, the assumption of existing debt and seller financing.

 

In October 2001, pursuant to the Consolidation, theCompany acquired its initial 34 properties, which consisted of 3,664,635 squarefeet 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.

 

## **DISPOSITIONS**

On October 15, 2002, theCompany sold Maple Tree, a 72,149 square foot shopping center in Missouri, for$3,800,000.  On October 11, 2002, theCompany sold Creekside Apartments, a 152-unit apartment property in California,for $8,300,000.  Gain on sales of $261,000and $866,000, respectively, were recorded as gain on sale of discontinuedoperations.  Total net sales proceeds,which totaled $279,000, were held in escrow at December 31, 2002.  It is anticipated the sales proceeds will beused in tax-deferred exchanges to assist with funding future acquisitions.

 

In July 2002, the Companyreceived compensation of $150,000 for a strip of land condemned for highwaypurposes on an office property in Illinois. The Company recorded a $69,000 gain on sale of real estate related tothe transaction.

 

On April 30, 2002, theCompany sold Beach & Lampson, a 13,017 square foot shopping center inCalifornia, for $1,200,000.  The Companyreceived net cash proceeds of approximately $59,000 on the sale date and a $1,100,000trust deed note from the buyer.  Thenote, which contained a $200,000 early pay-off discount, was paid in October2002 with the receipt of $900,000 from the buyer.  The sale of the property resulted in a $348,000 total loss onsale of real estate asset.

 

In November 2001, theCompany sold the 42,142 square foot Tower Industrial Building for$1,800,000.  The sale produced a netdeferred gain on the sale of approximately $232,000 and net proceeds of

 

 

44

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approximately$1,688,000.  The net proceeds, whichwere held in escrow at December 31, 2002, were used in a tax-deferred exchangeto assist the funding of the two office properties acquired in May 2002.  In the second quarter of 2002, the Companyrecognized the $232,000 deferred gain associated with the sale of the TowerIndustrial property in 2001.

 

**IMPAIRMENTS**

During 2002, the Companyrecorded impairment charges of $4,746,000 to provide for a decrease in theestimated fair market value of five properties.  Impairment charges totaling $2,400,000 were recorded on theCompany’s three shopping center properties in South Carolina.  Other charges consisted of $987,000 on anoffice property in Missouri, and $1,359,000 on an apartment property inCalifornia.  Based upon a review ofchanges in property conditions, capital requirements, and market conditions,the Company determined that the carrying value of certain of these propertieswere above what is anticipated to be recoverable.  The Company reviewed current market conditions includingcapitalization rates and investor return requirements in determining thereasonable values.

 

## **FUTURE MINIMUM RENTS**

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, 2002, are as follows(dollars in thousands): 

 

| **Year  Ending   December 31,** |   | **Future  Minimum  Rents** |   |
|---------------------------------|--------|----------------------------|--------|
| 2003                            |   | $                          | 27,124 |   |
| 2004                            |   | 20,716                     |   |
| 2005                            |   | 14,494                     |   |
| 2006                            |   | 7,795                      |   |
| 2007                            |   | 4,337                      |   |
| Thereafter                      |   | 9,281                      |   |
|                            |   | $                          | 83,747 |   |

 

## **NOTE 5. DISCONTINUED OPERATIONS**

 

As of December 31, 2002,Valencia, an 82,560 square foot office/warehouse property expected to be soldin the second quarter of 2003, was classified as “Real estate held forsale”.  Valencia was wholly owned by SPPI84prior to the Consolidation.  As ofDecember 31, 2001, Valencia, and two properties sold in October 2002 wereclassified as “Real estate held for sale” (See Note 4 — Real Estate).

 

In accordance with FAS144, the net income (loss) related to these properties for the years endedDecember 31, 2002, 2001 and 2000 are reflected in the consolidated statementsof operations as “Discontinued operations.”  The carrying amounts of these properties at December 31, 2002 andDecember 31, 2001 and their results of operations for the years ended December31, 2002, 2001 and 2000 are summarized below (dollars in thousands):

 
|                                                                             |   | **December  31,** |   |
|----------------------------------------------------------------------------------|--------|-------------------|--------|
| **Condensed Consolidated Balance  Sheets**                                       |   | **2002**          |   | **2001** |   |
| Real  estate                                                                     |   | $                 | 1,094  |   | $ | 12,222 |   |
| Other                                                                            |   | 280               |   | 575 |   |
| Real  estate assets held for sale                                                |   | $                 | 1,374  |   | $ | 12,797 |   |
|                                                                             |   |              |   |   |   |
| Notes  payable, net (including $800 and 1,000, respectively, to related parties) |   | $                 | 2,111  |   | $ | 9,277 |   |
| Accounts  payable                                                                |   | 10                |   | 24 |   |
| Accrued  and other liabilities (including $1,207 in 2001 to related parties)     |   | 114               |   | 1,422 |   |
| Minority  interest related to partially owned property                           |   | —            |   | 1,033 |   |
| Liabilities  related to real estate held for sale                                |   | $                 | 2,235  |   | $ | 11,756 |   |

 

45

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|                                                   |   | **Years  Ended December 31,** |   |
|--------------------------------------------------------|--------|-------------------------------|--------|
| **Condensed Consolidated Statements of  Operations**   |   | **2002**                      |   | **2001** |   | **2000** |   |
| Rental  revenue                                        |   | $                             | 2,139  |   | $ | 1,043 |   | $ | 583 |   |
| Total  expenses                                        |   | 1,699                         |   | 1,076 |   | 745 |   |
| Minority  interest related to partially owned property |   | (102                          | )      | (30 | ) | — |   |
| Gain  on sale of discontinued operations               |   | 1,127                         |   | — |   | — |   |
| Net  income (loss) from discontinued operations        |   | $                             | 1,465  |   | $ | (63 | ) | $ | (162 | ) |

 

**NOTE 6. INVESTMENT IN MANAGEMENTCOMPANY**

 

Pursuant to the Consolidation, the Company acquired aportion of the property management business of CGS.  The Company recorded a $4,000,000 investment in the propertymanagement business as determined by an exchange value computation.   See Note 3 — Consolidation Transaction.

 

FAS 142 requires intangible assets that are notsubject to amortization be tested for impairment annually, or more frequentlyif events or changes in circumstances indicate that the asset might beimpaired.  If the carrying amount of theintangible asset exceeds its fair value, an impairment loss shall be recognizedin an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount ofthe intangible asset shall be its new accounting basis.  Subsequent reversal of a previouslyrecognized impairment loss is prohibited.

 

At December 31, 2002, the Company evaluated itsinvestment in the management company in accordance with FAS 142 and determinedthat fair value had not decreased below carrying value and that no impairmentwas necessary.

 

**NOTE 7. INVESTMENT IN UNCONSOLIDATEDJOINT VENTURE**

 

Prior to the Consolidation, SPPI84 held an investmentin Sierra Mira Mesa Partners (SMMP), which it accounted for using the equitymethod.  The Company held no investmentsin operating joint ventures at December 31, 2002 and 2001.

 

SMMP, a Californiageneral partnership, was formed in 1985 between SPPI84 and Sierra-PacificDevelopment Fund II (“Fund II”), an affiliate of SPPI84, to develop and operatethe real property known as Mira Mesa, an office building located in San Diego,California.  For the years endedDecember 31, 2001, and 2000, SPPI84 recognized income from investment in SMMPof $393,764 and $327,510, respectively.

 

On October 19, 2001,SPPI84 and Fund II merged into a subsidiary of the Company pursuant to theConsolidation.  As a result, the assetsand liabilities of Mira Mesa and its results of operations for the two monthsand twelve days ended December 31, 2001, are included in the consolidatedfinancial statements of the Company at December 31, 2001.

 

46

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The consolidatedfinancial statements of SMMP include the accounts of SMMP and Sorrento IPartners, a majority owned California general partnership, for the year endedDecember 31, 2000.  The condensedstatement of operations for the year ended December 31, 2000 for SMMP follows(dollars in thousands):

 
|                                                                             |   | **2000** |   |
|----------------------------------------------------------------------------------|--------|----------|--------|
| Revenues:                                                                        |   |     |   |
| Rental  income                                                                   |   | $        | 2,152  |   |
| Other  income                                                                    |   | 250      |   |
| Total  revenues                                                                  |   | 2,402    |   |
| Expenses:                                                                        |   |     |   |
| Operating  expenses                                                              |   | 936      |   |
| Depreciation  and amortization                                                   |   | 571      |   |
| Interest                                                                         |   | 486      |   |
| Total  expenses                                                                  |   | 1,993    |   |
|                                                                             |   |     |   |
| Income  before Partnership’s share of unconsolidated joint venture income   |   | 409      |   |
|                                                                             |   |     |   |
| Partnership’s  share of unconsolidated joint venture income                 |   | 43       |   |
|                                                                             |   |     |   |
| Income  before minority interest’s share of consolidated joint venture loss |   | 452      |   |
|                                                                             |   |     |   |
| Minority  interest’s share of consolidated joint venture loss               |   | 17       |   |
|                                                                             |   |     |   |
| Net  income                                                                      |   | $        | 469    |   |

 

As of December 31, 2000,SMMP held a 43.92% interest in Sorrento II Partners (a California generalpartnership formed in 1993 with Sierra Pacific Institutional Properties V), a5.08% interest in Sierra Creekside Partners, (a California general partnershipformed in 1994 with Sierra Pacific Development Fund), and a 33.36% interest inSierra Vista Partners (a California general partnership formed in 1994 withSierra Pacific Development Fund III).

 

The following is asummary of aggregated results of operations for all investments owned by SMMPfor the year ended December 31, 2000, which were accounted for under the equitymethod (dollars in thousands):

 
|                                                      |   | **2000** |   |
|-----------------------------------------------------------|--------|----------|--------|
| Revenues:                                                 |   |     |   |
| Rental  income                                            |   | $        | 2,364  |   |
| Interest  income                                          |   | 11       |   |
| Total  revenues                                           |   | 2,375    |   |
|                                                      |   |     |   |
| Expenses:                                                 |   |     |   |
| Operating  expenses                                       |   | 1,048    |   |
| Depreciation  and amortization                            |   | 858      |   |
| Interest                                                  |   | 361      |   |
| Total  expenses                                           |   | 2,267    |   |
|                                                      |   |     |   |
| Income  before extraordinary loss                         |   | 108      |   |
|                                                      |   |     |   |
| Extraordinary  loss from write-off of deferred loan costs |   | (46      | )      |
|                                                      |   |     |   |
| Net  income                                               |   | $        | 62     |   |

 

47

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**NOTE 8.   RELATED PARTY TRANSACTIONS**

 

In connection with theConsolidation, limited partnerships and limited liability companies owned orcontrolled by William J. Carden and John N. Galardi and their family membersand affiliates merged into certain subsidiaries of the Company and the Companyacquired assets from corporations controlled by them.  Sixteen properties, in which these principal stockholders ownedinterests, along with certain assets and liabilities of the property managementbusiness of CGS, were acquired as a result of the Consolidation.  In addition, the principal stockholders heldlimited partnership interests in the public limited partnerships.

 

Mr. Carden, members ofhis family, trusts for the benefit of family members and entities in which Mr.Carden or members of his family had sole or shared control acquired 686,923shares of Common Stock and 464,819 OP Units as part of the Consolidation.  Mr. Galardi, members of his family, trustsfor the benefit of family members and entities in which Mr. Galardi or membersof his family had sole or shared control acquired 713,556 shares of CommonStock and 182,554 OP Units as part 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-owned affiliatesand CGS’s other affiliates, including the principal stockholders. The exchangerights agreement provides that holders of OP Units have the right, on and afterthe first anniversary of the year of the Consolidation, to cause the OperatingPartnership to exchange OP Units for cash at the then fair market value of theASR shares or, at the election of the Company, to exchange the OP Units for ASRshares on a one-for-one basis.

 

Certain obligations ofCGS and its majority-owned affiliates became liabilities of the Company as aresult of the Consolidation.  Theseobligations include a distribution payable of approximately  $7,883,000 due to the former limitedpartners of 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 byMr. Galardi.  This obligation, plusadditional accrued interest of approximately $186,000 in 2001 and $743,000 in2002 is reflected in accrued and other liabilities in the accompanyingconsolidated financial statements of the Company (See Note 15 — Commitments andContingencies).

 

In addition, relatedparty notes payable totaling $2,802,094 along with other accruals associatedwith the loans were assumed by ASR in connection with the Consolidation.  As of December 31, 2001, and December 31,2002 (provided in parenthesis) these consisted of the following:

 

•                  $1,600,000unsecured loan and accrued interest of $126,036 ($254,036) payable to John N.Galardi.  Refer to Note 9 for the termsof this note.

 

•                  $202,094unsecured note ($199,180) and accrued interest of $36,543 ($65,777) to BrownParker and Leahy, L.L.P, a law firm in which Mr. Brown, a director of theCompany, was a Partner.  Refer to Note 9for the terms of this note.

 

•                  $1,000,000secured loan with accrued interest and a participating profit liability of$1,207,081 to IDM Participating Mortgage Income Fund as of December 31,2001.  Entities owned by Mr. Carden owna 5% limited partnership interest and a 1% general partnership interest in IDMParticipating Mortgage Income Fund.  InOctober 2002, this obligation, which totaled $2,500,13, was paid as a result ofthe sale of Creekside Apartments.

 

Other related partyliabilities totaling $2,024,680 in the form of loans and advances were assumedas well.  These consisted of a$1,060,852 net indebtedness to a limited partnership, in which Mr. Carden andMr. Galardi own an aggregate 66% interest; $242,020 owed to CGS; and $721,808owed to ASJ, Ltd, a Texas limited partnership, which is owned by Mr. Carden,his spouse and trusts for his children. During 2002, the Company made payments totaling $521,808 on itsobligation to ASJ, Ltd., reducing the balance due to $200,000 as of December 31,2002.

 

48

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Effective January 1,2002, the Company acquired a receivable in the amount of $177,000 from arelated party in connection with the Company’s assumption of an executive suitein an office building owned by the Company. The Company cancelled this receivable by offsetting the amount of thereceivable against the amount payable by the Company to an entity owned by therelated party.

 

In December 2002, theCompany received proceeds of $800,000 from a loan on Valencia, anoffice/warehouse property classified as “Real estate held for sale” in theaccompanying consolidated financial statements.   The loan was provided by an affiliated entity of Mr.Carden.  The mortgage will be repaidupon the sale of the property, which is expected to occur in the second quarterof 2003.

 

In October 2002, theCompany received proceeds of $1,532,000 from two bridge loans on Maple Tree,one of its shopping center properties. One of the loans, which totaled $700,000, was provided by an affiliatedentity of Mr. Carden.  The mortgageswere repaid upon the sale of the property in October 2002.

 

In October 2002, theCompany paid a sales commission of $112,800 to a brokerage firm in which Patricia A. Nooney, an executiveofficer of the Company, holds an ownership interest.

 

During 2002, the Companypaid professional fees of $112,887 to a law firm in which Timothy R. Brown, adirector of the Company, is a partner.

 

In connection with thesettlement related to the Teachout matter, Mr. Galardi and Mr. Cardenacknowledged that they owe the Company the sum of $1,187,695 as indemnificationagainst a portion of the Company’s settlement obligation.  Mr. Galardi and certain affiliates of Mr.Carden and/or Mr. Galardi are beneficiaries, in part, of the settlement of theTeachout matter and are owed an amount in excess of this obligation pursuant tothat settlement.  Mr. Galardi and Mr.Carden have agreed to pay the Company the principal sum of this obligation,plus interest thereon at the annual rate of 6% from March 15, 2003, in the formof an assignment to the Company of their right to receive $1,187,695 ofprincipal payments on the notes payable to them and their affiliates by reasonof the settlement of the Teachout matter, plus all interest payable on suchprincipal amount of notes.  On December31, 2002, the receivable of $1,187,695 is reflected as a component of equity.

 

SPPI84 had paid a total of  $936,752 in expenses relating to the Consolidation, primarilyprofessional fees.    The limitedpartners of SPPI84 were compensated for SPPI84 paying Consolidation costs inexcess of  its allocable share byreceiving additional stock upon the consummation of the Consolidation.

 

In 1994, SPPI84 sold thePacific Spectrum property to an affiliate of its general partner for cash of $800,000and a $3,200,000 trust deed note dated December 31, 1994.  The note called for monthly interest onlypayments and bore interest of 10% per annum. Interest receivable had, from time to time, been added to the principalbalance of the note and the maturity had been extended annually for additionalone-year terms.  In 2000, interestreceivable of $159,161 was added to the principal balance of the note.  Interest income related to this note of$141,083 and $159,161 was recognized during the years ended December 31, 2001and 2000, respectively.   On October 19,2001, SPPI84 and the entity that then owned Pacific Spectrum were acquired byASR.  Accordingly, the $1,750,771 note receivablebalance and related interest receivable of $141,083 as of October 19, 2001 wereeliminated in the accompanying financial statements of ASR.

 

49

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**NOTE 9. NOTES PAYABLE**

 

The Company had the following mortgage loans, banklines, and notes payable outstanding as of December 31, 2002, and 2001 (dollarsin thousands):

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **2002** |    | **2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Secured  loans from various lenders, net of unamortized premiums of $3,655 and $4,407  at December 31, 2002 and 2001, respectively, bearing interest at fixed rates  between 5.00% and 13.00% at December 31, 2002, and 5.00% and 12.00% at  December 31, 2001, with monthly principal and interest payments ranging  between $3 and $269 at December 31, 2002, and $8 and $269 at December 31,  2001, and maturing at various dates through June 1, 2012. |   | $        | 133,649 |     | $      | 108,168 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Secured  loans from various banks bearing interest at variable rates ranging between  5.38% and 9.00% at December 31, 2002, and 4.93% and 9.00% at December 31,  2001 and maturing at various dates through May 1, 2008.                                                                                                                                                                                                                                   |   | 33,368   |    | 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.                                                                                                                                                                                                                                                                                           |   | 11,679   |    | 11,816   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Secured  Series C Bonds with a fixed interest rate of 9.50%, semi-annual principal and  interest payments ($104 at December 31, 2002 and $106 at December 31, 2001),  and a maturity date of November 1, 2006.                                                                                                                                                                                                                                             |   | 645      |    | 765      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Unsecured  loans from various lenders, bearing interest at fixed rates between 5.47% and  20.00% at December 31, 2002, and 8.00% and 20.00% at December 31, 2001, and  maturing at various dates through October 1, 2004.                                                                                                                                                                                                                                  |   | 1,083    |    | 1,279    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Unsecured loans from  various lenders, bearing interest at variable rates and maturing at various  dates through November 5, 2002.                                                                                                                                                                                                                                                                                                                         |   | —   |    | 72       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Unsecured  loan, non-interest bearing, and maturing January 1, 2003.  The Company anticipates paying the balance  of this loan in the second quarter of 2003.                                                                                                                                                                                                                                                                                         |   | 58       |    | 399      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Unsecured  note to 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 (4.25% and 5.00% at December 31, 2002  and 2001, respectively) and is payable on demand.                                                                                                                                                                                           |   | 199      |    | 202      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Unsecured  loan from John N. Galardi, a principal stockholder, with a fixed interest  rate of 8.00%, payable on demand.                                                                                                                                                                                                                                                                                                                                    |   | 1,600    |    | 1,600    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $        | 182,281 |     | $      | 167,638 |   |

 

In December 2002,modification agreements were entered into with a bank to extend the maturity onfive secured loans to December 31, 2004. These loans, whose balances total $22,003,000, bear interest at Liborplus 4% through June 30, 2003 and, provided certain lender conditions aresatisfied, Libor plus 3% thereafter.

 

In December 2002, theCompany received proceeds of $800,000 from a loan on Valencia, anoffice/warehouse property classified as “Real estate held for sale” in theaccompanying consolidated financial statements.   The loan was provided by an affiliate of a related party (SeeNote 8).  The mortgage will be repaidupon the sale of the property, which is expected to occur in the second quarterof 2003.

 

In October 2002, theCompany received proceeds of $1,532,000 from two bridge loans on Maple Tree,one of its shopping center properties. One of the loans, which totaled $700,000, was provided by an affiliateof a related party (See Note 8).  Themortgages were repaid upon the sale of the property in October 2002.  The additional proceeds from the sale of theproperty were held in escrow at December 31, 2002 in order to meet therequirements for a tax-deferred exchange.

 

50

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In August 2002, throughthe acquisition of an office property in Houston, Texas, the Company assumed aloan in the amount of $1,213,000.  Theloan bears interest at a fixed rate of 7.29% and matures in April 2005.

 

In July 2002, a lendernotified the Company it was technically in default under its loan agreement fornon-compliance with certain covenants, including covenants requiring improvementsto shopping center properties in South Carolina.  Thereafter, the lender notified the Company it was in default forfailure to pay a matured portion of the loan, which matured in November 2002.  As of December 31, 2002, the amount dueunder the matured portion of the loan was $2,720,000 and the aggregateprincipal balance of the loan agreement was $6,390,000.  In early 2003, the lender sold the loan tothe major tenant in the shopping center. The new lender has not accelerated the loan agreement.  The Company is considering variousalternatives, including selling the property or using proceeds from the sale ofanother property to provide capital to pay off the matured portion of the loan.  The Company continues to discuss thenon-compliance matter with the new lender.

 

# **In May 2002, through theacquisition of two office properties in Houston, Texas, the Company assumed twoloans totaling $8,650,000.  The loansbear interest at a fixed rate of 7.45% per annum and mature in May 2012.    The Company also entered into an agreementwhich provided for seller financing of $955,000, bearing interest at a fixedrate of 7.45% per annum and maturing in May 2004.**

 

In May 2002, the Company refinanced a $1,452,000 loansecured by Southwest Pointe, an office/warehouse property, and entered into anew loan agreement in the amount of $2,950,000.  The new loan bears interest at a fixed rate of 7.33% per annumand matures in June 2012.  Net proceedsof $1,297,000 were received as a result of the refinancing.

 

In May 2002, the Company refinanced a $1,346,000 loansecured by Leawood Fountain Plaza, an office property, and entered into a newloan agreement in the amount of $3,000,000. The new loan bears interest at Libor plus 2.85% with a minimum of 5.75%per annum (5.75% at December 31, 2002), and matures in June 2003.  The loan contains a one-year extensionoption and an option to convert to a permanent loan provided certain lenderconditions are satisfied.  Net proceedsof $1,026,000 were received as a result of the refinancing.

 

In May 2002, the Company financed insurance premiumsof $859,000 on its properties.  The loanbears interest at a fixed rate of 5.47% per annum and matures in February2003.  Other insurance premiums totaling$277,000 were financed during 2002. These loans bear interest at fixed rates between 5.47% and 6.99% perannum and mature at various dates in 2003.

 

In April 2002, the Company refinanced a $3,650,000loan secured by Oak Grove Commons, an office/warehouse property, and enteredinto a new loan agreement in the amount of $4,314,000.  The new loan bears interest at a fixed rateof 7.61% per annum and matures in May 2012. Net proceeds of $383,000 were received as a result of the refinancing.

 

In March 2002, the Company refinanced a $2,750,000 loanpartially 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.

 

In January 2002, the Company refinanced a $4,500,000loan 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.

 

During 2001, the Companyentered into three new loan agreements with a lender, each individually securedby the following properties; Sorrento II, Creekside, and Park Plaza I &II.  These loans totaled$17,420,000.  The loans bear interest atfixed rates, with a weighted average interest rate of 7.29% per annum (rangingfrom 7.17% to 7.54%), and mature at various dates in 2011 and 2012.

 

51

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During 2001, modificationagreements were also entered into with a bank involving five secured loans thatgenerated additional loan proceeds of $4,784,000 and extended maturity toDecember 31, 2002.  These loans, whosebalances totaled approximately $26,483,000 at the time of the modifications,bore interest at Libor plus 3%.  Theseloans were extended to December 31, 2004. In addition, the bank funded $1,310,000 on a $1,350,000 term loan atLibor plus 3% maturing December 31, 2002. This loan was refinanced.  Thenew loan, which matures June 30, 2003, contains a one-year extension option andan option to convert to a permanent loan provided certain conditions aresatisfied.

 

During 2001, the Companyrepaid in full six secured loans totaling $13,103,000 and two unsecured loanstotaling $1,580,000 with proceeds obtained from new loans and modificationagreements, and made other loan pay-downs and scheduled principal payments of$2,066,000.

 

Debt premiums areamortized into interest expense over the terms of the related mortgages usingthe effective interest method.  As ofDecember 31, 2002 and December 31, 2001, the unamortized debt premiums were$3,655,000 and $4,407,000, respectively.

 

The required principal payments on the Company’s debtfor the next five years and thereafter, as of December 31, 2002, are as follows(dollars in thousands):

 
| **Year  Ending December 31,**                          |   |    |    |
|--------------------------------------------------------|--------|---------|---------|
| 2003                                                   |   | $       | 12,665  |   |
| 2004                                                   |   | 33,374  |    |
| 2005                                                   |   | 3,454   |    |
| 2006                                                   |   | 7,579   |    |
| 2007                                                   |   | 13,115  |    |
| Thereafter                                             |   | 108,439 |    |
| Subtotal                                               |   | 178,626 |    |
| Net premium (net of  accumulated amortization of $729) |   | 3,655   |    |
| Total                                                  |   | $       | 182,281 |   |

 

As of this date, theCompany has not paid the 2002 property taxes due on several properties.  This non-payment could be considered atechnical default on the loans for these properties.  The Company plans to pay these taxes with the proceeds from thesale of a property which is expected to occur in the second quarter of2003.  There can be no assurance,however, that the sale of a property will occur.

 

# **NOTES PAYABLE TOFORMER LIMITED PARTNERS**

Limited partners of the eight public limitedpartnerships who voted against the Consolidation had the option of electing toreceive notes instead of 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 be redeemedat any time at the option of the Company, in whole or from time to time in part,at a redemption price equal to the sum of the principal amount of the notesbeing redeemed plus accrued interest thereon to the redemption date.  On March 18, 2002, $1,153,862 of the notes,plus accrued interest, was paid. Additional payments of $4,971, $705,161 and $191,055, plus accruedinterest, were paid on April 1, 2002, April 25, 2002, and July 2, 2002,respectively.  The principal balance ofthe notes as of December 31, 2002 was $236,622.

 

*Proceeds from Sale of PropertiesFormerly Owned by the Partnerships.* In the event that, ASR sells or otherwisedisposes of any property owned by one of the Partnerships immediately prior tothe Consolidation and realizes net cash proceeds, in excess of:

 

•                  theamount required to repay mortgage indebtedness outstanding immediately prior tothe Consolidation secured by such property or otherwise required to be appliedto the reduction of indebtedness of ASR; and

•                  thecosts incurred by ASR in connection with such sale or other disposition,

 

ASR will be required within90 days of receipt of the total net cash proceeds to redeem at the redemptionprice an aggregate amount of the principal of the particular series of notesissued to the holders who were

 

52

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limited partners of suchPartnership prior to the Consolidation equal to 80% of such net cash proceeds.

 

*Proceeds from Refinancing ofProperties Formerly Owned by the Partnerships.*  In the event that, ASR refinances, whetherat maturity or otherwise, any indebtedness secured by any property owned by oneof the partnerships immediately prior to the Consolidation and realizes netcash proceeds, in excess of:

 

•                  theamount of indebtedness secured by such property at the time of theConsolidation, calculated prior to any repayment or other reduction in theamount of such indebtedness in the Consolidation; and

•                  thecosts incurred by ASR in connection 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 10. NET (LOSS) GAIN ON EARLYEXTINGUISHMENTS OF DEBT**

 

In connection with therefinancing of several loans, as discussed above, the Company recorded a netloss on early extinguishments of debt of $53,000 in 2002.  Losses of $184,000 due to the write-off ofunamortized deferred loan costs and prepayment penalties were partially offsetby a $131,000 gain on the write-off of an unamortized loan premium.  The net loss is included in other income inthe consolidated statements of operations.

 

The Company recognized anet gain on early extinguishment 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 11.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.  On November 26,2002, the Company and holder agreed to extend the put exercise period to May30, 2003 through June 30, 2003.  Theholder may exercise the Put by giving written notice thereof to the Company,within three business days of the date of exercise in writing.  Within three business days’ of receipt ofthe notice of exercise of the Put, the Company shall deliver to the holder ingood funds the full exercise price for the shares exercised under the Put andwithin three days after receipt of such funds the holder will deliver to theCompany the certificates representing the number of shares of Common Stockbeing sold pursuant to the Put.

 

**NOTE 12.INCOME TAXES**

 

The provision for incometaxes on income consists of the following for the period ended December 31,2002 and 2001(thousands of dollars):

 
|                        |   | **2002** |   | **2001** |   |
|-----------------------------|--------|----------|--------|----------|--------|
| Current expense  (benefit): |   |     |   |     |   |
| Federal                     |   | —   |   | —   |   |
| State                       |   | —   |   | —   |   |
|                        |   |     |   |     |   |
| Deferred expense (benefit): |   |     |   |     |   |
| Federal                     |   | $        | (6,140 | )        | $      | — |   |
| State                       |   | (943     | )      | —   |   |
|                        |   |     |   |     |   |
|                        |   | $        | (7,083 | )        | $      | — |   |

 

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The Company has federaland state net operating loss carryforwards of approximately $11,492,000 and$8,217,000, respectively, as of December 31, 2002.  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 expires in 2021through 2022.

 

For 2002, the reportedincome tax benefit differs from the amount of benefit determined by applyingthe United States statutory federal income tax rate of 34% to loss beforeincome taxes as a result of the following:

 
|                                                   |   | **December  31, 2002** |   |
|--------------------------------------------------------|--------|------------------------|--------|
|                                                   |   |                   |   |
| Expected income tax  benefit at statutory federal rate |   | $                      | (5,648 | ) |
| State taxes, net of  federal benefit                   |   | (658                   | )      |
| Income not taxable                                     |   | (425                   | )      |
| Charges not deductible                                 |   | 2,196                  |   |
| Net change in valuation  allowance                     |   | (1,387                 | )      |
| Other                                                  |   | (52                    | )      |
| Prior losses with  current benefit                     |   | (1,109                 | )      |
|                                                   |   |                   |   |
|                                                   |   | $                      | (7,083 | ) |

 

The components ofdeferred tax assets and liabilities consist of the following as of December 31,2001 and December 31, 2002, respectively (thousands of dollars):

 
|                            |   | **December  31, 2002** |   | **December  31, 2001** |   |
|---------------------------------|--------|------------------------|--------|------------------------|--------|
| Deferred tax assets:            |   |                   |   |                   |   |
| Net operating losses            |   | $                      | 4,233  |                   | $      | 359 |   |
| Allowance for bad debts         |   | 121                    |   | 465                    |   |
| Capitalized lease costs         |   | 466                    |   | 563                    |   |
| Less:  Valuation allowance |   | —                 |   | (1,387                 | )      |
| Total deferred tax  asset       |   | 4,820                  |   | —                 |   |
|                            |   |                   |   |                   |   |
| Deferred tax  liabilities:      |   |                   |   |                   |   |
| Built-in gains                  |   | (10,710                | )      | —                 |   |
| Straight-line rents  receivable |   | (192                   | )      | —                 |   |
| Total deferred tax  liabilities |   | (10,902                | )      | —                 |   |
|                            |   |                   |   |                   |   |
| Net deferred tax  liabilities   |   | $                      | (6,082 | )                      | $      | — |   |

 

Management isreconsidering whether it is in the best interest of the Company to elect to betreated as a real estate investment trust or REIT, as defined under theInternal Revenue Code of 1986, as amended. In the event such election is made, the election could be effective asearly as January 1, 2003 upon the filing of the appropriate forms for the 2003tax year.  In this regard, the Companyplans to operate within the requirements of REIT status in 2003.  In general, a REIT is a company that owns orprovides financing for real estate and pays annual distributions to investorsof at least 90% of its taxable income. A REIT typically is not subject to federal income taxation on its netincome, provided applicable income tax requirements are satisfied.   For the tax year 2002, the Company wastaxed as a C corporation.

 

SFAS No. 109, “Accountingfor Income Taxes”, requires a valuation allowance against deferred tax assetsif, based on available evidence, it is more likely than not that some or all ofthe deferred tax assets will not be realized. For 2001, based on management’s intent to become a REIT, which wouldmake the Company not generally liable for federal corporate income taxes, andits intent to sell real estate assets only through tax deferred exchanges,management recorded a valuation allowance against the entire net deferred taxasset since uncertainty existed as to the ultimate tax asset to be realized.

 

In 2002, managementreevaluated an earlier decision and determined that it may sell certain of theCompany’s real estate assets outside of tax deferred exchanges.  If the Company elects REIT status, during

 

54

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the 10-year periodfollowing such election, the Company will be subject to an entity level tax onthe income it recognizes upon the sale of assets contributed by certainpartnerships that it held before electing REIT status in an amount up to theamount of the built-in gains at the time the Company becomes a REIT.  The potential tax related to this built-ingain for book purposes is approximately $13,165,000.  Therefore, the Company recognized a deferred tax liability forthis potential tax and has recorded this liability as a charge to equity.   During 2002, the deferred tax liability forthe built-in gains was reduced primarily due to the tax effect of impairmentsrecorded for certain real estate assets held. In addition, based on the current strategic plans of the Company,management has determined that it was more likely than not that future taxableincome, primarily from the gain on the sale of real estate assets, would besufficient to enable the Company to realize all of its deferred taxassets.  Therefore, as of December 31,2002, no valuation allowance has been recorded and the valuation allowancepreviously recorded has been reversed. The tax effect of the impairmentsrecorded and the reversal of the previously recorded allowance along with thetax benefits of the current year tax assets have been recorded in the statementof operations as an income tax benefit.

 

**NOTE 13.  NET LOSS PER SHARE**

 

Net loss per share is calculatedbased 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):

 
|                                              |   | **Years  Ended December 31,** |   |
|---------------------------------------------------|--------|-------------------------------|--------|
|                                              |   | **2002**                      |   | **2001** |   | **2000** |   |
|                                              |   |                          |   |   |   |   |   |
| Net (loss) income  before discontinued operations |   | $                             | (8,595 | ) | $ | (1,975 | ) | $ | 487 |   |
| Discontinued  operations:                         |   |                          |   |   |   |   |   |
| Income (loss) from discontinued  operations       |   | 338                           |   | (63 | )  | (162 | ) |
| Gain on sale of  discontinued operations          |   | 1,127                         |   | — |   | — |   |
| Income (loss) from  discontinued operations       |   | 1,465                         |   | (63 | ) | (162 | ) |
|                                              |   |                          |   |   |   |   |   |
| Net (loss) income                                 |   | $                             | (7,130 | ) | $ | (2,038 | ) | $ | 325 |   |
|                                              |   |                          |   |   |   |   |   |
| Basic and diluted per  share data:                |   |                          |   |   |   |   |   |
| Net loss before  discontinued operations          |   | $                             | (1.55  | ) | $ | (.36 | ) | $ | — |   |
| Income (loss) from  discontinued operations       |   | .26                           |   | (.01 | ) | — |   |
| Net loss                                          |   | $                             | (1.29  | ) | $ | (.37 | ) | $ | — |   |
|                                              |   |                          |   |   |   |   |   |
| Per unit data:                                    |   |                          |   |   |   |   |   |
| Net income before  discontinued operations        |   | $                             | N/A    |   | $ | N/A |   | $ | 6.26 |   |
| Loss from discontinued  operations                |   | N/A                           |   | N/A |   | (2.08 | ) |
| Net income                                        |   | $                             | N/A    |   | $ | N/A |   | $ | 4.18 |   |
|                                              |   |                          |   |   |   |   |   |
| Basic weighted average  shares used               |   | 5,534,348                     |   | 5,529,190 |   | — |   |
| Limited partnership  units outstanding            |   | N/A                           |   | N/A |   | 77,000 |   |

 

**NOTE 14. STOCK OPTION AND RESTRICTEDSHARE PLANS**

 

The Company has in effectthe Plan, which is administered by the Board of Directors and provides for thegranting of incentive and non-qualified stock options, stock appreciationrights, restricted stock, performance units and performance shares.   The Board has reserved a total of 720,000shares under the Plan.  As of December31, 2002, 421,000 ASR shares were available for issuance to executive officers,directors or other key employees of the Company.

 

55

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The following table summarizes activity andoutstanding options under the plan:

 
|                              |   | **Shares  Under  Option** |   | **Weighted  Average  Exercise  Price** |   |
|-----------------------------------|--------|---------------------------|--------|----------------------------------------|--------|
| Granted(1)                        |   | 87,250                    |   | $                                      | 15.00  |   |
| Outstanding  on December 31, 2001 |   | 87,250                    |   | $                                      | 15.00  |   |
|                              |   |                      |   |                                   |   |
| Granted(1)                        |   | 102,250                   |   | $                                      | 6.52   |   |
| Outstanding  on December 31, 2002 |   | 189,500                   |   | $                                      | 10.42  |   |
|                              |   |                      |   |                                   |   |
| Exercisable  as of:               |   |                      |   |                                   |   |
| December  31, 2001                |   | 40,563                    |   | $                                      | 15.00  |   |
| December  31, 2002                |   | 94,187                    |   | $                                      | 11.06  |   |

 

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(1) The exercise price of the stock options grantedwas equal to the fair market value on the date of grant.

 

The following table summarizes certain information foroptions outstanding on December 31, 2002:

 
| **Range  of  Exercise  Price** |   | **Number  Outstanding** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------|--------|-------------------------|--------|-----------------------------------------------------|--------|----------------------------------------|--------|
| $  5.03 - $6.79                |   | 102,250                 |   | 9.4 years                                           |   | $                                      | 6.52   |   |
| $  15.00 - $15.00              |   | 87,250                  |   | 8.8 years                                           |   | $                                      | 15.00  |   |

 

The following table summarizes certain information foroptions exercisable on December 31, 2002:

 
| **Range  of  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|--------------------------------|--------|-------------------------|--------|----------------------------------------|--------|
| $  5.03 - $6.79                |   | 44,312                  |   | $                                      | 6.62   |   |
| $  15.00 - $15.00              |   | 49,875                  |   | $                                      | 15.00  |   |

 

The Company accounts for the Plan under APB Opinion25.  Therefore, no compensation cost hasbeen recognized for the granting of options. For the pro forma disclosures presented in Note 1, the estimated fairvalue of the options is amortized to expense over the options’ vesting period.  The estimated fair value of options grantedduring the periods ended December 31, 2001 and 2002, were $10.29 and $4.45 pershare, respectively.  The fair value ofeach option is estimated, as of the grant date, using the Black-Scholes optionpricing model with the following assumptions used for the grants:  expected volatility of 49% and 53% for 2001and 2002, respectively; risk-free interest rate of 5.07% and 3.85% for 2001 and2002, respectively, and expected lives of 10 years.  The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility.  Because the Company’s stock options havecharacteristics significantly different from those of traded options andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options.

 

In addition, during fiscal 2001 and 2002, the Companygranted for 99,500 and 10,000 shares, respectively, of restricted stock whichis subject to repurchase by the Company on termination of the grantee’semployment for a price of $.01 per share. For 29,500 of the shares granted in 2001, the repurchase option lapsesin four equal installments on the first, second, third and fourth anniversariesof the date of grant.  For 35,000 of theshares granted in 2001, the repurchase option lapsed on October 14, 2002.  For the remaining 35,000 shares granted in2001, the repurchase option for 25% of the shares lapsed on September 1, 2002,

 

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and the remaining repurchase options will lapse on thefirst and/or second year anniversary of that date based on theperformance-based formula.  For theshares granted in 2002, the repurchase option lapsed as follows:  50% on the date of grant and 50% on the datewhich was six months following the date of grant.  For those granted in 2001, recipients of restricted stock paid noconsideration to the Company for the shares and for those granted in 2002, therecipient paid $.01 per share.  Allrecipients have the right to vote all shares subject to such grants, to receiveand retain all cash dividends payable to holders of ASR shares of record on orafter the date of grants and to exercise all other rights, powers andprivileges of a holder of ASR shares, with the exception that the recipientsmay not transfer the ASR shares during the restriction period.  Compensation expense is recognized on astraight-line basis over the vesting period. For the period ended December 31, 2001 and 2002, $78,000 and $834,000,respectively, was recognized as expense for restricted shares issued.  An additional $651,000 of compensationexpense will be expensed over the remaining vesting period.

 

**NOTE 15. COMMITMENTS ANDCONTINGENCIES**

 

Lewis-Madison Matter

On or about September 27,2001, Robert L. Lewis, Madison Liquidity Investors 103 LLC and MadisonLiquidity Investors 112 LLC, purporting to represent themselves and all otherssimilarly situated, initiated an action against the Company, CGS, William J.Carden, John N. Galardi and S-P Properties, Inc. in the Orange County SuperiorCourt, Case No. 01 CC 000394.

 

Plaintiffs’ complaint inthis action alleged claims against the Company and others for breach offiduciary duty and breach of contract. Plaintiffs’ complaint challenges the Consolidation although theConsolidation was disclosed in a Prospectus/Consent Solicitation filed with theSecurities and Exchange Commission and was approved by a majority vote of thelimited partners of the partnerships. Plaintiffs alleged that the approval wasinvalid and that the Consolidation constituted a breach of fiduciary duty byeach of the defendants.  Plaintiffsfurther alleged that the Consolidation constituted breach of the partnershipagreements governing the partnerships.

 

Plaintiffs’ prayer forrelief sought the following: 1) an injunction prohibiting the defendants fromcommingling; 2) imposition of a constructive trust providing for liquidation ofthe assets of the partnerships and a distribution of the assets to the formerlimited partners therein; 3) a judicial declaration that the action may bemaintained as a class action; 4) monetary/compensatory damages; 5) plaintiffs’costs of suit, including attorneys’, accountants’ and expert fees; and 6) ajudicial order of dissolution of the partnerships and appointment of aliquidating trustee.  On March 15, 2002,the Court sustained the Company’s demurrer to plaintiffs’ complaint and heldthat the complaint failed to state a cause of action for either breach offiduciary duty or breach of contract against the Company.  The Court gave the plaintiffs twenty daysleave to amend.

 

Subsequently, plaintiffsfiled and served a Second Amended Complaint alleging claims against the Companyfor breach of fiduciary duty, breach of contract, intentional interference withprospective economic advantage, and intentional interference with contractualrelations.  On June 14, 2002, the Courtsustained the Company’s demurrer on the grounds that Plaintiffs’ Second AmendedComplaint failed to state a cause of action against the Company forinterference with contract or interference with prospective economicadvantage.  The Court gave Plaintiffstwenty days leave to amend.

 

Subsequently, theplaintiffs filed and served a Third Amended Complaint on the Company allegingclaims against the Company for breach of fiduciary duty, breach of contract,intentional interference with prospective economic advantage, and intentionalinterference with contractual relations.  On September 6, 2002, the Court sustained the Company’s demurrer on thegrounds that the Plaintiffs’ Third Amended Compliant failed to state a cause ofaction for either interference with contract or interference with prospectiveeconomic advantage against the Company. The Court gave the Plaintiffs twenty days to amend.

 

On September 25, 2002,the plaintiffs filed and served a Fourth Amended Complaint on the Companyalleging claims against the Company for breach of fiduciary duty, breach ofcontract, intentional interference with prospective economic advantage, andintentional interference with contractual relations.

 

57

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The plaintiffs’ prayerfor relief on its Fourth Amended Compliant seeks the following:  1) an injunction prohibiting the defendantsfrom commingling; 2) imposition of a constructive trust providing forliquidation of the assets of the partnerships and a distribution of the assetsto the former limited partners therein; 3) a judicial declaration that theaction may be maintained as a class action; 4) monetary/compensatory damages;5) plaintiffs’ costs of suit, including attorneys’, accountants’ and expertfees; and 6) a judicial order of dissolution of the partnerships andappointment of a liquidating trustee.  OnOctober 29, 2002, the Company responded by answer and asserted general andspecific affirmative defenses to the allegations in the Fourth AmendedComplaint.

 

On January 10, 2003,plaintiffs filed and served a Notice of Motion and Motion for ClassCertification.  On January 31, 2003, theCompany filed an Opposition to Plaintiffs’ Motion for Class Certification.  On March 7, 2003, the Court grantedplaintiffs’ Motion for Class Certification but expressly reserved theright  to visit the issue ofcertification should rescission be chosen as a remedy to determine whether itis still a viable procedure in the class setting.

 

Teachout Matter

A subsidiary of CGS, S-PProperties, Inc., was a defendant in a lawsuit commenced in Superior Court,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 a property from FundII.  Fund II was merged into asubsidiary of the Company pursuant to the Consolidation.

 

As part of theConsolidation, the Company assumed the repayment obligation to the former FundII investors and has carried these loans with accrued interest on its books andrecords.  The obligation, totalingapproximately $8,800,000 at December 31, 2002, is reflected in accrued andother liabilities in the accompanying consolidated financial statements.

 

In January 2003, theparties reached a settlement regarding this matter.  Under the settlement, which is expected to be documented in thesecond quarter of 2003, the Company reaffirmed its previously announcedobligation to pay the former limited partners of Fund II, or their assignees ortransferees, the loans which were made and called by the former general partnerof Fund II as part of the Consolidation. Pursuant to the settlement, the Company has established a definitiverepayment plan and will secure the repayment obligation with a second deed oftrust on an office building owned by the Company.  The repayment plan consists of a promissory note in the amount of$8,800,000 (the amount of such loans, plus interest as of December 31, 2002),which shall accrue interest at 6% per annum. Interest only payments will be made quarterly until the note is paid.  The note may be prepaid in whole or in partat any time without penalty.

 

As part of thesettlement, the plaintiffs dismissed the lawsuit and all claims therein withprejudice, and the Company has no obligation to pay any further amounts, exceptfor legal fees of $1,200,000 to plaintiff’s counsel.

 

In connection with theagreement, Mr. John Galardi, a principal stockholder of the Company, and Mr.William J. Carden, the Chief Executive Officer, a director and a principalstockholder of the Company, acknowledged that they owe the Company the sum of$1,187,695 as indemnification against a portion of the Company’s settlementobligation.  Mr. Galardi and certainaffiliates of Mr. Carden and/or Mr. Galardi are beneficiaries, in part, of thesettlement of the Teachout matter and are owed an amount in excess of thisobligation pursuant to that settlement. Mr. Galardi and Mr. Carden have agreed to pay the Company the principalsum of this obligation, plus interest thereon at the annual rate of 6% fromMarch 15, 2003, in the form of an assignment to the Company of their right toreceive $1,187,695 of principal payments on the notes payable to them and theiraffiliates by reason of the settlement of the Teachout matter, plus allinterest payable on such principal amount of notes.  On December 31, 2002, the receivable of $1,187,695 is reflectedas a component of equity.

 

58

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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.

 

The Company has contractual obligations andcommitments with regards to the litigation settlement, operating leases,employment agreements and the purchase of OP Units from Nooney DevelopmentPartners.  The following tableaggregates these contractual obligations and commitments subsequent to December31, 2002 (dollars in thousands):

 
|                                                               |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|
| Litigation settlement                                              |   | 250      |   | —   |   | —   |   | 9,750    |   | —   |   | —         |   | 10,000    |   |
| Employee obligations                                               |   | 1,201    |   | 283      |   | —   |   | —   |   | —   |   | —         |   | 1,484     |   |
| Operating lease  commitments                                  |   | 171      |   | 37       |   | 12       |   | —   |   | —   |   | —         |   | 220       |   |
| Purchase of OP  Units  from Nooney  Development Partners |   | 223      |   | —   |   | —   |   | —   |   | —   |   | —         |   | 223       |   |
| Total                                                              |   | $        | 1,845  |     | $      | 320      |   | $        | 12     |     | $      | 9,750          |   | $         | — |   | $ | — |   | $ | 11,927 |   |
|                                                                    |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |  |  |  |  |  |  |  |

 

59

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**NOTE 16. SEGMENT INFORMATION**

 

As of December 31, 2002, the Company owned a diverseportfolio of properties comprising of office, office/warehouse, shopping centerand apartment properties, 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, distributionand manufacturing for single-tenant or multi-tenant use. The shopping centerportfolio consists primarily of community shopping centers. The properties inthe apartment portfolio are apartment buildings with units rented toresidential tenants on either a month-by-month basis or for terms of one yearor 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, 2002, 2001,and 2000 is as follows (dollars in thousands):

 
|                         |   | **Office** |    | **Office/  Warehouse** |   | **Shopping  Center** |   | **Apartment** |   | **Land  Held for  Development  and Other** |   | **Property  Total** |   |
|------------------------------|--------|------------|---------|------------------------|--------|----------------------|--------|---------------|--------|--------------------------------------------|--------|---------------------|--------|
| **2002**                     |   |       |    |                   |   |                 |   |          |   |                                       |   |                |   |
| Rental  revenue              |   | $          | 22,483  |                   | $      | 6,992                |   | $             | 1,492  |                                       | $      | 6,693               |   | $ | 383 |   | $ | 38,043 |   |
| Property  operating expenses |   | 8,314      |    | 2,022                  |   | 476                  |   | 3,485         |   | 466                                        |   | 14,763              |   |
| Net  operating income (NOI)  |   | $          | 14,169  |                   | $      | 4,970                |   | $             | 1,016  |                                       | $      | 3,208               |   | $ | (83 | ) | $ | 23,280 |   |
| Real  estate assets, net     |   | $          | 139,582 |                   | $      | 44,893               |   | $             | 10,000 |                                       | $      | 38,369              |   | $ | 4,046 |   | $ | 236,890 |   |
|                         |   |       |    |                   |   |                 |   |          |   |                                       |   |                |   |
| **2001**                     |   |       |    |                   |   |                 |   |          |   |                                       |   |                |   |
| Rental  revenue              |   | $          | 4,371   |                   | $      | 1,316                |   | $             | 302    |                                       | $      | 1,285               |   |   |   | $ | 7,274 |   |
| Property  operating expenses |   | 1,722      |    | 184                    |   | 117                  |   | 958           |   | $                                          | 9      |                | 2,990  |   |
| Net  operating income (NOI)  |   | $          | 2,649   |                   | $      | 1,132                |   | $             | 185    |                                       | $      | 327                 |   | $ | (9 | ) | $ | 4,284 |   |
| Real  estate assets, net     |   | $          | 133,182 |                   | $      | 46,484               |   | $             | 14,155 |                                       | $      | 39,450              |   | $ | 4,014 |   | $ | 237,285 |   |
|                         |   |       |    |                   |   |                 |   |          |   |                                       |   |                |   |
| **2000**                     |   |       |    |                   |   |                 |   |          |   |                                       |   |                |   |
| Rental  revenue              |   | —     |    | —                 |   | —               |   | —        |   | —                                     |   | —              |   |
| Property  operating expenses |   | —     |    | —                 |   | —               |   | —        |   | —                                     |   | —              |   |
| Net  operating income (NOI)  |   | —     |    | —                 |   | —               |   | —        |   | —                                     |   | —              |   |
| Real  estate assets, net     |   | —     |    | —                 |   | —               |   | —        |   | —                                     |   | —              |   |

 

60

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The following is areconciliation of segment revenues, income and assets to consolidated revenues,income and assets for the periods presented above (dollars in thousands):

 
|                                                                                                         |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **REVENUES**                                                                                                 |   |     | ** ** |     | ** ** |     | ** ** |
| Total  revenues for reportable segments                                                                      |   | $        | 38,043     |     | $          | 7,274    |       | $ | — |   |
| Other  revenues                                                                                              |   | 209      |       | 161      |       | 159      |       |
| Total  consolidated revenues                                                                                 |   | $        | 38,252     |     | $          | 7,435    |       | 159 |   |
|                                                                                                         |   |     |       |     |       |     |       |
| **NET INCOME**                                                                                               |   |     |       |     |       |     |       |
| NOI  for reportable segments                                                                                 |   | $        | 23,280     |     | $          | 4,284    |       | $ | — |   |
| Unallocated  amounts:                                                                                        |   |     |       |     |       |     |       |
| Interest  and other income                                                                                   |   | 209      |       | 161      |       | —   |       |
| General  and administrative expenses                                                                         |   | (8,586   | )          | (2,863   | )          | —   |       |
| Depreciation  and amortization                                                                               |   | (11,691  | )          | (2,123   | )          | —   |       |
| Interest  expense                                                                                            |   | (13,779  | )          | (2,409   | )          | —   |       |
| Litigation  settlement                                                                                       |   | (1,200   | )          |     |       |     |       |
| Impairment  of real estate assets                                                                            |   | (4,746   | )          | —   |       | —   |       |
| Net  loss on sale of real estate assets                                                                      |   | (47      | )          | —   |       | —   |       |
| Net  (loss) gain on extinguishment of debt                                                                   |   | (53      | )          | 314      |       | —   |       |
| Income  from investment in unconsolidated joint venture                                                      |   | —   |       | 394      |       | 328      |       |
| Net  (loss) income from operations before income tax benefit, minority interest  and discontinued operations |   | (16,613  | )          | (2,242   | )          | 487      |       |
| Income  tax benefit                                                                                          |   | 7,083    |       |     |       |     |       |
| Minority  interest                                                                                           |   | 935      |       | 267      |       | —   |       |
| Income  (loss) from discontinued operations                                                                  |   | 1,465    |       | (63      | )          | (162     | )          |
| Net  (loss) income                                                                                           |   | $        | (7,130     | )        | $          | (2,038   | )          | $ | 325 |   |
|                                                                                                         |   |     |       |     |       |     |       |
| **ASSETS**                                                                                                   |   |     |       |     |       |     |       |
| Total  assets for reportable segments                                                                        |   | $        | 236,890    |     | $          | 237,285  |       | $ | — |   |
| Real  estate held for sale                                                                                   |   | 1,374    |       | 12,797   |       | 1,558    |       |
| Cash  and cash equivalents                                                                                   |   | 788      |       | 2,284    |       | 34       |       |
| Tenant  and other receivables, net                                                                           |   | 512      |       | 1,286    |       | —   |       |
| Deferred  rent receivable                                                                                    |   | 505      |       | 98       |       | —   |       |
| Note  receivable from affiliate, net                                                                         |   | —   |       | —   |       | 1,618    |       |
| Account  receivable from affiliate                                                                           |   | —   |       | —   |       | 937      |       |
| Investment  in management company                                                                            |   | 4,000    |       | 4,000    |       | —   |       |
| Deposits  held in escrow                                                                                     |   | 279      |       | 1,956    |       | —   |       |
| Investment  in unconsolidated joint venture                                                                  |   | —   |       | —   |       | 7,063    |       |
| Prepaid  and other assets, net                                                                               |   | 9,209    |       | 6,499    |       | —   |       |
| Total  consolidated assets                                                                                   |   | $        | 253,557    |     | $          | 266,205  |       | $ | 11,210 |   |

 

**NOTE 17.LIQUIDITY AND CAPITAL RESOURCES**

 

The Company expects tomeet its short-term liquidity requirements for normal property operatingexpenses and general and administrative payroll expenses from cash generated byoperations.  In addition, the Companyanticipates selling assets to provide funds for payments of certain 2002payables consisting primarily of 2002 property taxes, tenant improvements andcapital improvements on properties and fees for professional services.  Also, the Company is projecting the need forcash to fund obligations in 2003, including capital costs incurred and to beincurred related to re-leasing space and improvements to properties andlitigation settlement costs.  The fundsto meet these obligations will be obtained from proceeds of the sale of assetsand lender held funds.  Based on currentanalysis, the Company believes that the cash generated by these anticipatedsales will be adequate to meet these obligations.  There can be no assurance, however, that the sales of theseassets will occur and that substantial cash will be generated.  If these sales do not occur, the Company willnot have sufficient cash to meet its obligations.

 

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**NOTE 18. SUBSEQUENT EVENTS**

 

In January 2003, theCompany reached a settlement related to the Teachout matter.  In connection with the settlement, which isexpected to be documented in the second quarter of 2003, Mr. John Galardi, aprincipal stockholder of the Company, and Mr. William J. Carden, the ChiefExecutive Officer, a director and a principal stockholder of the Company,acknowledged that they owe the Company the sum of $1,187,695 as indemnificationagainst a portion of the Company’s settlement obligation.  Mr. Galardi and certain affiliates of Mr.Carden and/or Mr. Galardi are beneficiaries, in part, of the settlement of theTeachout matter and are owed an amount in excess of this obligation pursuant tothat settlement.  Mr. Galardi and Mr.Carden have agreed to pay the Company the principal sum of this obligation,plus interest thereon at the annual rate of 6% from March 15, 2003, in the formof an assignment to the Company of their right to receive $1,187,695 ofprincipal payments on the notes payable to them and their affiliates by reasonof the settlement of the Teachout matter, plus all interest payable on suchprincipal amount of notes.  On December31, 2002, the receivable of $1,187,695 is reflected as a component of equity.

 

In February, 2003, theCompany reached an agreement with CGS Real Estate Company, Inc. whereby CGSacknowledged that it owed the Company a net amount of $270,375 which related toseveral issues asserted by Mr. Carden that were owed by CGS to the Company andby the Company to CGS.  This amount ispayable on March 15, 2006 with interest accruing from March 15, 2003 at anannual rate of 6% and payable quarterly commencing on June 15, 2003.  Mr. Carden is a principal stockholder, anofficer and a director of CGS.  Mr.Carden and Mr. Galardi have agreed to guarantee this obligation of CGS, andthey have secured this guarantee with an assignment to the Company of theirright to receive $270,375 of principal payments on the notes payable to themand their affiliates by reason of the settlement of the Teachout Matter, plusall interest payable on such principal amount of notes.

 

In January 2003, a notepayable in the amount of $509,000 became due and payable.  The Company continues to pay the monthlyinterest due on this note and is discussing an extension with the lender.

 

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**NOTE 19. UNAUDITED QUARTERLY RESULTSOF OPERATIONS**

 

The following representsan unaudited summary of quarterly results of operations for the year endedDecember 31, 2002 (dollars in thousands, except for  per share amounts):

 
|                                                                               |   | **Quarter  Ended**   |   |
|------------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                               |   | **March  31,  2002** |   | **June  30,  2002** |   | **Sept  30,  2002** |   | **Dec  31,  2002** |   |
| **REVENUES:**                                                                      |   |                 |   |   |   |   |   |   |   |   |   |   |
| Rental  revenue                                                                    |   | $                    | 9,264  |   | $ | 9,591 |   | $ | 9,688 |   | $ | 9,500 |   |
| Interest  and other income                                                         |   | 79                   |   | 72 |   | 46 |   | 12 |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Total  revenues                                                                    |   | 9,343                |   | 9,663 |   | 9,734 |   | 9,512 |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| **EXPENSES:**                                                                      |   |                 |   |   |   |   |   |   |   |
| Operating  expenses                                                                |   | 5,733                |   | 5,273 |   | 6,160 |   | 6,183 |   |
| Depreciation  and amortization                                                     |   | 2,851                |   | 2,743 |   | 3,027 |   | 3,070 |   |
| Interest  expense                                                                  |   | 3,166                |   | 3,568 |   | 3,554 |   | 3,491 |   |
| Litigation  settlement                                                             |   | —               |   | — |   | — |   | 1,200 |   |
| Impairment  of real estate assets                                                  |   | —               |   | — |   | — |   | 4,746 |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Total  expenses                                                                    |   | 11,750               |   | 11,584 |   | 12,741 |   | 18,690 |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| **OTHER INCOME (LOSS):**                                                           |   |                 |   |   |   |   |   |   |   |
| Net  gain (loss) on sale of real estate assets                                     |   | —               |   | 84 |   | 69 |   | (200 | ) |
| Net  loss on extinguishment of debt                                                |   | —               |   | (53 | ) | — |   | — |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Total  other income (loss)                                                         |   | —               |   | 31 |   | 69 |   | (200 | ) |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Net  loss before income tax benefit, minority interest and discontinued operations |   | (2,407               | )      | (1,890 | ) | (2,938 | ) | (9,378 | ) |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Income  tax benefit                                                                |   | —               |   | — |   | — |   | 7,083 |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Net  loss before minority interest and discontinued operations                     |   | (2,407               | )      | (1,890 | ) | (2,938 | ) | (2,295 | ) |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Minority  interest                                                                 |   | 276                  |   | 194 |   | 336 |   | 129 |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Net  loss before discontinued operations                                           |   | (2,131               | )      | (1,696 | ) | (2,602 | ) | (2,166 | ) |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Income  from discontinued operations                                               |   | 30                   |   | 214 |   | 45 |   | 1,176 |   |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Net  loss                                                                          |   | $                    | (2,101 | ) | $ | (1,482 | ) | $ | (2,557 | ) | $ | (990 | ) |
|                                                                               |   |                 |   |   |   |   |   |   |   |
| Basic  and diluted per share data:                                                 |   |                 |   |   |   |   |   |   |   |
| Net  loss before discontinued operations                                           |   | $                    | (0.39  | ) | $ | (0.31 | ) | $ | (0.47 | ) | $ | (0.38 | ) |
| Income  from discontinued operations                                               |   | 0.01                 |   | 0.04 |   | 0.01 |   | 0.20 |   |
| Net  loss                                                                          |   | $                    | (0.38  | ) | $ | (0.27 | ) | $ | (0.46 | ) | $ | (0.18 | ) |

 

63

----

 

The following representsan unaudited summary of quarterly results of operations for the year endedDecember 31, 2001 (dollars in thousands, except for per share amounts):

 
|                                                                  |   | **Quarter  Ended**   |   |
|-----------------------------------------------------------------------|--------|----------------------|--------|
|                                                                  |   | **March  31,  2001** |   | **June  30,  2001** |   | **Sept  30,  2001** |   | **Dec  31,  2001** |   |
| **REVENUES:**                                                         |   |                 |   |   |   |   |   |   |   |
| Rental  revenue                                                       |   | $                    | — |   | $ | — |   | $ | — |   | $ | 7,274 |   |
| Interest  and other income                                            |   | 44                   |   | 44 |   | 44 |   | 29 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Total  revenues                                                       |   | 44                   |   | 44 |   | 44 |   | 7,303 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| **EXPENSES:**                                                         |   |                 |   |   |   |   |   |   |   |
| Operating  expenses                                                   |   | —               |   | — |   | — |   | 5,853 |   |
| Depreciation  and amortization                                        |   | —               |   | — |   | — |   | 2,123 |   |
| Interest  expense                                                     |   | —               |   | — |   | — |   | 2,409 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Total  expenses                                                       |   | —               |   | — |   | — |   | 10,385 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| **OTHER INCOME (LOSS):**                                              |   |                 |   |   |   |   |   |   |   |
| Net  gain on extinguishment of debt                                   |   | —               |   | — |   | — |   | 314 |   |
| Income  (loss) from investment in   unconsolidated joint venture |   | (20                  | )      | 230 |   | 156 |   | 28 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Total  other income (loss)                                            |   | (20                  | )      | 230 |   | 156 |   | 342 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Minority  interest                                                    |   | —               |   | — |   | — |   | 267 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Net  income (loss) before discontinued   operations              |   | 24                   |   | 274 |   | 200 |   | (2,473 | ) |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Net  (loss) income from discontinued   operations                |   | (67                  | )      | (35 | ) | (36 | ) | 75 |   |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Net  (loss) income                                                    |   | $                    | (43    | ) | $ | 239 |   | $ | 164 |   | $ | (2,398 | ) |
|                                                                  |   |                 |   |   |   |   |   |   |   |
| Basic  and diluted per share data:                                    |   |                 |   |   |   |   |   |   |   |
| Net  loss before discontinued operations                              |   | $                    | N/A    |   | $ | N/A |   | $ | N/A |   | $ | (0.36 | ) |
| Loss  from discontinued operations                                    |   | N/A                  |   | N/A |   | N/A |   | (0.01 | ) |
| Net  loss                                                             |   | $                    | N/A    |   | $ | N/A |   | $ | N/A |   | $ | (0.37 | ) |

 

64

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**AMERICANSPECTRUM REALTY, INC.**

**SCHEDULE III - REAL ESTATE ANDACCUMULATED DEPRECIATION**

 

DECEMBER 31, 2002 

(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, 2002(4)** |    |
| **Description**                       |   | **Encumbrances** |    | **Land**                        |   | **Buildings  and  Improve-  ments**             |   | **Improvements**                                   |    | **Land** |   | **Buildings  and  Improve-  ments** |   | **Total** |   |
| **Real Estate Held for Investment**   |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| ***Office Properties:***              |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| Mira  Mesa, CA                        |   | $                | 3,743   |                            | $      | 810                                             |   | $                                                  | 6,904   |   | $ | 214 |   | $ | 810 |   | $ | 7,118 |   | $ | 7,928 |   |
| San  Felipe, TX                       |   | 2,879            |    | 2,290                           |   | 4,290                                           |   | 226                                                |    | 2,290 |   | 4,516 |   | 6,806 |   |
| Sorrento  II, CA                      |   | 8,588            |    | 780                             |   | 7,079                                           |   | 1                                                  |    | 780 |   | 7,080 |   | 7,860 |   |
| Creekside,  CA                        |   | 6,344            |    | 2,790                           |   | 6,460                                           |   | 85                                                 |    | 2,790 |   | 6,545 |   | 9,335 |   |
| Countryside  Office Park, IL          |   | 4,995            |    | 2,027                           |   | 4,000                                           |   | 158                                                |    | 2,027 |   | 4,158 |   | 6,185 |   |
| Leawood  Fountain Plaza, KS           |   | 3,000            |    | 1,510                           |   | 5,120                                           |   | 121                                                |    | 1,510 |   | 5,241 |   | 6,751 |   |
| North  Creek Office Park, OH          |   | 5,586            |    | 550                             |   | 7,860                                           |   | 175                                                |    | 550 |   | 8,035 |   | 8,585 |   |
| Bristol  Bay, CA                      |   | 7,492            |    | 1,620                           |   | 7,880                                           |   | 7                                                  |    | 1,620 |   | 7,887 |   | 9,507 |   |
| Daimler  Chrysler, CA                 |   | 37,327           |    | 9,150                           |   | 40,390                                          |   | 283                                                |    | 9,150 |   | 40,673 |   | 49,823 |   |
| Northwest  Corporate Center, MO       |   | 5,520            |    | 1,550                           |   | 5,230                                           |   | 62                                                 |    | 1,550 |   | 5,292 |   | 6,842 |   |
| 16350  Park Ten, TX                   |   | 5,361            |    | 1,174                           |   | 5,324                                           |   | 13                                                 |    | 1,174 |   | 5,336 |   | 6,510 |   |
| 16360  Park Ten, TX                   |   | 4,200            |    | 900                             |   | 4,192                                           |   | 15                                                 |    | 900 |   | 4,207 |   | 5,107 |   |
| 888  Sam Houston Parkway, TX          |   | 1,207            |    | 500                             |   | 892                                             |   | 4                                                  |    | 500 |   | 897 |   | 1,397 |   |
| Pacific  Spectrum, AZ                 |   | 6,053            |    | 1,460                           |   | 6,880                                           |   | 261                                                |    | 1,460 |   | 7,141 |   | 8,601 |   |
| Parkade  Center, MO(2)                |   | 4,365            |    | 1,690                           |   | 5,730                                           |   | 162                                                |    | 1,690 |   | 4,905 |   | 6,595 |   |
| **Office Total**                      |   | $                | 106,660 |                            | $      | 28,801                                          |   | $                                                  | 118,231 |   | $ | 1,787 |   | $ | 28,801 |   | $ | 119,031 |   | $ | 147,832 |   |
| ***Office/Warehouse Properties:***    |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| Sorrento  I, CA                       |   | $                | 1,774   |                            | $      | 580                                             |   | $                                                  | 2,250   |   | — |   | $ | 580 |   | $ | 2,250 |   | $ | 2,830 |   |
| Southwest  Point, TX                  |   | 2,938            |    | 1,800                           |   | 1,530                                           |   | $                                                  | 215     |   | 1,800 |   | 1,745 |   | 3,545 |   |
| Westlakes,  TX                        |   | 1,924            |    | 280                             |   | 4,690                                           |   | —                                             |    | 280 |   | 4,690 |   | 4,970 |   |
| Park  Plaza I & II, IN            |   | 2,340            |    | 610                             |   | 2,810                                           |   | 16                                                 |    | 610 |   | 2,826 |   | 3,436 |   |
| Jackson  Industrial A, IN             |   | 3,531            |    | 1,190                           |   | 4,260                                           |   | 89                                                 |    | 1,190 |   | 4,349 |   | 5,539 |   |
| Morenci  Professional Park, IN        |   | 2,057            |    | 790                             |   | 2,680                                           |   | 27                                                 |    | 790 |   | 2,707 |   | 3,497 |   |
| Northeast  Commerce Center, OH        |   | 1,709            |    | 1,020                           |   | 3,480                                           |   | 213                                                |    | 1,020 |   | 3,693 |   | 4,713 |   |
| Oak  Grove Commons, IL                |   | 4,295            |    | 1,650                           |   | 3,940                                           |   | 78                                                 |    | 1,650 |   | 4,018 |   | 5,668 |   |
| Business  Center, MO                  |   | 3,083            |    | 700                             |   | 2,670                                           |   | 1                                                  |    | 700 |   | 2,671 |   | 3,371 |   |
| Technology,  TX                       |   | 7,763            |    | 580                             |   | 9,360                                           |   | —                                             |    | 580 |   | 9,360 |   | 9,940 |   |
| **Office/Warehouse Total**            |   | $                | 31,414  |                            | $      | 9,200                                           |   | $                                                  | 37,670  |   | $ | 639 |   | $ | 9,200 |   | $ | 38,309 |   | $ | 47,509 |   |
| ***Shopping Center Properties:***     |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| Columbia  NE, SC(2)                   |   | $                | 1,100   |                            | $      | 1,050                                           |   | 1,530                                              |    | $ | 39 |   | $ | 1,050 |   | $ | 1,097 |   | 2,147 |   |
| Marketplace,  SC(2)                   |   | 6,319            |    | 2,120                           |   | 3,110                                           |   | 292                                                |    | 2,120 |   | 2,405 |   | 4,525 |   |
| Richardson  Plaza, SC(2)              |   | 4,054            |    | 960                             |   | 4,210                                           |   | —                                             |    | 960 |   | 3,279 |   | 4,239 |   |
| **Shopping Center Total**             |   | $                | 11,473  |                            | $      | 4,130                                           |   | $                                                  | 8,850   |   | $ | 331 |   | $ | 4,130 |   | $ | 6,781 |   | $ | 10,911 |   |
| ***Apartment Properties:***           |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| Emerald  Pointe, TX                   |   | $                | 7,327   |                            | $      | 980                                             |   | $                                                  | 8,800   |   | 1,762 |   | $ | 980 |   | $ | 10,562 |   | $ | 11,542 |   |
| Villa  Redondo, CA(2)                 |   | 9,042            |    | 1,490                           |   | 13,090                                          |   | 294                                                |    | 1,490 |   | 12,025 |   | 13,515 |   |
| The  Lakes, MO                        |   | 12,324           |    | 3,060                           |   | 12,000                                          |   | 104                                                |    | 3,060 |   | 12,104 |   | 15,164 |   |
| **Apartment Total**                   |   | $                | 28,693  |                            | $      | 5,530                                           |   | $                                                  | 33,890  |   | $ | 2,160 |   | $ | 5,530 |   | $ | 34,691 |   | $ | 40,221 |   |
| ***Development Land and Other:***     |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| Phoenix  Van Buren, AZ                |   | $                | 1,300   |                            | $      | 3,900                                           |   | —                                             |    | — |   | $ | 3,900 |   | — |   | $ | 3,900 |   |
| American  Spectrum Realty-FF&E    |   | —           |    | —                          |   | $                                               | 138    |                                               | $       | 99 |   | — |   | $ | 237 |   | 237 |   |
| Third  Coast Business Center-FF&E |   | —           |    | —                          |   | 2                                               |   | 12                                                 |    | — |   | 15 |   | 15 |   |
| **Development Land and Other Total**  |   | $                | 1,300   |                            | $      | 3,900                                           |   | $                                                  | 140     |   | $ | 111 |   | $ | 3,900 |   | $ | 252 |   | $ | 4,152 |   |
| ***Combined Total***                  |   | $                | 179,540 |                            | $      | 51,561                                          |   | $                                                  | 198,781 |   | $ | 5,028 |   | $ | 51,561 |   | $ | 199,064 |   | $ | 250,625 |   |
| **Real Estate Held for Sale**         |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| ***Office/Warehouse Properties:***    |   |             |    |                            |   |                                            |   |                                               |    |   |   |   |   |   |   |
| Valencia,  CA                         |   | $                | 2,111   |                            | $      | 978                                             |   | $                                                  | 1,212   |   | $ | 47 |   | $ | 978 |   | $ | 116 |   | $ | 1,094 |   |
| ***Total***                           |   | $                | 2,111   |                            | $      | 978                                             |   | $                                                  | 1,212   |   | $ | 47 |   | $ | 978 |   | $ | 116 |   | $ | 1,094 |   |

 

65

----

 
| **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** | ** ** |
| **Real Estate Held for Investment**   |   |                          |   |                       |   |               |   |                                                                    |       |
| ***Office Properties:***              |   |                          |   |                       |   |               |   |                                                                    |       |
| Mira  Mesa, CA                        |   | $                             | 478    |                       | 1986   |               | 2001   |                                                                    | 5-40       |   |
| San  Felipe, TX                       |   | 305                           |   | 1977                       |   | 2001               |   | 5-40                                                                    |       |
| Sorrento  II, CA                      |   | 480                           |   | 1988                       |   | 2001               |   | 5-40                                                                    |       |
| Creekside,  CA                        |   | 467                           |   | 1984                       |   | 2001               |   | 5-40                                                                    |       |
| Countryside  Office Park, IL          |   | 348                           |   | 1984                       |   | 2001               |   | 5-40                                                                    |       |
| Leawood  Fountain Plaza, KS           |   | 378                           |   | 1982                       |   | 2001               |   | 5-40                                                                    |       |
| North  Creek Office Park, OH          |   | 605                           |   | 1984-1986                  |   | 2001               |   | 5-40                                                                    |       |
| Bristol  Bay, CA                      |   | 538                           |   | 1988                       |   | 2001               |   | 5-40                                                                    |       |
| Daimler  Chrysler, CA                 |   | 2,948                         |   | 1989                       |   | 2001               |   | 5-40                                                                    |       |
| Northwest  Corporate Center, MO       |   | 400                           |   | 1983-1987                  |   | 2001               |   | 5-40                                                                    |       |
| 16350  Park Ten, TX                   |   | 183                           |   | 1979                       |   | 2002               |   | 5-40                                                                    |       |
| 16360  Park Ten, TX                   |   | 146                           |   | 1981                       |   | 2002               |   | 5-40                                                                    |       |
| 888  Sam Houston Parkway, TX          |   | 19                            |   | 1979                       |   | 2002               |   | 5-40                                                                    |       |
| Pacific  Spectrum, AZ                 |   | 511                           |   | 1986                       |   | 2001               |   | 5-40                                                                    |       |
| Parkade  Center, MO(2)                |   | 445                           |   | 1965                       |   | 2001               |   | 5-40                                                                    |       |
| **Office Total**                      |   | $                             | 8,250  |                       |   |               |   |                                                                    |       |   |
| ***Office/Warehouse Properties:***    |   |                          |   |                       |   |               |   |                                                                    |       |
| Sorrento  I, CA                       |   | $                             | 153    |                       | 1986   |               | 2001   |                                                                    | 5-40       |   |
| Southwest  Point, TX                  |   | 132                           |   | 1972                       |   | 2001               |   | 5-40                                                                    |       |
| Westlakes,  TX                        |   | 288                           |   | 1985                       |   | 2001               |   | 5-40                                                                    |       |
| Park  Plaza I & II, IN            |   | 212                           |   | 1975-1979                  |   | 2001               |   | 5-40                                                                    |       |
| Jackson  Industrial A, IN             |   | 355                           |   | 1976-1980                  |   | 2001               |   | 5-40                                                                    |       |
| Morenci  Professional Park, IN        |   | 191                           |   | 1975-1979                  |   | 2001               |   | 5-40                                                                    |       |
| Northeast  Commerce Center, OH        |   | 256                           |   | 1985                       |   | 2001               |   | 5-40                                                                    |       |
| Oak  Grove Commons, IL                |   | 263                           |   | 1972-1976                  |   | 2001               |   | 5-40                                                                    |       |
| Business  Center, MO                  |   | 189                           |   | 1985                       |   | 2001               |   | 5-40                                                                    |       |
| Technology,  TX                       |   | 576                           |   | 1986                       |   | 2001               |   | 5-40                                                                    |       |
| **Office/Warehouse Total**            |   | $                             | 2,616  |                       |   |               |   |                                                                    |       |   |
| ***Shopping Center Properties:***     |   |                          |   |                       |   |               |   |                                                                    |       |
| Columbia  NE, SC(2)                   |   | $                             | 180    |                       | 1991   |               | 2001   |                                                                    | 5-25       |   |
| Marketplace,  SC(2)                   |   | 370                           |   | 1980                       |   | 2001               |   | 5-25                                                                    |       |
| Richardson  Plaza, SC(2)              |   | 361                           |   | 1992                       |   | 2001               |   | 5-25                                                                    |       |
| **Shopping Center Total**             |   | $                             | 911    |                       |   |               |   |                                                                    |       |   |
| ***Apartment Properties:***           |   |                          |   |                       |   |               |   |                                                                    |       |
| Emerald  Pointe, TX                   |   | $                             | 678    |                       | 1999   |               | 2001   |                                                                    | 5-40       |   |
| Villa  Redondo, CA(2)                 |   | 493                           |   | 1990                       |   | 2001               |   | 5-40                                                                    |       |
| The  Lakes, MO                        |   | 681                           |   | 1985                       |   | 2001               |   | 5-40                                                                    |       |
| **Apartment Total**                   |   | $                             | 1,852  |                       |   |               |   |                                                                    |       |   |
| ***Development Land and Other:***     |   |                          |   |                       |   |               |   |                                                                    |       |
| Phoenix  Van Buren, AZ                |   | —                        |   | —                     |   | 2001               |   | N/A                                                                     |       |
| American  Spectrum Realty-FF&E    |   | $                             | 102    |                       | — |               | — |                                                                    | 3-5        |   |
| Third  Coast Business Center-FF&E |   | 4                             |   | —                     |   | —             |   | 3-5                                                                     |       |
| **Development Land and Other Total**  |   | $                             | 106    |                       |   |               |   |                                                                    |       |   |
| **Combined Total**                    |   | $                             | 13,735 |                       |   |               |   |                                                                    |       |   |
| **Real Estate Held for Sale**         |   |                          |   |                       |   |               |   |                                                                    |       |
| ***Office/Warehouse Properties:***    |   |                          |   |                       |   |               |   |                                                                    |       |
| Valencia,  CA                         |   | $                             | — |                       | 1987   |               | 1987   |                                                                    | 5-40       |   |
| **Total**                             |   | $                             | — |                       |   |               |   |                                                                    |       |   |

 

----

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

(2) Valuation allowancesestablished in 2002 as the estimated fair market value declined below bookvalue: Parkade Center - $987, Columbia NE - $472, Marketplace - $997,Richardson - $931 and Villa Redondo - $1,359. 

(3) The aggregate costfor federal income tax purposes is $263,302.

 

66

----

 

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

 
|                                 |   | **2002** |    | **2001** |   | **2000** |   |
|--------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **Rental  Property:**                |   |     |    |     |   |     |   |
| Balance at beginning of  year        |   | $        | 239,423 |     | $      | —   |   | $ | — |   |
| Additions during year:               |   |     |    |     |   |     |   |
| Property acquisitions  and additions |   | 17,355   |    | 240,883  |   | —   |   |
| Retirements/sales                    |   | (1,407   | )       | (1,460   | )      | —   |   |
| Impairment of real  estate assets    |   | (4,746   | )       | —   |   | —   |   |
| Balance at end of year               |   | $        | 250,625 |     | $      | 239,423  |   | $ | — |   |
|                                 |   |     |    |     |   |     |   |
| **Accumulated  Depreciation:**       |   |     |    |     |   |     |   |
| Balance at beginning of  year        |   | $        | 2,138   |     | $      | —   |   | $ | — |   |
| Additions during year:               |   |     |    |     |   |     |   |
| Depreciation                         |   | 11,614   |    | 2,138    |   | —   |   |
| Retirements/sales                    |   | (17      | )       | —   |   | —   |   |
| Balance at end of year               |   | $        | 13,735  |     | $      | 2,138    |   | $ | — |   |

 

67

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**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: March 27, 2003* |                                                              | */s/ William J.  Carden* |   |
|------------------------|-------------------------------------------------------------------|--------------------------|--------|
|                   | *William J. Carden*                                               |
|                   | *Chairman of the Board, President,*                               |
|                   | *Chief Executive Officer and Acting Chief Financial Officer* |

 
| *Date: March 27, 2003* |                                       | */s/ Harry A.  Mizrahi* |   |
|------------------------|--------------------------------------------|-------------------------|--------|
|                   | *Harry A. Mizrahi*                         |
|                   | *Director, Senior Vice President,*         |
|                   | *Chief Operating Officer &  Secretary* |

 
| *Date: March 27, 2003* |                                                | */s/ Patricia A.  Nooney* |   |
|------------------------|-----------------------------------------------------|---------------------------|--------|
|                   | *Patricia A. Nooney*                                |
|                   | *Senior Vice President and Director  of Accounting* |
|                   | *(Principal Accounting Officer)*                    |

 
| *Date: March 27, 2003* |               | */s/ Timothy R.  Brown* |   |
|------------------------|--------------------|-------------------------|--------|
|                   | *Timothy R. Brown* |
|                   | *Director*         |

 
| *Date: March 27, 2003* |                    | */s/ William W.  Geary, Jr.* |   |
|------------------------|-------------------------|------------------------------|--------|
|                   | *William W. Geary, Jr.* |
|                   | *Director*              |

 
| *Date: March 27, 2003* |                  | */s/ Lawrence E.  Fiedler* |   |
|------------------------|-----------------------|----------------------------|--------|
|                   | *Lawrence E. Fiedler* |
|                   | *Director*            |

 

68

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CERTIFICATION

 

I, William J. Carden,certify that

1. I have reviewed thisannual report on Form 10-K of American Spectrum Realty, Inc.;

 

2. Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report,

 

3. Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to filing date of this annual report ( the“Evaluation Date”); and 

c) presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: March 27, 2003

 

 
| */s/  William J. Carden*            |   |   |
|-------------------------------------|--------|--------|
| William J. Carden                   |   |
| Chief Executive Officer  and Acting |   |
| Chief Financial Officer             |   |

 

69

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**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)                                                                                                                                              |
|             |   |                                                                                                                                                                   |
| 3.3              |   | Amended and Restated Bylaws of the Company are  incorporated herein by reference to Exhibit 3.01 to the Company’s Form 10-Q  for the quarter ended June 30, 2002. |
|             |   |                                                                                                                                                                   |
| 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 L.P.(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 L.L.C.(1)                                                                   |

 

70

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| 10.18  |   | Agreement and Plan of Merger, dated August 6, 2000,  between the Company and Third Coast L.L.C.(1)                                                                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.19  |   | Agreement and Plan of Contribution, 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, 2000, between  the Company and CGS Real Estate Company, Inc.(1)                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.26  |   | Contribution Agreement, dated May 31, 2000, 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 L.L.C.(1)                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.29  |   | Agreement and Plan of Merger, dated May 31, 2001,  between the Company and Back Bay L.L.C.(1)                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.30  |   | Contribution Agreement, dated May 31, 2001, between  American Spectrum Realty Management, Inc. 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 L.L.C.(2)                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.32  |   | Amendment of Agreement Plan of Merger between the  Company and Pasadena Autumn Ridge, L.P.(2)                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.33  |   | Amendment of Agreement  Plan of Merger between the Company and Third Coast L.L.C.(2)                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.34  |   | Registration Right’s Agreement between the Company,  the Operating Partnership, and other parties(2)                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.35  |   | Employment Agreement dated October 15, 2001 between  the Company and Harry A. Mizrahi is incorporated herein by reference to  Exhibit 10.01 to the Company’s Form 10-Q for the quarter ended March 31,  2002.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                    |
| 10.36  |   | Employment Agreement dated April 3, 2002 between the  Company and Paul E. Perkins is incorporated herein by reference to Exhibit  10.02 to the Company’s Form 10-Q for the quarter ended March 31, 2002                                                                            |

 

71

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| 10.37  |   | Employment Agreement dated April 16, 2002 between  the Company and Patricia A. Nooney is incorporated herein by reference to  Exhibit 10.03 to the Company’s Form 10-Q for the quarter ended March 31, 2002                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.38  |   | Employment Agreement dated September 1, 2002 between  the Company and Thomas N. Thurber is incorporated herein by reference to  Exhibit 10.04 to the Company’s Form 1-Q for the quarter ended June 30, 2002  (Exhibits pursuant to the Agreement have not been filed by the Company, who  hereby undertakes to file such exhibits upon the request of the SEC) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.39  |   | Employment Agreement dated October 15, 2001 between  the Company and William J. Carden is incorporated herein by reference to  Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended September 30,  2002                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.40  |   | Letter Agreement dated February 25, 2003 between the  Company and William J. Carden and John N. Galardi                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.41  |   | Letter Agreement dated February 25, 2003 between the  Company and CGS Real Estate Company, Inc.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10.42  |   | Letter Agreement dated February 25, 2003 between the  Company and William J. Carden and John N. Galardi                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 21     |   | Significant Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 23     |   | Consent of BDO Seidman, LLP, Independent Auditors                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 99     |   | Certification pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                              |

 

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(1) Incorporated hereinby reference to the Company’s Registration Statement on Form S-4 (RegistrationNo. 333-43686), which became effective August 8, 2001.

 

(2) Incorporated hereinby reference to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

72

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